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| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
þ ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For year ended December 31, 2004
Commission file number 001-16407
ZIMMER HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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13-4151777 |
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(State of Incorporation) |
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(IRS Employer Identification No.) |
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345 East Main Street |
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46580 |
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Warsaw, Indiana |
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(Zip Code) |
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(Address of principal executive offices) |
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Registrant’s telephone number, including area code:
(574) 267-6131
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered |
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Common Stock, $.01 par value
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. þ
Indicate by checkmark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the
Act). Yes þ No o
The aggregate market value of shares held by non-affiliates was
$21,590,347,993 (based on closing price of these shares on the
New York Stock Exchange on June 30, 2004, and assuming
solely for the purpose of this calculation that all directors
and executive officers of the registrant are
“affiliates”). As of February 18, 2005,
246,690,710 shares of the registrant’s $.01 par value
common stock were outstanding.
Documents Incorporated by Reference
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Document
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Form 10-K |
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Proxy Statement with respect to the 2005 Annual Meeting of
Stockholders
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Part III |
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| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
This annual report contains certain statements that are
forward-looking statements within the meaning of federal
securities laws. When used in this report, the words
“may,” “will,” “should,”
“anticipate,” “estimate,”
“expect,” “plan,” “believe,”
“predict,” “potential,” “project,”
“target,” “forecast,” “intend” and
similar expressions are intended to identify forward-looking
statements. Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ
materially from those projected. These risks and uncertainties
include, but are not limited to, price and product competition,
rapid technological development, demographic changes, dependence
on new product development, the mix of our products and
services, supply and prices of raw materials and products,
customer demand for our products and services, the ability to
successfully integrate acquired companies including Centerpulse
AG and Implex Corp., the outcome of the pending informal
Securities and Exchange Commission investigation of Centerpulse
AG accounting, control of costs and expenses, the ability to
form and implement alliances, changes in reimbursement programs
by third-party payors, governmental laws and regulations
affecting our U.S. and international businesses, including
tax obligations and risks, product liability and intellectual
property litigation losses, international growth, general
industry and market conditions and growth rates and general
domestic and international economic conditions including
interest rate and currency exchange rate fluctuations. Readers
of this report are cautioned not to place undue reliance on
these forward-looking statements, since, while the Company
believes the assumptions on which the forward-looking statements
are based are reasonable, there can be no assurance that these
forward-looking statements will prove to be accurate. This
cautionary statement is applicable to all forward-looking
statements contained in this report and the material
accompanying this report which comprise the Company’s
annual report to stockholders.
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| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Part I
GENERAL
Zimmer Holdings, Inc., a Delaware corporation, is a global
leader in the design, development, manufacture and marketing of
reconstructive orthopaedic implants, including joint and dental,
spinal implants, and trauma products and related orthopaedic
surgical products. The Company is headquartered in Warsaw,
Indiana. Unless the context requires otherwise, the terms
“Zimmer” and “Company” refer to Zimmer
Holdings, Inc. and all of its subsidiaries.
In October 2003, the Company finalized its acquisition of
Centerpulse AG (“Centerpulse”), a
Switzerland-based orthopaedics company and the leader in the
European reconstructive market. In addition to providing the
Company with a leading position in the European orthopaedic
reconstructive implant market, the Centerpulse acquisition
provided the Company with a platform in the faster growing spine
and dental implant markets. As discussed in detail in this
report, the Centerpulse acquisition had a significant impact on
the Company’s financial results in 2004.
On April 23, 2004, the Company acquired Implex Corp.
(“Implex”), a New Jersey based company, pursuant to an
Amended and Restated Agreement and Plan of Merger (the
“Merger Agreement”). The Implex acquisition was a
culmination of a distribution and strategic alliance agreement,
under which the Company and Implex had been operating since
2000, relating to the commercialization of reconstructive
implant and trauma products incorporating Trabecular
Metal™ Technology. Subsequent to the acquisition, the
Company changed the name of Implex to Zimmer Trabecular Metal
Technology, Inc.
Throughout 2004 and entering 2005, a key focus of the Company
has been, and will continue to be, the successful integration of
the Centerpulse and Implex businesses. In 2004, the Company
performed ahead of schedule under its comprehensive integration
plan. As of the conclusion of 2004, the Company accomplished
more than 2,000 of the total planned 3,364 integration
milestones for the Centerpulse acquisition and the Company
raised the estimated, sustainable integration cost synergies for
this transaction to slightly over $100 million annually, an
increase from the original estimates of $70 to $90 million.
The Company also expects cash on hand to be in excess of total
outstanding debt incurred from the Centerpulse and Implex
acquisitions by June 30, 2006, absent any cash requirements
for acquisitions.
Zimmer was incorporated on January 12, 2001 as a
wholly-owned subsidiary of Bristol-Myers Squibb Company
(“Bristol-Myers”). Zimmer, Inc., a predecessor founded
in 1927, was acquired by Bristol-Myers in 1972 and along with
its wholly-owned subsidiaries and certain other of
Bristol-Myers’ operations comprised the orthopaedics
business of Bristol-Myers. On August 6, 2001, the Company
was spun off from Bristol-Myers and became an independent public
company.
CUSTOMERS, SALES AND MARKETING
The Company’s primary customers include musculoskeletal
surgeons, neuro-surgeons, oral surgeons, dentists, hospitals,
distributors, healthcare dealers and, in their capacity as
agents, healthcare purchasing organizations or buying groups.
These customers range from large multinational enterprises to
independent surgeons.
The Company has operations in more than 24 countries and markets
products in more than 100 countries, with corporate headquarters
in Warsaw, Indiana, and more than 100 manufacturing,
distribution and warehousing and/or office facilities worldwide.
The Company manages its operations through three major
geographic segments – the Americas, which is comprised
principally of the United States and includes other North,
Central and South American markets; Europe, which is comprised
principally of Europe and includes the Middle East and Africa;
and Asia Pacific, which is comprised primarily of Japan and
includes other Asian and Pacific markets. Information about
geographic segments can be found in Note 14 to the
Consolidated Financial Statements, which are included herein
under Item 8.
The Company markets and sells product through three principal
channels: 1) direct to health care institutions, such as
hospitals, which is referred to as a direct channel account,
2) through stocking distributors and, in the Asia Pacific
region, healthcare dealers, and 3) directly to dental
practices and dental laboratories. Through the direct channel
accounts, inventory is generally consigned to sales agents or
customers so that products are available when needed for
surgical procedures. With the sales to stocking distributors,
healthcare dealers, dental practices and dental laboratories,
title to product passes generally upon shipment. Products are
marketed and sold to all types of Company customers via both
direct channel accounts and stocking distributors and healthcare
dealers. No individual direct channel account, stocking
distributor, healthcare dealer, dental practice or dental
laboratory accounted for more than 10 percent of the
Company’s net revenues for 2004.
The Company carries inventory in warehouse facilities and
retains title to consigned inventory in sufficient quantities so
that products are available when needed for surgical procedures.
Safety stock levels are determined based on a number of factors,
including demand, manufacturing lead times and optimal
quantities required to maintain the highest possible service
levels. The Company also carries trade accounts receivable
balances based on credit terms that are generally consistent
with local market practices.
The Company utilizes a network of sales associates, sales
managers and support personnel, most of who are employed by
independent distributors and sales agencies. The Company
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| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
invests a significant amount of time and expense in providing
training in such areas as product features and benefits, how to
use specific products and how to best inform surgeons of such
features and uses. Sales force representatives rely heavily on
strong technical selling skills, medical education and the
ability to provide staff technical support for surgeons.
In response to the different healthcare systems throughout the
world, the Company’s sales and marketing strategies and
organizational structures differ by region. The Company utilizes
a global approach to sales force training, marketing and medical
education into each locality to provide consistent, high quality
service. Additionally, the Company keeps current with key
surgical developments and other issues related to
musculoskeletal surgeons and the medical procedures they
perform, in part through sponsorship of medical education
events. In 2004, the Company sponsored more than 250 medical
education events and meetings with and among musculoskeletal
surgeons around the world.
Americas. The Americas is the largest geographic segment,
accounting for $1,741.3 million, or 58.4 percent, of
2004 net sales, with the United States accounting for
$1,665 million of sales in this region. The United States
sales force consists of independent sales agents, together with
sales associates, sales managers and sales support personnel,
the majority of which sell Company products exclusively for
Zimmer. Sales agents in the United States receive a commission
on product sales and are responsible for many operating
decisions and costs. Sales commissions are accrued at the time
of sale.
In this region, the Company has also concentrated on negotiating
contracts with purchasing organizations or buying groups and
managed care accounts and has increased unit growth by linking
the level of discount received to volume of purchases by
customer health care institutions within a specified group. At
negotiated thresholds within a contract buying period, price
discounts increase. For these buying groups and managed care
accounts, the Company tracks sales volume by contract and as
contractual volume thresholds are achieved, the higher discounts
are applied at an item level on customer invoices. Under these
buying contracts, the Company is generally designated as one of
several identified preferred purchasing sources for the members
of the buying group for specified products, although the members
are not obligated to purchase the Company’s products.
A majority of hospitals in the United States belong to at least
one group purchasing organization. In 2004, individual hospital
orders purchased through contractual arrangements with such
purchasing organizations or buying groups accounted for
approximately 45 percent of the Company’s net sales in
the United States. Contractual sales were highest through
Novation, LLC (“Novation”), Premier Purchasing
Partners, L.P. (“Premier”), and Health Trust
Purchasing Group, representing 21.9 percent,
15.0 percent and 6.3 percent, respectively, of net
sales in the United States. No individual end-user, however,
accounted for over 1 percent of the Company’s net
sales, and the top ten end-users accounted for approximately
3.5 percent of the Company’s aggregate net sales in
the United States.
These buying contracts generally have a term of three years with
extensions as warranted. The Company’s current arrangements
with Premier, Novation and Health Trust Purchasing Group have
all been renegotiated and updated in the past 12 months.
In the Americas, the Company maintains an extensive monitoring
and incentive system ranking sales agents across a range of
performance metrics. The Company evaluates and rewards sales
agents based on achieving certain sales targets and on
maintaining efficient levels of working capital. The Company
sets expectations for efficient management of inventory and
provides sales agents a motivation to aid in the collection of
receivables.
Europe. The European geographic segment accounted for
$808.3 million, or 27.1 percent, of 2004 net sales,
with France, Germany, Italy, Spain, Switzerland and the
United Kingdom collectively accounting for more than
82 percent of net sales in the region. In addition, the
Company also operates in other key markets such as the Benelux,
Austria, Nordic, and Central and Eastern Europe. The
Company’s sales force in this region is comprised of
independent distributors, commissioned agents, direct sales
associates and sales support personnel. During 2004, the Company
converted its distribution model in France, Italy, Switzerland
and Austria from third-party distributors to direct sales. As
expected following the acquisition of Centerpulse, in 2004 the
Company substantially increased its presence in the European
orthopaedic reconstructive implant market. In marketing its
orthopaedic implant portfolio in Europe, the Company has
continued to emphasize the advantages of clinically proven,
established designs.
Asia Pacific. The Asia Pacific geographic segment
accounted for $431.3 million, or 14.5 percent of 2004
net sales, with Japan being the largest market within this
segment, accounting for 65 percent of the sales in this
region. In addition, the Company operates in key markets such as
Australia, New Zealand, Korea, China, Taiwan, India, Thailand
and Singapore. In Japan and most countries in the Asia Pacific
region, the Company maintains a network of dealers who act
principally as order agents on behalf of hospitals in the
region, together with sales associates who build and maintain
strong relationships with musculoskeletal surgeons in their
markets. These sales associates cover over 7,000 hospitals in
the region. The knowledge and skills of the Company’s sales
associates play a critical role in providing service, product
information and support to surgeons who continue to enhance
their knowledge and skills to improve the quality of surgical
outcomes. The Company has strengthened, and intends to continue
to support the clinical needs of surgeons in the region
primarily through sponsorship of medical education and training
programs relating to orthopaedic surgery. The key marketing and
educational activities in the region center on minimally
invasive surgical procedures and technologies, increased range
of motion and improved patient outcomes.
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| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
The Company’s business is generally not seasonal in nature;
however, many of the Company’s products are used in
elective procedures, which typically decline during the summer
months and holiday seasons.
DISTRIBUTION
The Company generally ships its orders via overnight courier.
The Company’s operations support local language labeling
for all shipments to the European Union member countries. The
Company operates distribution facilities, among other places, in
Warsaw, Indiana; Dover, Ohio; Statesville, North Carolina;
Memphis, Tennessee; Carlsbad, California; and internationally in
Australia, Belgium, Canada, France, Germany, Italy, Japan,
Korea, the Netherlands, Singapore, Spain, Switzerland and the
United Kingdom. The Company’s backlog of firm orders is not
considered material to an understanding of its business.
PRODUCTS
The Company designs, develops, manufactures and markets
reconstructive orthopaedic implants, including joint and dental,
spinal implants, and trauma products, and related orthopaedic
surgical products. Orthopaedic reconstructive implants restore
joint function lost due to disease or trauma in joints such as
knees, hips, shoulders, and elbows. Dental reconstructive
implants restore function and aesthetics in patients that have
lost teeth due to trauma or disease. Spinal implants are
utilized by orthopaedic surgeons and neurosurgeons in the
treatment of degenerative diseases, deformities and trauma in
all regions of the spine. Trauma products are devices used
primarily to reattach or stabilize damaged bone or tissue to
support the body’s natural healing process. The
Company’s related orthopaedic surgical products include
surgical supplies and instruments designed to aid in orthopaedic
surgical procedures. The Company also has a limited array of
sports medicine products.
Orthopaedic Reconstructive Implants
The majority of reconstructive implant procedures restore joint
function lost due to degenerative diseases such as arthritis and
relieve pain in knees and hips.
In 2004, the Company continued its efforts to maximize the
potential patient benefits of applying minimally invasive
surgical techniques to orthopaedic surgery, which the Company
refers to as Minimally Invasive Solutions™
(MIS™) Procedures and Technologies. The Zimmer
Institute, with its main facility located at the Company’s
global headquarters, has been used, in addition to 17 satellite
centers and wet lab locations, to facilitate the training of
over 2,200 surgeons, sales associates, and other medical
professionals on several innovative MIS Procedures. The
Company expects another 1,800 surgeons to be trained through The
Zimmer Institute and its satellite locations during 2005.
The Company is working with several global medical centers to
evaluate and refine advanced minimally invasive knee and hip
replacement procedures. In February 2004, the Company announced
that it is working with Johns Hopkins University School of
Medicine to advance education in MIS Technologies. The
Company also announced a similar relationship with a group of
surgeons affiliated with the University of British Columbia in
Vancouver, Canada, as well as relationships with the University
of Nebraska Medical Center, Ohio Orthopaedic Surgery Institute,
Alabama Orthopaedic Institute, and Tucson Orthopaedic Institute.
The Company has plans to continue to affiliate with additional
North American and international institutions to provide surgeon
education at the Zimmer Institute and its satellite locations.
The principal goals of these MIS Technology efforts are
to reduce the hardships of having a total joint replacement,
such as the time a patient must spend in rehabilitation, pain
reduction and lost time from work. The Company is continuing its
work to develop navigation systems, through the use of
image-guided surgical technology, to aid surgeons in learning
procedures and gaining confidence in the placement of
instrumentation and implants where navigation is difficult due
to the small incisions necessary in effectuating MIS
Procedures. The Company is focused both on further
commercializing existing MIS Technique approaches and
investigating new ways to apply MIS Technology
principles to additional procedures and products. The
Company’s financial investment in the MIS Technology
program in 2004 was more than $30 million, excluding
instruments.
Total knee surgeries typically include a femoral component, a
patella (knee cap), a tibial tray and an articulating surface
(placed on the tibial tray). Knee replacement surgeries include
first-time joint replacement procedures and revision procedures
for the replacement, repair or enhancement of an implant or
component from a previous procedure. Knee implants are designed
to accommodate different levels of ligament stabilization of the
joint. While some knee implant designs, called cruciate
retaining (“CR”) designs, require the retention of the
posterior cruciate ligament, other designs, called posterior
stabilized (“PS”) designs, provide joint stability
without the posterior cruciate ligament. There are also
procedures for partial reconstruction of the knee, which treat
limited knee degeneration and involve the replacement of only
one side or compartment of the knee with a unicompartmental knee
prosthesis. The Company offers a wide range of products for
specialized knee procedures, including, among others, the
following brands:
Prolong™ Highly Crosslinked Polyethylene Articular
Surfaces. The Prolong Polyethylene is a bearing surface
material for total knee replacement. It is believed to be the
only articulating surface product with the ability to claim
“resistance to delamination”.
NexGen® Complete Knee Solution. The NexGen
Knee product line is a comprehensive system for knee replacement
surgery which has had significant application in PS, CR and
revision procedures. The NexGen Knee System
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| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
offers joint stability and sizing that can be tailored to
individual patient needs while providing surgeons with a unified
system of interchangeable components. The NexGen Knee
System provides surgeons with complete and versatile knee
instrument options, including MIS Quad-Sparing™ and
MIS Mini-Incision Instruments, milling and multiple
traditional saw blade cutting instrument systems. The breadth
and versatility of the NexGen Knee System allows surgeons
to change from one type of implant to another during surgery,
according to the needs of the patient, and to support current
surgical philosophies. The ongoing use of Trabecular
Metal Monoblock Tibial Components in both CR and PS
philosophies enhances the Company’s strategy to add new
innovative technologies to this brand. Trabecular Metal
Materials provide a dramatically higher level of porosity and
surface friction than existing alternatives, are similar in
stiffness to natural bone and are believed to be a major
advancement in orthopaedic materials.
The NexGen Complete Knee Solution Legacy®
Knee-Posterior Stabilized product line provides stability in the
absence of the posterior cruciate ligament. The PS capabilities
have been augmented through the introduction of the NexGen
Legacy Posterior Stabilized Flex Knee (the “LPS-Flex
Knee”), a high-flexion implant that has the potential to
safely accommodate knee flexion up to a 155-degree range of
motion in some patients when implanted using a specialized
surgical technique. The NexGen LPS-Flex Fixed
Prolong Articular Surfaces and Femoral Implants were
released in December 2004.
The NexGen CR product line is designed to be used in
conjunction with a functioning posterior cruciate ligament. The
NexGen CR-Flex Fixed Bearing Knee was added to the
product line in 2003 and is designed with components to provide
a greater range of motion for patients who require deep bending
in their daily activities. The NexGen CR-Flex Femoral
Components allow the surgeon to adjust component sizing without
removing additional bone.
The NexGen Revision Knee product line consists of several
different products that are designed to provide clinical
solutions to surgeons for various revision situations. In 2004,
the Company commercialized a new bone augmentation implant
system made from Trabecular Metal Technology material.
These new augments are designed to address significant bone loss
in revision surgery.
The Natural-Knee® System. The Natural-Knee
Prosthesis System consists of a complete range of
interchangeable, anatomically designed implants which include
several innovative features the Company believes cannot be found
in other current systems, including a proprietary
Cancellous-Structured Titanium™ (CSTi™)
Porous Coating option for stable fixation in active patients.
The original Natural-Knee System will be celebrating its
20th anniversary of clinical use in 2005. New
Natural-Knee II MIS Instrumentation was
launched in December 2004. These instruments are designed to
accommodate a smaller incision during the knee procedure.
The Innex™ Total Knee System. The Innex Knee
System offers fixed bearing and mobile bearing knee components
all designed within the same system philosophy. While the
Innex Knee System is best known for its mobile bearing
knee offering, the availability of differing levels of articular
constraint and the Innex Revision Knee components provide
for a comprehensive mobile and fixed bearing knee system. The
Innex Knee System is currently distributed in Europe and
Asia Pacific, but is not available for commercial distribution
in the United States.
Unicompartmental Knee Systems. The M/G®,
Natural-Knee II and Allegretto™ Unicompartmental
Knee Systems apply the same flexibility and quality of the
Company’s other knee implant products to unicompartmental,
or single compartment disease. These systems offer the surgeon
the ability to conserve bone by replacing only the compartment
of the knee that has had degenerative changes.
The Zimmer® Unicompartmental Knee System was
commercialized in 2004 offering a high flexion design to
unicompartmental knee surgery. The high flexion design is a
patient lifestyle attribute and this product was designed
specifically for less invasive surgeries and strengthens the
Company’s offering in MIS Procedures and
Technologies.
The Company has further established itself in the use of
minimally invasive knee surgery with the development of
minimally invasive instruments for the M/G
Unicompartmental Knee System. MIS Mini-Incision Total
Knee Procedures and MIS Quad-Sparing Total Knee
Procedures have allowed the Company to build upon its industry
position by offering surgeons the benefits of MIS Surgery
for their total knee procedures. The MIS Mini-Incision
Total Knee Instruments feature smaller instruments which
accommodate a smaller incision and less disruption of the
surrounding soft tissues. The MIS Quad-Sparing Total Knee
Procedure features advanced instrument concepts which allow
surgeons to perform the total knee arthroplasty through a 7-10
cm incision without cutting the patient’s muscles or
tendons. Navigation system capability (similar to an automotive
Ground Positioning System (GPS)) was added by the Company in
December 2004 as a tool to aid in the placement of the implants
during surgery.
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 for the
replacement, repair or enhancement of an implant product or
component from a previous procedure. Historically, most hip
implant procedures have involved the use of bone cement to
attach the prosthetic components to the surrounding bone. Today,
most of the components used in total hip replacement procedures
are porous, which means they do not require bone cement because
bone can actually grow into, and onto, the implant surface.
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| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
The Company’s portfolio of MIS Techniques includes
the MIS 2-Incision™ Hip Replacement Procedure, the
Mini-Incision Posterior Procedure, the Mini-Incision Anterior
Procedure, and the MIS Anterolateral Single Incision
Technique launched in December 2004. The new anterolateral
procedure has the potential to offer similar patient outcomes as
the MIS 2-Incision Procedure. Standard implants are used
in all MIS Procedures. The incision for a traditional
open hip primary replacement may be 12 inches long. Other less
invasive approaches, such as a “mini” incision for
hips, have been in existence for approximately six years. In
January 2004, the first computer image-guided MIS
2-Incision Hip Replacement Procedure live surgery was
performed utilizing new technology and instrumentation
co-developed by the Company and its MIS Technologies
computer navigation partner, Medtronic, Inc. In January 2004,
the United States Patent and Trademark Office granted the
Company a patent specific to the Company’s MIS
2-Incision Hip Replacement Procedure, and such patent
includes 17 approved claims related to the procedure.
The Company’s key hip replacement products include, among
others:
VerSys® Hip System. The VerSys Hip System, a
Zimmer flagship brand, is supported by a common instrumentation
set and is an integrated family of hip products that offers
surgeons design-specific options to meet varying surgical
philosophies and patient needs. The VerSys Hip System
includes the following features: a variety of stem designs and
fixation options for both primary and revision situations, a
modular design that allows for a variety of femoral heads,
optimal sizing selections, and a common instrumentation set for
use with virtually all VerSys Stems.
Zimmer® M/L Taper Prosthesis. The M/L Taper
Prosthesis was launched in early 2004 and in a short period of
time has become a key product in the Company’s portfolio.
The prosthesis offers a dual wedge and proximally coated design
that was based on long term clinically proven concepts. The
M/L Taper has become widely used in the Company’s
MIS Procedures due to its overall design and ease of use.
Specific instruments have been developed to facilitate the
insertion of the M/L Taper through the MIS Anterolateral
Technique.
Alloclassic® (Zweymueller®) Hip System.
The Alloclassic (Zweymueller) Hip System has become the
most used, primary, cementless hip in the world. This is one of
the few stems available today that is practically unchanged
since its introduction in 1979. In 2004, the Company celebrated
the 25th anniversary of the Alloclassic Stem with a
symposium in Vienna, Austria. A new offset design was added in
2004 and offers the surgeon increased capability to restore the
patient’s anatomical joint movement.
CLS® Spotorno™ Hip System. The CLS
Spotorno Stem is one of the Company’s largest selling
hip prostheses, especially in the European markets. Since the
first implantation in 1984, more than 380,000 stems have
been implanted. Additions to the product line in 2004 provide
the capability for restoration of the physiological center of
rotation. The Company believes that more than 20 years of
experience and excellent clinical results, confirmed by the 2004
Swedish Hip Registry with a 100 percent survivorship after
11 years, makes the CLS Spotorno Stem one of the
most successful uncemented hip prostheses on the market.
ZMR® and Revitan® Revision Hip Systems.
The ZMR Revision Hip System, introduced to address the
porous modular revision market, and the Revitan Revision
Hip System, provide the versatility to accommodate varying
fixation and sizing needs. These systems offer straight as well
as bowed stems, and cylindrical and spout proximal bodies.
Trilogy® Acetabular System. The Trilogy
Acetabular System, including titanium alloy shells, polyethylene
liners, screws and instruments, is a prominent acetabular cup
system. The Trilogy Family of products offers patients
and surgeons innovative options and versatile component designs
and instrumentation. One option, the Longevity®
Highly Crosslinked Polyethylene Liner, is designed to address
the issue of wear in total hip arthroplasty. Polyethylene debris
may cause the degeneration of bone surrounding reconstructive
implants, a painful condition called osteolysis. The Company has
augmented and continues to augment its offerings of porous
reconstructive hip implants through the introduction of
Trabecular Metal Technology. The Company fully launched
the Trabecular Metal Modular Primary Acetabular Shell in
2004. This particular product incorporates design features from
the Trilogy family of Acetabular shells augmented with
the advanced fixation surface of Trabecular Metal
material. In addition to the Trabecular Metal primary
system, the Company also offers a Trabecular Metal
Revision Acetabular Shell for advanced fixation in acetabulae
with insufficient bone.
Alternative Bearing Technology. The Company has a broad
portfolio of alternative bearing technologies which include
Longevity and Durasul® Highly Crosslinked
Polyethylene, Metasul® Metal-on-Metal Tribological
Solution and Cerasul® and Trilogy AB®
Ceramic-on-Ceramic Tribological Solutions. Alternative bearings
help to minimize wear over time, potentially increasing the
longevity of the implant. The Company submitted a pre-market
approval application to the United States Food and Drug
Administration (“FDA”) in December 2004 and expects to
launch the Trilogy AB System with ceramic-on-ceramic and
metal-on-metal bearing surfaces later in 2005.
Durom™ Hip Resurfacing System. This product is
particularly suited to younger patients since it preserves the
patient’s healthy bone stock. A primary objective of this
system is to allow the patient to return to an active lifestyle.
The Durom System uses the highly wear resistant
Metasul Metal-on-Metal Technology as the bearing surface
for the implant design. Since 1988, Metasul Technology
has been used successfully for total hip replacement.
Today’s metal-on-metal technology is the result of over one
and a half decades of development, research and clinical
evaluation. This has formed the foundation for the latest
development – the
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2004 FORM 10-K |
Durom Hip Resurfacing System. The option of the large
diameter heads, which was introduced in 2004, offers the
advantage of a low-wear solution while providing greater joint
stability and high range of motion in combination with the wide
range of cemented and uncemented femoral implants. This product
is not available for commercial distribution in the United
States.
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Elbow and Shoulder
Implants |
Coonrad/ Morrey Total Elbow. The Coonrad/ Morrey Total Elbow
product line is a family of elbow replacement implant products
which have helped the Company establish itself in the global
elbow implant market.
Bigliani/ Flatow® Complete Shoulder Solution. The
Bigliani/ Flatow product line gives the Company a
significant presence in the global shoulder implant market. The
system is designed to treat arthritic conditions and fractures
as well as to enhance the outcome of primary or revision
surgery. New Bigliani/ Flatow Shoulder Instrumentation
for fracture treatment was released in February 2004.
Anatomical Shoulder™ System. The Anatomical
Shoulder system can be tailored to each patient’s
individual anatomy. In March 2004, the functionality was
increased by adding modular rasp instrumentation. This provides
the surgeon more versatility in orienting the head of the
humerus for optimal clinical results.
The Company’s Dental Division manufactures and distributes
(i) dental reconstructive implants – for
individuals who are totally without teeth or are missing one or
more teeth; (ii) dental restorative products –
aimed at providing a more natural restoration to mimic the
original teeth; and (iii) dental regenerative
products – for bone grafting applications. Zimmer
Dental also develops and offers a variety of educational
material and courses to support the clinician in his or her
practice. In 2004, Zimmer Dental relocated its manufacturing
operations to Carlsbad, California, and began construction of a
state-of-the-art training facility designed to provide various
educational opportunities for its global customers.
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Dental Reconstructive
Implants |
The Company’s dental reconstructive implant products and
surgical and restorative techniques include, among others:
Tapered Screw-Vent® Implant System. The
Company’s largest selling dental product line provides the
clinician a tapered geometry which mimics the natural shape of a
tooth root. The Tapered Screw-Vent System, with its
two-stage design, was developed and designed to minimize
valuable chair time for restorations even in the most
challenging locations. Featuring a patented internal hex
connection, multiple lead threads for reduced insertion time and
selective surface coatings, the Tapered Screw-Vent
Product is a technologically advanced dental implant offering
features which allow the clinician to meet the needs of patients
even in the most demanding circumstances.
AdVent® Implant System. Utilizing many features of
the Tapered Screw-Vent System, the AdVent Product
is a transgingival, one stage design that utilizes the same
surgical system as the Tapered Screw-Vent System,
allowing the clinician to use both design concepts without
incurring the added cost of a second surgical system.
Tapered SwissPlus® Implant System. Designed to meet
the needs of clinicians who prefer a transgingival, one stage,
dental implant design, the Tapered SwissPlus System
incorporates innovative multiple lead threads for faster
insertion time, and a tapered body to allow it to be placed in
tight interdental spaces. The Tapered SwissPlus System
also incorporates a unique internal connection.
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Dental Restorative
Products |
In 2004, the Company continued development efforts concerning
products for the aesthetic restorative market aimed at providing
a more natural restoration. The following are the primary
restorative dental products of the Company:
Atlantis™1
Abutment. The Atlantis Abutment System is marketed by the
Company through an agreement with Atlantis Components, Inc. This
product allows for a custom made restoration improving aesthetic
results in dental implant procedures.
PureForm™ Ceramic System. Utilizing patented
designs, the PureForm System is a ceramic system which
allows clinicians to provide to their patients a more natural
looking restoration. This easy-to-use concept provides the
clinician a product to custom fabricate and color the crown to
each patient’s individual needs.
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Dental Regenerative
Products |
The Company markets the following product lines for use in
regenerative techniques in oral surgery:
Puros® Allograft. The Puros Material is an
allograft bone grafting material which utilizes the
Tutoplast®2
Tissue Processing Technique that provides exceptional bone
grafting material for use in oral surgery. The Puros
Allograft material is recognized as an excellent bone grafting
material by clinicians throughout the world.
Biomend®3
and Biomend® Extend Absorbable Collagen
Membrane Products. Periodontal and oral surgery often require
the use of a membrane to cover the surgical site. The
Biomend Family of collagen based membranes offer the
surgeon excellent handling characteristics while typically
reducing the patient’s surgery to one visit.
1 Trademark
of Atlantis Components, Inc.
2 Registered
Trademark of Tutogen Medical, Inc.
3 Registered
Trademark of Integra LifeSciences Corporation.
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2004 FORM 10-K |
Spine Implants
The primary focus of the Company’s Spine division in 2004
was the establishment of an increased presence in the spinal
market. Zimmer Spine has created a new global infrastructure
that will further focus on introducing products internationally
and it implemented a new U.S. sales distribution system in
2004. Zimmer Spine is planning to launch key product offerings
in 2005 and initiate or continue a variety of research and
development projects. The Company’s spine product offerings
include, among others:
Dynesys®4
Dynamic Stabilization System. The Dynesys Dynamic
Stabilization System uses flexible materials to stabilize the
affected lower spine while preserving the natural anatomy of the
spine. The Dynesys System is indicated as an adjunct to
fusion.
NeuGraft®5
Strip Bone Graft Mix. The NeuGraft Strip Bone Graft
Matrix is a mixture of purified fibrillar collagen (PFC) and
hydroxyapatite/ tricalcium phosphate ceramic (HA/TCP). The
NeuGraft Strip, when coated with autogenous bone marrow,
is indicated for use in bony voids or gaps that are not
intrinsic to the stability of the bony structure. Current
distribution rights from NeuColl, Inc. allow the Company to
market this product in the United States.
Trinica® Select Anterior Cervical Plate System. The
Trinica Select Anterior Cervical Plate System and
All-Through-One instrumentation is designed to simplify the
surgical procedure while requiring less retraction and reducing
the risk of soft-tissue damage. The Trinica Select
Self-Drilling Screws seek to provide the surgeon with the option
to reduce the amount of instruments, thereby potentially
reducing the amount of retraction and surgical time to implant
the Trinica Select Plate.
Trabecular Metal Technology. Trabecular Metal
Technology has a wide range of spinal applications. In the
United States, Trabecular Metal Materials are cleared for
both Thoracolumbar and Vertebral Body Replacement procedures as
well as bone void fillers.
Puros Allograft Products. The Company continues to sell
traditional and specialty Puros Allograft bone products
through its exclusive U.S. distribution agreement with
Tutogen Medical, GmbH. Puros Products consist of
traditional and specialty grafts which are donated human
tissues, preserved with Tutogen’s patented Tutoplast
Process of tissue preservation and viral inactivation. The
Tutoplast Process is a proprietary tissue processing
system designed to significantly reduce the amount of cells,
bone marrow and lipid components from processed allograft bone
and connective tissue while preserving the extra-cellular matrix
(collagen and mineral components).
Trauma
Trauma products include devices used primarily to stabilize
damaged bone and tissue to support the body’s natural
healing process. The most common surgical stabilization of bone
fracture involves the internal fixation of bone fragments. This
stabilization can involve the use of a wide assortment of
plates, screws, rods, wires and pins. In addition, external
fixation devices may be used to stabilize fractures or correct
deformities by applying them externally to the limb. The Company
offers a comprehensive line of cost-effective quality products,
including, among others:
M/DN® Intramedullary Fixation, ITST™
Intertrochanteric/ Subtrochanteric Fixation System, and
Sirus® Nail System. The M/DN, ITST, and
Sirus Intramedullary Nailing Systems are utilized for the
internal fixation of long bone fractures. Both stainless steel
and titanium are used to accommodate various market philosophies.
Zimmer® Periarticular Plating System. The
periarticular plating system, used to stabilize fractures near
joints, includes recently released locking plates, which are
pre-contoured to closely follow the shape of the bone and create
a fit that requires little or no additional bending.
Zimmer® Plates and Screws. The Zimmer Plates
and Screws System is a comprehensive system of stainless steel
plates, screws and instruments for internal fracture fixation.
Because this system is compatible with major competitive
systems, it affords surgeons added flexibility and value.
Wristore™6
Distal Radius Fracture Fixator. In early 2003, the Company
acquired the design of this new all polymer external fixator for
special application to more common wrist fractures. The
Wristore Fixator was launched in late 2004 in a sterile
pack that provides all of the necessary instruments and device
components in one convenient package.
TransFx™ External Fixation System. In December 2004,
the Company completed the integration of the TransFx
External Fixation System product line that was acquired from
Immedica, Inc. in 2003. The innovative design of the
TransFx Product Line provides excellent fracture
reduction and stability while contributing to efficient
inventory management within the hospital. The TransFx
System is comprehensive with a broad range of sizes capable of
treating most any fracture where external fixation is utilized.
Orthopaedic Surgical Products
The Company manufactures and markets non-implant surgical
products, including tourniquets, blood management systems, wound
debridement products, traction devices and
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| 4 |
The Dynesys Dynamic Stabilization Spinal System is
cleared in the United States for use as an adjunct to fusion.
The Dynesys Dynamic Stabilization Spinal System is also
currently in an investigational device study for a non-fusion
application and is limited by U.S. federal law to
investigational use only. |
5 Registered
Trademark of NeuColl, Inc.
6 Trademark
of Millenium Medical Technologies, Inc.
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| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
orthopaedic softgoods. The Company develops and markets surgical
products to support its reconstructive, trauma, spinal and
dental product systems in the operating room environment with a
focus on blood, surgical wound management, pain management and
patient management products.
The Company’s orthopaedic surgical products include, among
others:
A.T.S.® Tourniquet Systems. The A.T.S.
Product Line represents a complete family of tourniquet machines
and cuffs. The family of three machines is designed to meet the
demands of a wide variety of health care facilities and clinical
applications. The range of cuffs which complement the machines
provides the flexibility to occlude blood flow safely with
convenience and accuracy for adult limbs of virtually every size
and shape.
OrthoPAT®7
Orthopedic Perioperative Autotransfusion System. This
autotransfusion system, which includes patented disposable
components, has been specifically designed to collect, wash and
prepare a patient’s own blood for re-infusion during and
following an orthopaedic surgical procedure. The Company markets
OrthoPAT Autotransfusion Systems through an exclusive
distribution arrangement in the United States.
Zimmer® Blood Reinfusion System (ZBRS). This new
addition to the Company’s portfolio of blood management
products salvages, filters and then reinfuses the patient’s
own blood following surgery.
Pulsavac® Plus and Pulsavac Plus LP Wound
Debridement Systems. These Pulsavac Systems are used for
cleaning and debridement of contaminants and foreign matter from
wounds using simultaneous irrigation and suction. Both
Pulsavac systems are completely disposable to reduce the
risk of cross contamination.
Palacos®8
Bone Cements. Recently, the Company executed a distribution
agreement with Heraeus Kulzer GmbH, giving Zimmer the
U.S. distribution rights to a variety of Heraeus Kulzer
bone cement brands. Included in these brands are
Palacos R and Palacos R G Bone
Cements. Palacos R G Product is a bone cement
with the antibiotic gentamicin pre-mixed in the formulation
which is used by the orthopaedic surgeon to reduce the risk of
postoperative infection. The multi-year agreement is for
nonexclusive distribution rights in 2005, and Zimmer will assume
exclusive U.S. distribution rights in 2006. Zimmer expects
to launch the Palacos Bone Cements in the first half of
2005.
Zimmer® Ambulatory Pump. In 2004, the Company
executed a supply agreement with Baxter Healthcare Corporation,
which allows Zimmer to incorporate Baxter’s MULTIRATE
INFUSOR9
Elastomeric Mechanical Device in a
kit10
that will be used for post-surgical pain management. Zimmer
expects to launch this product in the United States in the first
half of 2005.
Sports Medicine
The Company markets a limited product line in the area of sports
medicine which is focused on products for the fixation and
repair of soft tissues, including:
Sysorb® Bioresorbable Interference Screw System. The
unique design of the Sysorb Bioresorbable Interference
Screws and associated instrumentation accommodate the use of an
amorphous polymer. The benefits of an amorphous polymer are that
it has an excellent biocompatibility and degrades completely
within approximately one year. It maintains a strong fixation
during the entire healing process. The patented turbine-like
drive of the Sysorb Screw distributes the torque equally
over the whole screw length during its insertion, which helps to
prevent screw failure during screw placement.
In addition, various projects are underway at the Company to
address the repair of cartilage as an early stage treatment.
PRODUCT DEVELOPMENT
The Company has extensive research and development activities
underway to introduce new surgical techniques, materials,
biologics and product designs intended to advance the field of
orthopaedics. The product development function works closely
with the strategic brand marketing function to understand and
respond quickly to our customers’ needs on a global basis,
and with the research function to incorporate new technologies
in our product pipeline. The rapid commercialization of
innovative new materials, biologics products, implant and
instrument designs, and surgical techniques remains one of the
Company’s core strategies and continues to be an important
driver of sales growth.
Key new products, surgical techniques and instruments introduced
or developed by the Company in 2004 include, among others:
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| • |
MIS Implants, Surgical Techniques and Instrumentation for
knee, hip and trauma: |
|
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| • |
MIS THA Instruments and Techniques:
MIS Mini-Incision and MIS 2-Incision
Instrument Enhancements, as well as launch of new Single
Anterolateral Incision Technique and Instruments |
| • |
MIS TKA Instruments and Techniques: General releases for
MIS Quad-Sparing Technique and Instruments and MIS
Mini-Incision (Intramedullary and 4-in-1) Technique and
Instruments for NexGen Knee System, as well as MIS
Mini-Incision Technique and Instruments for the
Natural-Knee II System |
| • |
MIS TKA Implants: NexGen Mini Keel Tibial Plate
Implants and Instruments (outside U.S. only until FDA
clearance) |
7 Trademark
of Haemonetics Corporation
8 Registered
Trademark of Heraeus Kulzer GmbH.
9 MULTIRATE
and INFUSOR are Trademarks of Baxter International Inc.
10 Not
yet available for commercial distribution.
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| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
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| • |
Zimmer Unicompartmental Knee (Fixed Bearing) –
Implant and MIS Instrumentation Systems |
| • |
Zimmer® Computer Assisted Solutions: Imageless
NexGen Open Knee developed in conjunction with partner,
Medtronic, Inc.; in addition to the applications released in
2003, the MIS 2-Incision Hip software and
instrumentation have been improved |
|
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| • |
Trabecular Metal Augments for the knee, including
traditional augment blocks and tibial cones for revision surgery
with substantial bone loss |
| • |
NexGen LPS-Flex Prolong Highly Crosslinked Polyethylene
and Molded Polyethylene Tibial Articular Surfaces (Fixed Bearing) |
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| • |
Natural Knee II Patello-Femoral Joint |
| • |
Wristore External Fixator – New external
fixation system for the wrist; sold in a sterilized kit |
| • |
Zimmer Periarticular Locking Plates, starting with Distal
Lateral Volar Plates for the wrist and a limited release to
developers on the Distal Femoral Plates. Plates for other
anatomical sites will be released throughout 2005. |
| • |
Elogenics Finger (Europe only) |
| • |
Anatomic Hip Stem |
| • |
Constrained Acetabular Cup Liners for the Converge®
Porous Acetabular Cup System |
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| • |
Expansions to existing systems: |
|
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| • |
NexGen CR-Flex Knee |
| • |
NexGen LPS-Flex Trabecular Metal Monoblock Tibial |
| • |
VerSys Revision Stems |
| • |
TransFx External Fixation System |
| • |
Variall™ Cups Line Extension |
| • |
AllegrettoTM
Unicompartmental Knee |
| • |
Sirus Nail System |
| • |
CLS Hip Stems |
| • |
NexGen Rotating Hinge Knee |
| • |
NexGen LPS-Flex Knee |
| • |
M/DN Intramedullary Fixation System |
These and other new products introduced in the last
3 years accounted for approximately 18 percent of 2004
total sales, consistent with the Company’s new products
sales goal of 15 to 20 percent of total sales on an annual
basis.
The Company is actively broadening its product offerings in each
of the product areas and exploring new technologies that have
applications in multiple areas. For the years ended
December 31, 2004, 2003 and 2002, the Company spent
$166.7 million, $105.8 million, and
$80.7 million, respectively, on research and development.
The substantial increases in research and development
expenditures have accelerated the output of new orthopaedic and
dental reconstructive implants, spine and trauma products,
including advanced new materials, product designs and surgical
techniques. The Company’s primary research and development
facility is located in Warsaw, Indiana, but the Company also has
other research and development personnel based in, among other
places, Dover, Ohio; Austin, Texas; Carlsbad, California;
Minneapolis, Minnesota; Cedar Knolls, New Jersey; and
Winterthur, Switzerland. As of December 31, 2004, the
Company employed more than 540 research and development
employees worldwide.
The Company will continue to identify innovative technologies
and consider acquiring complementary products or businesses, or
establishing technology licensing arrangements or strategic
alliances. The Zimmer Institute, and the Company’s
affiliations with medical teaching institutions, will continue
to play an integral role in facilitating training for surgeons,
sales associates and other medical professionals on the
procedures for applying MIS Techniques to orthopaedic
surgery. In addition, the Company has developed and maintains
close relationships with a number of orthopaedic surgeons who
assist in product research and development.
ORTHOBIOLOGICS
As part of its focused research and development efforts and
desire to create new orthopaedic treatments, the Company has
established an Orthobiologics group based in Austin, Texas, with
its own full-time staff and dedicated projects. The Company is
actively involved in the field of biologics and is committed to
investing in biologics research activities. The Company is
working on biological solutions to repair and regenerate damaged
or degenerated orthopaedic tissues. These materials potentially
could transform treatment of damaged joints by biological
regeneration rather than replacement with inert materials.
In 2004, the Company, working with Tissue Science Laboratories,
prepared for the launch of the Zimmer® Collagen
Repair Patch to treat rotator cuff tears, which is planned for
release in 2005. The Company also continued collaborating with
ISTO Technologies on a project to develop a chondral and
osteochondral cartilage graft for cartilage tissue repair. The
Company continued in 2004 to plan the release of the
Denovo®-T Autologous Chrondrocyte Transplantation
Graft, which is an autologous cell implantation service for
articular cartilage repair. Moreover, in the orthobiologics
area, the Company has other ongoing programs and technology
survey activities in the areas of soft tissue repair and
regeneration, including tendon, ligament and meniscus and in
bone regeneration, spine and dental areas.
GOVERNMENT REGULATIONS AND QUALITY SYSTEMS
The Company is subject to government regulation with regard to
its products and operations in the countries in which it
conducts business. It is the policy of the Company to comply
with all regulatory requirements governing its operations and
products, and the Company believes that the research,
development, manufacturing and quality control procedures that
it employs are in material compliance with all applicable
regulations.
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| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
In the United States, numerous regulations govern the
development, testing, manufacturing, marketing and distribution
of medical devices, including, among others, the Federal Food,
Drug and Cosmetic Act and regulations issued or promulgated
thereunder. The FDA regulates product safety and efficacy,
laboratory, clinical and manufacturing practices, labeling and
record keeping for medical devices and post market surveillance
to identify potential problems with marketed medical devices. A
few of the devices developed and marketed by the Company are in
a category for which the FDA has implemented stringent clinical
investigation and pre-market approval requirements. The FDA has
the authority to halt the distribution of certain medical
devices; detain or seize adulterated or misbranded medical
devices; or order the repair, replacement or refund of the costs
of such devices. There are also certain requirements of state,
local and foreign governments that must be complied with in the
manufacture and marketing of the Company’s products.
In many of the foreign countries in which the Company markets
its products, the Company is subject to local regulations
affecting, among other things, clinical efficacy, product
standards, packaging requirements and labeling requirements.
Many of the regulations applicable to the Company’s devices
and products in these countries are similar to those of the FDA.
The member countries of the European Union have adopted the
European Medical Device Directives, which create a single set of
medical device regulations for all member countries. These
regulations require companies that wish to manufacture and
distribute medical devices in European Union member countries to
obtain CE Marks for their products. The Company maintains a
certified status with the European and Canadian Notified Bodies,
which provides for CE marking of products for these markets.
The Company is subject to various government regulations
pertaining to healthcare fraud and abuse, including
anti-kickback laws and physician self-referral laws. Violations
of these laws are punishable by criminal and/or civil sanctions,
including, in some instances, fines, imprisonment and, within
the United States, exclusion from participation in government
healthcare programs, including Medicare, Medicaid, Veterans
Administration (VA) health programs and Civilian Health and
Medical Program Uniformed Service (CHAMPUS). The scope and
enforcement of these laws and regulations are uncertain and
subject to rapid change, especially in light of the lack of
applicable precedent and regulations. The Company believes that
its operations are in material compliance with these laws.
The Company is committed to providing high quality products to
its customers. To meet this commitment, the Company has
implemented modern quality systems and concepts throughout the
organization. The quality assurance department supervises the
Company’s quality systems. Senior management is actively
involved in setting quality policies and managing internal and
external quality performance. The Company’s regulatory
affairs and compliance department is responsible for assuring
compliance with all applicable regulations, standards and
internal policies.
The Company has initiated numerous quality improvement programs
and all of the Company’s manufacturing operations are
ISO 9000 and/or ISO 13485/13488 series certified.
The Company’s facilities and operations are also subject to
various government environmental and occupational health and
safety requirements of the United States and foreign countries,
including those relating to discharges of substances in the air,
water and land, the handling, storage and disposal of wastes and
the cleanup of properties by pollutants. The Company believes it
is currently in material compliance with such requirements.
COMPETITION
The orthopaedics industry is highly competitive. In the global
markets for reconstructive implants, trauma and orthopaedic
surgical products, major competitors include: DePuy
Orthopaedics, Inc. (a subsidiary of Johnson & Johnson),
Stryker Corporation, Biomet, Inc., Synthes, Inc. and Smith &
Nephew plc.
In the Americas geographic segment, DePuy Orthopaedics, Inc.,
Stryker Corporation, Biomet, Inc. and Smith & Nephew, Inc.
(a subsidiary of Smith & Nephew plc), along with the
Company, account for a large majority of the total
reconstructive implant sales.
In the Asia Pacific market for reconstructive implant and trauma
products, the Company competes primarily with DePuy
Orthopaedics, Inc. and Stryker Corporation, as well as regional
companies, including Japan Medical Materials Corporation and
Japan Medical Dynamic Marketing, Inc. Factors, such as the
dealer system, complex regulatory environments and the
accompanying inability to compete on price, make it difficult
for smaller companies, particularly those that are non-regional,
to compete effectively with the market leaders in the Asia
Pacific region.
In Europe, the reconstructive implant and trauma product markets
are more fragmented than the Americas or the Asia Pacific
segments. The variety of philosophies held by European surgeons
regarding hip reconstruction, for example, has fostered the
existence of many small, niche European companies. Today most
hip implants sold in Europe are products developed specifically
for Europe, although global products are gaining acceptance.
Therefore, the Company, in addition to its global products, will
continue to develop and produce specially tailored products to
meet specific European needs.
In the spinal implant area, the Company competes globally
primarily with Medtronic Sofamor Danek, Inc. (a subsidiary of
Medtronic, Inc.), Synthes, Inc., DePuy Spine (a subsidiary of
Johnson & Johnson), Stryker Corporation and EBI, L.P. (a
subsidiary of Biomet, Inc.).
In the dental reconstructive implant area, the Company competes
primarily with Nobel Biocare Holding AG, Straumann Holding AG,
and Implant Innovations, Inc. (a subsidiary of Biomet, Inc.).
12
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2004 FORM 10-K |
Competition within the industry is primarily based on
technology, innovation, quality, reputation, customer
relationships and service. A key factor in the Company’s
continuing success in the future will continue to be its ability
to develop new products and improve upon existing products and
technologies. Where possible, the Company will continue to seek
patent, trademark and other intellectual property protection
concerning the surgical techniques, materials, technologies and
products it designs and develops.
MANUFACTURING AND RAW MATERIALS
The Company manufactures substantially all of its products at
eight locations in the United States, Puerto Rico, Switzerland
and France. Specifically, the Company presently conducts
manufacturing operations for various product areas in
Warsaw, Indiana; Winterthur, Switzerland; Ponce, Puerto
Rico; Dover, Ohio; Austin,
Texas11;
Statesville, North Carolina; Carlsbad, California; and Etupes,
France. In 2004, as part of the execution of the Centerpulse
integration plan, the Company transferred some of its production
operations among its facilities in order to optimize its
manufacturing capacity. The Company believes that its
manufacturing facilities set industry standards in terms of
automation and have the flexibility to accommodate future
growth. The manufacturing operations at these facilities are
designed to incorporate the cellular concept for production and
to implement tenets of a manufacturing philosophy focused on
continuous operational improvement. In addition, at certain of
the Company’s manufacturing facilities, many of the
employees are cross-trained.
The Company generally operates its manufacturing facilities at
its targeted goal of approximately 90 percent of total
capacity. The Company continually evaluates the potential to
in-source products currently purchased from outside vendors to
on-site production. The Company is currently in the process of
expanding certain of its facilities.
Improving manufacturing productivity has been a major
contributor to the Company’s profitability improvements in
recent years. Major areas of improvement have included
utilization of computer-assisted robots to precision polish
medical devices, automation of certain manufacturing processes,
in-sourcing of core products, such as castings and forgings,
high-speed machining, and negotiated reductions in raw materials
costs.
The Company uses a diverse and broad range of raw materials in
the design, development and manufacturing of its products. The
Company purchases all of its raw materials and select components
used in manufacturing its products from external suppliers. In
addition, the Company purchases some supplies from single
sources for reasons of quality assurance, sole source
availability, cost effectiveness or constraints resulting from
regulatory requirements. The Company works closely with its
suppliers to assure continuity of supply while maintaining high
quality and reliability. Although a change in suppliers could
require significant effort or investment by the Company in
circumstances where the items supplied are integral to the
performance of the Company’s products or incorporate unique
technology, the Company does not believe that the loss of any
existing supply contract would have a material adverse effect on
its financial and operational performance. To date, the Company
has not experienced any significant difficulty in locating and
obtaining the materials necessary to fulfill its production
schedules.
INTELLECTUAL PROPERTY
The Company believes that patents and other proprietary rights
are important to the continued success of its business and the
Company also relies upon trade secrets, know-how, continuing
technological innovation and licensing opportunities to develop
and maintain its competitive position. The Company protects its
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.
The Company owns or controls through licensing arrangements more
than 2,130 issued patents and more than 2,106 patent
applications throughout the world that relate to aspects of the
technology incorporated in many of the Company’s products.
EMPLOYEES
The Company employs more than 6,600 employees worldwide,
including more than 540 employees dedicated to research and
development. Approximately 4,100 employees are located within
the United States and more than 2,500 employees are located
outside of the United States, primarily in Japan and throughout
Europe. The Company has over 2,400 employees dedicated to the
manufacture of its products worldwide. The Warsaw, Indiana,
production facility employs more than 900 employees. Nearly 200
North American employees are members of a trade union covered by
a collective bargaining agreement.
In May 2000, the Company renewed a collective bargaining
agreement with the United Steelworkers of America covering
employees at the Dover, Ohio, facility. This agreement will
continue in effect until May 15, 2007. The agreement
automatically renews thereafter on a year-to-year basis until
either party gives written notice of its intent to terminate the
agreement, 60 days prior to a termination date. The Company
believes that its relationship with its employees and the union
that represents them is good.
AVAILABLE INFORMATION
The Company’s Internet website address is www.zimmer.com.
Its annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and
|
|
| 11 |
The Company has announced plans to phase-out this facility by
the end of 2005. |
13
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act are available or
may be accessed free of charge through the Investor Relations
section of the Company’s Internet website as soon as
reasonably practicable after the Company electronically files
such material with, or furnishes it to, the SEC. The
Company’s Internet website and the information contained
therein or connected thereto are not intended to be incorporated
by reference into this Annual Report on Form 10-K.
The following corporate governance and related documents are
available through the Company’s website or may be obtained
in print form, without charge, by request to the Company’s
Investor Relations Department: Corporate Governance Guidelines,
Code of Business Conduct, Code of Ethics for Chief Executive
Officer and Senior Financial Officers, Audit Committee Charter,
Compensation and Management Development Committee Charter,
Corporate Governance Committee Charter, and Science and
Technology Committee Charter.
The Company intends to post on its website any amendment to, or
waiver from, a provision of its Code of Ethics for Chief
Executive Officer and Senior Financial Officers.
14
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Executive Officers of the Company
The following table sets forth certain information with respect
to the executive officers of the Company as of January 31,
2005.
| |
|
|
|
|
|
|
| Name |
|
Age |
|
Position |
| |
| J. Raymond Elliott |
|
55 |
|
Chairman, President and Chief Executive Officer |
| Sheryl L. Conley |
|
44 |
|
President, Global Products Group |
| James T. Crines |
|
45 |
|
Senior Vice President, Finance/ Controller and Information
Technology |
| David C. Dvorak |
|
41 |
|
Executive Vice President, Corporate Services, Chief Counsel and
Secretary |
| Richard Fritschi |
|
44 |
|
President, Zimmer Europe and Australasia |
| Jon E. Kramer |
|
58 |
|
President, Americas |
| Sam R. Leno |
|
59 |
|
Executive Vice President, Corporate Finance and Operations and
Chief Financial Officer |
| Bruno A. Melzi |
|
57 |
|
Chairman, Zimmer International |
| |
J. Raymond Elliott was appointed Chairman on
August 6, 2001 and President and Chief Executive Officer of
the Company on March 20, 2001. Mr. Elliott was
appointed President of Zimmer, Inc., the Company’s
predecessor, in November 1997. Mr. Elliott has more than
30 years of experience in orthopaedics, medical devices and
consumer products. He has served as a director on more than 20
business-related boards in the U.S., Canada, Japan and Europe
and has served on five occasions as Chairman. He has served as a
member of the board of directors and chair of the orthopaedic
sector of the Advanced Medical Technology Association (AdvaMed)
and is currently a director of the State of Indiana Workplace
Development Board, the Indiana Chamber of Commerce, the American
Swiss Foundation, and represents the State of Indiana on the
President’s State Scholars Program. Mr. Elliott has
served as a trustee of the Orthopaedic Research and Education
Foundation (OREF).
Sheryl L. Conley was appointed President, Global Products
Group in October 2003 and she oversees the Company’s Global
Development and Global Brand Management groups, the Orthopaedic
Surgical Products Division and the Dental Products Division.
Ms. Conley has responsibility for, among other things,
strategic planning and market research. From September 2002 to
October 2003, Ms. Conley served as President, Zimmer
Reconstructive and from May 2000 to August 2002, she served as
Vice President, Global Brand Management and Commercialization,
where she was responsible for the Company’s worldwide
branding, marketing and new product development efforts.
Ms. Conley was General Manager, Zimmer Canada, from 1998 to
2000. Ms. Conley joined Zimmer, Inc. in 1983 and has held
various management positions in marketing, operations and
clinical research.
James T. Crines was appointed Senior Vice President,
Finance/ Controller and Information Technology in October 2003
and he is responsible for a variety of financial functions,
including accounting, corporate reporting, investments and
treasury, as well as for the Company’s worldwide
Information Technology function. From July 2001 to October 2003,
Mr. Crines served as Vice President, Finance/ Controller
and from September 2000 to July 2001, he served as Vice
President, Finance and Information Technology. Mr. Crines
served Zimmer, Inc. as Director of Finance and Logistics, Japan
from May 1999 until September 2000. Mr. Crines served as
Associate Director, Accounting at Bristol-Myers Squibb, the
Company’s former parent, from September 1995 until he
joined Zimmer, Inc. in 1997 as Director of Finance.
Mr. Crines has over 20 years of experience in
corporate and operations finance and accounting, including five
years as an auditor.
David C. Dvorak was appointed Executive Vice President,
Corporate Services, Chief Counsel and Secretary in October 2003
and he is responsible for, among other things, legal affairs,
corporate business development, corporate communications and
corporate human resources. Mr. Dvorak also serves as the
Company’s Compliance Officer. From December 2001 to October
2003, Mr. Dvorak served as Senior Vice President, Corporate
Affairs and General Counsel of the Company. He has served as
Corporate Secretary since February 2003. Prior to his
appointment with the Company, Mr. Dvorak served as Senior
Vice President, General Counsel and Corporate Secretary and was
a member of the Executive Committee of STERIS Corporation. Prior
to joining STERIS in June 1996, Mr. Dvorak practiced
corporate law at two large Cleveland, Ohio law firms, focusing
on mergers and acquisitions and on securities law.
Richard Fritschi was appointed President, Zimmer Europe
and Australasia in October 2003 and he is responsible for sales
in the European market as well as all European marketing and the
European and Australasia operations group, including the
Winterthur, Switzerland manufacturing facility. From July 2001
to October 2003, Mr. Fritschi served as President of
Centerpulse Orthopedics Europe/Asia/Latin America. He joined
Allo Pro AG (subsequently known as Sulzer Medica Company) as
Controller in 1991 and was promoted to Chief Financial Officer
of Allo Pro AG in 1992 before becoming General Manager of Sulzer
Orthopedics Ltd. in 1999.
Jon E. Kramer was appointed President, Americas in August
2004 and he has responsibilities with respect to the
Company’s business in the United States, Canada and Latin
America. From October 2003 to August 2004, Mr. Kramer
served as Vice President, U.S. Sales, and from 2001 to
October 2003, he was the Company’s Area Vice President for
the Southeast region of the United States. Prior to joining the
Company, Mr. Kramer served as Vice President of Sales for
Implex Corp. The Company acquired Implex on April 23,
15
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
2004, and the company formerly known as Implex now is a
wholly-owned subsidiary of Zimmer. Mr. Kramer has over
20 years of sales experience in the orthopaedics industry.
Sam R. Leno was appointed Executive Vice President,
Corporate Finance and Operations, and Chief Financial Officer in
October 2003 and, in addition to his Chief Financial Officer
role, he is responsible for the Company’s equity investment
portfolio, global operations, which include the Company’s
information technology group, Puerto Rico operations, global
sourcing, global planning and logistics, global inventory
oversight, facilities and facilities planning, and productivity.
From July 2001 to October 2003, Mr. Leno served as Senior
Vice President and Chief Financial Officer of the Company. Prior
to his appointment with the Company, Mr. Leno served as
Senior Vice President and Chief Financial Officer of Arrow
Electronics, Inc., a global distributor of electronic
components, a position he held from March 1999 until he joined
the Company. Between 1971 and March 1999, Mr. Leno held
various chief financial officer and other financial positions
with several U.S. based companies and he previously served
as a U.S. Naval Officer.
Bruno A. Melzi was appointed Chairman, Zimmer
International in October 2003 and he is responsible for the
Company’s operations in Europe and Japan, as well as the
international staff functions of finance, human resources, legal
and communications. He joined Zimmer, Inc. in 1990 as Managing
Director, Italy. In March 2000, Mr. Melzi was promoted from
Vice President and Managing Director of Italy, Germany and
Switzerland, a position he held since October of 1997, to the
role of President, Europe/MEA. Mr. Melzi has over
28 years of experience in the orthopaedics and medical
products industry, including serving as General Manager and
member of the Board of Directors of Johnson & Johnson Italy
from 1983 to 1990.
16
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
The Company has the following properties:
| |
|
|
|
|
|
|
|
|
|
|
| Location |
|
Use |
|
Owned/Leased | |
|
Square Feet | |
| | |
|
Warsaw, Indiana
|
|
Research & Development, Manufacturing, Warehousing,
Marketing and Administration |
|
|
Owned |
|
|
|
796,000 |
|
| |
|
Warsaw, Indiana
|
|
Corporate Headquarters and The Zimmer Institute |
|
|
Owned |
|
|
|
115,000 |
|
| |
|
Warsaw, Indiana
|
|
Offices, Manufacturing & Warehousing |
|
|
Leased |
|
|
|
125,000 |
|
| |
|
Statesville, North Carolina
|
|
Manufacturing & Warehousing |
|
|
Owned |
|
|
|
156,000 |
|
| |
|
Dover, Ohio
|
|
Research & Development, Manufacturing & Warehousing |
|
|
Owned |
|
|
|
140,000 |
|
| |
|
Austin, Texas
|
|
Offices, Research & Development & Manufacturing |
|
|
Owned |
|
|
|
227,000 |
|
| |
|
Carlsbad, California
|
|
Offices, Research & Development & Manufacturing |
|
|
Leased |
|
|
|
85,000 |
|
| |
|
Minneapolis, Minnesota
|
|
Offices & Research & Development |
|
|
Owned |
|
|
|
42,000 |
|
| |
|
Minneapolis, Minnesota
|
|
Warehousing |
|
|
Leased |
|
|
|
16,000 |
|
| |
|
Cedar Knolls, New Jersey
|
|
Manufacturing & Warehousing |
|
|
Leased |
|
|
|
25,000 |
|
| |
|
Memphis, Tennessee
|
|
Offices & Warehousing |
|
|
Leased |
|
|
|
30,000 |
|
| |
|
Sydney, Australia
|
|
Offices & Warehousing |
|
|
Leased |
|
|
|
36,000 |
|
| |
|
Wemmel, Belgium
|
|
Offices & Warehousing |
|
|
Leased |
|
|
|
15,000 |
|
| |
|
Shanghai, China
|
|
Offices & Warehousing |
|
|
Leased |
|
|
|
10,000 |
|
| |
|
Etupes, France
|
|
Offices, Manufacturing & Warehousing |
|
|
Owned |
|
|
|
90,000 |
|
| |
|
Freiburg, Germany
|
|
Offices & Warehousing |
|
|
Leased |
|
|
|
44,000 |
|
| |
|
Kiel, Germany
|
|
Offices & Warehousing |
|
|
Leased |
|
|
|
21,000 |
|
| |
|
Treviso, Italy
|
|
Offices & Warehousing |
|
|
Leased |
|
|
|
11,000 |
|
| |
|
Milan, Italy
|
|
Offices & Warehousing |
|
|
Leased |
|
|
|
36,000 |
|
| |
|
Fukuoka, Japan
|
|
Warehousing |
|
|
Leased |
|
|
|
22,000 |
|
| |
|
Gotemba, Japan
|
|
Offices, Service Center & Warehousing |
|
|
Owned |
|
|
|
87,000 |
|
| |
|
Tokyo, Japan
|
|
Offices & Warehousing |
|
|
Leased |
|
|
|
24,000 |
|
| |
|
Seoul, Korea
|
|
Offices & Warehousing |
|
|
Leased |
|
|
|
38,000 |
|
| |
|
Utrecht, Netherlands
|
|
Offices & Warehousing |
|
|
Leased |
|
|
|
16,000 |
|
| |
|
Mississauga, Canada
|
|
Offices & Warehousing |
|
|
Leased |
|
|
|
52,000 |
|
| |
|
Ponce, Puerto Rico
|
|
Manufacturing & Warehousing |
|
|
Owned |
|
|
|
113,000 |
|
| |
|
Ponce, Puerto Rico
|
|
Offices & Warehousing |
|
|
Leased |
|
|
|
12,000 |
|
| |
|
Singapore
|
|
Offices & Warehousing |
|
|
Leased |
|
|
|
10,000 |
|
| |
|
Barcelona, Spain
|
|
Offices & Warehousing |
|
|
Leased |
|
|
|
67,000 |
|
| |
|
Baar, Switzerland
|
|
Warehousing |
|
|
Leased |
|
|
|
40,000 |
|
| |
|
Winterthur, Switzerland
|
|
Offices, Research & Development & Manufacturing |
|
|
Leased |
|
|
|
251,000 |
|
| |
|
Münsingen, Switzerland
|
|
Offices |
|
|
Owned |
|
|
|
76,000 |
|
| |
|
Swindon, United Kingdom
|
|
Offices & Warehousing |
|
|
Leased |
|
|
|
68,000 |
|
The Company has begun to phase-out production in its Austin
facility and intends to close the facility in 2005. To
compensate, additions to the facilities in Warsaw, Indiana and
Ponce, Puerto Rico of approximately 132,000 and 110,000 square
feet, respectively, have begun and are expected to be completed
in 2005.
In addition to the above, the Company maintains more than 100
other offices and warehouse facilities in more than 24 countries
around the world, including the United States, Japan, Australia,
France, Russia, India, Germany, Italy, Switzerland and China.
The Company believes that all of the facilities and equipment
are in good condition, well maintained and able to operate at
present levels.
|
|
|
|
ITEM 3. |
|
Legal Proceedings |
Information pertaining to legal proceedings can be found in
Note 16 to the Consolidated Financial Statements, which are
included herein under Item 8.
|
|
|
|
ITEM 4. |
|
Submission of Matters to a Vote of Security Holders |
Not Applicable.
17
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Part II
|
|
|
|
ITEM 5. |
|
Market for the Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases |
of Equity Securities
The Company’s common stock is traded on the New York Stock
Exchange and the SWX Swiss Exchange under the symbol
“ZMH.” The high and low sales prices for the
Company’s common stock on the New York Stock Exchange for
the calendar quarters of fiscal years 2004 and 2003 are set
forth as follows:
| |
|
|
|
|
|
|
|
|
| Quarterly High-Low Share Prices |
|
High | |
|
Low | |
| | |
|
Year Ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
81.68 |
|
|
$ |
68.24 |
|
|
Second Quarter
|
|
$ |
88.95 |
|
|
$ |
73.66 |
|
|
Third Quarter
|
|
$ |
89.44 |
|
|
$ |
64.40 |
|
|
Fourth Quarter
|
|
$ |
84.99 |
|
|
$ |
67.00 |
|
|
Year Ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
49.90 |
|
|
$ |
38.02 |
|
|
Second Quarter
|
|
$ |
49.58 |
|
|
$ |
41.20 |
|
|
Third Quarter
|
|
$ |
57.00 |
|
|
$ |
43.69 |
|
|
Fourth Quarter
|
|
$ |
71.85 |
|
|
$ |
54.84 |
|
The Company has not declared or paid dividends on the common
stock since becoming a public company on August 6, 2001.
Currently, the Company does not anticipate paying any cash
dividends on the common stock in the foreseeable future. The
Company’s credit facility also restricts the payment of
dividends under certain circumstances.
The number of beneficial owners of common stock on
February 18, 2005 was approximately 594,000. On
February 18, 2005, the closing price of the common stock,
as reported on the New York Stock Exchange, was $85.76 per share.
The information required by this Item concerning equity
compensation plans is incorporated by reference to Item 12
of this report.
18
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
|
|
|
|
ITEM 6. |
|
Selected Financial Data |
The financial information for each of the past five years ended
December 31, is set forth below (in millions, except per
share amounts):
Summary of Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003(1) | |
|
2002 | |
|
2001 | |
|
2000 | |
| | |
|
Net sales
|
|
$ |
2,980.9 |
|
|
$ |
1,901.0 |
|
|
$ |
1,372.4 |
|
|
$ |
1,178.6 |
|
|
$ |
1,040.6 |
|
|
Net earnings
|
|
|
541.8 |
|
|
|
346.3 |
|
|
|
257.8 |
|
|
|
149.8 |
|
|
|
176.0 |
|
|
Pro forma net earnings assuming change in accounting principle
for instruments is applied
retroactively(2)
|
|
|
541.8 |
|
|
|
291.2 |
|
|
|
260.8 |
|
|
|
156.2 |
|
|
|
177.1 |
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
2.22 |
|
|
$ |
1.67 |
|
|
$ |
1.33 |
|
|
$ |
0.77 |
|
|
$ |
0.91 |
|
| |
Diluted
|
|
|
2.19 |
|
|
|
1.64 |
|
|
|
1.31 |
|
|
|
0.77 |
|
|
|
0.91 |
|
|
Pro forma earnings per common share assuming change in
accounting principle for instruments is applied
retroactively(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
2.22 |
|
|
$ |
1.40 |
|
|
$ |
1.34 |
|
|
$ |
0.81 |
|
|
$ |
0.91 |
|
| |
Diluted
|
|
|
2.19 |
|
|
|
1.38 |
|
|
|
1.33 |
|
|
|
0.80 |
|
|
|
0.91 |
|
|
Average common shares
outstanding(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
244.4 |
|
|
|
207.7 |
|
|
|
194.5 |
|
|
|
193.7 |
|
|
|
193.6 |
|
| |
Diluted
|
|
|
247.8 |
|
|
|
211.2 |
|
|
|
196.8 |
|
|
|
194.3 |
|
|
|
193.6 |
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
5,695.5 |
|
|
$ |
5,156.0 |
|
|
$ |
858.9 |
|
|
$ |
745.0 |
|
|
$ |
597.4 |
|
|
Due to former parent
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
144.0 |
|
|
Short-term debt
|
|
|
27.5 |
|
|
|
101.3 |
|
|
|
156.7 |
|
|
|
150.0 |
|
|
|
– |
|
|
Long-term debt
|
|
|
624.0 |
|
|
|
1,007.8 |
|
|
|
– |
|
|
|
213.9 |
|
|
|
– |
|
|
Other long-term obligations
|
|
|
420.9 |
|
|
|
352.6 |
|
|
|
91.8 |
|
|
|
79.3 |
|
|
|
5.5 |
|
|
Stockholders’ equity
|
|
|
3,942.5 |
|
|
|
3,143.3 |
|
|
|
366.3 |
|
|
|
78.7 |
|
|
|
N/A |
|
| |
|
|
| (1) |
Includes the results of Centerpulse subsequent to
October 2, 2003 and Centerpulse balance sheet data as of
December 31, 2003. See Note 3 to the audited financial
statements for more information on the Centerpulse acquisition. |
| |
| (2) |
Pro forma net earnings for the year ended December 31, 2003
are before the cumulative effect of an accounting change of
$55.1 million. The years ended December 31, 2002, 2001
and 2000 reflect the retroactive application of a new accounting
method for instruments. Effective January 1, 2003, Zimmer
changed its method of accounting for instruments which are owned
by Zimmer and used by orthopaedic surgeons during total joint
replacement and other surgical procedures. Instruments are
recognized as long-lived assets and are included in property,
plant and equipment and are depreciated using the straight-line
method based on estimated useful lives, determined principally
in reference to associated product life cycles, primarily five
years. In prior periods, undeployed instruments were carried as
a prepaid cost and recognized in selling, general and
administrative expense in the year in which the instruments were
placed into service. |
| |
| (3) |
For periods ended prior to August 6, 2001, average common
shares reflect the number of shares of Company common stock
outstanding on August 6, 2001, the date all of the shares
of Company common stock were distributed to the stockholders of
the Company’s former parent. For periods subsequent to
August 6, 2001, average common shares reflect any new
issuances of common stock and the dilutive effect of outstanding
stock options, where appropriate. |
19
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
|
|
|
|
ITEM 7. |
|
Management’s Discussion and Analysis of Financial Condition
and Results of Operations |
The following discussion should be read in conjunction with the
consolidated financial statements and the corresponding notes
included elsewhere in this Form 10-K. This
Management’s Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements.
OVERVIEW
Zimmer Holdings, Inc. is a global leader in the design,
development, manufacture and marketing of reconstructive
orthopaedic implants, including joint and dental, spinal
implants, and trauma products and related orthopaedic surgical
products (“OSP”). Orthopaedic reconstructive implants
restore joint function lost due to disease or trauma in joints
such as knees, hips, shoulders and elbows. Dental reconstructive
implants restore function and aesthetics in patients that have
lost teeth due to trauma or disease. Spinal implants are
utilized by orthopaedic surgeons and neurosurgeons in the
treatment of degenerative diseases, deformities and trauma in
all regions of the spine. Trauma products are devices used
primarily to reattach or stabilize damaged bone and tissue to
support the body’s natural healing process. The
Company’s related orthopaedic surgical products include
supplies and instruments designed to aid in orthopaedic surgical
procedures. With operations in more than 24 countries and
products marketed in more than 100 countries, operations are
managed through three reportable geographic segments –
the Americas, Europe and Asia Pacific. As used in this
discussion, the “Company” means Zimmer Holdings, Inc.
and its subsidiaries.
The Company believes that the following developments or trends
are important to understanding the Company’s financial
condition, results of operations and cash flows for the year
ended December 31, 2004.
|
|
|
Acquisitions of Centerpulse and
Implex |
The Centerpulse acquisition, completed in the fourth quarter of
2003, had a significant impact on financial results for the year
ended December 31, 2004. Centerpulse accounted for
37 percentage points of the Company’s 57 percent
sales growth for the year ended December 31, 2004. In
addition, for the year ended December 31, 2004, the Company
incurred $81.1 million of Centerpulse and Implex
acquisition and integration expenses. The Company’s gross
profit margin for the year ended December 31, 2004 was also
impacted by the Centerpulse and Implex acquisitions, as an
inventory step-up charge reduced reported gross profit by
$59.4 million (2.0 percent of sales). “Inventory
step-up” as used herein represents the difference between
the cost basis and the fair value of acquired Centerpulse and
Implex inventories. SFAS No. 141 requires the recorded
values for acquired inventories to be adjusted from cost to fair
value at the date of acquisition based upon estimated sales
price less distribution costs and a profit allowance.
“Inventory step-up charge(s)” as used herein
represents the amount of non-cash expense that is recorded upon
the sale of acquired inventories.
Net synergies associated with the acquisition and integration of
Centerpulse were approximately $16 million for the year
ended December 31, 2004 compared to an original estimate of
$1 million. As anticipated, only modest synergies were
recognized in cost of goods sold during 2004. More significant
cost of goods synergies are expected to be recognized in 2005
and 2006 upon depletion of acquired inventories, upon completion
of the transfer of production from Centerpulse’s
U.S. manufacturing facility in Austin, Texas to other
Company manufacturing facilities in Warsaw, Indiana, Winterthur,
Switzerland and Ponce, Puerto Rico and upon completion of the
manufacturing portion of the integration plan including, for
example, in-sourcing forgings and castings. Operating expense
synergies, principally in selling, general and administrative
expenses, have exceeded the Company’s original
expectations, reflecting more rapid than expected execution and
achievement of operational efficiencies. However, these cost
synergies were partially offset by negative sales synergies
(losses), also anticipated, and increases in other expenses.
Estimated sales losses, including distributor buy backs
(accounted for as sales returns) related to distribution
restructuring, were $51 million for the year ended
December 31, 2004. Increases in other expenses during 2004
include higher distributor commissions, professional fees
connected with corporate compliance and training programs and
relocation and recruiting to fill open positions. Net synergies
for 2005 are expected to approximate $63 million compared
to the Company’s original estimate of $56 million. Net
synergies for 2006 are expected to be in excess of
$100 million compared to the Company’s original
estimate of $70 to $90 million.
The Company continues to manage the integration of Centerpulse.
As of December 31, 2004, the Company has completed over
60 percent of the 3,364 scheduled milestones required to
execute the entire integration. The Company has made substantial
progress in developing global combined product strategies, in
integrating the sales and business organizations, and in melding
essential activities as diverse as global accounting policies
and procedures, manufacturing processes and E-mail systems.
During 2004, the Company, among other things:
|
|
| • |
combined and trained sales organizations |
| • |
created common branding worldwide |
| • |
created common worldwide financial consolidation and quality
systems |
| • |
implemented a global product development system to improve
speed-to-market |
| • |
consolidated its orthobiologics research activities in Austin,
Texas |
| • |
in-sourced a variety of formerly out-sourced manufacturing
functions |
| • |
initiated a worldwide supply chain strategic plan for
manufacturing and distribution networks |
| • |
unified professional medical education initiatives |
20
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
|
|
| • |
completed the closure of Centerpulse’s former headquarters
in Zurich, Switzerland |
| • |
began the transfer of production from Centerpulse’s
U.S. manufacturing facility in Austin, Texas to Warsaw,
Indiana, Winterthur, Switzerland and Ponce, Puerto Rico |
| • |
implemented a more tax efficient global business structure |
| • |
completed approximately 75 percent of the Warsaw, Indiana
and Ponce, Puerto Rico plant expansions, with Winterthur,
Switzerland expansion plans initiated |
| • |
consolidated North American distribution and customer service
functions |
Remaining integration milestones relate primarily to the
completion of the manufacturing integration plan, including the
shut-down of manufacturing operations in Austin, Texas and the
in-sourcing of a variety of formerly out-sourced manufacturing
functions, including forging and casting production. In addition
to the remaining manufacturing integration milestones, other
integration activities still to be completed include the
establishment of common information technology systems and
certain warehouse consolidations. The Company expects to incur
approximately $45 million of integration expenses during
2005 to complete the remaining integration milestones.
The Company completed the acquisition of Implex on
April 23, 2004. During 2004, the Company paid approximately
$153.1 million in initial Implex acquisition costs, net of
cash acquired. The acquisition was a culmination of a
distribution and strategic alliance agreement relating to the
development and distribution of reconstructive implant and
trauma products incorporating Trabecular Metal
Technology. Pursuant to the former distribution and strategic
alliance agreement, the Company sold products incorporating
Trabecular Metal Technology. Prior to the acquisition,
over 90 percent of Implex sales were Trabecular
Metal Technology sales to the Company. Therefore, the
acquisition did not result in the immediate addition of
significant new customers or sales for the Company. Post
acquisition profit margins on Company products incorporating
Trabecular Metal Technology also did not immediately
improve as these sales consisted primarily of inventory that the
Company already had on hand at the acquisition date. In
addition, during 2004 the Company recorded amortization expense
of approximately $4 million related to acquired technology
intangible assets. Therefore, the acquisition reduced diluted
EPS by an estimated $0.02 for the year ended December 31,
2004. The Company expects to realize significantly improved
future profit margins on Trabecular Metal Technology
product sales as it sells inventory manufactured after the
acquisition date. In addition, due to continued strong demand
for products incorporating Trabecular Metal Technology,
the Company expects to triple its Trabecular Metal
Technology manufacturing capacity, which will lead to future
sales increases and improved profit margins as a result of
manufacturing efficiencies.
|
|
|
Demand (Volume and Mix)
Trends |
On a pro
forma11
basis, volume and mix improvements contributed 9 percentage
points of sales growth during the year ended December 31,
2004. Orthopaedic procedure volume on a global basis continues
to rise at mid to high single digit rates driven by an aging
global population, proven clinical benefits, new material
technologies, advances in surgical techniques (such as the
Company’s MIS Procedures and Technologies) and more
active lifestyles, among other factors. In addition, the
continued shift in demand to premium products, such as
Longevity and Durasul Highly Crosslinked
Polyethylene Liners, Trabecular Metal Technology
products, high flex knees, knee and hip revision products and
porous hip stems, continue to positively impact sales growth.
For the year ended December 31, 2004, primary porous hip
stems accounted for 63 percent of all Zimmer standalone
primary hip stem units sold, compared to 46 percent,
53 percent and 59 percent of total primary hip stem
units sold for Zimmer standalone in 2001, 2002 and 2003,
respectively. “Zimmer standalone sales” as used herein
refers to sales for the period less sales from acquired
Centerpulse businesses.
The Company believes innovative surgical approaches will
continue to significantly impact the orthopaedics industry. The
Company has made significant progress in the development and
introduction of MIS Procedures and Technologies. During
the year ended December 31, 2004, the Company trained more
than 1,400 surgeons at The Zimmer Institute and its satellite
locations in MIS Techniques, including the
MIS 2-Incision Hip Replacement Technique and MIS
Quad-Sparing Knee Replacement Technique. During the fourth
quarter of 2004, the Company estimates that 50 percent and
36 percent of all Zimmer standalone U.S. hip and knee
sales, respectively, utilized an MIS Procedure and/or
Technology.
In the Americas, the Company’s largest operating segment,
the Company realized pro forma average selling price growth of
4 percent for the year ended December 31, 2004. In
Europe, pro forma sales growth reflected flat average selling
prices during the year. However, during the fourth quarter of
2004, European average selling prices decreased approximately
1 percent, primarily due to a 6 percent price decrease
in Germany, principally the result of a revised reimbursement
system implemented by the German government. In the Asia Pacific
operating segment on a pro forma basis, the Company experienced
an average selling price reduction of 2 percent during the
year ended December 31, 2004, principally the result of the
Japanese
|
|
| 11 |
The unaudited pro forma net sales information, including
comparisons to 2004 net sales, contained in this Form 10-K
and presented in accordance with U.S. generally accepted
accounting principles has been derived from the audited
financial statements of the Company for the year ended
December 31, 2003 and the financial statements of
Centerpulse for the nine months ended September 30, 2003 to
give effect to the Centerpulse acquisition as if it had occurred
on January 1, 2003. |
21
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
government’s bi-annual change in reimbursement rates.
Pressure from governmental healthcare cost containment efforts,
group purchasing organizations and potential gain sharing
arrangements between surgeons and hospitals may negatively
affect the Company’s ability to realize global price
increases of 2-3 percent.
|
|
|
Foreign Currency Exchange
Rates |
A weakened U.S. dollar during the year ended
December 31, 2004 compared to last year contributed
4 percentage points sales growth, on a pro forma basis. The
Company addresses currency risk management through regular
operating and financing activities, and under appropriate
circumstances and subject to proper authorization, through the
use of simple forward contracts solely for managing foreign
currency volatility and risk. The use of derivative financial
instruments for trading or speculative purposes is prohibited.
New products, which management defines as products introduced
within the prior 36-month period, accounted for 18 percent,
or $541 million, of the Company’s sales during the
year ended December 31, 2004. Adoption rates for new
technologies are a key indicator of industry performance. Sales
have grown with the introduction of new products such as
Prolong Highly Crosslinked Polyethylene for the knee,
which was introduced in 2002, and represented approximately
49 percent of all cruciate retaining articulating surface
product sales and 12 percent of all knee articulating
surfaces for the year ended December 31, 2004. Adoption
rates for the Company’s new products should continue to
favorably affect the Company’s operating performance.
RESULTS OF OPERATIONS
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003
|
|
|
Net Sales by Operating
Segment |
The following table presents net sales by operating segment and
the components of the percentage changes
(dollars in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
|
|
Zimmer Standalone |
|
Impact of | |
| |
|
| |
|
|
|
| |
|
| |
| |
|
| |
|
|
|
Volume/ | |
|
|
|
Foreign | |
|
Centerpulse | |
| |
|
2004 | |
|
2003 | |
|
% Inc | |
|
Mix | |
|
Price | |
|
Exchange | |
|
Acquisition | |
| | |
|
Americas
|
|
$ |
1,741.3 |
|
|
$ |
1,208.3 |
|
|
|
44 |
% |
|
|
16 |
% |
|
|
5 |
% |
|
|
– |
% |
|
|
23 |
% |
|
Europe
|
|
|
808.3 |
|
|
|
366.0 |
|
|
|
121 |
|
|
|
9 |
|
|
|
2 |
|
|
|
10 |
|
|
|
100 |
|
|
Asia Pacific
|
|
|
431.3 |
|
|
|
326.7 |
|
|
|
32 |
|
|
|
10 |
|
|
|
(3 |
) |
|
|
8 |
|
|
|
17 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
2,980.9 |
|
|
$ |
1,901.0 |
|
|
|
57 |
|
|
|
14 |
|
|
|
3 |
|
|
|
3 |
|
|
|
37 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
“Foreign Exchange” as used in the tables herein
represents the effect of changes in foreign exchange rates on
sales growth. “Impact of Centerpulse Acquisition” as
used in the tables herein represents the impact of the
Centerpulse acquisition on sales growth.
The following table presents 2004 net sales by operating segment
and 2003 unaudited pro forma net sales by operating segment and
the components of the percentage changes
(dollars in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
Zimmer Standalone |
|
|
| |
|
| |
|
| |
|
|
| |
|
Reported | |
|
Pro forma | |
|
|
|
Volume/ | |
|
|
|
Foreign | |
| |
|
2004 | |
|
2003 | |
|
% Inc | |
|
Mix | |
|
Price | |
|
Exchange | |
| | |
|
Americas
|
|
$ |
1,741.3 |
|
|
$ |
1,499.1 |
|
|
|
16 |
% |
|
|
12 |
% |
|
|
4 |
% |
|
|
– |
% |
|
Europe
|
|
|
808.3 |
|
|
|
707.1 |
|
|
|
14 |
|
|
|
5 |
|
|
|
– |
|
|
|
9 |
|
|
Asia Pacific
|
|
|
431.3 |
|
|
|
383.4 |
|
|
|
13 |
|
|
|
7 |
|
|
|
(2 |
) |
|
|
8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
2,980.9 |
|
|
$ |
2,589.6 |
|
|
|
15 |
|
|
|
9 |
|
|
|
2 |
|
|
|
4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
|
|
|
Net Sales by Product
Category |
The following table presents net sales by product category and
the components of the percentage changes
(dollars in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Zimmer Standalone |
|
|
| |
|
|
|
|
|
| |
|
|
| |
|
Year Ended December 31, |
|
|
|
|
|
Impact of | |
| |
|
| |
|
|
|
Volume/ | |
|
|
|
Foreign | |
|
Centerpulse | |
| |
|
2004 | |
|
2003 | |
|
% Inc | |
|
Mix | |
|
Price | |
|
Exchange | |
|
Acquisition | |
| | |
|
Reconstructive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Knees
|
|
$ |
1,194.5 |
|
|
$ |
800.6 |
|
|
|
49 |
% |
|
|
18 |
% |
|
|
3 |
% |
|
|
3 |
% |
|
|
25 |
% |
| |
Hips
|
|
|
1,079.0 |
|
|
|
645.5 |
|
|
|
67 |
|
|
|
16 |
|
|
|
2 |
|
|
|
3 |
|
|
|
46 |
|
| |
Dental
|
|
|
124.7 |
|
|
|
29.8 |
|
|
|
319 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
319 |
|
| |
Extremities
|
|
|
58.1 |
|
|
|
45.1 |
|
|
|
28 |
|
|
|
9 |
|
|
|
5 |
|
|
|
3 |
|
|
|
11 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
2,456.3 |
|
|
|
1,521.0 |
|
|
|
62 |
|
|
|
17 |
|
|
|
3 |
|
|
|
3 |
|
|
|
39 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trauma
|
|
|
172.9 |
|
|
|
150.1 |
|
|
|
15 |
|
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
|
|
7 |
|
|
Spine
|
|
|
134.2 |
|
|
|
35.1 |
|
|
|
281 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
281 |
|
|
OSP
|
|
|
217.5 |
|
|
|
194.8 |
|
|
|
12 |
|
|
|
5 |
|
|
|
2 |
|
|
|
2 |
|
|
|
3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,980.9 |
|
|
$ |
1,901.0 |
|
|
|
57 |
|
|
|
14 |
|
|
|
3 |
|
|
|
3 |
|
|
|
37 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Knee sales were led by the NexGen Complete Knee Solution
product line including the NexGen LPS-Flex Knee,
NexGen Trabecular Metal Tibial Components and the
NexGen CR-Flex Knee. In addition, the NexGen
Rotating Hinge Knee and the Innex Total Knee System
exhibited strong growth. Hip sales were led by growth in porous
stems, including significant growth of the VerSys Fiber
Metal and Zimmer M/L Taper Stems (the stems of choice for
MIS Procedures), Trabecular Metal Acetabular Cups,
Trilogy Acetabular Cups, Durom Hip Resurfacing
Products, and Longevity and Durasul Highly
Crosslinked Polyethylene Liners. The Alloclassic Hip
System and Allofit™ Acetabular Shell also had strong
growth. Dental sales were led by sales of biologicals, surgical
products and prosthetic implants, including strong growth of the
SwissPlus® Implant System and Tapered
Screw-Vent Internal Hex Implant System. Extremities sales
were led by the Bigliani/ Flatow Shoulder. Trauma sales
were led by sales of Zimmer Periarticular Plates,
Cable-Ready® Cable Products, Zimmer Plates
and Screws System, ITST and Sirius Intramedullary
Nails, TransFx External Fixation System and the
Trabecular Metal AVN Rod. Spine sales were led by the
Dynesys Dynamic Stabilization System and Trinica
Select Anterior Cervical Plate System. OSP sales were primarily
driven by the continued growth of the OrthoPAT
Autotransfusion System and wound management and drainage
products.
The following table presents 2004 net sales by product category
and 2003 unaudited pro forma net sales by product category and
the components of the percentage changes (dollars in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
| |
|
| |
|
|
|
|
|
|
|
|
| |
|
Reported | |
|
Pro forma | |
|
|
|
Volume/ | |
|
|
|
Foreign | |
| |
|
2004 | |
|
2003 | |
|
% Inc | |
|
Mix | |
|
Price | |
|
Exchange | |
| | |
|
Reconstructive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Knees
|
|
$ |
1,194.5 |
|
|
$ |
1,007.8 |
|
|
|
19 |
% |
|
|
12 |
% |
|
|
3 |
% |
|
|
4 |
% |
| |
Hips
|
|
|
1,079.0 |
|
|
|
937.6 |
|
|
|
15 |
|
|
|
9 |
|
|
|
1 |
|
|
|
5 |
|
| |
Dental
|
|
|
124.7 |
|
|
|
99.9 |
|
|
|
25 |
|
|
|
19 |
|
|
|
3 |
|
|
|
3 |
|
| |
Extremities
|
|
|
58.1 |
|
|
|
52.2 |
|
|
|
11 |
|
|
|
3 |
|
|
|
5 |
|
|
|
3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
2,456.3 |
|
|
|
2,097.5 |
|
|
|
17 |
|
|
|
11 |
|
|
|
2 |
|
|
|
4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trauma
|
|
|
172.9 |
|
|
|
161.4 |
|
|
|
7 |
|
|
|
1 |
|
|
|
3 |
|
|
|
3 |
|
|
Spine
|
|
|
134.2 |
|
|
|
130.9 |
|
|
|
3 |
|
|
|
(3 |
) |
|
|
4 |
|
|
|
2 |
|
|
OSP
|
|
|
217.5 |
|
|
|
199.8 |
|
|
|
9 |
|
|
|
5 |
|
|
|
1 |
|
|
|
3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,980.9 |
|
|
$ |
2,589.6 |
|
|
|
15 |
|
|
|
9 |
|
|
|
2 |
|
|
|
4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
The following table presents estimated* 2004 global market size
and market share information (dollars in billions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Global | |
|
Global | |
|
Zimmer | |
|
Zimmer | |
| |
|
Market | |
|
Market | |
|
Market | |
|
Market | |
| |
|
Size | |
|
% Growth** | |
|
Share | |
|
Position | |
| | |
|
Reconstructive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Knees
|
|
$ |
4.2 |
|
|
|
15 |
% |
|
|
28 |
% |
|
|
1 |
|
| |
Hips
|
|
|
3.9 |
|
|
|
10 |
|
|
|
28 |
|
|
|
1 |
|
| |
Dental
|
|
|
1.3 |
|
|
|
20 |
|
|
|
9 |
|
|
|
4 |
|
| |
Extremities
|
|
|
0.3 |
|
|
|
15 |
|
|
|
18 |
|
|
|
2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
9.7 |
|
|
|
14 |
|
|
|
25 |
|
|
|
1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Trauma
|
|
$ |
2.4 |
|
|
|
11 |
|
|
|
7 |
|
|
|
4 |
|
|
Spine***
|
|
$ |
3.9 |
|
|
|
24 |
|
|
|
3 |
|
|
|
6 |
|
* Estimates based on company annual
filings, Wall Street equity research and Zimmer management
** Excludes the effect of changes in foreign exchange
rates on sales growth
*** Spine includes related orthobiologics
Pro forma sales growth of 15 percent (12 percent
volume/mix and 3 percent price) and 10 percent
(9 percent volume/mix and 1 percent price) for knees
and hips, respectively, during 2004 was in line with market
growth, despite Centerpulse acquisition sales dis-synergies and
inventory buy backs (accounted for as sales returns) due to
changes in the Company’s distribution network resulting
from the Centerpulse acquisition. Pro forma dental sales growth
of 22 percent (19 percent volume/mix and
3 percent price), outpaced the market due to strong sales
of biologicals, surgical products and prosthetic implants; the
continued rebranding to Zimmer also was a positive factor. The
Company’s pro forma 2004 sales growth rates for
extremities, trauma and spine were below the corresponding
estimated market growth rates, reflecting market share loss.
Extremities and spine lagged the overall market growth rate due
to the fact that the Company does not have a complete product
offering to compete effectively with the product category market
leaders. Trauma is lagging the overall market growth rate due to
delays in new product introductions. Comparison of the OSP pro
forma growth rate to a market growth rate is not meaningful due
to the fragmented nature of the market.
The following table presents Americas net sales (dollars
in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
|
|
Impact of | |
| |
|
| |
|
|
|
Centerpulse | |
| |
|
2004 | |
|
2003 | |
|
% Inc | |
|
Acquisition | |
| | |
|
Reconstructive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Knees
|
|
$ |
762.0 |
|
|
$ |
523.6 |
|
|
|
46 |
% |
|
|
18 |
% |
| |
Hips
|
|
|
499.5 |
|
|
|
365.6 |
|
|
|
37 |
|
|
|
16 |
|
| |
Dental
|
|
|
75.3 |
|
|
|
18.2 |
|
|
|
314 |
|
|
|
314 |
|
| |
Extremities
|
|
|
41.1 |
|
|
|
34.0 |
|
|
|
21 |
|
|
|
5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
1,377.9 |
|
|
|
941.4 |
|
|
|
46 |
|
|
|
21 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Trauma
|
|
|
105.7 |
|
|
|
100.3 |
|
|
|
5 |
|
|
|
– |
|
|
Spine
|
|
|
111.0 |
|
|
|
29.5 |
|
|
|
276 |
|
|
|
249 |
|
|
OSP
|
|
|
146.7 |
|
|
|
137.1 |
|
|
|
7 |
|
|
|
– |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,741.3 |
|
|
$ |
1,208.3 |
|
|
|
44 |
|
|
|
23 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Growth in the Americas was led by strong knee and hip sales.
Knee sales were led by the NexGen Complete Knee Solution
product line, including the NexGen LPS-Flex Knee,
NexGen Trabecular Metal Tibial Components, the
NexGen LCCK Revision Knee, the NexGen CR-Flex Knee
and Prolong Highly Crosslinked Polyethylene. The
Natural-Knee System also made a strong contribution. Hip
sales were led by growth in porous stems, including significant
growth of the VerSys Fiber Metal and Zimmer M/L
Taper Stems (the stems of choice for MIS Procedures),
beaded stems, Trabecular Metal Acetabular Cups and
Longevity and Durasul Highly Crosslinked
Polyethylene Liners.
The following table presents 2004 Americas net sales and 2003
Americas unaudited pro forma net sales (dollars
in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
|
| |
|
| |
|
|
| |
|
Reported | |
|
Pro forma | |
|
% Inc | |
| |
|
2004 | |
|
2003 | |
|
(Dec) | |
| | |
|
Reconstructive
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Knees
|
|
$ |
762.0 |
|
|
$ |
625.9 |
|
|
|
22 |
% |
| |
Hips
|
|
|
499.5 |
|
|
|
425.1 |
|
|
|
18 |
|
| |
Dental
|
|
|
75.3 |
|
|
|
61.0 |
|
|
|
23 |
|
| |
Extremities
|
|
|
41.1 |
|
|
|
37.3 |
|
|
|
10 |
|
| |
|
|
|
|
|
|
|
|
| |
Total
|
|
|
1,377.9 |
|
|
|
1,149.3 |
|
|
|
20 |
|
| |
|
|
|
|
|
|
|
|
|
Trauma
|
|
|
105.7 |
|
|
|
100.9 |
|
|
|
5 |
|
|
Spine
|
|
|
111.0 |
|
|
|
112.0 |
|
|
|
(1 |
) |
|
OSP
|
|
|
146.7 |
|
|
|
136.9 |
|
|
|
7 |
|
| |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,741.3 |
|
|
$ |
1,499.1 |
|
|
|
16 |
|
| |
|
|
|
|
|
|
|
|
24
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
The following table presents Europe net sales (dollars
in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
|
|
Impact of | |
| |
|
| |
|
|
|
Centerpulse | |
| |
|
2004 | |
|
2003 | |
|
% Inc | |
|
Acquisition | |
| | |
|
Reconstructive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Knees
|
|
$ |
292.0 |
|
|
$ |
162.8 |
|
|
|
79 |
% |
|
|
61 |
% |
| |
Hips
|
|
|
398.4 |
|
|
|
151.7 |
|
|
|
163 |
|
|
|
137 |
|
| |
Dental
|
|
|
34.8 |
|
|
|
8.2 |
|
|
|
323 |
|
|
|
323 |
|
| |
Extremities
|
|
|
11.6 |
|
|
|
7.1 |
|
|
|
62 |
|
|
|
44 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
736.8 |
|
|
|
329.8 |
|
|
|
124 |
|
|
|
103 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Trauma
|
|
|
29.5 |
|
|
|
16.3 |
|
|
|
81 |
|
|
|
59 |
|
|
Spine
|
|
|
19.8 |
|
|
|
4.6 |
|
|
|
330 |
|
|
|
330 |
|
|
OSP
|
|
|
22.2 |
|
|
|
15.3 |
|
|
|
45 |
|
|
|
29 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
808.3 |
|
|
$ |
366.0 |
|
|
|
121 |
|
|
|
100 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Growth in Europe was led by strong knee and hips sales. Knee
sales were driven by strong sales of the NexGen Complete
Knee Solution product line, including the NexGen CR Knee,
NexGen Trabecular Metal Tibial Components and the
NexGen Rotating Hinge Knee. Hip sales were driven by
strong sales of Longevity and Durasul Highly
Crosslinked Polyethylene Liners, VerSys Porous Stems and
Trabecular Metal Acetabular Cups. The Alloclassic
Hip System and Allofit Acetabular Shell also had strong
growth.
The following table presents 2004 Europe net sales and
2003 Europe unaudited pro forma net sales (dollars
in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
|
| |
|
| |
|
|
| |
|
Reported | |
|
Pro forma | |
|
|
| |
|
2004 | |
|
2003 | |
|
% Inc | |
| | |
|
Reconstructive
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Knees
|
|
$ |
292.0 |
|
|
$ |
254.4 |
|
|
|
15 |
% |
| |
Hips
|
|
|
398.4 |
|
|
|
351.5 |
|
|
|
13 |
|
| |
Dental
|
|
|
34.8 |
|
|
|
27.9 |
|
|
|
25 |
|
| |
Extremities
|
|
|
11.6 |
|
|
|
10.3 |
|
|
|
11 |
|
| |
|
|
|
|
|
|
|
|
| |
Total
|
|
|
736.8 |
|
|
|
644.1 |
|
|
|
14 |
|
| |
|
|
|
|
|
|
|
|
|
Trauma
|
|
|
29.5 |
|
|
|
26.0 |
|
|
|
14 |
|
|
Spine
|
|
|
19.8 |
|
|
|
16.7 |
|
|
|
19 |
|
|
OSP
|
|
|
22.2 |
|
|
|
20.3 |
|
|
|
9 |
|
| |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
808.3 |
|
|
$ |
707.1 |
|
|
|
14 |
|
| |
|
|
|
|
|
|
|
|
The following table presents Asia Pacific net sales (dollars in
millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
|
|
Impact of | |
| |
|
| |
|
|
|
Centerpulse | |
| |
|
2004 | |
|
2003 | |
|
% Inc | |
|
Acquisition | |
| | |
|
Reconstructive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Knees
|
|
$ |
140.5 |
|
|
$ |
114.2 |
|
|
|
23 |
% |
|
|
9 |
% |
| |
Hips
|
|
|
181.0 |
|
|
|
128.3 |
|
|
|
41 |
|
|
|
25 |
|
| |
Dental
|
|
|
14.6 |
|
|
|
3.4 |
|
|
|
333 |
|
|
|
333 |
|
| |
Extremities
|
|
|
5.4 |
|
|
|
4.0 |
|
|
|
34 |
|
|
|
8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
341.5 |
|
|
|
249.9 |
|
|
|
37 |
|
|
|
22 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Trauma
|
|
|
37.7 |
|
|
|
33.4 |
|
|
|
13 |
|
|
|
2 |
|
|
Spine
|
|
|
3.4 |
|
|
|
1.0 |
|
|
|
213 |
|
|
|
213 |
|
|
OSP
|
|
|
48.7 |
|
|
|
42.4 |
|
|
|
15 |
|
|
|
– |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
431.3 |
|
|
$ |
326.7 |
|
|
|
32 |
|
|
|
17 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Growth in Asia Pacific was led by strong knee and hip sales.
Knee sales were driven by the NexGen LPS-Flex Knee,
NexGen Trabecular Metal Tibial Components and the
NexGen CR Knee. The Natural-Knee System also
made a strong contribution. Hip sales were driven primarily by
the continued conversion to porous stems, including
VerSys Porous Stems, and sales of Longevity Highly
Crosslinked Polyethylene Liners.
The following table presents 2004 Asia Pacific net sales and
2003 Asia Pacific unaudited pro forma net sales (dollars
in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
|
| |
|
| |
|
|
| |
|
Reported | |
|
Pro forma | |
|
|
| |
|
2004 | |
|
2003 | |
|
% Inc | |
| | |
|
Reconstructive
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Knees
|
|
$ |
140.5 |
|
|
$ |
127.5 |
|
|
|
10 |
% |
| |
Hips
|
|
|
181.0 |
|
|
|
161.0 |
|
|
|
12 |
|
| |
Dental
|
|
|
14.6 |
|
|
|
11.0 |
|
|
|
33 |
|
| |
Extremities
|
|
|
5.4 |
|
|
|
4.6 |
|
|
|
17 |
|
| |
|
|
|
|
|
|
|
|
| |
Total
|
|
|
341.5 |
|
|
|
304.1 |
|
|
|
12 |
|
| |
|
|
|
|
|
|
|
|
|
Trauma
|
|
|
37.7 |
|
|
|
34.5 |
|
|
|
9 |
|
|
Spine
|
|
|
3.4 |
|
|
|
2.2 |
|
|
|
51 |
|
|
OSP
|
|
|
48.7 |
|
|
|
42.6 |
|
|
|
15 |
|
| |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
431.3 |
|
|
$ |
383.4 |
|
|
|
13 |
|
| |
|
|
|
|
|
|
|
|
25
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Gross profit as a percentage of net sales was 73.8 percent
in 2004, compared to 72.8 percent in 2003 and
68.1 percent for the three month period ended
December 31, 2003 (the first quarter of combined Zimmer and
Centerpulse operations). The following table reconciles the
gross margin for the year ended December 31, 2004 and for
the three month period ended December 31, 2003.
| |
|
|
|
|
|
Three month period ended December 31, 2003 gross margin
|
|
|
68.1 |
% |
|
Inventory step-up charge
|
|
|
4.1 |
|
|
Increased average selling prices
|
|
|
1.8 |
|
|
Operating segment and product category mix
|
|
|
0.2 |
|
|
Other
|
|
|
(0.4 |
) |
| |
|
Year ended December 31, 2004 gross margin
|
|
|
73.8 |
% |
| |
Decreased Centerpulse and Implex inventory step-up charges as a
percentage of net sales during 2004 ($59.4 million, or
2.0 percent of net sales) compared to the three month
period ended December 31, 2003 ($42.7 million, or
6.1 percent of net sales) and increases in average selling
prices were the primary contributors to improved gross margins.
In addition, operating segment mix and product category mix both
had a positive impact on gross margins due to higher sales
growth in the more profitable Americas segment compared to
Europe and Asia Pacific, higher sales growth of reconstructive
implants and the continued shift to premium products. Offsetting
these favorable impacts were a variety of other items, including
increased royalty expenses and higher losses on foreign exchange
contracts included in cost of products sold, partially offset by
reduced manufacturing costs due to automation, vertical
integration and process improvements.
R&D as a percentage of net sales was 5.6 percent for
years ended December 31, 2004 and 2003. R&D increased
to $166.7 million from $105.8 million reflecting a
full year of Centerpulse research and development expenses and
increased spending on active projects focused on areas of
strategic significance. The Company’s pipeline includes 146
projects with a total investment equal to or greater than
$1 million. Of the 146 projects, approximately two-thirds
involve new platforms, MIS or other technologies. For
example, the Company’s orthobiological research group in
Austin, Texas is developing innovative solutions for hip
fracture and cartilage regeneration. During 2004, the Company
delivered more than 40 major development projects to market. The
Company has strategically targeted R&D spending to be at the
high end of what management believes to be an average of
4-6 percent for the industry. The Company expects over the
next few years to invest in research and development at
approximately 5.5 percent to 6 percent of sales.
SG&A as a percentage of net sales was 39.9 percent for
the year ended December 31, 2004 compared to
38.8 percent for the same 2003 period. Amortization expense
increased to $39.1 million, or 1.3 percent of sales,
during the year ended December 31, 2004 compared to
$10.9 million, or less than 1 percent of sales, during
the year ended December 31, 2003. The increase was
primarily due to amortization expense related to Centerpulse and
Implex finite lived intangible assets. In addition, during 2004
the Company continued to introduce or expand strategic programs
and activities. In 2004, The Zimmer Institute and its satellite
locations were well utilized with over 1,400 surgeons trained,
compared to 500 surgeons trained in 2003. These surgeon training
costs are recognized in SG&A. The Company also recognized
approximately $5 million of Sarbanes-Oxley compliance
expenses, including consultant fees and increased audit fees.
These increases were partially offset by expense synergies
realized from the Centerpulse acquisition and controlled
spending. The Company has begun to realize synergies from the
Centerpulse acquisition and expects to pursue additional synergy
opportunities. The Company estimates that over the next two
years it will be able to reduce annual SG&A as a percentage
of net sales to 38.9 percent or lower, representing a 200
basis point improvement over the fourth quarter of 2003 (the
first quarter of combined Zimmer and Centerpulse operations).
Acquisition and integration expenses related to the acquisitions
of Centerpulse and Implex were $81.1 million compared to
$79.6 million for the same 2003 period and included
$24.4 million of sales agent and lease contract termination
expenses, $24.2 million of integration consulting expenses,
$9.4 million of employee severance and retention expenses,
$7.8 million of professional fees, $5.2 million of
personnel expenses and travel for full-time integration team
members, $4.3 million of costs related to integrating the
Company’s information technology systems, $2.9 million
of costs related to relocation of facilities, and
$2.9 million of other miscellaneous acquisition and
integration expenses.
|
|
|
Operating Profit, Income Taxes
and Net Earnings |
Operating profit for the year ended December 31, 2004
increased 69 percent to $763.2 million from
$450.7 million in the comparable 2003 period. Operating
profit growth was driven by Zimmer standalone sales growth,
operating profit contributed by Centerpulse, effectively
controlled operating expenses and the absence of in-process
research and development expense in 2004 compared to
$11.2 million in 2003. These favorable items were partially
offset by Centerpulse and Implex inventory step-up of
$59.4 million in 2004 compared to $42.7 million in
2003 and intangible asset amortization of $39.1 million in
2004 versus $10.9 million in 2003.
The effective tax rate on earnings before income taxes, minority
interest and cumulative effect of change in accounting principle
decreased to 25.9 percent for the year ended
December 31, 2004 from 33.6 percent for the same
period in 2003. A major component of the decrease
(4.7 percent, or $34.5 million) was the result of
revaluing deferred taxes of acquired Centerpulse operations due
to a reduction in the ongoing Swiss tax rate. The major reasons
26
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
for the remaining decrease in the effective tax rate were the
ongoing European restructuring initiatives, the successful
negotiation of a lower ongoing Swiss tax rate (from
approximately 24 percent to 12.5 percent) and
continued expansion of operations in lower tax jurisdictions.
Net earnings increased 57 percent to $541.8 million
for the year ended December 31, 2004 compared to
$346.3 million in the same 2003 period. The increase was
due to higher operating profit offset partially by increased
interest expense, $31.7 million in 2004 compared to
$13.2 million in 2003. Net earnings for 2003 also included
a one-time, $55.1 million (net of tax), non-cash cumulative
effect of a change in accounting principle for instruments. Net
earnings in 2004 also benefited from the decreased effective
income tax rate. Basic and diluted earnings per share increased
33 percent and 34 percent to $2.22 and $2.19,
respectively, from $1.67 and $1.64 in 2003.
Year Ended December 31, 2003
Compared to Year Ended December 31, 2002
The following table presents the components of the 2003 over
2002 percentage changes in net sales by geographic segment:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Zimmer Standalone |
|
|
|
|
| |
|
| |
|
Impact of | |
|
|
| |
|
Volume/ | |
|
|
|
Foreign | |
|
Sub- | |
|
Centerpulse | |
|
Net | |
| |
|
Mix | |
|
Price | |
|
Exchange | |
|
Total | |
|
Acquisition | |
|
Change | |
| | |
|
Americas
|
|
|
15 |
% |
|
|
4 |
% |
|
|
– |
% |
|
|
19 |
% |
|
|
11 |
% |
|
|
30 |
% |
|
Europe
|
|
|
19 |
|
|
|
2 |
|
|
|
17 |
|
|
|
38 |
|
|
|
77 |
|
|
|
115 |
|
|
Asia Pacific
|
|
|
4 |
|
|
|
1 |
|
|
|
9 |
|
|
|
14 |
|
|
|
7 |
|
|
|
21 |
|
|
Consolidated
|
|
|
13 |
|
|
|
3 |
|
|
|
4 |
|
|
|
20 |
|
|
|
19 |
|
|
|
39 |
|
Net sales for the year ended December 31, 2003 increased
39 percent to $1,901.0 million. Sales growth was
driven by strong demand for the Company’s reconstructive
implants and additional sales from the October 2, 2003
Centerpulse acquisition. The 39 percent increase was
comprised of a 20 percent increase in Zimmer standalone
sales and a 19 percent increase due to the Centerpulse
acquisition. Favorable demographics, including an aging
population and a continued shift to premium priced products,
contributed to the favorable volume and mix growth. Higher
average selling prices were realized in all three geographic
segments. The continued weakening of the U.S. dollar versus
the Euro and the Japanese yen were the main contributors to the
favorable impact of foreign currency exchange rates on net sales.
Net sales in the Americas for the year ended December 31,
2003 increased 30 percent to $1,208.3 million. Sales
growth was driven by strong demand for the Company’s
reconstructive implants and additional sales from the
Centerpulse acquisition. The 30 percent increase was
comprised of a 19 percent increase in Zimmer standalone
sales plus an 11 percent increase due to the Centerpulse
acquisition. Net sales of reconstructive implants increased
33 percent to $941.4 million, 22 percent due to
increased Zimmer standalone sales and 11 percent related to
the Centerpulse acquisition. Knee sales increased
32 percent to $523.6 million, 24 percent related
to increased Zimmer standalone sales and 8 percent due to
the Centerpulse acquisition. Hip sales increased 27 percent
to $365.6 million, 21 percent due to increased Zimmer
standalone sales and 6 percent due to the Centerpulse
acquisition. Knee sales growth was led by the NexGen
Legacy Knee-Posterior Stabilized product line, including the
LPS-Flex Knee, the NexGen Trabecular Metal Technology
Tibial Components, the NexGen CR Knee with
Prolong Highly Crosslinked Polyethylene and the
NexGen Rotating Hinge Knee. Hip sales growth was driven
by the continued conversion to porous stems including
significant growth of the VerSys Fiber Metal Taper Stem,
which is often used in MIS Hip Replacement Procedures;
Trabecular Metal Acetabular Cups; and increased sales of
Trilogy Acetabular Cups incorporating Longevity
Highly Crosslinked Polyethylene Liners.
Net sales in Europe for the year ended December 31, 2003
increased 115 percent to $366.0 million. Sales growth
was driven by additional sales from the Centerpulse acquisition
and strong demand for the Company’s reconstructive
implants. The 115 percent increase was comprised of a
77 percent increase due to the Centerpulse acquisition and
a 38 percent increase in Zimmer standalone sales. Net sales
of reconstructive implants increased 119 percent to
$329.8 million, 81 percent due to the Centerpulse
acquisition and 38 percent due to increased Zimmer
standalone sales, including 18 percent due to changes in
foreign exchange rates. Knee sales increased 72 percent to
$162.8 million, 37 percent due to the Centerpulse
acquisition and 35 percent due to increased Zimmer
standalone sales, including 18 percent due to changes in
foreign exchange rates. Hip sales increased 196 percent to
$151.7 million, 152 percent due to the Centerpulse
acquisition and 44 percent due to increased Zimmer
standalone sales, including 17 percent due to changes in
foreign exchange rates. Knee sales were driven by strong sales
of the NexGen Legacy system of knee prostheses, the
NexGen CR Knee, NexGen Trabecular Metal Components
and the NexGen Rotating Hinge Knee. Hip sales were driven
by strong sales of Trilogy Acetabular Cups incorporating
Longevity Highly Crosslinked Polyethylene Liners,
VerSys Porous Stems and Trabecular Metal
Acetabular Cups.
Net sales in Asia Pacific for the year ended December 31,
2003 increased 21 percent to $326.7 million. Sales
growth was driven by strong demand for the Company’s
reconstructive implants and additional sales from the
Centerpulse acquisition. The 21 percent increase was
comprised of a 14 percent increase in Zimmer standalone
sales and a 7 percent increase due to the Centerpulse
acquisition. Net sales of reconstructive implants increased
25 percent to $249.8 million, 14 percent due to
increased Zimmer standalone sales, including 9 percent due
to changes in foreign exchange rates, and 11 percent due to
the Centerpulse acquisition. Knee sales increased
21 percent to $114.2 million, 16 percent due to
increased Zimmer standalone sales, including 10 percent due
to changes in foreign exchange rates, and 5 percent due to
the Centerpulse acquisition. Hip sales increased 25 percent
to $128.2 million, 13 percent due to increased Zimmer
standalone sales,
27
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
including 9 percent due to changes in foreign exchange
rates, and 12 percent due to the Centerpulse acquisition.
Knee sales were driven by the NexGen LPS-Flex Knee,
NexGen Trabecular Metal Technology Tibial Components and
the NexGen CR Knee. Hip sales were driven primarily by
the continued conversion to porous stems and sales of
Trilogy Acetabular Cups incorporating Longevity
Highly Crosslinked Polyethylene Liners.
The following table presents the components of the 2003 over
2002 percentage changes in net sales by product category:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Zimmer Standalone |
|
|
|
|
| |
|
| |
|
Impact of | |
|
|
| |
|
Volume/ | |
|
|
|
Foreign | |
|
Sub- | |
|
Centerpulse | |
|
Net | |
| |
|
Mix | |
|
Price | |
|
Exchange | |
|
Total | |
|
Acquisition | |
|
Change | |
| | |
|
Reconstructive implants
|
|
|
16 |
% |
|
|
3 |
% |
|
|
4 |
% |
|
|
23 |
% |
|
|
20 |
% |
|
|
43 |
% |
|
Trauma
|
|
|
4 |
|
|
|
3 |
|
|
|
3 |
|
|
|
10 |
|
|
|
3 |
|
|
|
13 |
|
|
Spine(1)
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
N/A |
|
|
|
N/A |
|
|
Orthopaedic surgical products
|
|
|
5 |
|
|
|
2 |
|
|
|
3 |
|
|
|
10 |
|
|
|
– |
|
|
|
10 |
|
|
Consolidated
|
|
|
13 |
|
|
|
3 |
|
|
|
4 |
|
|
|
20 |
|
|
|
19 |
|
|
|
39 |
|
Overall, worldwide reconstructive implant sales increased
43 percent to $1,521.0 million. The 43 percent
increase was comprised of a 23 percent increase in Zimmer
standalone sales and a 20 percent increase due to the
Centerpulse acquisition. Knee sales increased 37 percent to
$800.5 million, 24 percent due to increased Zimmer
standalone sales, including 4 percent due to changes in
foreign exchange rates and 13 percent due to the
Centerpulse acquisition. Knee sales were led by the NexGen
Legacy Knee Posterior Stabilized product line including the
LPS-Flex Knee, NexGen Trabecular Metal Tibial Components
and the NexGen CR Knee with Prolong Highly
Crosslinked Polyethylene. Hip sales increased 46 percent to
$645.6 million, 24 percent due to the Centerpulse
acquisition and 22 percent due to increased Zimmer
standalone sales, including 5 percent due to changes in
foreign exchange rates. Hip sales were driven by continued
conversion to porous stems, Trabecular Metal Acetabular
Cups, and increased sales of Trilogy Acetabular Cups
incorporating Longevity Highly Crosslinked Polyethylene
Liners. Dental sales were $29.8 million, reflecting solid
growth in both standard and tapered SwissPlus Implants.
Trauma sales increased 13 percent to $151.6 million,
10 percent due to increased Zimmer standalone sales,
including 3 percent due to changes in foreign exchange
rates, and 3 percent due to the Centerpulse acquisition.
Trauma sales were led by sales of the Zimmer
Periarticular Plating System. Spine sales were
$33.6 million due to sales from Centerpulse. OSP sales
increased 10 percent, including 3 percent due to
changes in foreign currency, to $194.8 million, primarily
driven by the continued growth of the OrthoPAT Orthopedic
Perioperative Autotransfusion System.
Gross profit as a percentage of net sales was 72.8 percent
in 2003 compared to 74.9 percent in 2002. Gross profit for
2003 was reduced $42.7 million, or 2.2 percent of net
sales, as a result of an inventory step-up charge recognized in
connection with the Centerpulse acquisition. Sales and gross
profit from Centerpulse also reduced reported gross margins as
Centerpulse has a greater percentage of sales based in Europe,
where gross margins are historically lower than the
U.S. and Japan. Increased Zimmer standalone average selling
prices in all geographic segments, the continued conversion from
cemented implants to higher margin porous implants and the
ongoing efforts to reduce manufacturing costs through
automation, in-sourcing and process improvements had positive
impacts on gross profit. The Company’s operating plans
annually call for reductions in unit manufacturing cost of its
products as a direct result of a number of factors, including
but not limited to, increased volume, improvements in material
technology, replacement of used machinery and equipment with
higher speed equipment, changes in the configuration of
manufacturing cells designed to increase throughput, labor
automation as well as in-sourcing. Focus on inventory cost
reduction is a strategic imperative. The Company will continue
to direct efforts on driving down costs of products sold,
general and administrative expenses and holding costs associated
with working capital.
Research and development as a percentage of net sales was
5.6 percent in 2003 compared to 5.9 percent in 2002,
as research and development expenses increased 31 percent
from the prior year compared to a 39 percent increase in
sales. Research and development expense increased to
$105.8 million from $80.7 million reflecting research
and development expenses from Centerpulse and increased spending
on active projects focused on areas of strategic significance,
including MIS Technologies, innovative materials such as
Trabecular Metal Technology and Highly Crosslinked
Polyethylene, lifestyle designs, revision implants and
biological solutions. The Company has strategically targeted
R&D spending to be at the high end of what management
believes to be an average of 4-6 percent for the industry.
Maintaining a robust product development pipeline has enabled
Zimmer to achieve significant contributions in revenue from new
products, which management defines as products introduced within
the prior 36 month period. For example, in the fourth
quarter, new product revenue, excluding Centerpulse, represented
18.9 percent of sales, at the high end of the
Company’s stated quarterly and annual goal of
15-20 percent, in place since 1999. Management expects over
the next year or two to continue to invest in R&D at almost
6 percent of sales on a higher revenue base as investments
in spine, biologics and new technology increase.
Selling, general and administrative expenses
(“SG&A”) as a percentage of net sales were
38.8 percent in 2003 compared to 39.8 percent
(39.4 percent assuming the change in accounting principle
for instruments is applied retroactively) in 2002. Low cost
inflation accompanied with double digit revenue growth has
driven the overall expense
|
|
| (1) |
Spine was a new product category as a result of the Centerpulse
acquisition. |
28
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
ratio lower for the year. Detailed planning, monitoring and
control over these expenses have also contributed to the
improvement. While well managed, the Company introduced programs
and activities in 2003 that involved significant investments,
which, in part, are reflected in SG&A. As an example, The
Zimmer Institute saw very active use in 2003. The Zimmer
Institute, which is used for surgeon training, product
development activities such as prototype evaluations and product
and instrument training for independent field sales
representatives, provided training for over 500 surgeons,
physician assistants and nurses on the MIS 2-Incision Hip
Replacement Procedure and the MIS Quad-Sparing Total Knee
Procedure over the course of 2003. The cost of training is borne
by the Company and reported in SG&A. The acquisition of
Centerpulse resulted in higher SG&A as a percentage of sales
in the fourth quarter of 2003. The change in accounting
principle for instruments favorably impacted SG&A by
$26.8 million, or 1.4 percent of net sales, in 2003.
Acquisition and integration expenses related to the acquisition
of Centerpulse and InCentive were $79.6 million, including
$36.1 million of sales agent and lease contract termination
expenses, $15.4 million of integration consulting expenses,
$10.2 million of employee severance and retention expenses,
$6.4 million of professional fees, $5.3 million of
costs for meetings and activities associated with the initial
cross-training of employees and independent sales
representatives, $2.4 million of investment banking fees
incurred by Centerpulse, $2.0 million of personnel expenses
and travel for full-time integration team members,
$0.6 million of employee relocation expenses and
$1.2 million of other miscellaneous acquisition and
integration expenses.
Operating profit increased 12 percent to
$450.7 million. Operating profit growth was driven by
strong organic sales growth, operating profit contributed by
Centerpulse and effectively controlled operating expenses. In
addition, the change in accounting principle for instruments
favorably impacted operating profit by $26.8 million. These
favorable items were offset by Centerpulse inventory step-up of
$42.7 million, Centerpulse in-process research and
development write-offs of $11.2 million and Centerpulse
acquisition and integration expenses of $79.6 million.
The Company’s effective tax rate for the year ended
December 31, 2003 was 33.6 percent, compared to
33.7 percent in 2002. The decrease from 33.7 percent
to 33.6 percent was due to expanded operations in Puerto
Rico and the implementation of certain business strategies in
2002 which resulted in reducing taxes in certain jurisdictions
and increased credits, offset by non-deductible in-process
research and development charges.
Net earnings increased 34 percent to $346.3 million
from $257.8 million in 2002, driven by strong organic sales
growth, earnings contributed by Centerpulse, leveraged operating
expenses and the one-time, non-cash cumulative effect of change
in accounting principle for instruments of $55.1 million
(net of tax), offset by Centerpulse inventory step-up of
$28.0 million (net of tax), Centerpulse in-process research
and development write-offs of $11.2 million and Centerpulse
acquisition and integration expenses of $51.1 million (net
of tax). Basic and diluted earnings per share increased
26 percent and 25 percent to $1.67 and $1.64,
respectively, from $1.33 and $1.31 in 2002.
OPERATING PROFIT BY SEGMENT
Company management evaluates operating segment performance based
upon segment operating profit exclusive of operating expenses
pertaining to global operations and corporate expenses,
acquisition and integration expenses, inventory step-up,
in-process research and development write-offs and intangible
asset amortization expense. Global operations include research,
development engineering, medical education, brand management,
corporate legal, finance, human resource functions and the
Americas operations and logistics functions. For more
information regarding the Company’s segments, see
Note 14 to the consolidated financial statements included
elsewhere in this Form 10-K.
The following table sets forth the operating profit as a
percentage of sales by segment for the years ended
December 31, 2004, 2003 and 2002:
Percent of net sales
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31, |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Americas
|
|
|
51.3 |
% |
|
|
51.2 |
% |
|
|
48.3 |
% |
|
Europe
|
|
|
34.6 |
|
|
|
26.3 |
|
|
|
24.4 |
|
|
Asia Pacific
|
|
|
42.3 |
|
|
|
45.3 |
|
|
|
46.1 |
|
Year Ended December 31, 2004
Compared to Year Ended December 31, 2003
In the Americas, operating profit as a percentage of sales
improved slightly due to improved gross margins and controlled
operating expenses. Gross profit margins increased as a result
of improved average selling prices, lower royalty expenses as a
percentage of net sales and the impact of a more favorable
product sales mix. Product sales mix made favorable
contributions as the Company sold a higher concentration of more
profitable reconstructive implants and spinal implants, while
less profitable trauma and OSP products became a smaller
percentage of net sales. Royalties as a percentage of net sales
declined as certain royalty contracts have fixed components and
caps, or ceilings, on payments. In addition to improved gross
margins, the Company effectively controlled operating expenses,
including general and administrative expenses. These
improvements were offset primarily by increased selling expenses
as a percentage of net sales due to the restructuring of certain
distributor contracts.
In Europe, operating profit as a percentage of net sales
improved due to improved gross margins, controlled operating
expenses and the favorable impact of the Centerpulse
acquisition. Gross profit margins increased principally due to
improved average selling prices, a more favorable product and
country sales mix and the favorable impact of the Centerpulse
acquisition. Product sales mix made favorable contributions as
the Company sold a higher concentration of more profitable
reconstructive implants and
29
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
spinal implants, while less profitable trauma and OSP products
became a smaller percentage of net sales. Country sales mix made
favorable contributions as the profitable German market
represented a greater percentage of total Europe sales.
Asia Pacific operating profit as a percentage of net sales
declined primarily due to decreased average selling prices,
principally the result of the 4.9 percent decrease in
government reimbursement rates in Japan, and increased selling
expenses as a percentage of net sales due to the restructuring
of certain dealer contracts in Japan.
Year Ended December 31, 2003
Compared to Year Ended December 31, 2002
Operating profit for the Americas as a percentage of net sales
increased due to improved gross margins driven by higher average
selling prices and increased sales of higher margin products,
leveraged operating expenses and the favorable impact of the
change in accounting principle for instruments. The change in
accounting principle for instruments increased operating profit
by 1.7 percentage points. With respect to sales growth,
increased Zimmer standalone average selling prices of
4 percent in 2003 and favorable effects of volume and mix,
15 percent increase in 2003, represent the most significant
factors in improved operating profit in the Americas. As
reconstructive implant sales grow at a higher rate than trauma
and OSP, operating profit margins generally tend to improve
since reconstructive product sales generally earn higher gross
margins. This was the case in 2003, with Zimmer standalone
reconstructive implant sales growth of 22 percent as
compared with total Zimmer standalone sales growth of
19 percent. In the fourth quarter, the Company reported
operating profit as a percent of net sales of 50.4 percent
for the Americas.
Operating profit for Europe as a percentage of net sales
increased due to improved gross profit margins driven by higher
Zimmer standalone average selling prices and favorable product
and country mix, leveraged operating expenses and the favorable
impact of the change in accounting principle for instruments.
The change in accounting for instruments increased operating
profit by 1.4 percentage points. Increases in Zimmer
standalone average selling prices in Europe of 2 percent in
2003 and the effect of volume and mix, 19 percent increase
in 2003, were the key factors in improved operating profit. Also
contributing to the improvement was significantly lower growth
in operating expenses. In the fourth quarter of 2003, the
Company reported operating profit as a percent of net sales of
24.7 percent for Europe.
Operating profit for Asia Pacific as a percentage of net sales
decreased primarily due to less favorable rates on hedge
contracts during the year compared to the prior year, partially
offset by increased Zimmer standalone average selling prices and
leveraged operating expenses. The change in accounting for
instruments had an immaterial effect on operating profit for
Asia Pacific. Increases in Zimmer standalone average selling
prices in Asia Pacific of 1 percent and volume and mix
improvements of 4 percent in 2003 contributed modest
improvement but was offset by higher cost of products sold.
Included in cost of product sold are losses on foreign exchange
hedge contracts, which increased in 2003 relative to 2002. In
the fourth quarter, the Company reported operating profit as a
percent of net sales of 47.1 percent for Asia Pacific.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were
$862.2 million in 2004 compared to $494.8 million in
2003. The principal source of cash was net earnings of
$541.8 million. Non-cash expenses for the period included
depreciation and amortization expense of $181.3 million and
Centerpulse and Implex inventory step-up of $59.4 million.
Included in operating cash flow is approximately
$112 million of payments related to the Centerpulse and
Implex integration. Income taxes generated $139.2 million
of operating cash flow, primarily due to reduced
U.S. federal income tax payments resulting from the
utilization of acquired Centerpulse net operating losses and
exercises of stock options by Company employees, which are
deductible expenses in the U.S. In addition, during 2004
the Company received a $55 million tax refund related to
the overpayment of U.S. federal income taxes during 2003.
Working capital, including the management of inventory and
accounts receivable, continues to be a key management focus. At
December 31, 2004, the Company had 59 days of sales
outstanding in accounts receivable, favorable to
December 31, 2003 by 3 days and unfavorable to
December 31, 2002 by 7 days. Acquired Centerpulse
businesses accounted for the decline from December 31,
2002, as Centerpulse’s business mix has a greater
proportion of European sales with payment terms generally longer
than those in the U.S. The improvement from the prior year
is due to the Europe operating segment reducing its days of
sales outstanding by 6 days due to improved collections in
larger markets, such as Germany and France, and the factoring of
receivables in Italy. At December 31, 2004, the Company had
258 days of inventory on hand, unfavorable to the prior
year by 26 days. Inventory balances have increased due to
the acquisition of Implex and to support new product launches.
The 258 days of inventory on hand at December 31, 2004
is in line with the Company’s anticipated levels of
250-260 days.
Cash flows used in investing activities declined to
$388.3 million in 2004 compared to $1,102.7 million in
2003. During 2003 the Company made $927.7 million of cash
payments, net of acquired cash, for the Centerpulse and
InCentive Capital acquisitions, compared to $18.2 million
during 2004 to complete the compulsory acquisition process.
During 2004 the Company also completed the acquisition of Implex
for cash consideration of $153.1 million, comprised of
$98.6 million of initial cash consideration, earn-out
payments of $51.9 million and direct acquisition costs of
$2.6 million. Additions to other property, plant and
equipment during 2004 were $100.8 million compared to
$44.9 million in 2003. Increases were primarily to support
the acquired Centerpulse businesses, to support sales growth and
new product
30
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
launches and to fund the facility expansions in Warsaw, Indiana,
Ponce, Puerto Rico, and Parsippany, New Jersey. Additions to
instruments during 2004 were $139.6 million compared to
$113.6 million in 2003. Increases in instrument purchases
were primarily to support acquired Centerpulse businesses and to
support new product launches. Also, additional instrument
purchases were made during 2004 to support MIS Procedure
growth, including the placement of over 2,000 MIS
Quad-Sparing Knee Replacement and Mini-Incision Knee
Replacement instrument sets in the field. During 2005 the
Company expects purchases of other property, plant and equipment
to increase to approximately $125 million to
$135 million, as a result of ongoing facility expansions in
Warsaw, Indiana, Ponce, Puerto Rico, Winterthur, Switzerland and
Parsippany, New Jersey. Facility expansions are due to increased
demand, the closure of the Austin, Texas, facility and the
tripling of Trabecular Metal Technology production
capacity. During 2005 the Company expects purchases of
instruments to be approximately $145 million to
$150 million as the Company continues to invest in
instruments to support new products, sales growth and MIS
procedures.
Cash flows used in financing activities were $402.0 million
in 2004 compared to $664.8 million provided by financing
activities in 2003. The Company repaid $461.4 million of
debt in 2004 utilizing cash on hand, cash generated from
operating activities and $65.0 million in cash proceeds
received from the exercise of Company stock options.
As of December 31, 2004, the Company has the following
committed financing arrangements: (i) $400 million
364-day revolving credit facility maturing May 2005,
(ii) $800 million three-year revolving credit facility
maturing June 2006 and (iii) $550 million five-year
term loan facility maturing June 2008 (collectively, the
“Senior Credit Facility”). Available borrowings under
the Senior Credit Facility at December 31, 2004, were
approximately $1.1 billion.
On May 24, 2004, the Company renewed its $400 million
364-day revolving credit facility and amended its five-year term
loan facility to $550 million and reduced its term loan
pricing by 25 basis points.
The Company and certain of its wholly owned foreign and domestic
subsidiaries are the borrowers and its wholly owned domestic
subsidiaries are the guarantors of the Senior Credit Facility.
Borrowings may bear interest at the appropriate LIBOR-based
rate, or an alternative base rate, plus an applicable margin
determined by reference to the Company’s senior unsecured
long-term credit rating and the amounts drawn under the Senior
Credit Facility. The Senior Credit Facility contains customary
affirmative and negative covenants and events of default for an
unsecured financing arrangement, including, among other things,
limitations on consolidations, mergers and sales of assets, as
defined in the Senior Credit Facility. Financial covenants
include a maximum leverage ratio of 3.0 to 1.0 and a minimum
interest coverage ratio of 3.5 to 1.0. If the Company falls
below an investment grade credit rating, additional restrictions
would result, including restrictions on investments and payment
of dividends, as defined in the Senior Credit Facility. The
Company intends to maintain a capital structure that is
consistent with an investment grade credit rating. The Company
was in compliance with all covenants under the Senior Credit
Facility as of December 31, 2004. Commitments under the
$400 million 364-day revolving credit facility and the
$800 million three-year revolving credit facility are
subject to certain fees, including a facility and a utilization
fee.
The Company also has available uncommitted credit facilities
totaling $50 million.
The terms of the Implex acquisition include additional cash
earn-out payments that are contingent on the year-over-year
growth of Implex product sales through 2006. The Company
estimates total earn-out payments, including payments already
made, to be in a range from $120 to $160 million. The
Company expects to pay future earn-out payments, if any, with
cash flows from operations and borrowings available under its
Senior Credit Facility.
The Company had $154.6 million in cash and equivalents,
$18.9 million in restricted cash and total debt of
$651.5 million as of December 31, 2004. At
December 31, 2004, $70.2 million of cash and
equivalents was held at Company locations outside the
U.S. The Company expects cash on hand to be in excess of
total outstanding debt by June 30, 2006, absent any cash
requirements for acquisitions.
Management believes that cash flows from operations, together
with available borrowings under the Senior Credit Facility, will
be sufficient to meet the Company’s working capital,
capital expenditure and debt service needs. Should investment
opportunities arise, the Company believes that its earnings,
balance sheet and cash flows will allow the Company to obtain
additional capital, if necessary.
31
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
CONTRACTUAL OBLIGATIONS
The Company has entered into contracts with various third
parties in the normal course of business which will require
future payments. The following table illustrates the
Company’s contractual obligations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
2006 | |
|
2008 | |
|
2010 | |
| |
|
|
|
|
|
and | |
|
and | |
|
and | |
| Contractual Obligations |
|
Total | |
|
2005 | |
|
2007 | |
|
2009 | |
|
Thereafter | |
| | |
|
Debt obligations
|
|
$ |
651.5 |
|
|
$ |
27.5 |
|
|
$ |
449.0 |
|
|
$ |
175.0 |
|
|
$ |
– |
|
|
Operating leases
|
|
|
103.0 |
|
|
|
23.5 |
|
|
|
34.2 |
|
|
|
17.7 |
|
|
|
27.6 |
|
|
Purchase obligations
|
|
|
16.1 |
|
|
|
15.5 |
|
|
|
0.6 |
|
|
|
– |
|
|
|
– |
|
|
Other long-term liabilities
|
|
|
420.9 |
|
|
|
– |
|
|
|
135.7 |
|
|
|
30.5 |
|
|
|
254.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$ |
1,191.5 |
|
|
$ |
66.5 |
|
|
$ |
619.5 |
|
|
$ |
223.2 |
|
|
$ |
282.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRITICAL ACCOUNTING ESTIMATES
The financial results of the Company are affected by the
selection and application of accounting policies and methods.
Significant accounting policies which require management’s
judgment are discussed below.
Excess Inventory and Instruments – The Company
must determine as of each balance sheet date how much, if any,
of its inventory may ultimately prove to be unsaleable or
unsaleable at its carrying cost. Similarly, the Company must
also determine if instruments on hand will be put to productive
use or remain undeployed as a result of excess supply. Reserves
are established to effectively adjust inventory and instruments
to net realizable value. To determine the appropriate level of
reserves, the Company evaluates current stock levels in relation
to historical and expected patterns of demand for all of its
products and instrument systems and components. The basis for
the determination is generally the same for all inventory and
instrument items and categories except for work-in-progress
inventory, which is recorded at cost. Obsolete or discontinued
items are generally destroyed and completely written off.
Management evaluates the need for changes to valuation reserves
based on market conditions, competitive offerings and other
factors on a regular basis.
Income Taxes – The Company estimates income tax
expense and income tax liabilities and assets by taxable
jurisdiction. Realization of deferred tax assets in each taxable
jurisdiction is dependent on the Company’s ability to
generate future taxable income sufficient to realize the
benefits. The Company evaluates deferred tax assets on an
ongoing basis and provides valuation allowances if it is
determined to be “more likely than not” that the
deferred tax benefit will not be realized. Federal income taxes
are provided on the portion of the income of foreign
subsidiaries that is expected to be remitted to the
U.S. The Company operates within numerous taxing
jurisdictions. The Company is subject to regulatory review or
audit in virtually all of those jurisdictions and those reviews
and audits may require extended periods of time to resolve. The
Company makes use of all available information and makes
reasoned judgments regarding matters requiring interpretation in
establishing tax expense, liabilities and reserves. The Company
believes adequate provisions exist for income taxes for all
periods and jurisdictions subject to review or audit.
Commitments and Contingencies – Accruals for
product liability and other claims are established with internal
and external legal counsel based on current information and
historical settlement information for claims, related fees and
for claims incurred but not reported. An actuarial model is used
by the Company to assist management in determining an
appropriate level of accruals for product liability claims.
Historical patterns of claim loss development over time are
statistically analyzed to arrive at factors which are then
applied to loss estimates in the actuarial model. The amounts
established represent management’s best estimate of the
ultimate costs that it will incur under the various
contingencies.
Goodwill and Intangible Assets – The Company
evaluates the carrying value of goodwill and indefinite life
intangible assets annually, or whenever events or circumstances
indicate the carrying value may not be recoverable. The Company
evaluates the carrying value of finite life intangible assets
whenever events or circumstances indicate the carrying value may
not be recoverable. Significant assumptions are required to
estimate the fair value of goodwill and intangible assets, most
notably estimated future cash flows generated by these assets.
Changes to these assumptions could result in the Company being
required to record impairment charges on these assets.
RECENT ACCOUNTING PRONOUNCEMENTS
Information about recent accounting pronouncements is included
in Note 2 to the Consolidated Financial Statements, which
are included herein under Item 8.
32
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|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
|
|
|
|
ITEM 7A. |
|
Quantitative and Qualitative Disclosures About Market Risk |
MARKET RISK
The Company is exposed to certain market risks as part of its
ongoing business operations, including risks from changes in
foreign currency exchange rates, interest rates and commodity
prices that could impact its financial condition, results of
operations and cash flows. The Company manages its exposure to
these and other market risks through regular operating and
financing activities, and on a limited basis, through the use of
derivative financial instruments. Derivative financial
instruments are used solely as risk management tools and not for
speculative investment purposes.
FOREIGN CURRENCY EXCHANGE RISK
The Company operates on a global basis and is exposed to the
risk that its financial condition, results of operations and
cash flows could be adversely affected by changes in foreign
currency exchange rates. The Company is primarily exposed to
foreign currency exchange rate risk with respect to its
transactions and net assets denominated in Euros, Swiss Francs,
Japanese Yen, British Pounds, Canadian Dollars and Australian
Dollars. The Company manages the foreign currency exposure
centrally, on a combined basis, which allows the Company to net
exposures and to take advantage of any natural offsets. In order
to reduce the uncertainty of foreign exchange rate movements on
transactions denominated in foreign currencies, the Company
enters into derivative financial instruments in the form of
foreign exchange forward contracts with major financial
institutions. These forward contracts are designed to hedge
anticipated foreign currency transactions, primarily
intercompany sale and purchase transactions, for periods
consistent with commitments. Realized and unrealized gains and
losses on these contracts that qualify as cash flow hedges are
temporarily recorded in other comprehensive income, then
recognized in cost of products sold when the hedged item affects
net earnings.
The notional amounts of outstanding foreign exchange forward
contracts, principally Euros, Swiss Francs, Japanese Yen,
British Pounds, Canadian Dollars and Australian Dollars, entered
into with third parties, at December 31, 2004 and 2003,
were $1,052 million and $506 million, respectively.
For contracts outstanding at December 31, 2004, the Company
has an obligation to purchase U.S. Dollars and sell Euros,
Swiss Francs, Japanese Yen, British Pounds, Canadian Dollars and
Australian Dollars or purchase Swiss Francs and sell U.S.
Dollars at set maturity dates ranging from January 2005 through
December 2006. The weighted average contract rates outstanding
are Euro: USD 1.20, USD: Swiss Franc 1.25, USD:
Yen 110, British Pound: USD 1.76, USD: Canadian
Dollar 1.37 and Australian Dollar: USD 0.65.
The Company maintains written policies and procedures governing
its risk management activities. The Company’s policy
requires that critical terms of hedging instruments are the same
as hedged forecasted transactions. On this basis, with respect
to cash flow hedges, changes in cash flows attributable to
hedged transactions are generally expected to be completely
offset by changes in the fair value of hedge instruments. As
part of its risk management program, the Company also performs
sensitivity analyses to assess potential changes in revenue,
operating results, cash flows and financial position relating to
hypothetical movements in currency exchange rates. A sensitivity
analysis of changes in the fair value of foreign exchange
forward contracts outstanding at December 31, 2004,
indicated that, if the U.S. Dollar uniformly changed in
value by 10 percent relative to the Euro, Swiss Franc,
Japanese Yen, British Pound, Canadian Dollar and Australian
Dollar, with no change in the interest differentials, the fair
value of those contracts would increase or decrease earnings
before income taxes in periods through 2007, depending on the
direction of the change, by an average approximate amount of
$62.1 million, $21.8 million, $20.3 million,
$6.3 million, $4.4 million and $3.7 million for
the Euro, Swiss Franc, Japanese Yen, British Pound, Canadian
Dollar and Australian Dollar contracts, respectively. Any change
in the fair value of foreign exchange forward contracts as a
result of a fluctuation in a currency exchange rate is expected
to be largely offset by a change in the value of the hedged
transaction. Consequently, foreign exchange contracts would not
subject the Company to material risk due to exchange rate
movements because gains and losses on these contracts offset
gains and losses on the assets, liabilities, and transactions
being hedged.
The Company had net investment exposures to net foreign currency
denominated assets and liabilities of approximately
$1,860 million at December 31, 2004, primarily in
Swiss Francs, Japanese Yen and Euros. Approximately
$1,140 million of the net asset exposure at
December 31, 2004 relates to goodwill recorded in the
Europe and Asia Pacific geographic segments.
The Company enters into foreign currency forward exchange
contracts with terms of one month to manage currency exposures
for assets and liabilities denominated in a currency other than
an entity’s functional currency. As a result, foreign
currency translation gains/ losses recognized in earnings under
SFAS No. 52, “Foreign Currency Translation” are
generally offset with gain/losses on the foreign currency
forward exchange contracts in the same reporting period.
COMMODITY PRICE RISK
The Company purchases raw material commodities such as cobalt
chrome, titanium, tantalum, polymer and sterile packaging. The
Company enters into 12 to 24 month supply contracts, where
available, on these commodities to alleviate the impact of
market fluctuation in prices. As part of the Company’s risk
management program, sensitivity analyses related to potential
commodity price changes are performed. A 10 percent price
change across all these commodities would not have a material
impact on the Company’s consolidated financial position,
results of operations or cash flows.
33
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
INTEREST RATE RISK
In the normal course of business, the Company is exposed to
market risk from changes in interest rates that could impact its
results of operations and financial condition. The Company
manages its exposure to interest rate risks through its regular
operations and financing activities.
Presently, the Company invests its cash and equivalents in money
market and investment-grade short-term debt instruments. The
primary investment objective is to ensure capital preservation
of its invested principal funds by limiting default and market
risk. Currently, the Company does not use derivative financial
instruments in its investment portfolio.
The Company’s exposure to interest rate risk arises
principally from the variable rates associated with its credit
facilities. The Company is subject to interest rate risk through
movements in interest rates on the committed Senior Credit
Facility and its uncommitted credit facilities. Presently, all
of its debt outstanding bears interest at short-term rates. The
Company currently does not hedge its interest rate exposure, but
may do so in the future. Based upon the Company’s overall
interest rate exposure as of December 31, 2004, a change of
10 percent in interest rates (or 25 basis points), assuming
the amount outstanding remains constant, would result in an
annual increase of interest expense of approximately
$1.0 million. However, due to the uncertainty of the
actions that would be taken and their possible effects, this
analysis assumes no such action, nor management actions to
mitigate interest rate changes. Further, this analysis does not
consider the effect of the change in the level of overall
economic activity that could exist in such an environment.
CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, are primarily cash, cash
equivalents, counterparty transactions, and accounts receivable.
The Company places its investments in highly rated financial
institutions and money market instruments, and limits the amount
of credit exposure to any one entity. The Company does not
believe it is exposed to any significant credit risk on its cash
and equivalents and investments.
The Company is exposed to credit loss in the event of
nonperformance by the financial institutions with which it
conducts business. However, this loss is limited to the amounts,
if any, by which the obligations of the counterparty to the
financial instrument contract exceed the obligation of the
Company. The Company also minimizes exposure to credit risk by
dealing with a diversified group of major financial
institutions. Credit risk is managed through the monitoring of
counterparty financial condition and by the use of standard
credit guidelines. The Company does not anticipate any
nonperformance by any of the counterparties.
Concentration of credit risk with respect to trade accounts
receivable is limited due to the large number of customers and
their dispersion across a number of geographic areas and by
frequent monitoring of the creditworthiness of the customers to
whom credit is granted in the normal course of business.
However, essentially all of the Company’s trade receivables
are concentrated in the public and private hospital and
healthcare industry in the U.S. and internationally or with
distributors or dealers who operate in international markets
and, accordingly, are exposed to their respective business,
economic and country specific variables. Repayment is dependent
upon the financial stability of these industry sectors and the
respective countries’ national economic and health care
systems. Exposure to credit risk is controlled through credit
approvals, credit limits and monitoring procedures and the
Company believes that reserves for losses are adequate. There is
no significant net exposure due to any individual customer or
other major concentration of credit risk.
34
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Management’s Report on Internal Control Over Financial
Reporting
The management of Zimmer Holdings, Inc. is responsible for
establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting
is defined in Rules 13a-15(f) or 15d-15(f) promulgated
under the Securities Exchange Act of 1934 as a process designed
by, or under the supervision of, the Company’s principal
executive and principal financial officers and effected by the
Company’s Board of Directors, management and other
personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
U.S. generally accepted accounting principles and includes
those policies and procedures that:
|
|
|
| |
• |
Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of the assets of the Company; |
| |
| |
• |
Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting
principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of
management and directors of the Company; and |
| |
| |
• |
Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on the
financial statements. |
Because of its inherent limitations, the Company’s internal
control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.
The Company’s management assessed the effectiveness of the
Company’s internal control over financial reporting as of
December 31, 2004. In making this assessment, the
Company’s management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework.
Based on our assessment, management has concluded that, as of
December 31, 2004, the Company’s internal control over
financial reporting is effective based on those criteria.
The Company’s independent auditors have audited our
assessment of the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2004,
as stated in their report which appears in Item 8 of this
Annual Report on Form 10-K.
35
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
|
|
|
|
ITEM 8. |
|
Financial Statements and Supplementary Data |
Zimmer Holdings, Inc.
|
|
| Index to Consolidated Financial Statements |
Page |
| |
|
|
|
|
|
FINANCIAL STATEMENTS:
|
|
|
|
|
| |
|
Report of Independent Registered Public Accounting Firm
|
|
|
37 |
|
| |
|
Consolidated Statements of Earnings for the Years Ended
December 31, 2004, 2003 and 2002
|
|
|
39 |
|
| |
|
Consolidated Balance Sheets as of December 31, 2004 and 2003
|
|
|
40 |
|
| |
|
Consolidated Statements of Stockholders’ Equity for the
Years Ended December 31, 2004, 2003 and 2002
|
|
|
41 |
|
| |
|
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002
|
|
|
42 |
|
| |
|
Consolidated Statements of Comprehensive Income for the Years
Ended December 31, 2004, 2003 and 2002
|
|
|
43 |
|
| |
|
Notes to Consolidated Financial Statements
|
|
|
44 |
|
36
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Zimmer Holdings,
Inc.:
We have completed an integrated audit of Zimmer Holdings,
Inc.’s 2004 consolidated financial statements and of its
internal control over financial reporting as of
December 31, 2004 and audits of its 2003 and 2002
consolidated financial statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits, are
presented below.
|
|
|
Consolidated financial
statements |
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of Zimmer
Holdings, Inc. and its subsidiaries at December 31, 2004
and 2003, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
index appearing under Item 15(a)(2) presents fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements. These financial statements and financial statement
schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit of financial statements includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
As described in Note 4, the Company changed its method of
accounting for instruments effective January 1, 2003.
|
|
|
Internal control over financial
reporting |
Also, in our opinion, management’s assessment, included in
Management’s Report on Internal Control Over Financial
Reporting appearing at the conclusion of Item 7A, that the
Company maintained effective internal control over financial
reporting as of December 31, 2004 based on criteria
established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is fairly
stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2004, based on criteria
established in Internal Control – Integrated
Framework issued by the COSO. The Company’s management
is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express opinions on management’s assessment and on
the effectiveness of the Company’s internal control over
financial reporting based on our audit. We conducted our audit
of internal control over financial reporting in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was
maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an
understanding of internal control over financial reporting,
evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
company’s assets that could have a material effect on the
financial statements.
37
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
|
|
| |
 |
| |
| |
PricewaterhouseCoopers LLP |
| |
Chicago, IL |
| |
March 9, 2005 |
38
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Consolidated Statements of Earnings
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (in millions, except per share amounts) | |
| | |
| For the Years Ended December 31, |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Net Sales
|
|
$ |
2,980.9 |
|
|
$ |
1,901.0 |
|
|
$ |
1,372.4 |
|
|
Cost of products sold
|
|
|
779.9 |
|
|
|
516.2 |
|
|
|
344.8 |
|
| |
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
2,201.0 |
|
|
|
1,384.8 |
|
|
|
1,027.6 |
|
| |
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
166.7 |
|
|
|
105.8 |
|
|
|
80.7 |
|
|
Selling, general and administrative
|
|
|
1,190.0 |
|
|
|
737.5 |
|
|
|
546.0 |
|
|
In-process research and development
|
|
|
– |
|
|
|
11.2 |
|
|
|
– |
|
|
Acquisition and integration
|
|
|
81.1 |
|
|
|
79.6 |
|
|
|
– |
|
| |
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
1,437.8 |
|
|
|
934.1 |
|
|
|
626.7 |
|
| |
|
|
|
|
|
|
|
|
|
Operating Profit
|
|
|
763.2 |
|
|
|
450.7 |
|
|
|
400.9 |
|
|
Interest expense
|
|
|
31.7 |
|
|
|
13.2 |
|
|
|
12.0 |
|
| |
|
|
|
|
|
|
|
|
|
Earnings before income taxes, minority interest and
cumulative effect of change in accounting principle
|
|
|
731.5 |
|
|
|
437.5 |
|
|
|
388.9 |
|
|
Provision for income taxes
|
|
|
189.6 |
|
|
|
146.8 |
|
|
|
131.1 |
|
|
Minority interest
|
|
|
(0.1 |
) |
|
|
0.5 |
|
|
|
– |
|
| |
|
|
|
|
|
|
|
|
|
Earnings before cumulative effect of change in accounting
principle
|
|
|
541.8 |
|
|
|
291.2 |
|
|
|
257.8 |
|
|
Cumulative effect of change in accounting principle, net of tax
|
|
|
– |
|
|
|
55.1 |
|
|
|
– |
|
| |
|
|
|
|
|
|
|
|
|
Net Earnings
|
|
$ |
541.8 |
|
|
$ |
346.3 |
|
|
$ |
257.8 |
|
| |
|
|
|
|
|
|
|
|
|
Earnings Per Common Share – Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before cumulative effect of
change in accounting principle
|
|
$ |
2.22 |
|
|
$ |
1.40 |
|
|
$ |
1.33 |
|
|
Cumulative effect of change in
accounting principle, net of tax
|
|
|
– |
|
|
|
0.27 |
|
|
|
– |
|
| |
|
|
|
|
|
|
|
|
|
Earnings Per Common Share –
Basic
|
|
$ |
2.22 |
|
|
$ |
1.67 |
|
|
$ |
1.33 |
|
| |
|
|
|
|
|
|
|
|
|
Earnings Per Common Share – Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before cumulative effect of
change in accounting principle
|
|
$ |
2.19 |
|
|
$ |
1.38 |
|
|
$ |
1.31 |
|
|
Cumulative effect of change in
accounting principle, net of tax
|
|
|
– |
|
|
|
0.26 |
|
|
|
– |
|
| |
|
|
|
|
|
|
|
|
|
Earnings Per Common Share –
Diluted
|
|
$ |
2.19 |
|
|
$ |
1.64 |
|
|
$ |
1.31 |
|
| |
|
|
|
|
|
|
|
|
|
Pro Forma Amounts Assuming the New Accounting Principle is
Applied Retroactively
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings
|
|
$ |
541.8 |
|
|
$ |
291.2 |
|
|
$ |
260.8 |
|
|
Earnings Per Common Share –
Basic
|
|
$ |
2.22 |
|
|
$ |
1.40 |
|
|
$ |
1.34 |
|
|
Earnings Per Common Share –
Diluted
|
|
$ |
2.19 |
|
|
$ |
1.38 |
|
|
$ |
1.33 |
|
|
Weighted Average Common Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
244.4 |
|
|
|
207.7 |
|
|
|
194.5 |
|
|
Diluted
|
|
|
247.8 |
|
|
|
211.2 |
|
|
|
196.8 |
|
The accompanying notes are an integral part of these
consolidated financial statements.
39
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Consolidated Balance Sheets
| |
|
|
|
|
|
|
|
|
|
|
| (in millions, except share amounts) | |
| | |
| December 31, | |
|
2004 | |
|
2003 | |
| | |
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
| |
Cash and equivalents
|
|
$ |
154.6 |
|
|
$ |
77.5 |
|
| |
Restricted cash
|
|
|
18.9 |
|
|
|
14.5 |
|
| |
Accounts receivable, less allowance for doubtful accounts
|
|
|
524.8 |
|
|
|
486.4 |
|
| |
Inventories, net
|
|
|
536.0 |
|
|
|
527.7 |
|
| |
Prepaid expenses
|
|
|
54.0 |
|
|
|
43.5 |
|
| |
Deferred income taxes
|
|
|
272.6 |
|
|
|
189.1 |
|
| |
|
|
|
|
| |
|
Total Current Assets
|
|
|
1,560.9 |
|
|
|
1,338.7 |
|
| |
Property, plant and equipment, net
|
|
|
628.5 |
|
|
|
525.2 |
|
| |
Goodwill
|
|
|
2,528.9 |
|
|
|
2,291.8 |
|
| |
Intangible assets, net
|
|
|
794.8 |
|
|
|
760.5 |
|
| |
Other assets
|
|
|
182.4 |
|
|
|
239.8 |
|
| |
|
|
|
|
|
Total Assets
|
|
$ |
5,695.5 |
|
|
$ |
5,156.0 |
|
| |
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
| |
Accounts payable
|
|
$ |
131.6 |
|
|
$ |
127.6 |
|
| |
Income taxes payable (receivable)
|
|
|
34.2 |
|
|
|
(59.0 |
) |
| |
Other current liabilities
|
|
|
507.7 |
|
|
|
475.4 |
|
| |
Short-term debt
|
|
|
27.5 |
|
|
|
101.3 |
|
| |
|
|
|
|
| |
|
Total Current Liabilities
|
|
|
701.0 |
|
|
|
645.3 |
|
|
Other long-term liabilities
|
|
|
420.9 |
|
|
|
352.6 |
|
|
Long-term debt
|
|
|
624.0 |
|
|
|
1,007.8 |
|
| |
|
|
|
|
|
Total Liabilities
|
|
|
1,745.9 |
|
|
|
2,005.7 |
|
| |
|
|
|
|
|
Commitments and Contingencies (Note 16)
|
|
|
|
|
|
|
|
|
|
Minority Interest
|
|
|
7.1 |
|
|
|
7.0 |
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
| |
Common stock, $0.01 par value, one billion shares authorized,
245.5 million (242.4 million in 2003) issued and
outstanding
|
|
|
2.5 |
|
|
|
2.4 |
|
| |
Paid-in capital
|
|
|
2,485.2 |
|
|
|
2,342.5 |
|
| |
Retained earnings
|
|
|
1,201.5 |
|
|
|
659.7 |
|
| |
Accumulated other comprehensive income
|
|
|
253.3 |
|
|
|
138.7 |
|
| |
|
|
|
|
|
Total Stockholders’ Equity
|
|
|
3,942.5 |
|
|
|
3,143.3 |
|
| |
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$ |
5,695.5 |
|
|
$ |
5,156.0 |
|
| |
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
40
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Consolidated Statements of Stockholders’ Equity
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in millions) | |
| | |
| |
|
|
|
|
|
Accumulated | |
|
|
| |
|
Common Shares | |
|
|
|
Other | |
|
Total | |
| |
|
| |
|
Paid-in | |
|
Retained | |
|
Comprehensive | |
|
Stockholders’ | |
| |
|
Number | |
|
Amount | |
|
Capital | |
|
Earnings | |
|
Income | |
|
Equity | |
| | |
|
Balance January 1, 2002
|
|
|
193.9 |
|
|
$ |
1.9 |
|
|
$ |
4.4 |
|
|
$ |
55.6 |
|
|
$ |
16.8 |
|
|
$ |
78.7 |
|
|
Net earnings
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
257.8 |
|
|
|
– |
|
|
|
257.8 |
|
|
Other comprehensive income
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(2.8 |
) |
|
|
(2.8 |
) |
|
Stock option exercises
|
|
|
1.3 |
|
|
|
0.1 |
|
|
|
30.9 |
|
|
|
– |
|
|
|
– |
|
|
|
31.0 |
|
|
Other
|
|
|
– |
|
|
|
– |
|
|
|
1.6 |
|
|
|
– |
|
|
|
– |
|
|
|
1.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2002
|
|
|
195.2 |
|
|
|
2.0 |
|
|
|
36.9 |
|
|
|
313.4 |
|
|
|
14.0 |
|
|
|
366.3 |
|
|
Net earnings
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
346.3 |
|
|
|
– |
|
|
|
346.3 |
|
|
Other comprehensive income
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
124.7 |
|
|
|
124.7 |
|
|
Centerpulse and InCentive Exchange Offers net of
$(11.9) million equity issuance costs
|
|
|
44.5 |
|
|
|
0.4 |
|
|
|
2,211.6 |
|
|
|
– |
|
|
|
– |
|
|
|
2,212.0 |
|
|
Stock option exercises
|
|
|
2.7 |
|
|
|
– |
|
|
|
88.1 |
|
|
|
– |
|
|
|
– |
|
|
|
88.1 |
|
|
Other
|
|
|
– |
|
|
|
– |
|
|
|
5.9 |
|
|
|
– |
|
|
|
– |
|
|
|
5.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2003
|
|
|
242.4 |
|
|
|
2.4 |
|
|
|
2,342.5 |
|
|
|
659.7 |
|
|
|
138.7 |
|
|
|
3,143.3 |
|
|
Net earnings
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
541.8 |
|
|
|
– |
|
|
|
541.8 |
|
|
Other comprehensive income
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
114.6 |
|
|
|
114.6 |
|
|
Centerpulse and InCentive compulsory acquisition
|
|
|
0.6 |
|
|
|
– |
|
|
|
28.1 |
|
|
|
– |
|
|
|
– |
|
|
|
28.1 |
|
|
Stock option exercises
|
|
|
2.5 |
|
|
|
0.1 |
|
|
|
104.3 |
|
|
|
– |
|
|
|
– |
|
|
|
104.4 |
|
|
Other
|
|
|
– |
|
|
|
– |
|
|
|
10.3 |
|
|
|
– |
|
|
|
– |
|
|
|
10.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2004
|
|
|
245.5 |
|
|
$ |
2.5 |
|
|
$ |
2,485.2 |
|
|
$ |
1,201.5 |
|
|
$ |
253.3 |
|
|
$ |
3,942.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
41
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Consolidated Statements of Cash Flows
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in millions) | |
| | |
| For the Years Ended December 31, | |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Cash flows provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net earnings
|
|
$ |
541.8 |
|
|
$ |
346.3 |
|
|
$ |
257.8 |
|
| |
Adjustments to reconcile net earnings to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Depreciation and amortization
|
|
|
181.3 |
|
|
|
103.3 |
|
|
|
25.3 |
|
| |
|
Inventory step-up
|
|
|
59.4 |
|
|
|
42.7 |
|
|
|
– |
|
| |
|
Write off of in-process research and development
|
|
|
– |
|
|
|
11.2 |
|
|
|
– |
|
| |
|
Cumulative effect of change in accounting principle
|
|
|
– |
|
|
|
(89.1 |
) |
|
|
– |
|
| |
|
Changes in operating assets and liabilities, net of acquired
assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Income taxes
|
|
|
139.2 |
|
|
|
117.8 |
|
|
|
29.9 |
|
| |
|
|
Receivables
|
|
|
(10.6 |
) |
|
|
(39.0 |
) |
|
|
(25.0 |
) |
| |
|
|
Inventories
|
|
|
(44.7 |
) |
|
|
(53.0 |
) |
|
|
(59.7 |
) |
| |
|
|
Accounts payable and accrued liabilities
|
|
|
(3.1 |
) |
|
|
75.9 |
|
|
|
(12.2 |
) |
| |
|
|
Other assets and liabilities
|
|
|
(1.1 |
) |
|
|
(21.3 |
) |
|
|
4.1 |
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
Net cash provided by operating activities
|
|
|
862.2 |
|
|
|
494.8 |
|
|
|
220.2 |
|
| |
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Additions to instruments
|
|
|
(139.6 |
) |
|
|
(113.6 |
) |
|
|
– |
|
| |
Additions to other property, plant and equipment
|
|
|
(100.8 |
) |
|
|
(44.9 |
) |
|
|
(33.7 |
) |
| |
Centerpulse and InCentive acquisitions, net of acquired cash
|
|
|
(18.2 |
) |
|
|
(927.7 |
) |
|
|
– |
|
| |
Implex acquisition, net of acquired cash
|
|
|
(153.1 |
) |
|
|
– |
|
|
|
– |
|
| |
Proceeds from note receivable
|
|
|
25.0 |
|
|
|
– |
|
|
|
– |
|
| |
Investments in other assets
|
|
|
(1.6 |
) |
|
|
(16.5 |
) |
|
|
(2.0 |
) |
| |
|
|
|
|
|
|
|
|
| |
|
|
|
Net cash used in investing activities
|
|
|
(388.3 |
) |
|
|
(1,102.7 |
) |
|
|
(35.7 |
) |
| |
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net proceeds/(payments) on lines of credit
|
|
|
(561.4 |
) |
|
|
170.6 |
|
|
|
(212.8 |
) |
| |
Proceeds from term loans
|
|
|
100.0 |
|
|
|
550.0 |
|
|
|
– |
|
| |
Payments on term loans
|
|
|
– |
|
|
|
(100.0 |
) |
|
|
– |
|
| |
Proceeds from exercise of stock options
|
|
|
65.0 |
|
|
|
70.5 |
|
|
|
23.9 |
|
| |
Debt issuance costs
|
|
|
(0.6 |
) |
|
|
(19.4 |
) |
|
|
– |
|
| |
Equity issuance costs
|
|
|
(5.0 |
) |
|
|
(6.9 |
) |
|
|
– |
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(402.0 |
) |
|
|
664.8 |
|
|
|
(188.9 |
) |
| |
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and equivalents
|
|
|
5.2 |
|
|
|
4.9 |
|
|
|
1.7 |
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
Increase (decrease) in cash and equivalents
|
|
|
77.1 |
|
|
|
61.8 |
|
|
|
(2.7 |
) |
|
Cash and equivalents, beginning of year
|
|
|
77.5 |
|
|
|
15.7 |
|
|
|
18.4 |
|
| |
|
|
|
|
|
|
|
|
|
Cash and equivalents, end of year
|
|
$ |
154.6 |
|
|
$ |
77.5 |
|
|
$ |
15.7 |
|
| |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
42
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Consolidated Statements of Comprehensive Income
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in millions) | |
| | |
| For the Years Ended December 31, |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Net Earnings
|
|
$ |
541.8 |
|
|
$ |
346.3 |
|
|
$ |
257.8 |
|
|
Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Foreign currency cumulative translation adjustments
|
|
|
145.5 |
|
|
|
156.6 |
|
|
|
13.5 |
|
| |
Unrealized foreign currency hedge losses, net of tax effects
of
$10.0 in 2004, $21.6 in 2003 and $7.5 in 2002
|
|
|
(48.7 |
) |
|
|
(35.3 |
) |
|
|
(12.2 |
) |
| |
Reclassification adjustments on foreign currency hedges, net of
tax
effects of $(9.6) in 2004, $(2.1) in 2003 and $2.1 in 2002
|
|
|
15.7 |
|
|
|
3.4 |
|
|
|
(3.5 |
) |
| |
Unrealized gains on securities, net of tax effect of $(1.5)
|
|
|
2.4 |
|
|
|
– |
|
|
|
– |
|
| |
Minimum pension liability, net of tax effects of $0.2 in 2004
and $0.4 in 2002
|
|
|
(0.3 |
) |
|
|
– |
|
|
|
(0.6 |
) |
| |
|
|
|
|
|
|
|
|
| |
|
Other comprehensive income (loss)
|
|
|
114.6 |
|
|
|
124.7 |
|
|
|
(2.8 |
) |
| |
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
$ |
656.4 |
|
|
$ |
471.0 |
|
|
$ |
255.0 |
|
| |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
43
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Notes to Consolidated Financial Statements
Zimmer Holdings, Inc. and its subsidiaries (individually and
collectively the “Company”) design, develop,
manufacture and market reconstructive orthopaedic implants,
including joint and dental, spinal implants, and trauma
products. Joint reconstructive implants restore function lost
due to disease or trauma in joints such as knees, hips,
shoulders and elbows. Dental reconstructive implants restore
function and aesthetics in patients that have lost teeth due to
trauma or disease. Spinal implants are utilized by orthopaedic
surgeons and neurosurgeons in the treatment of degenerative
diseases, deformities and trauma in all regions of the spine.
Trauma products are devices used primarily to reattach or
stabilize damaged bone and tissue to support the body’s
natural healing process. The Company’s related orthopaedic
surgical products include surgical supplies and instruments
designed to aid in orthopedic surgical procedures. The Company
also has a limited array of sports medicine products.
The Company has operations in more than 24 countries and
markets its products in more than 100 countries. The Company
operates in a single industry but has three reportable
geographic segments, the Americas, Europe and Asia Pacific.
|
|
|
|
2. |
|
SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation – The consolidated
financial statements include the accounts of Zimmer Holdings,
Inc. and its subsidiaries in which it holds a controlling equity
position. Investments in companies in which the Company
exercises significant influence over the operating and financial
affairs, but does not control, are accounted for under the
equity method. Under the equity method, the Company records the
investment at cost and adjusts the carrying amount of the
investment by its proportionate share of the investee’s net
earnings or losses. All significant intercompany accounts and
transactions are eliminated. Certain amounts in the 2003 and
2002 consolidated financial statements have been reclassified to
conform to the 2004 presentation.
Use of Estimates – The consolidated financial
statements are prepared in conformity with accounting principles
generally accepted in the United States and, accordingly,
include amounts that are based on management’s best
estimates and judgments. Actual results could differ from those
estimates.
Foreign Currency Translation – The financial
statements of the Company’s foreign subsidiaries are
translated into U.S. dollars using period-end exchange
rates for assets and liabilities and average exchange rates for
operating results. Unrealized translation gains and losses are
included in accumulated other comprehensive income in
stockholders’ equity. Foreign currency transaction gains
and losses included in net earnings are not material.
Revenue Recognition – The Company sells product
through three principal channels: 1) direct to health care
institutions, 2) through stocking distributors and
healthcare dealers and 3) directly to dental practices and
dental laboratories. The direct channel accounts for greater
than 80 percent of the Company’s revenue. Through this
channel, inventory is generally consigned to sales agents or
customers so that products are available when needed for
surgical procedures. No revenue is recognized upon the placement
of inventory into consignment as the Company retains title and
maintains the inventory on the Company’s balance sheet.
Upon use, the Company issues an invoice and revenue is
recognized. Pricing for products is generally predetermined by
contracts with customers, agents acting on behalf of customer
groups or by government regulatory bodies, depending on the
market. Price discounts under group purchasing contracts are
generally linked to volume of implant purchases by customer
health care institutions within a specified group. At negotiated
thresholds within a contract buying period, price discounts
increase. The Company tracks sales volumes by contract and as
contractual volume thresholds are achieved, the higher discounts
are applied at an item level on customer invoices. As such,
discounts are reflected in revenue as earned. The Company also
accrues for anticipated price adjustments, which can occur
subsequent to invoicing, based on reasonable estimates derived
from past experience. Revenue is recognized on sales to stocking
distributors, healthcare dealers, dental practices and dental
laboratories, which account for less than 20 percent of the
Company’s revenue, when title to product passes to the
distributor, healthcare dealer, dental practice or dental
laboratory, generally upon shipment. Product is generally sold
to distributors on secured credit terms at fixed prices for
specified periods. A distributor may return product in the event
that the Company terminates the relationship. Under those
circumstances, the Company records an estimated sales return in
the period in which constructive notice of termination is given
to a distributor.
The reserves for doubtful accounts were $28.4 million and
$29.5 million as of December 31, 2004 and 2003,
respectively.
Shipping and Handling – Amounts billed to
customers for shipping and handling of products are reflected in
net sales, and are not significant. Expenses incurred related to
shipping and handling of products are reflected in selling,
general and administrative.
Acquisition and Integration – The Company
recognizes incremental expenses resulting directly from the
acquisitions of Centerpulse and Implex as “Acquisition and
integration”
44
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Notes to Consolidated Financial Statements
(Continued)
expenses. Acquisition and integration expenses for the years
ended December 31, 2004 and 2003, included (in millions):
| |
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
|
2004 | |
|
2003 | |
| | |
|
Sales agent and lease contract terminations
|
|
$ |
24.4 |
|
|
$ |
36.1 |
|
|
Integration consulting
|
|
|
24.2 |
|
|
|
15.4 |
|
|
Employee severance and retention
|
|
|
9.4 |
|
|
|
10.2 |
|
|
Professional fees
|
|
|
7.8 |
|
|
|
6.4 |
|
|
Integration personnel
|
|
|
5.2 |
|
|
|
2.0 |
|
|
Information technology integration
|
|
|
4.3 |
|
|
|
– |
|
|
Other
|
|
|
5.8 |
|
|
|
9.5 |
|
| |
|
|
|
|
| |
|
$ |
81.1 |
|
|
$ |
79.6 |
|
| |
|
|
|
|
Cash and Equivalents – The Company considers
all highly liquid investments with an original maturity of three
months or less to be cash equivalents. The carrying amounts
reported in the balance sheet for cash and equivalents are
valued at cost, which approximates their fair value. The Company
has restricted cash primarily composed of cash held in escrow
related to certain insurance coverage.
Inventories – Inventories, net of allowances
for obsolete and slow-moving goods, are stated at the lower of
cost or market, with cost determined on a first-in first-out
basis.
Property, Plant and Equipment – Property, plant
and equipment is carried at cost less accumulated depreciation.
Depreciation is computed on a straight-line method based on the
estimated useful lives of ten to forty years for buildings and
improvements, three to eight years for machinery and equipment
and generally five years for instruments. Maintenance and
repairs are expensed as incurred. In accordance with Statement
of Financial Accounting Standards (“SFAS”)
No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” the Company reviews property, plant and
equipment for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may
not be recoverable. An impairment loss would be recognized when
estimated future undiscounted cash flows relating to the asset
are less than its carrying amount. An impairment loss is
measured as the amount by which the carrying amount of an asset
exceeds its fair value.
Goodwill – The Company accounts for goodwill in
accordance with SFAS No. 142, “Goodwill and Other
Intangible Assets”. Under SFAS 142, goodwill is not
amortized but is subject to annual impairment tests. Goodwill
has been assigned to reporting units, which are consistent with
the Company’s reportable operating segments. The Company
performs annual impairment tests in accordance with SFAS
No. 142 by comparing each reporting unit’s fair value
to its carrying amount to determine if there is potential
impairment. If the fair value of the reporting unit is less than
its carrying value, an impairment loss is recorded to the extent
that the implied fair value of the reporting unit goodwill is
less than the carrying value of the reporting unit goodwill. The
fair value of the reporting unit and the implied fair value of
goodwill are determined based upon discounted cash flows, market
multiples or appraised values as appropriate.
Intangible Assets – The Company accounts for
intangible assets in accordance with SFAS No. 142.
Intangible assets with an indefinite life, including certain
trademarks and trade names, are not amortized. The useful lives
of indefinite life intangible assets are assessed annually to
determine whether events and circumstances continue to support
an indefinite life. Intangible assets with a finite life,
including core and developed technology, certain trademarks and
trade names, customer related intangibles and patents and
licenses are amortized over their estimated useful life, ranging
from seven to thirty years. Intangible assets with an indefinite
life are tested for impairment annually, or whenever events or
circumstances indicate that the carrying amount may not be
recoverable. An impairment loss is recognized if the carrying
amount exceeds the estimated fair value of the asset. The amount
of the impairment loss to be recorded would be determined based
upon the excess of the asset’s carrying value over its fair
value. Intangible assets with a finite life are tested for
impairment whenever events or circumstances indicate that the
carrying amount may not be recoverable.
Research and Development – The Company expenses
all research and development costs as incurred. Research and
development costs include salaries, prototypes, depreciation of
equipment used in research and development, consultant fees and
amounts paid to collaborative partners.
Income Taxes – The Company accounts for income
taxes in accordance with SFAS No. 109, “Accounting for
Income Taxes.” Under this method, deferred tax assets and
liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates in effect for the years
in which the differences are expected to reverse. Federal income
taxes are provided on the portion of the income of foreign
subsidiaries that is expected to be remitted to the U.S.
Derivative Financial Instruments – The Company
accounts for all derivative financial instruments in accordance
with SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended by SFAS
No. 138, “Accounting for Certain Derivative
Instruments and Certain Hedging Activities (an amendment of FASB
Statement No. 133)” and SFAS No. 149,
“Amendment of Statement 133 on Derivative Instruments and
Hedging Activities”. SFAS No. 133 requires that all
derivative instruments be reported as assets or liabilities on
the balance sheet and measured at fair value. The Company
maintains written policies and procedures that permit, under
appropriate circumstances and subject to proper authorization,
the use of derivative financial instruments solely for hedging
purposes. The use of derivative financial instruments for
trading or speculative purposes is prohibited. The Company is
exposed to market risk due to changes in currency exchange
rates. As a result, the Company utilizes foreign exchange
forward contracts to offset the effect of exchange rate
fluctuations on anticipated foreign currency transactions,
generally intercompany sales
45
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Notes to Consolidated Financial Statements
(Continued)
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
and purchases expected to occur within the next twelve to
twenty-four months. Derivative instruments that qualify as cash
flow hedges are designated as such from inception. Formal
documentation is maintained of the Company’s objectives,
the nature of the risk being hedged, identification of the
instrument, the hedged transaction, the hedging relationship and
how effectiveness of the hedging instrument will be assessed.
The Company’s policy requires that critical terms of a
hedging instrument are essentially the same as a hedged
forecasted transaction. On this basis, with respect to a cash
flow hedge, changes in cash flows attributable to the hedged
transaction are generally expected to be completely offset by
the cash flows attributable to hedge instruments. The Company,
therefore, performs quarterly assessments of hedge effectiveness
by verifying and documenting those critical terms of the hedge
instrument and that forecasted transactions have not changed.
The Company also assesses on a quarterly basis whether there
have been adverse developments regarding the risk of a
counterparty default. For derivatives which qualify as hedges of
future cash flows, the effective portion of changes in fair
value is temporarily recorded in other comprehensive income and
then recognized in cost of products sold when the hedged item
affects net earnings. The ineffective portion of a
derivative’s change in fair value, if any, is reported in
cost of products sold immediately. The net amount recognized in
earnings during the years ended December 31, 2004, 2003 and
2002, due to ineffectiveness and amounts excluded from the
assessment of hedge effectiveness, was not significant.
The notional amounts of outstanding foreign exchange forward
contracts, principally Euros, Swiss Francs, Japanese Yen,
British Pounds, Canadian Dollars and Australian Dollars, entered
into with third parties, at December 31, 2004, were
$1,052.3 million. The fair value of outstanding derivative
instruments recorded on the balance sheet at December 31,
2004, together with settled derivatives where the hedged item
has not yet affected earnings, was a net unrealized loss of
$97.3 million, or $73.4 million net of taxes, which is
deferred in other comprehensive income, of which,
$57.9 million, or $46.2 million, net of taxes, is
expected to be reclassified to earnings over the next twelve
months.
The Company also enters into foreign currency forward exchange
contracts with terms of one month to manage currency exposures
for assets and liabilities denominated in a currency other than
an entity’s functional currency. As a result, any foreign
currency translation gains/ losses recognized in earnings under
SFAS No. 52, “Foreign Currency Translation” are
generally offset with gains/ losses on the foreign currency
forward exchange contracts in the same reporting period.
Stock Compensation – At December 31, 2004,
the Company had three stock-option compensation plans for
employees, which are described more fully in Note 13, an
employee stock purchase plan and a restricted stock plan for
certain key members of management. The Company accounts for
those plans under the recognition and measurement principles of
APB Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related Interpretations. No compensation
cost is reflected in net income for the stock-option
compensation plans, as all options granted under those plans had
exercise prices equal to the market value of the underlying
common stock on the date of grant. No compensation cost is
reflected in net income for the employee stock purchase plan
under the provisions of APB 25, which allows a discounted
purchase price under Section 423 of the Internal Revenue
Code. Compensation cost related to restricted stock is
recognized in earnings over the vesting period of the stock,
which is generally five years. Compensation cost related to
restricted stock was not significant for the years ended
December 31, 2004, 2003 and 2002. The following table
illustrates the effect on net earnings and earnings per share if
the Company had applied the fair value recognition provisions of
SFAS No. 123, “Accounting for Stock Based
Compensation,” to the above plans.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in millions, except per share amounts) | |
| | |
| For the Years Ended December 31, |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Net earnings, as reported
|
|
$ |
541.8 |
|
|
$ |
346.3 |
|
|
$ |
257.8 |
|
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
tax
|
|
|
(26.0 |
) |
|
|
(14.3 |
) |
|
|
(12.7 |
) |
| |
|
|
|
|
|
|
|
|
|
Pro forma net earnings
|
|
$ |
515.8 |
|
|
$ |
332.0 |
|
|
$ |
245.1 |
|
| |
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic – as reported
|
|
$ |
2.22 |
|
|
$ |
1.67 |
|
|
$ |
1.33 |
|
| |
Basic – pro forma
|
|
|
2.11 |
|
|
|
1.60 |
|
|
|
1.26 |
|
| |
Diluted – as reported
|
|
|
2.19 |
|
|
|
1.64 |
|
|
|
1.31 |
|
| |
Diluted – pro forma
|
|
|
2.08 |
|
|
|
1.57 |
|
|
|
1.25 |
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
244.4 |
|
|
|
207.7 |
|
|
|
194.5 |
|
| |
Diluted
|
|
|
247.8 |
|
|
|
211.2 |
|
|
|
196.8 |
|
The fair value of each option granted is estimated on the date
of grant using the Black-Scholes option-pricing model with the
following assumptions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
2003 |
|
2002 |
| |
|
Dividend Yield
|
|
|
– |
% |
|
|
– |
% |
|
|
– |
% |
|
Volatility
|
|
|
28.0 |
% |
|
|
27.1 |
% |
|
|
30.3 |
% |
|
Risk-free interest rate
|
|
|
3.4 |
% |
|
|
3.1 |
% |
|
|
4.6 |
% |
|
Expected life (years)
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
The weighted average fair value for options granted during 2004,
2003 and 2002 was $21.85, $12.85 and $10.63, respectively.
Comprehensive Income – Other comprehensive
income refers to revenues, expenses, gains and losses that under
generally accepted accounting principles are included in
comprehensive income but are excluded from net earnings as these
amounts are recorded directly as an adjustment to
stockholders’ equity. The Company’s other
comprehensive income is comprised of unrealized foreign currency
hedge gains and losses, minimum pension liability adjustments,
unrealized gains (losses) on available-for-sale securities, and
foreign currency translation adjustments.
46
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Notes to Consolidated Financial Statements
(Continued)
The components of accumulated other comprehensive income are as
follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Accumulated | |
| |
|
Foreign | |
|
Foreign | |
|
Minimum | |
|
Unrealized | |
|
Other | |
| |
|
Currency | |
|
Currency | |
|
Pension | |
|
Gains on | |
|
Comprehensive | |
| |
|
Translation | |
|
Hedges | |
|
Liability | |
|
Securities | |
|
Income | |
| | |
|
Beginning balance at January 1, 2004
|
|
$ |
179.7 |
|
|
$ |
(40.4 |
) |
|
$ |
(0.6 |
) |
|
$ |
– |
|
|
$ |
138.7 |
|
|
Other comprehensive income (loss)
|
|
|
145.5 |
|
|
|
(33.0 |
) |
|
|
(0.3 |
) |
|
|
2.4 |
|
|
|
114.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
$ |
325.2 |
|
|
$ |
(73.4 |
) |
|
$ |
(0.9 |
) |
|
$ |
2.4 |
|
|
$ |
253.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting Pronouncements – In November 2004,
the FASB issued FASB Staff Position
(“FSP”) 109-1, “Application of FASB
Statement No. 109, Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004” and FSP 109-2,
“Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs
Creation Act of 2004”. FSP 109-1 states that a
company’s deduction under the American Jobs Creation Act of
2004 (the “Act”) should be accounted for as a special
deduction in accordance with SFAS No. 109 and not as a tax
rate reduction. FSP 109-2 provides accounting and
disclosure guidance for repatriation provisions included under
the Act. FSP 109-1 and FSP 109-2 were both effective
upon issuance. The adoption of these FSP’s did not have a
material impact on the Company’s financial position,
results of operations or cash flows in 2004.
In November 2004, the FASB issued SFAS No. 151,
“Inventory Costs” to clarify the accounting for
abnormal amounts of idle facility expense. SFAS No. 151
requires that fixed overhead production costs be applied to
inventory at “normal capacity” and any excess fixed
overhead production costs be charged to expense in the period in
which they were incurred. SFAS No. 151 is effective for
fiscal years beginning after June 15, 2005. The company
does not expect SFAS No. 151 to have a material impact on
its financial position, results of operations, or cash flows.
In December 2004, the FASB issued SFAS No. 153,
“Exchanges of Nonmonetary Assets”, which is effective
for fiscal years beginning after June 15, 2004. The Company
does not routinely engage in exchanges of nonmonetary assets; as
such, SFAS No. 153 is not expected to have a material
impact on the Company’s financial position, results of
operations or cash flows.
In May 2004, the FASB issued FSP 106-2 “Accounting and
Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003”, which is
effective for the first interim or annual period beginning after
June 15, 2004. The Company does not expect to be eligible
for the federal subsidy available pursuant to the Medicare
Prescription Drug Improvement and Modernization Act of 2003;
therefore, this staff position did not have a material impact on
the Company’s results of operations, financial position or
cash flow.
In December 2004, the FASB issued SFAS No. 123(R),
“Share-Based Payment”, which is a revision to SFAS
No. 123, “Accounting for Stock Based
Compensation”. SFAS No. 123(R) requires all
share-based payments to employees, including stock options, to
be expensed based on their fair values. The Company has
disclosed the effect on net earnings and earnings per share if
the Company had applied the fair value recognition provisions of
SFAS 123. SFAS 123(R) contains three methodologies for
adoption: 1) adopt SFAS 123(R) on the effective date
for interim periods thereafter, 2) adopt SFAS 123(R)
on the effective date for interim periods thereafter and restate
prior interim periods included in the fiscal year of adoption
under the provisions of SFAS 123, or 3) adopt
SFAS 123(R) on the effective date for interim periods
thereafter and restate all prior interim periods under the
provisions of SFAS 123. The Company has not determined an
adoption methodology. The Company is in the process of assessing
the impact that SFAS 123(R) will have on its financial
position, results of operations and cash flows. SFAS 123(R)
is effective for the Company on July 1, 2005.
Centerpulse AG and InCentive Capital AG
On October 2, 2003 (the “Closing Date”), the
Company closed its exchange offer for Centerpulse, a global
orthopaedic medical device company headquartered in Switzerland
that services the reconstructive joint, spine and dental implant
markets. The Company also closed its exchange offer for
InCentive, a company that, at the Closing Date, owned only cash
and beneficially owned 18.3 percent of the issued
Centerpulse shares. The primary reason for making the
Centerpulse and InCentive exchange offers (the “Exchange
Offers”) was to create a global leader in the design,
development, manufacture and marketing of orthopaedic
reconstructive implants, including joint and dental, spine
implants, and trauma products. The strategic compatibility of
the products and technologies of the Company and Centerpulse is
expected to provide significant earnings power and a strong
platform from which it can actively pursue growth opportunities
in the industry. For the Company, Centerpulse provides a unique
platform for growth and diversification in Europe as well as in
the spine and dental areas of the medical device industry. As a
result of the Exchange Offers, the Company beneficially owned
98.7 percent of the issued Centerpulse shares (including
the Centerpulse shares owned by InCentive) and 99.9 percent
of the issued InCentive shares on the Closing Date.
47
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Notes to Consolidated Financial Statements
(Continued)
Pursuant to Swiss law, the Company initiated the compulsory
acquisition process to acquire all of the shares of Centerpulse
and InCentive that remained outstanding following the Exchange
Offers, and completed this process on April 29, 2004. The
aggregate consideration paid by the Company for shares acquired
pursuant to the compulsory acquisition process was
$42.3 million, consisting of Company common stock valued at
$28.1 million (562,870 shares exchanged) and
$14.2 million of cash. In accordance with EITF 99-12,
“Determination of the Measurement Date for the Market Price
of Acquirer Securities Issued in a Purchase Business
Combination”, the fair value of the Company’s common
stock issued pursuant to the compulsory acquisition process was
determined to be $49.93 per share based upon the average closing
price of the Company’s common stock two days before and
after the date when sufficient Centerpulse and InCentive shares
had been tendered to make the Exchange Offers binding
(August 27, 2003). The aggregate consideration paid by the
Company in the Exchange Offers, including amounts paid pursuant
to the compulsory acquisition process, was
$3,495.7 million, consisting of Company common stock valued
at $2,252.0 million (45,101,640 shares exchanged),
$1,201.3 million of cash and $42.4 million of direct
acquisition costs.
The Exchange Offers were accounted for under the purchase method
of accounting pursuant to SFAS No. 141, “Business
Combinations”. Accordingly, Centerpulse and InCentive
results of operations have been included in the Company’s
consolidated results of operations subsequent to the Closing
Date, and their respective assets and liabilities were recorded
at their estimated fair values in the Company’s
consolidated statement of financial position as of the Closing
Date, with the excess purchase price being allocated to goodwill.
The Company finalized the purchase price allocation in 2004 in
accordance with U.S. generally accepted accounting
principles. During the year ended December 31, 2004, the
Company adjusted certain estimates included in the preliminary
purchase price allocation, including estimated fair values of
certain acquired investments, intangible assets, inventory,
fixed assets, income tax liabilities, product liabilities and
other legal liabilities. In accordance with SFAS No. 141,
all adjustments to the purchase price allocation have been
reflected as changes to goodwill. See Note 7 for the
changes in the carrying amount of goodwill during the year ended
December 31, 2004.
The purchase price allocation was based on information available
to the Company, and expectations and assumptions deemed
reasonable by the Company’s management. No assurance can be
given, however, that the underlying assumptions used to estimate
expected technology based product revenues, development costs or
profitability, or the events associated with such technology,
will occur as projected.
The following table summarizes the fair values of the assets
acquired and liabilities assumed at the Closing Date.
| |
|
|
|
|
| (in millions) | |
| | |
| |
|
As of | |
| |
|
October 2, 2003 | |
| | |
|
Current assets
|
|
$ |
793.6 |
|
|
Property, plant and equipment
|
|
|
179.3 |
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
| |
Trademarks and trade names
|
|
|
207.4 |
|
|
Intangible assets subject to amortization:
|
|
|
|
|
| |
Core technology
|
|
|
110.6 |
|
| |
Developed technology
|
|
|
303.0 |
|
| |
Trademarks and trade names
|
|
|
30.4 |
|
| |
Customer relationships
|
|
|
44.0 |
|
|
In-process research and development
|
|
|
11.2 |
|
|
Deferred taxes
|
|
|
579.5 |
|
|
Other assets
|
|
|
75.7 |
|
|
Goodwill
|
|
|
2,293.5 |
|
| |
| |
|
Total assets acquired
|
|
|
4,628.2 |
|
| |
|
Short-term debt
|
|
|
306.3 |
|
|
Deferred taxes
|
|
|
250.3 |
|
|
Other current liabilities
|
|
|
299.7 |
|
|
Integration liability
|
|
|
67.6 |
|
|
Long-term liabilities
|
|
|
208.6 |
|
| |
| |
|
Total liabilities assumed
|
|
|
1,132.5 |
|
| |
|
Net assets acquired
|
|
$ |
3,495.7 |
|
| |
In 2003, the Company recorded a $75.7 million integration
liability consisting of $49.7 million of employee
termination benefits, $22.6 million of sales agent and
lease contract termination costs and $3.4 million of
employee relocation costs. In accordance with EITF 95-3
“Recognition of Liabilities Assumed in a Purchase Business
Combination”, these liabilities were included in the
allocation of the purchase price. Reductions to the integration
liability of $8.1 million during the purchase price
allocation period were recorded as adjustments to goodwill.
Increases to the liability subsequent to the completion of the
allocation period are expensed in the financial statements, and
were not significant. Reductions in the liability subsequent to
the completion of the allocation period are recorded as
adjustments to goodwill.
The Company’s integration plan covers all functional
business areas, including sales force, research and development,
manufacturing and administrative. Approximately 830 Centerpulse
employees have been or will be involuntarily terminated through
the Company’s integration plan. The Company began
phasing-out production at its Austin, Texas manufacturing
facility in 2004. The phase-out will result in the involuntary
termination of approximately 550 employees, including 390
employees involved in manufacturing. Products previously
manufactured at the Austin facility will be sourced from the
Company’s other manufacturing facilities. The Company has
begun to hire additional manufacturing employees at its other
manufacturing facilities to handle increased production
schedules. The Austin phase-out is expected to be completed
48
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Notes to Consolidated Financial Statements
(Continued)
in 2005. As of December 31, 2004, approximately 420
Centerpulse employees had been involuntarily terminated. With a
few exceptions, the Company’s integration plan is expected
to be completed by the end of 2005. Reconciliation of the
integration liability, as of December 31, 2004, is as
follow (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Employee | |
|
|
|
|
|
|
| |
|
Termination | |
|
Contract | |
|
Employee | |
|
|
| |
|
Benefits | |
|
Terminations | |
|
Relocation | |
|
Total | |
| | |
|
Balance, Closing Date
|
|
$ |
49.7 |
|
|
$ |
22.6 |
|
|
$ |
3.4 |
|
|
$ |
75.7 |
|
|
Cash Payments
|
|
|
(20.7 |
) |
|
|
(0.2 |
) |
|
|
– |
|
|
|
(20.9 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
29.0 |
|
|
|
22.4 |
|
|
|
3.4 |
|
|
|
54.8 |
|
|
Cash Payments
|
|
|
(19.2 |
) |
|
|
(2.3 |
) |
|
|
(1.3 |
) |
|
|
(22.8 |
) |
|
Additions/(Reductions)
|
|
|
2.1 |
|
|
|
(11.8 |
) |
|
|
1.6 |
|
|
|
(8.1 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
$ |
11.9 |
|
|
$ |
8.3 |
|
|
$ |
3.7 |
|
|
$ |
23.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The $11.8 million reduction in contract terminations during
the year ended December 31, 2004 primarily resulted due to
the assignment of $5.2 million of lease obligations related
to closed Centerpulse facilities and a $7.9 million
reduction in estimated Centerpulse distributor contract
termination payments, offset by $1.3 million of
miscellaneous adjustments related to the restructuring or
termination of certain Centerpulse contractual obligations. The
$2.1 million and $1.6 million increases in employee
termination benefits and employee relocation, respectively,
during the year ended December 31, 2004 is a result of the
finalization of the integration plan, including decisions on
management structure and consolidation of facilities.
The $11.2 million assigned to in-process research and
development was written off as of the Closing Date in accordance
with FASB Interpretation No. 4, “Applicability of FASB
Statement No. 2 to Business Combinations Accounted for by
the Purchase Method”. The fair value of acquired in-process
research and development was determined in accordance with the
AICPA practice aid entitled “Assets Acquired in a Purchase
Business Combination to be used in Research and Development
Activities” and was primarily based upon the estimated
present value of future after-tax cash flows of acquired
in-process research and development projects.
Goodwill of $1,316.2 million, $870.5 million and
$106.8 million was assigned to the Americas, Europe and
Asia Pacific geographic segments, respectively. None of the
goodwill is deductible for tax purposes. See Note 7 for
more information related to goodwill and acquired intangible
assets.
The following sets forth unaudited pro forma financial
information (i) derived from the financial statements of
the Company for the years ended December 31, 2003 and 2002
and (ii) derived from the financial statements of
Centerpulse for the year ended December 31, 2002 and the
nine month period ended September 30, 2003. The unaudited
pro forma financial information is based on the financial
statements of the Company and the financial statements of
Centerpulse and has been adjusted to give effect to the Exchange
Offers as if they had occurred on January 1 of the
respective years:
| |
|
|
|
|
|
|
|
|
| (Unaudited; in millions, except per share amounts) | |
| | |
| Year Ended December 31, |
|
2003 | |
|
2002 | |
| | |
|
Net Sales
|
|
$ |
2,589.6 |
|
|
$ |
2,167.9 |
|
|
Earnings before cumulative effect of change in accounting
principle
|
|
|
453.5 |
|
|
|
312.6 |
|
|
Net Earnings
|
|
|
508.6 |
|
|
|
312.6 |
|
|
Earnings Per Share, before cumulative effect of change in
accounting principle – Diluted
|
|
$ |
1.85 |
|
|
$ |
1.30 |
|
|
Earnings Per Share – Diluted
|
|
$ |
2.08 |
|
|
$ |
1.30 |
|
These unaudited pro forma results have been prepared for
comparative purposes only and include adjustments such as
amortization of acquired intangible assets and interest expense
on debt incurred to finance the Exchange Offers. The unaudited
pro forma results for 2003 exclude $11.2 million of
in-process research and development write-offs,
$170.0 million ($121.3 million net of tax) of
investment banking fees, legal and accounting fees, break-up
fee, compensation expense related to the accelerated vesting of
certain Centerpulse stock options, distributor terminations,
integration related consulting and professional fees, severance
and other acquisition and integration related expenses, and
inventory step-up of $95.3 million ($62.1 million net
of tax).
The unaudited pro forma results for 2003 include
$90.4 million of expense related to Centerpulse hip and
knee litigation, $54.4 million of cash income tax benefits
as a result of Centerpulse electing to carry back its 2002
U.S. federal net operating loss for 5 years versus
10 years, which resulted in more losses being carried
forward to future years and less tax credits going unutilized
due to the shorter carry back period and an $8.0 million
gain on sale of Orquest Inc., an investment previously held by
Centerpulse. The unaudited pro forma results are not necessarily
indicative either of the results of operations that actually
would have resulted had the Exchange Offers been in effect at
the beginning of the respective years or of future results.
Implex Corp.
On April 23, 2004, the Company acquired Implex, a privately
held orthopaedics company based in New Jersey, pursuant to an
Amended and Restated Merger Agreement (“Merger
Agreement”). The Company acquired 100 percent of the
shares of Implex for an initial cash consideration of
approximately $108.0 million, before adjustments for debt
repayment, certain payments previously made by Zimmer to Implex
pursuant to their existing alliance agreement and other items.
The aggregate cash consideration paid by the Company through
December 31, 2004 was $153.1 million, consisting of a
$98.6 million payment at closing (including
$9.8 million delivered to an escrow agent to be held for
eighteen months, subject to possible indemnification claims of
the Company), $2.6 million of direct acquisition costs and
$51.9 million of earn-out payments made pursuant to the
Merger Agreement. The acquisition is a culmination of a
distribution and strategic alliance agreement, under which
49
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Notes to Consolidated Financial Statements
(Continued)
the Company and Implex had been operating since 2000, relating
to the development and distribution of reconstructive implant
and trauma products incorporating Trabecular Metal
Technology.
The Merger Agreement contains provisions for additional annual
cash earn-out payments that are based on year-over-year sales
growth through 2006 of certain products that incorporate
Trabecular Metal Technology. The Company estimates total
earn-out payments, including payments already made, to be in a
range from $120 to $160 million. These earn-out payments
represent contingent consideration and, in accordance with SFAS
No. 141 and EITF 95-8 “Accounting for Contingent
Consideration Paid to the Shareholders of an Acquired Enterprise
in a Purchase Business Combination”, are recorded as an
additional cost of the transaction upon resolution of the
contingency and therefore increase goodwill.
The Implex acquisition was accounted for under the purchase
method of accounting pursuant to SFAS No. 141. Accordingly,
Implex results of operations have been included in the
Company’s consolidated results of operations subsequent to
April 23, 2004, and its respective assets and liabilities
have been recorded at their estimated fair values in the
Company’s consolidated statement of financial position as
of April 23, 2004, with the excess purchase price being
allocated to goodwill. Pro forma financial information has not
been included as the acquisition did not have a material impact
upon the Company’s financial position, results of
operations or cash flows.
The Company completed the preliminary purchase price allocation
in accordance with U.S. generally accepted accounting
principles. The process included interviews with management,
review of the economic and competitive environment and
examination of assets including historical performance and
future prospects. The preliminary purchase price allocation was
based on information currently available to the Company, and
expectations and assumptions deemed reasonable by the
Company’s management. No assurance can be given, however,
that the underlying assumptions used to estimate expected
technology based product revenues, development costs or
profitability, or the events associated with such technology,
will occur as projected. The final purchase price allocation may
vary from the preliminary purchase price allocation. The final
valuation and associated purchase price allocation is expected
to be completed as soon as possible, but no later than one year
from the date of acquisition. To the extent that the estimates
need to be adjusted, the Company will do so.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of the
Implex acquisition:
| |
|
|
|
|
| (in millions) | |
| | |
| |
|
As of | |
| |
|
April 23, 2004 | |
| | |
|
Current assets
|
|
$ |
23.1 |
|
|
Property, plant and equipment
|
|
|
4.5 |
|
|
Intangible assets subject to amortization:
|
|
|
|
|
| |
Core technology (30 year useful life)
|
|
|
3.6 |
|
| |
Developed technology (30 year useful life)
|
|
|
103.9 |
|
|
Other assets
|
|
|
14.4 |
|
|
Goodwill
|
|
|
61.0 |
|
| |
| |
|
Total assets acquired
|
|
|
210.5 |
|
| |
| |
Current liabilities
|
|
|
14.1 |
|
| |
Deferred taxes
|
|
|
43.3 |
|
| |
| |
|
Total liabilities assumed
|
|
|
57.4 |
|
| |
|
Net assets acquired
|
|
$ |
153.1 |
|
| |
|
|
|
|
4. |
|
CHANGE IN ACCOUNTING PRINCIPLE |
Instruments are hand held devices used by orthopaedic surgeons
during total joint replacement and other surgical procedures.
Effective January 1, 2003, instruments are recognized as
long-lived assets and are included in property, plant and
equipment. Undeployed instruments are carried at cost, net of
allowances for obsolescence. Instruments in the field are
carried at cost less accumulated depreciation. Depreciation is
computed using the straight-line method based on average
estimated useful lives, determined principally in reference to
associated product life cycles, primarily five years. In
accordance with SFAS No. 144, the Company reviews
instruments for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may
not be recoverable. An impairment loss would be recognized when
estimated future cash flows relating to the asset are less than
its carrying amount. Depreciation of instruments is recognized
as selling, general and administrative expense, consistent with
the classification of instrument cost in periods prior to
January 1, 2003.
Prior to January 1, 2003, undeployed instruments were
carried as a prepaid expense at cost, net of allowances for
obsolescence ($54.8 million, net, at December 31,
2002), and recognized in selling, general and administrative
expense in the year in which the instruments were placed into
service. The new method of accounting for instruments was
adopted to recognize the cost of these important assets of the
Company’s business within the consolidated balance sheet
and meaningfully allocate the cost of these assets over the
periods benefited, typically five years.
The effect of the change during the year ended December 31,
2003 was to increase earnings before cumulative effect of change
in accounting principle by $26.8 million
($17.8 million net of tax), or $0.08 per diluted share. The
cumulative effect adjustment of $55.1 million (net of
income taxes of $34.0 million) to retroactively apply the
50
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Notes to Consolidated Financial Statements
(Continued)
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
new capitalization method as if applied in years prior to 2003
is included in earnings during the year ended December 31,
2003. The pro forma amounts shown on the consolidated statement
of earnings have been adjusted for the effect of the retroactive
application on depreciation and related income taxes.
Inventories at December 31, 2004 and 2003, consist of the
following (in millions):
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| | |
|
Finished goods
|
|
$ |
420.5 |
|
|
$ |
384.3 |
|
|
Raw materials and work in progress
|
|
|
112.2 |
|
|
|
90.8 |
|
|
Inventory step-up (primarily finished goods)
|
|
|
3.3 |
|
|
|
52.6 |
|
| |
|
|
|
|
|
Inventories, net
|
|
$ |
536.0 |
|
|
$ |
527.7 |
|
| |
|
|
|
|
Reserves for obsolete and slow-moving inventory were
$124.1 million and $129.1 million at December 31,
2004 and 2003, respectively. Inventory step-up includes
$3.3 million from the Implex acquisition at
December 31, 2004 and $52.6 million from the
Centerpulse acquisition at December 31, 2003. Both the
Centerpulse step-up and Implex step-up values were based upon
estimated sales prices less distribution costs and a profit
allowance.
|
|
|
|
6. |
|
PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment at December 31, 2004 and
2003, was as follows (in millions):
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| | |
|
Land
|
|
$ |
20.0 |
|
|
$ |
22.0 |
|
|
Building and equipment
|
|
|
677.1 |
|
|
|
600.3 |
|
|
Instruments
|
|
|
557.8 |
|
|
|
431.4 |
|
|
Construction in progress
|
|
|
57.9 |
|
|
|
20.1 |
|
| |
|
|
|
|
| |
|
|
1,312.8 |
|
|
|
1,073.8 |
|
|
Accumulated depreciation
|
|
|
(684.3 |
) |
|
|
(548.6 |
) |
| |
|
|
|
|
|
Property, plant and equipment, net
|
|
$ |
628.5 |
|
|
$ |
525.2 |
|
| |
|
|
|
|
Depreciation expense was $142.2 million, $92.4 million
and $25.3 million for the years ended December 31,
2004, 2003 and 2002, respectively.
|
|
|
|
7. |
|
GOODWILL AND OTHER INTANGIBLE ASSETS |
The following table summarizes the changes in the carrying
amount of goodwill for the years ended December 31, 2004
and 2003 (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Asia | |
|
|
| |
|
Americas | |
|
Europe | |
|
Pacific | |
|
Total | |
| | |
|
Balance at January 1, 2003
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
| |
Acquisition of Centerpulse and InCentive
|
|
|
1,263.6 |
|
|
|
836.3 |
|
|
|
104.8 |
|
|
|
2,204.7 |
|
| |
Acquisition of TransFx
|
|
|
11.9 |
|
|
|
|
|
|
|
|
|
|
|
11.9 |
|
| |
Currency translation
|
|
|
– |
|
|
|
69.7 |
|
|
|
5.5 |
|
|
|
75.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
1,275.5 |
|
|
|
906.0 |
|
|
|
110.3 |
|
|
|
2,291.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Completion of Centerpulse and InCentive compulsory acquisition
process
|
|
|
24.3 |
|
|
|
16.0 |
|
|
|
2.0 |
|
|
|
42.3 |
|
| |
Acquisition of Implex
|
|
|
61.0 |
|
|
|
– |
|
|
|
– |
|
|
|
61.0 |
|
| |
Change in preliminary fair value estimates of Centerpulse
related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Intangible assets
|
|
|
10.7 |
|
|
|
26.5 |
|
|
|
– |
|
|
|
37.2 |
|
| |
|
Income taxes
|
|
|
(33.7 |
) |
|
|
6.6 |
|
|
|
0.3 |
|
|
|
(26.8 |
) |
| |
|
Property, plant and equipment
|
|
|
(5.3 |
) |
|
|
(3.1 |
) |
|
|
– |
|
|
|
(8.4 |
) |
| |
|
Inventories
|
|
|
6.5 |
|
|
|
1.8 |
|
|
|
– |
|
|
|
8.3 |
|
| |
|
Integration liability
|
|
|
4.9 |
|
|
|
(12.8 |
) |
|
|
(0.2 |
) |
|
|
(8.1 |
) |
| |
|
Other assets
|
|
|
10.3 |
|
|
|
– |
|
|
|
– |
|
|
|
10.3 |
|
| |
|
Preacquisition contingencies
|
|
|
37.9 |
|
|
|
– |
|
|
|
– |
|
|
|
37.9 |
|
| |
|
Other
|
|
|
(3.0 |
) |
|
|
(0.8 |
) |
|
|
(0.1 |
) |
|
|
(3.9 |
) |
| |
Currency translation
|
|
|
– |
|
|
|
83.0 |
|
|
|
4.3 |
|
|
|
87.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
$ |
1,389.1 |
|
|
$ |
1,023.2 |
|
|
$ |
116.6 |
|
|
$ |
2,528.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The components of identifiable intangible assets are as follows
(in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Trademarks | |
|
|
|
|
|
|
| |
|
Core | |
|
Developed | |
|
and Trade | |
|
Customer | |
|
|
|
|
| |
|
Technology | |
|
Technology | |
|
Names | |
|
Relationships | |
|
Other | |
|
Total | |
| | |
|
As of December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross carrying amount
|
|
$ |
117.9 |
|
|
$ |
417.3 |
|
|
$ |
31.7 |
|
|
$ |
34.4 |
|
|
$ |
34.1 |
|
|
|
$635.4 |
|
| |
Accumulated amortization
|
|
|
(8.0 |
) |
|
|
(31.9 |
) |
|
|
(3.8 |
) |
|
|
(1.3 |
) |
|
|
(13.7 |
) |
|
|
(58.7 |
) |
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross carrying amount
|
|
|
– |
|
|
|
– |
|
|
|
218.1 |
|
|
|
– |
|
|
|
– |
|
|
|
218.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable intangible assets
|
|
$ |
109.9 |
|
|
$ |
385.4 |
|
|
$ |
246.0 |
|
|
$ |
33.1 |
|
|
$ |
20.4 |
|
|
|
$794.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross carrying amount
|
|
$ |
118.9 |
|
|
$ |
318.8 |
|
|
$ |
33.1 |
|
|
$ |
34.4 |
|
|
$ |
23.6 |
|
|
|
$528.8 |
|
| |
Accumulated amortization
|
|
|
(1.6 |
) |
|
|
(5.5 |
) |
|
|
(0.8 |
) |
|
|
(0.3 |
) |
|
|
(11.4 |
) |
|
|
(19.6 |
) |
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross carrying amount
|
|
|
– |
|
|
|
– |
|
|
|
251.3 |
|
|
|
– |
|
|
|
– |
|
|
|
251.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable intangible assets
|
|
$ |
117.3 |
|
|
$ |
313.3 |
|
|
$ |
283.6 |
|
|
$ |
34.1 |
|
|
$ |
12.2 |
|
|
|
$760.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Notes to Consolidated Financial Statements
(Continued)
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Total amortization expense for finite-lived intangible assets
was $39.1 million and $10.9 million for the years
ended December 31, 2004 and 2003, respectively, and was
recorded as part of selling, general and administrative.
Amortization expense for the year ended December 31, 2002
was not significant. Estimated annual amortization expense for
the years ending December 31, 2005 through 2009 is
$38.2 million, $38.1 million, $37.9 million,
$37.9 million and $37.9 million, respectively.
The useful lives of intangible assets range from 11 to
30 years. In determining the useful lives of intangible
assets, the Company considers the expected use of the assets and
the effects of obsolescence, demand, competition, anticipated
technological advances, changes in surgical techniques, market
influences and other economic factors. For technology based
intangible assets, the Company considers the expected product
life cycles of products, absent unforeseen technological
advances, which incorporate the corresponding technology.
Trademarks and trade names that do not have a wasting
characteristic (i.e. there are no legal, regulatory,
contractual, competitive, economic or other factors which limit
the useful life) are assigned an indefinite life. Trademarks and
trade names that are related to products expected to be phased
out are assigned lives consistent with the period in which the
products bearing each brand are expected to be sold. For
customer relationship intangible assets, the Company assigns
useful lives based upon historical levels of customer attrition.
|
|
|
|
8. |
|
OTHER CURRENT AND LONG-TERM LIABILITIES |
Other current and long-term liabilities at December 31,
2004 and 2003, consist of the following (in millions):
| |
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| | |
|
Other current liabilities:
|
|
|
|
|
|
|
|
|
| |
Service arrangements
|
|
$ |
114.3 |
|
|
$ |
92.9 |
|
| |
Fair value of derivatives
|
|
|
72.8 |
|
|
|
56.4 |
|
| |
Salaries, wages and benefits
|
|
|
54.7 |
|
|
|
60.5 |
|
| |
Litigation liability
|
|
|
38.3 |
|
|
|
59.5 |
|
| |
Integration liability
|
|
|
23.9 |
|
|
|
54.8 |
|
|
Accrued liabilities
|
|
|
203.7 |
|
|
|
151.3 |
|
| |
|
|
|
|
|
Total other current liabilities
|
|
$ |
507.7 |
|
|
$ |
475.4 |
|
| |
|
|
|
|
|
Other long-term liabilities:
|
|
|
|
|
|
|
|
|
| |
Long-term income tax payable
|
|
$ |
156.7 |
|
|
$ |
128.9 |
|
| |
Other long-term liabilities
|
|
|
264.2 |
|
|
|
223.7 |
|
| |
|
|
|
|
|
Total other long-term liabilities
|
|
$ |
420.9 |
|
|
$ |
352.6 |
|
| |
|
|
|
|
The Company has the following committed financing arrangements:
(i) $400 million 364-day revolving credit facility
maturing May 2005, (ii) $800 million three-year
revolving credit facility maturing June 2006 and
(iii) $550 million five-year term loan facility
maturing June 2008 (collectively, the “Senior Credit
Facility”). There is no prepayment penalty included in the
Senior Credit Facility. The $800 million three-year
revolving credit facility has a multi-currency option of up to
an aggregate principal amount of $350 million. In addition
to the Senior Credit Facility, the Company has uncommitted,
unsecured revolving lines of credit totaling $50 million.
The Company and certain of its wholly owned foreign and domestic
subsidiaries are the borrowers and its wholly owned domestic
subsidiaries are the guarantors of the Senior Credit Facility.
Borrowings may bear interest at the appropriate LIBOR-based
rate, or an alternative base rate, plus an applicable margin
determined by reference to the Company’s senior unsecured
long-term credit rating and the amounts drawn under the Senior
Credit Facility. The Senior Credit Facility contains customary
affirmative and negative covenants and events of default for an
unsecured financing arrangement. Financial covenants include a
maximum leverage ratio and a minimum interest coverage ratio.
The Company was in compliance with all covenants under the
Senior Credit Facility as of December 31, 2004. Commitments
under the $400 million 364-day revolving credit facility
and the $800 million three-year revolving credit facility
are subject to certain fees, including a facility and a
utilization fee.
Outstanding debt as of December 31, 2004 and 2003 consists
of the following (in millions):
| |
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| | |
|
Senior Credit Facility
|
|
|
|
|
|
|
|
|
| |
364-day revolving credit facility
|
|
$ |
– |
|
|
$ |
100.0 |
|
| |
Three-year revolving credit facility
|
|
|
97.8 |
|
|
|
552.4 |
|
| |
Five-year term loan
|
|
|
550.0 |
|
|
|
450.0 |
|
|
Uncommitted credit facilities
|
|
|
1.1 |
|
|
|
0.6 |
|
|
Other
|
|
|
2.6 |
|
|
|
6.1 |
|
| |
|
|
|
|
|
Total debt
|
|
|
651.5 |
|
|
|
1,109.1 |
|
|
Less: Current Portion
|
|
|
27.5 |
|
|
|
101.3 |
|
| |
|
|
|
|
|
Total Long-Term Debt
|
|
$ |
624.0 |
|
|
$ |
1,007.8 |
|
| |
|
|
|
|
The weighted average interest rates for borrowings under the
five year term loan and three-year revolving credit facility
were 3.42 percent and 0.58 percent, respectively, at
December 31, 2004. Borrowings under the three-year
revolving credit facility at December 31, 2004 are Japanese
Yen based borrowings. The Company paid $27.9 million,
$6.3 million and $13.0 million in interest during
2004, 2003 and 2002, respectively.
Maturities of obligations outstanding under the five-year term
loan at December 31, 2004, are $25.0 million,
$100.0 million, $250.0 million and $175.0 million
for the years ended December 31, 2005 through 2008,
respectively. The carrying value of the Company’s
borrowings approximates fair value due to their short-term
interest rates.
Debt issuance costs of $20.5 million were incurred to
obtain the Senior Credit Facility arrangement. These costs were
capitalized and are amortized to interest expense over the lives
of the related facilities. At December 31, 2004,
unamortized debt issuance costs were $9.1 million.
52
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Notes to Consolidated Financial Statements
(Continued)
|
|
|
|
10. |
|
RETIREMENT AND POSTRETIREMENT BENEFIT PLANS |
The Company has defined benefit pension plans covering certain
U.S. and Puerto Rico employees who were hired before
September 2, 2002. Employees hired after September 2,
2002 are not part of the U.S. and Puerto Rico defined
benefit plans, but do receive additional benefits under the
Company’s defined contribution plans. Plan benefits are
primarily based on years of credited service and the
participant’s average eligible compensation or a monthly
retirement benefit amount. In addition to the U.S. and
Puerto Rico defined benefit pension plans, the Company sponsors
various non-U.S. pension arrangements, including retirement
and termination benefit plans required by local law or
coordinated with government sponsored plans. As a result of the
consummation of the Exchange Offers, the Company acquired the
obligations and assets of certain Centerpulse defined benefit
plans as of the Closing Date.
The Company also provides comprehensive medical and group life
insurance benefits to certain U.S. and Puerto Rico eligible
retirees who elect to participate in the Company’s
comprehensive medical and group life plans. The medical plan is
contributory, and the life insurance plan is non-contributory.
No similar plans exist for employees outside the U.S. and
Puerto Rico. Employees hired after September 2, 2002, are
not eligible for retiree medical and life insurance benefits.
The Company uses a December 31 measurement date for its
benefit plans.
The components of net pension expense for the years ended
December 31 for the Company’s defined benefit
retirement plans are as follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
U.S. and Puerto Rico |
|
Non-U.S. |
| |
|
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Service cost
|
|
$ |
9.7 |
|
|
$ |
8.6 |
|
|
$ |
7.2 |
|
|
$ |
13.1 |
|
|
$ |
4.9 |
|
|
$ |
2.0 |
|
|
Interest cost
|
|
|
4.2 |
|
|
|
3.1 |
|
|
|
2.0 |
|
|
|
4.8 |
|
|
|
2.0 |
|
|
|
0.7 |
|
|
Expected return on plan assets
|
|
|
(4.8 |
) |
|
|
(2.8 |
) |
|
|
(1.2 |
) |
|
|
(5.8 |
) |
|
|
(2.2 |
) |
|
|
(1.0 |
) |
|
Amortization of prior service cost
|
|
|
(0.1 |
) |
|
|
(0.2 |
) |
|
|
0.1 |
|
|
|
0.4 |
|
|
|
1.9 |
|
|
|
– |
|
|
Amortization of unrecognized actuarial loss
|
|
|
0.9 |
|
|
|
0.5 |
|
|
|
0.1 |
|
|
|
0.6 |
|
|
|
0.4 |
|
|
|
0.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$ |
9.9 |
|
|
$ |
9.2 |
|
|
$ |
8.2 |
|
|
$ |
13.1 |
|
|
$ |
7.0 |
|
|
$ |
1.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average actuarial assumptions used to determine
net pension expense for the Company’s defined benefit
retirement plans were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
U.S. and Puerto Rico |
|
Non-U.S. |
| |
|
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Discount rate
|
|
|
6.75 |
% |
|
|
7.00 |
% |
|
|
7.25 |
% |
|
|
3.81 |
% |
|
|
4.08 |
% |
|
|
4.25 |
% |
|
Rate of compensation increase
|
|
|
3.60 |
% |
|
|
3.62 |
% |
|
|
3.60 |
% |
|
|
1.57 |
% |
|
|
2.27 |
% |
|
|
3.17 |
% |
|
Expected long-term return on plan assets
|
|
|
8.75 |
% |
|
|
9.00 |
% |
|
|
9.00 |
% |
|
|
4.83 |
% |
|
|
4.77 |
% |
|
|
5.95 |
% |
The expected long-term rates of return on plan assets is based
on the period expected benefits will be paid and the historical
rates of return on the different asset classes held in the
plans. The expected long-term rate of return is the weighted
average of the target asset allocation of each individual asset
class. The Company believes that historical asset results
approximate expected market returns applicable to the funding of
a long-term benefit obligation.
53
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Notes to Consolidated Financial Statements
(Continued)
Changes in projected benefit obligations and plan assets, for
the years ended December 31, 2004 and 2003 for the
Company’s pension plans, were (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
U.S. and Puerto Rico |
|
Non-U.S. |
| |
|
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
| | |
|
Projected benefit obligation – beginning of year
|
|
$ |
63.8 |
|
|
$ |
42.5 |
|
|
$ |
130.2 |
|
|
$ |
21.6 |
|
|
Obligation assumed from Centerpulse
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
101.1 |
|
|
Plan amendments
|
|
|
(0.1 |
) |
|
|
0.7 |
|
|
|
– |
|
|
|
– |
|
|
Service cost
|
|
|
9.7 |
|
|
|
8.6 |
|
|
|
13.1 |
|
|
|
4.9 |
|
|
Interest cost
|
|
|
4.2 |
|
|
|
3.1 |
|
|
|
4.8 |
|
|
|
2.0 |
|
|
Employee contributions
|
|
|
– |
|
|
|
– |
|
|
|
4.3 |
|
|
|
2.3 |
|
|
Benefits paid
|
|
|
(0.7 |
) |
|
|
(0.6 |
) |
|
|
(20.9 |
) |
|
|
(7.8 |
) |
|
Actuarial (gain) loss
|
|
|
12.3 |
|
|
|
9.5 |
|
|
|
0.6 |
|
|
|
(6.4 |
) |
|
Translation loss
|
|
|
– |
|
|
|
– |
|
|
|
10.9 |
|
|
|
12.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation – end of year
|
|
$ |
89.2 |
|
|
$ |
63.8 |
|
|
$ |
143.0 |
|
|
$ |
130.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets at fair market value – beginning of year
|
|
$ |
45.5 |
|
|
$ |
21.4 |
|
|
$ |
128.0 |
|
|
$ |
17.3 |
|
|
Assets contributed by Centerpulse
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
94.3 |
|
|
Actual return on plan assets
|
|
|
5.4 |
|
|
|
6.8 |
|
|
|
2.3 |
|
|
|
4.8 |
|
|
Company contributions
|
|
|
16.5 |
|
|
|
18.1 |
|
|
|
9.1 |
|
|
|
6.3 |
|
|
Employee contributions
|
|
|
– |
|
|
|
– |
|
|
|
7.8 |
|
|
|
3.2 |
|
|
Benefits paid
|
|
|
(0.7 |
) |
|
|
(0.6 |
) |
|
|
(20.9 |
) |
|
|
(7.8 |
) |
|
Expenses
|
|
|
(0.6 |
) |
|
|
(0.2 |
) |
|
|
– |
|
|
|
– |
|
|
Translation gain
|
|
|
– |
|
|
|
– |
|
|
|
10.9 |
|
|
|
9.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets at fair market value – end of year
|
|
$ |
66.1 |
|
|
$ |
45.5 |
|
|
$ |
137.2 |
|
|
$ |
128.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$ |
(23.1 |
) |
|
$ |
(18.3 |
) |
|
$ |
(5.8 |
) |
|
$ |
(2.2 |
) |
|
Unrecognized prior service cost
|
|
|
(0.6 |
) |
|
|
(0.7 |
) |
|
|
1.2 |
|
|
|
– |
|
|
Unrecognized actuarial (gain) loss
|
|
|
26.4 |
|
|
|
15.0 |
|
|
|
0.8 |
|
|
|
(0.6 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$ |
2.7 |
|
|
$ |
(4.0 |
) |
|
$ |
(3.8 |
) |
|
$ |
(2.8 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in consolidated balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Prepaid pension
|
|
$ |
5.8 |
|
|
$ |
2.1 |
|
|
$ |
6.1 |
|
|
$ |
6.9 |
|
| |
Accrued benefit liability
|
|
|
(4.6 |
) |
|
|
(7.2 |
) |
|
|
(9.9 |
) |
|
|
(9.7 |
) |
| |
Accumulated other comprehensive income
|
|
|
1.5 |
|
|
|
1.1 |
|
|
|
– |
|
|
|
– |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$ |
2.7 |
|
|
$ |
(4.0 |
) |
|
$ |
(3.8 |
) |
|
$ |
(2.8 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average actuarial assumptions used to determine the
projected benefit obligation for the Company’s defined
benefit retirement plans were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
U.S. and Puerto Rico |
|
Non-U.S. |
| |
|
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Discount rate
|
|
|
6.25 |
% |
|
|
6.75 |
% |
|
|
7.00 |
% |
|
|
3.75 |
% |
|
|
4.03 |
% |
|
|
4.17 |
% |
|
Rate of compensation increase
|
|
|
3.84 |
% |
|
|
3.62 |
% |
|
|
3.60 |
% |
|
|
2.22 |
% |
|
|
2.27 |
% |
|
|
3.17 |
% |
Plans with projected benefit obligations in excess of plan
assets as of December 31, 2004 and 2003 were as follows
(in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
U.S. and Puerto Rico |
|
Non-U.S. |
| |
|
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
| | |
|
Benefit obligation
|
|
$ |
82.9 |
|
|
$ |
58.8 |
|
|
$ |
38.9 |
|
|
$ |
32.1 |
|
|
Plan assets at fair market value
|
|
|
58.1 |
|
|
|
39.7 |
|
|
|
30.2 |
|
|
|
24.3 |
|
Plans with accumulated benefit obligations in excess of plan
assets as of December 31, 2004 and 2003 were as follows
(in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
U.S. and Puerto Rico |
|
Non-U.S. |
| |
|
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
| | |
|
Accumulated benefit obligation
|
|
$ |
4.0 |
|
|
$ |
– |
|
|
$ |
16.2 |
|
|
$ |
10.6 |
|
|
Plan assets at fair market value
|
|
|
– |
|
|
|
– |
|
|
|
12.5 |
|
|
|
9.1 |
|
54
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Notes to Consolidated Financial Statements
(Continued)
The accumulated benefit obligation for U.S. and Puerto Rico
defined benefit retirement pension plans was $53.0 million
and $35.1 million as of December 31, 2004 and 2003,
respectively. The accumulated benefit obligation for
non-U.S. defined benefit retirement plans was
$126.6 million and $115.6 million as of
December 31, 2004 and 2003, respectively.
The benefits expected to be paid out in each of the next five
years and for the five years combined thereafter are as follows
(in millions):
| |
|
|
|
|
|
|
|
|
| |
|
U.S. and | |
|
|
| For the Years Ending December 31, |
|
Puerto Rico | |
|
Non-U.S. | |
| | |
|
2005
|
|
$ |
0.8 |
|
|
$ |
9.1 |
|
|
2006
|
|
|
1.1 |
|
|
|
10.5 |
|
|
2007
|
|
|
1.5 |
|
|
|
13.1 |
|
|
2008
|
|
|
2.1 |
|
|
|
12.6 |
|
|
2009
|
|
|
2.9 |
|
|
|
12.8 |
|
|
2010 – 2014
|
|
|
30.4 |
|
|
|
54.5 |
|
The Company’s weighted-average asset allocations at
December 31, 2004 and 2003, by asset category are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
U.S. and | |
|
|
| |
|
Puerto Rico | |
|
Non-U.S. | |
| |
|
| |
|
| |
| Asset Category |
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
| | |
|
Equity Securities
|
|
|
65 |
% |
|
|
65 |
% |
|
|
37 |
% |
|
|
36 |
% |
|
Debt Securities
|
|
|
35 |
|
|
|
35 |
|
|
|
35 |
|
|
|
35 |
|
|
Real Estate
|
|
|
– |
|
|
|
– |
|
|
|
15 |
|
|
|
15 |
|
|
Cash Funds
|
|
|
– |
|
|
|
– |
|
|
|
5 |
|
|
|
5 |
|
|
Other
|
|
|
– |
|
|
|
– |
|
|
|
8 |
|
|
|
9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
The U.S. and Puerto Rico defined benefit retirement
plans’ overall investment strategy is to maximize total
returns by emphasizing long-term growth of capital while
avoiding risk. The Company has established target ranges of
assets held by the plans of 50 to 75 percent for equity
securities and 25 to 50 percent for debt securities. The
plans strive to have sufficiently diversified assets so that
adverse or unexpected results from one asset class will not have
an unduly detrimental impact on the entire portfolio. The
investments in the plans are rebalanced quarterly based upon the
target asset allocation of the plans.
The investment strategies of non-U.S. based plans vary
according to the plan provisions and local laws. The majority of
the assets in non-U.S. based plans are located in
Switzerland based plans. These assets are held in trusts and are
commingled with the assets of other Swiss companies, with
representatives of all the companies making the investment
decisions. The overall strategy is to maximize total returns
while avoiding risk. The trustees of the assets have established
target ranges of assets held by the plans of 30 to
50 percent in debt securities, 20 to 37 percent in
equity securities, 15 to 24 percent in real estate, 3 to
15 percent in cash funds and 0 to 12 percent in other
funds.
As of December 31, 2004 and 2003, the Company’s
defined benefit pension plans’ assets did not hold any
direct investment in the Company’s common stock.
The Company expects that it will have no minimum funding
requirements by law for the U.S. and Puerto Rico defined
benefit retirement plans. However, the Company expects to
voluntarily contribute between $10 million to
$13 million to these plans during 2005. Contributions to
non-U.S. defined benefit are estimated to be approximately
$9 million in 2005.
The Company also sponsors defined contribution plans for
substantially all of the U.S. and Puerto Rico employees and
employees in other countries. The benefits of these plans relate
to local customs and practices in the countries concerned. The
Company expensed $6.4 million, $4.8 million and
$3.5 million to these plans for the years ended
December 31, 2004, 2003 and 2002, respectively.
The components of net periodic expense for the year ended
December 31 for the Company’s postretirement benefit
plans are as follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Service cost
|
|
$ |
1.4 |
|
|
$ |
1.3 |
|
|
$ |
1.1 |
|
|
Interest cost
|
|
|
1.7 |
|
|
|
1.5 |
|
|
|
1.2 |
|
|
Amortization of unrecognized actuarial loss
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
– |
|
| |
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$ |
3.3 |
|
|
$ |
2.9 |
|
|
$ |
2.3 |
|
| |
| |
|
|
|
|
|
|
|
|
The weighted average actuarial assumptions used in accounting
for the Company’s postretirement benefit plans were as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Discount rate – Benefit obligation
|
|
|
6.25 |
% |
|
|
6.75 |
% |
|
|
7.00 |
% |
|
Discount rate – Net periodic benefit cost
|
|
|
6.75 |
% |
|
|
7.00 |
% |
|
|
7.25 |
% |
|
Initial health care cost trend rate
|
|
|
9.50 |
% |
|
|
9.00 |
% |
|
|
10.00 |
% |
|
Ultimate health care cost trend rate
|
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
5.00 |
% |
|
First year of ultimate trend rate
|
|
|
2014 |
|
|
|
2012 |
|
|
|
2012 |
|
Changes in benefit obligations for the Company’s
postretirement benefit plans were (in millions):
| |
|
|
|
|
|
|
|
|
| December 31, |
|
2004 | |
|
2003 | |
| | |
|
Benefit obligation – beginning of year
|
|
$ |
25.0 |
|
|
$ |
20.5 |
|
|
Service cost
|
|
|
1.4 |
|
|
|
1.3 |
|
|
Interest cost
|
|
|
1.7 |
|
|
|
1.5 |
|
|
Benefits paid
|
|
|
(0.4 |
) |
|
|
– |
|
|
Actuarial loss
|
|
|
3.5 |
|
|
|
1.7 |
|
| |
|
|
|
|
|
Benefit obligation – end of year
|
|
$ |
31.2 |
|
|
$ |
25.0 |
|
| |
|
|
|
|
|
Funded status
|
|
$ |
(31.2 |
) |
|
$ |
(25.0 |
) |
|
Unrecognized prior service cost
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
Unrecognized actuarial loss
|
|
|
7.0 |
|
|
|
3.7 |
|
| |
|
|
|
|
|
Net amount recognized
|
|
$ |
(24.3 |
) |
|
$ |
(21.4 |
) |
| |
|
|
|
|
|
Accrued benefit liability recognized
|
|
$ |
(24.3 |
) |
|
$ |
(21.4 |
) |
| |
|
|
|
|
As of December 31, 2004 and 2003, the Company had no assets
set aside in a trust for its postretirement benefit plans.
A one percentage point change in the assumed health care cost
trend rates would have no significant effect on the service and
interest cost components of net postretirement benefit expense
and the accumulated postretirement benefit obligation. The
effect of a change in the healthcare cost trend rate is tempered
by an annual cap that limits medical costs to be paid by the
Company.
55
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Notes to Consolidated Financial Statements
(Continued)
The benefits expected to be paid out in each of the next five
years and for the five years combined thereafter are as follows
(in millions):
| |
|
|
|
|
| For the Years Ending December 31, |
|
|
| | |
|
2005
|
|
$ |
0.5 |
|
|
2006
|
|
|
0.8 |
|
|
2007
|
|
|
1.1 |
|
|
2008
|
|
|
1.5 |
|
|
2009
|
|
|
1.9 |
|
|
2010 – 2014
|
|
|
15.3 |
|
The components of earnings before taxes consist of the following
(in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
United States operations
|
|
$ |
385.7 |
|
|
$ |
307.6 |
|
|
$ |
292.0 |
|
|
Foreign operations
|
|
|
345.8 |
|
|
|
129.9 |
|
|
|
96.9 |
|
| |
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
731.5 |
|
|
$ |
437.5 |
|
|
$ |
388.9 |
|
| |
|
|
|
|
|
|
|
|
|
The provision for income taxes consists of (in millions): |
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
$ |
122.7 |
|
|
$ |
(14.3 |
) |
|
$ |
79.9 |
|
| |
State
|
|
|
17.1 |
|
|
|
3.8 |
|
|
|
12.9 |
|
| |
Foreign
|
|
|
114.9 |
|
|
|
60.6 |
|
|
|
34.4 |
|
| |
|
|
|
|
|
|
|
|
| |
|
|
254.7 |
|
|
|
50.1 |
|
|
|
127.2 |
|
| |
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
|
(20.2 |
) |
|
|
116.0 |
|
|
|
3.3 |
|
| |
State
|
|
|
(9.6 |
) |
|
|
6.1 |
|
|
|
(1.3 |
) |
| |
Foreign
|
|
|
(35.3 |
) |
|
|
(25.4 |
) |
|
|
1.9 |
|
| |
|
|
|
|
|
|
|
|
| |
|
|
(65.1 |
) |
|
|
96.7 |
|
|
|
3.9 |
|
| |
|
|
|
|
|
|
|
|
| |
|
$ |
189.6 |
|
|
$ |
146.8 |
|
|
$ |
131.1 |
|
| |
|
|
|
|
|
|
|
|
Income taxes paid by the Company during 2004, 2003 and 2002 were
$143.3 million, $116.1 million and
$114.2 million, respectively.
A reconciliation of the U.S. statutory income tax rate to
the Company’s effective tax rate is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
U.S. statutory income tax rate
|
|
|
35.0% |
|
|
|
35.0% |
|
|
|
35.0% |
|
|
State taxes, net of federal deduction
|
|
|
0.7 |
|
|
|
1.5 |
|
|
|
3.0 |
|
|
Foreign income taxes at rates different from the
U.S. statutory rate, net of foreign tax credits
|
|
|
(2.3 |
) |
|
|
– |
|
|
|
– |
|
|
Tax benefit from decreased deferred taxes of acquired
Centerpulse operations; due to Swiss tax rate reduction
|
|
|
(4.7 |
) |
|
|
– |
|
|
|
– |
|
|
Tax benefit relating to operations in Puerto Rico
|
|
|
(1.7 |
) |
|
|
(2.7 |
) |
|
|
(2.6 |
) |
|
Tax benefit relating to U.S. export sales
|
|
|
(1.3 |
) |
|
|
(0.3 |
) |
|
|
(1.1 |
) |
|
R&D credit
|
|
|
(0.7 |
) |
|
|
(0.4 |
) |
|
|
(0.6 |
) |
|
Non-deductible expenses
|
|
|
0.6 |
|
|
|
0.1 |
|
|
|
– |
|
|
In-process research & development
|
|
|
– |
|
|
|
0.9 |
|
|
|
– |
|
|
Other
|
|
|
0.3 |
|
|
|
(0.5 |
) |
|
|
– |
|
| |
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
25.9% |
|
|
|
33.6% |
|
|
|
33.7% |
|
| |
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes.
The components of deferred income taxes consisted of the
following (in millions):
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| | |
|
Inventory
|
|
$ |
102.4 |
|
|
$ |
77.6 |
|
|
Fixed assets
|
|
|
(31.8 |
) |
|
|
(12.3 |
) |
|
Net operating loss carryover
|
|
|
297.9 |
|
|
|
336.6 |
|
|
Capital loss carryover
|
|
|
11.5 |
|
|
|
11.5 |
|
|
Tax credit carryover
|
|
|
76.5 |
|
|
|
8.2 |
|
|
Accrued liabilities
|
|
|
158.4 |
|
|
|
156.9 |
|
|
Intangible assets
|
|
|
(201.4 |
) |
|
|
(206.3 |
) |
|
Valuation allowances
|
|
|
(67.6 |
) |
|
|
(58.0 |
) |
|
Other
|
|
|
22.4 |
|
|
|
36.1 |
|
| |
|
|
|
|
| |
|
$ |
368.3 |
|
|
$ |
350.3 |
|
| |
|
|
|
|
At December 31, 2004, the vast majority of the net
operating loss is available to reduce future federal and state
taxable earnings of the U.S. companies. These losses
generally expire within a period of 1 to 19 years.
$24.7 million of state losses are subject to valuation
allowances and certain restrictions. The tax credits are
entirely available to offset future federal and state tax
liabilities of the U.S. companies. These credits generally
expire within a 1 to 15 year period. $11.1 million of
the tax credits are subject to valuation allowances and certain
restrictions. The capital loss carryover is also available to
reduce future federal taxable earnings of the
U.S. companies; however, the entire carryover is subject to
a valuation allowance and expires in 2005 and 2006.
The Company’s former parent received a ruling from the
Internal Revenue Service (“IRS”), that the spin-off of
the Company would qualify as a tax-free transaction. Such a
ruling, while generally binding upon the IRS, is subject to
certain factual representations and assumptions. The Company has
agreed to certain restrictions on its future actions to provide
further assurances that the spin-off will qualify as tax-free.
If the Company fails to abide by such restrictions and, as a
result, the spin-off fails to qualify as a tax-free transaction,
the Company will be obligated to indemnify its former parent for
any resulting tax liability.
During 2004, the Company’s tax provision included a
deferred tax benefit of $34.5 million as a result of
revaluing deferred taxes of acquired Centerpulse operations due
to a reduction in the ongoing Swiss tax rate (from approximately
24 percent to 12.5 percent).
The Company has a long-term tax liability of $156.7 million
at December 31, 2004 for expected settlement of various
U.S. and foreign income tax liabilities.
At December 31, 2004, the Company had an aggregate of
approximately $270 million of unremitted earnings of
foreign subsidiaries that have been, or are intended to be,
permanently reinvested for continued use in foreign operations.
If the total undistributed earnings of foreign subsidiaries were
remitted, a significant amount of the additional tax would be
offset by the allowable foreign tax credits. It is impractical
for the Company to determine the additional tax of remitting
these earnings.
As a result of recent changes to U.S. tax rules regarding
foreign earnings repatriation, the Company may repatriate
56
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Notes to Consolidated Financial Statements
(Continued)
earnings of foreign subsidiaries at reduced U.S. tax rates.
The Company believes the impact of such repatriation will not be
material and expects to complete its evaluation by
December 31, 2005.
|
|
|
|
12. |
|
CAPITAL STOCK AND EARNINGS PER SHARE |
On September 13, 2004, the Company amended its Rights
Agreement to have the rights expire on September 16, 2004.
The stockholder rights plan had been established in 2001 and was
scheduled to expire in 2011. The Company has authorized for
issuance 2 million shares of Series A Participating
Cumulative Preferred Stock (“Series A Preferred
Stock”). No shares of the Series A Preferred Stock
have been issued as of December 31, 2004.
The numerator for both basic and diluted earnings per share is
net earnings available to common stockholders. The denominator
for basic earnings per share is the weighted average number of
common shares outstanding during the period. The denominator for
diluted earnings per share is weighted average shares
outstanding adjusted for the effect of dilutive stock options.
The following is a reconciliation of weighted average shares for
the basic and diluted share computations for the years ending
December 31 (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Weighted average shares outstanding for basic net earnings per
share
|
|
|
244.4 |
|
|
|
207.7 |
|
|
|
194.5 |
|
|
Effect of dilutive stock options
|
|
|
3.4 |
|
|
|
3.5 |
|
|
|
2.3 |
|
| |
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for diluted net earnings per
share
|
|
|
247.8 |
|
|
|
211.2 |
|
|
|
196.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
13. |
|
STOCK OPTION AND COMPENSATION PLANS |
The Company had three stock option plans in effect at
December 31, 2004: the 2001 Stock Incentive Plan, the
TeamShare Stock Option Plan, and the Stock Plan for Non-Employee
Directors. The Company has reserved the maximum number of shares
of common stock available for award under the terms of each of
these plans and has registered 34.3 million shares of
common stock. Options may be granted under these plans at a
price of not less than the fair market value of a share of
common stock on the date of grant. The 2001 Stock Incentive Plan
provides for the grant of nonqualified stock options and
incentive stock options, long-term performance awards,
restricted stock awards and deferred stock units. Options
granted under the 2001 Stock Incentive Plan may include stock
appreciation rights. The TeamShare Stock Option Plan provides
for the grant of non-qualified stock options and, in certain
jurisdictions, stock appreciation rights, while the Stock Plan
for Non-Employee Directors provides for awards of stock options,
restricted stock and restricted stock units to non-employee
directors.
Options granted under these plans generally vest over four
years, although in no event in less than one year, and expire
ten years from the date of grant. In the past, certain options
have had price thresholds, which affect exercisability. All such
price thresholds have been satisfied.
Under the 2001 Stock Incentive Plan, the total number of awards
which may be granted in a given year pursuant to options and
other awards under the plan may not exceed 1.9 percent of
the outstanding shares of the Company’s stock on the
effective date of the Plan for 2001 or January 1 of each
subsequent year, plus the number of shares from the prior year
that were available for grant but not granted, that were granted
but subsequently terminated, expired, cancelled or surrendered
without being exercised or tendered in the prior year to pay for
options or satisfy tax withholding requirements. No participant
may receive options or awards which in the aggregate exceed
2 million shares of stock over the life of the Plan.
A summary of the status of all options granted to employees and
non-employee directors for the years ended December 31,
2004, 2003 and 2002 is presented below:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
Weighted | |
| |
|
Options | |
|
Average | |
| |
|
(in thousands) | |
|
Exercise Price | |
| | |
|
Outstanding at January 1, 2002
|
|
|
10,727 |
|
|
$ |
25.01 |
|
|
Options granted
|
|
|
1,833 |
|
|
|
30.34 |
|
|
Options exercised
|
|
|
(1,262 |
) |
|
|
18.94 |
|
|
Options cancelled
|
|
|
(263 |
) |
|
|
28.73 |
|
| |
|
|
|
|
|
Outstanding at December 31, 2002
|
|
|
11,035 |
|
|
|
26.51 |
|
|
Options granted
|
|
|
2,395 |
|
|
|
43.06 |
|
|
Options exercised
|
|
|
(2,688 |
) |
|
|
23.80 |
|
|
Options cancelled
|
|
|
(272 |
) |
|
|
34.76 |
|
| |
|
|
|
|
|
Outstanding at December 31, 2003
|
|
|
10,470 |
|
|
|
30.77 |
|
|
Options granted
|
|
|
3,407 |
|
|
|
70.41 |
|
|
Options exercised
|
|
|
(2,450 |
) |
|
|
25.90 |
|
|
Options cancelled
|
|
|
(136 |
) |
|
|
50.81 |
|
| |
|
|
|
|
|
Outstanding at December 31, 2004
|
|
|
11,291 |
|
|
$ |
43.60 |
|
| |
|
|
|
|
57
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Notes to Consolidated Financial Statements
(Continued)
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
The following table summarizes information about stock options
outstanding at December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Outstanding |
|
Exercisable |
| |
|
| |
|
| |
| |
|
|
|
Weighted | |
|
|
|
|
| |
|
|
|
Average | |
|
Weighted | |
|
|
|
Weighted | |
| |
|
Options | |
|
Remaining | |
|
Average | |
|
Options | |
|
Average | |
| Range of Exercise Prices |
|
(in thousands) | |
|
Contractual Life | |
|
Exercise Price | |
|
(in thousands) | |
|
Exercise Price | |
| | |
|
$6.25 – $17.00
|
|
|
259 |
|
|
|
1.22 |
|
|
$ |
11.86 |
|
|
|
259 |
|
|
$ |
11.86 |
|
|
$19.50 – $27.50
|
|
|
1,583 |
|
|
|
4.95 |
|
|
|
24.80 |
|
|
|
1,373 |
|
|
|
24.50 |
|
|
$27.51 – $37.50
|
|
|
4,012 |
|
|
|
6.22 |
|
|
|
30.70 |
|
|
|
2,667 |
|
|
|
30.90 |
|
|
$39.50 – $51.00
|
|
|
2,082 |
|
|
|
8.22 |
|
|
|
43.10 |
|
|
|
478 |
|
|
|
42.70 |
|
|
$69.00 – $87.50
|
|
|
3,355 |
|
|
|
9.22 |
|
|
|
70.50 |
|
|
|
3 |
|
|
|
78.30 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
11,291 |
|
|
|
7.19 |
|
|
$ |
43.60 |
|
|
|
4,780 |
|
|
$ |
29.30 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2004, 2003 and 2002,
were 4.8 million, 4.9 million and 4.7 million,
respectively, with average exercise prices of $29.30, $25.97 and
$22.81, respectively.
See Note 2 for the effect on net earnings and earnings per
share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock based employee
compensation.
The Company designs, develops, manufactures and markets
reconstructive orthopaedic implants, including joint and dental,
spinal implants, and trauma products and orthopaedic surgical
products which include surgical supplies and instruments
designed to aid in orthopaedic surgical procedures. Operations
are managed through three major geographic segments – the
Americas, which is comprised principally of the United States
and includes other North, Central and South American markets;
Europe, which is comprised principally of Europe and includes
the Middle East and Africa; and Asia Pacific, which is comprised
primarily of Japan and includes other Asian and Pacific markets.
This structure is the basis for the Company’s reportable
segment information discussed below. Company management
evaluates operating segment performance based upon segment
operating profit exclusive of operating expenses pertaining to
global operations and corporate expenses, acquisition and
integration expenses, inventory step-up, in-process research and
development write-offs and intangible asset amortization
expense. Global operations include research, development
engineering, medical education, brand management, corporate
legal, finance, human resource functions, and U.S. and
Puerto Rico based operations and logistics. Intercompany
transactions have been eliminated from segment operating profit.
Company management reviews accounts receivable, inventory,
property, plant and equipment, goodwill and intangible assets by
reportable segment exclusive of U.S. and Puerto Rico based
operations and logistics and corporate assets.
Net sales, segment operating profit and year-end assets are as
follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net Sales |
|
Operating Profit |
|
Year-End Assets |
| |
|
| |
|
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2004 | |
|
2003 | |
| | |
|
Americas
|
|
$ |
1,741.3 |
|
|
$ |
1,208.3 |
|
|
$ |
932.9 |
|
|
$ |
893.1 |
|
|
$ |
619.2 |
|
|
$ |
450.2 |
|
|
$ |
2,430.9 |
|
|
$ |
2,181.1 |
|
|
Europe
|
|
|
808.3 |
|
|
|
366.0 |
|
|
|
169.9 |
|
|
|
279.4 |
|
|
|
96.4 |
|
|
|
41.4 |
|
|
|
1,824.4 |
|
|
|
1,731.7 |
|
|
Asia Pacific
|
|
|
431.3 |
|
|
|
326.7 |
|
|
|
269.6 |
|
|
|
182.3 |
|
|
|
148.1 |
|
|
|
124.3 |
|
|
|
310.6 |
|
|
|
300.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
2,980.9 |
|
|
$ |
1,901.0 |
|
|
$ |
1,372.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory step-up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59.4 |
) |
|
|
(42.7 |
) |
|
|
– |
|
|
|
|
|
|
|
|
|
|
Acquisition and integration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(81.1 |
) |
|
|
(79.6 |
) |
|
|
– |
|
|
|
|
|
|
|
|
|
|
In-process research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
– |
|
|
|
(11.2 |
) |
|
|
– |
|
|
|
|
|
|
|
|
|
|
Global operations and corporate functions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(451.1 |
) |
|
|
(279.5 |
) |
|
|
(215.0 |
) |
|
|
1,129.6 |
|
|
|
942.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
763.2 |
|
|
$ |
450.7 |
|
|
$ |
400.9 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,695.5 |
|
|
$ |
5,156.0 |
|
| |
|
|
|
|
58
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Notes to Consolidated Financial Statements
(Continued)
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
U.S. sales were $1,664.5 million,
$1,152.0 million and $892.3 million for the years
ended December 31, 2004, 2003 and 2002, respectively. The
Company’s sales to any individual country outside of the
U.S. were not significant. Sales are attributable to a
country based upon the customer’s country of domicile.
Net sales by product category are as follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Reconstructive implants
|
|
$ |
2,456.3 |
|
|
$ |
1,521.0 |
|
|
$ |
1,061.7 |
|
|
Trauma
|
|
|
172.9 |
|
|
|
150.1 |
|
|
|
133.8 |
|
|
Spine
|
|
|
134.2 |
|
|
|
35.1 |
|
|
|
– |
|
|
Orthopaedic surgical products
|
|
|
217.5 |
|
|
|
194.8 |
|
|
|
176.9 |
|
| |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,980.9 |
|
|
$ |
1,901.0 |
|
|
$ |
1,372.4 |
|
| |
|
|
|
|
|
|
|
|
Long-lived tangible assets as of December 31, 2004 and 2003
are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| | |
|
Americas
|
|
$ |
416.8 |
|
|
$ |
344.9 |
|
|
Europe
|
|
|
170.9 |
|
|
|
143.8 |
|
|
Asia Pacific
|
|
|
40.8 |
|
|
|
36.5 |
|
| |
|
|
|
|
| |
|
$ |
628.5 |
|
|
$ |
525.2 |
|
| |
|
|
|
|
The Americas long-lived tangible assets are located primarily in
the U.S. Approximately $70 million of Europe
long-lived tangible assets are located in Switzerland.
Capital expenditures by operating segment for the years ended
December 31, 2004, 2003 and 2002 were as follows (in
millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Americas
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Additions to instruments
|
|
$ |
– |
|
|
$ |
1.5 |
|
|
$ |
– |
|
| |
Additions to other property, plant and equipment
|
|
|
0.3 |
|
|
|
0.8 |
|
|
|
0.1 |
|
|
Europe
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Additions to instruments
|
|
|
14.0 |
|
|
|
4.0 |
|
|
|
– |
|
| |
Additions to other property, plant and equipment
|
|
|
24.4 |
|
|
|
5.4 |
|
|
|
1.4 |
|
|
Asia Pacific
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Additions to instruments
|
|
|
1.4 |
|
|
|
1.0 |
|
|
|
– |
|
| |
Additions to other property, plant and equipment
|
|
|
3.2 |
|
|
|
3.5 |
|
|
|
1.3 |
|
|
Global operations and corporate functions
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Additions to instruments
|
|
|
124.2 |
|
|
|
107.1 |
|
|
|
– |
|
| |
Additions to other property, plant and equipment
|
|
|
72.9 |
|
|
|
35.2 |
|
|
|
30.9 |
|
For segment reporting purposes, deployed instruments are
included in the measurement of operating segment assets while
undeployed instruments at U.S. and Puerto Rico based
operations and logistics are included in global operations and
corporate functions. The majority of instruments are purchased
by U.S. and Puerto Rico based operations and logistics and
are deployed to the operating segments as needed for the
business.
Depreciation and amortization used in determining operating
segment profit for the years ended December 31, 2004, 2003
and 2002 was as follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Americas
|
|
$ |
46.1 |
|
|
$ |
36.8 |
|
|
$ |
0.1 |
|
|
Europe
|
|
|
50.5 |
|
|
|
23.4 |
|
|
|
1.1 |
|
|
Asia Pacific
|
|
|
17.9 |
|
|
|
16.8 |
|
|
|
1.4 |
|
|
Global operations and corporate functions
|
|
|
66.8 |
|
|
|
26.3 |
|
|
|
22.7 |
|
| |
|
|
|
|
|
|
|
|
| |
|
$ |
181.3 |
|
|
$ |
103.3 |
|
|
$ |
25.3 |
|
| |
|
|
|
|
|
|
|
|
The increase in deprecation and amortization in 2004 from 2003
was primarily caused by a full year of depreciation and
amortization on Centerpulse acquired assets in 2004 versus one
quarter of depreciation and amortization in 2003. The increase
in depreciation and amortization in 2003 from 2002 was primarily
caused by the change in accounting principle for instruments.
Future minimum rental commitments under non-cancelable operating
leases in effect as of December 31, 2004 were
$23.5 million for 2005, $19.6 million for 2006,
$14.6 million for 2007, $9.5 million for 2008,
$8.2 million for 2009 and $27.6 million thereafter.
Total rent expense for the years ended December 31, 2004,
2003 and 2002 aggregated $24.2 million, $15.7 million
and $9.1 million, respectively.
|
|
|
|
16. |
|
COMMITMENTS AND CONTINGENCIES |
As a result of the Centerpulse transaction, the Company acquired
the entity involved in Centerpulse’s hip and knee implant
litigation matter. The litigation was a result of a voluntary
recall of certain hip and knee implants manufactured and sold by
Centerpulse. On March 13, 2002, a
U.S. Class Action Settlement Agreement
(“Settlement Agreement”) was entered into by
Centerpulse that resolved U.S. claims related to the
affected products and a settlement trust (“Settlement
Trust”) was established and funded for the most part by
Centerpulse. The court approved the settlement arrangement on
May 8, 2002. Under the terms of the Settlement Agreement,
the Company will reimburse the Settlement Trust a specified
amount for each revision surgery over 4,000 and revisions on
reprocessed shells over 64. As of March 4, 2005, the claims
administrator has received 4,136 likely valid claims for hips
(cut-off date June 5, 2003) and knees (cut-off date
November 17, 2003) and 198 claims for reprocessed shells
(cut-off date September 8, 2004). The Company believes the
litigation liability recorded as of December 31, 2004 is
adequate to provide for any future claims regarding the hip and
knee implant litigation.
On February 6, 2004, BTG International Limited
(“BTG”) filed an action against the Company and two
unrelated parties in the United States District Court for the
District of Delaware alleging infringement by the defendants of
U.S. Patent No. 6,352,559 (the “559
Patent”). The Company’s Trilogy®
Acetabular System is specifically accused of
59
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Notes to Consolidated Financial Statements
(Continued)
infringement, as well as Centerpulse’s
Converge® and Allofit™ Acetabular
Systems. BTG’s complaint seeks unspecified damages and
injunctive relief. On March 4, 2004, the Company filed an
answer to the complaint denying infringement, and asserting a
counterclaim alleging that the “559 Patent is invalid. The
Company believes that its defenses are valid and meritorious and
the Company intends to continue to defend the BTG lawsuit
vigorously.
On February 15, 2005, Howmedica Osteonics Corp.
(“Howmedica”) filed an action against the Company and
an unrelated party in the United States District Court for the
District of New Jersey alleging infringement by the defendants
of U.S. Patent Nos. 6,174,934; 6,372,814; 6,664,308;
and 6,818,020. Howmedica’s complaint seeks unspecified
damages and injunctive relief. The Company believes that its
defenses are valid and meritorious and the Company intends to
defend the Howmedica lawsuit vigorously.
The Company is also subject to product liability and other
claims and lawsuits arising in the ordinary course of business,
for which the Company maintains insurance, subject to
self-insured retention limits. The Company establishes accruals
for product liability and other claims in conjunction with
outside counsel based on current information and historical
settlement information for open claims, related fees and for
claims incurred but not reported. While it is not possible to
predict with certainty the outcome of these cases, it is the
opinion of management that, upon ultimate resolution, these
cases will not have a material adverse effect on the
consolidated financial position, results of operations or cash
flows of the Company.
On July 25, 2003, the Staff of the Securities and Exchange
Commission informed Centerpulse that it was conducting an
informal investigation of Centerpulse relating to certain
accounting issues. The Company is continuing to cooperate with
the Securities and Exchange Commission in this matter.
|
|
|
|
17. |
|
QUARTERLY FINANCIAL INFORMATION (UNAUDITED) |
(in millions, except per share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 Quarter Ended |
|
2003 Quarter Ended |
| |
|
| |
|
| |
| |
|
Mar | |
|
Jun | |
|
Sep | |
|
Dec | |
|
Mar | |
|
Jun | |
|
Sep | |
|
Dec(2) | |
| | |
|
Net sales
|
|
$ |
742.2 |
|
|
$ |
737.4 |
|
|
$ |
700.2 |
|
|
$ |
801.1 |
|
|
$ |
390.1 |
|
|
$ |
411.1 |
|
|
$ |
398.2 |
|
|
$ |
701.6 |
|
|
Gross profit
|
|
|
522.7 |
|
|
|
535.5 |
|
|
|
531.1 |
|
|
|
611.7 |
|
|
|
293.2 |
|
|
|
312.7 |
|
|
|
301.4 |
|
|
|
477.5 |
|
|
Earnings before cumulative effect of change in accounting
principle(1)
|
|
|
97.6 |
|
|
|
116.3 |
|
|
|
127.9 |
|
|
|
200.0 |
|
|
|
80.2 |
|
|
|
89.0 |
|
|
|
85.0 |
|
|
|
37.0 |
|
|
Net earnings
|
|
|
97.6 |
|
|
|
116.3 |
|
|
|
127.9 |
|
|
|
200.0 |
|
|
|
135.3 |
|
|
|
89.0 |
|
|
|
85.0 |
|
|
|
37.0 |
|
|
Earnings per common share before cumulative effect of change in
accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
0.40 |
|
|
|
0.48 |
|
|
|
0.52 |
|
|
|
0.82 |
|
|
|
0.41 |
|
|
|
0.45 |
|
|
|
0.43 |
|
|
|
0.15 |
|
| |
Diluted
|
|
|
0.40 |
|
|
|
0.47 |
|
|
|
0.52 |
|
|
|
0.81 |
|
|
|
0.41 |
|
|
|
0.45 |
|
|
|
0.43 |
|
|
|
0.15 |
|
|
Net earnings per common
share(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
0.40 |
|
|
|
0.48 |
|
|
|
0.52 |
|
|
|
0.82 |
|
|
|
0.69 |
|
|
|
0.45 |
|
|
|
0.43 |
|
|
|
0.15 |
|
| |
Diluted
|
|
|
0.40 |
|
|
|
0.47 |
|
|
|
0.52 |
|
|
|
0.81 |
|
|
|
0.68 |
|
|
|
0.45 |
|
|
|
0.43 |
|
|
|
0.15 |
|
| |
|
|
| (1) |
The three month period ended March 31, 2003 includes a
cumulative effect of a change in accounting principle for
instruments as discussed in Note 4 of these audited
financial statements. |
| |
| (2) |
The three month period ended December 31, 2003 includes the
results of Centerpulse subsequent to the Closing Date, as
discussed in Note 3 of these audited financial statements. |
60
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
|
|
|
|
ITEM 9. |
|
Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure |
None
|
|
|
|
ITEM 9A. |
|
Controls and Procedures |
The Company has established disclosure controls and procedures
and internal controls over financial reporting to provide
reasonable assurance that material information relating to the
Company, including its consolidated subsidiaries, is made known
on a timely basis to management and the Board of Directors.
However, any control system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives
of the control system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances
of fraud, if any, within a company have been detected.
Based on their evaluation, the Company’s principal
executive officer and principal financial officer have concluded
that the Company’s disclosure controls and procedures as of
the end of the period covered by this report are effective.
Management’s report on internal control over financial
reporting appears in this report at the conclusion of
Item 7A.
There was no change in the Company’s internal control over
financial reporting (as defined in Rule 13a-15(f)) that
occurred during the fourth quarter of 2004 that has materially
affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.
|
|
|
|
ITEM 9B. |
|
Other Information |
None
61
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Part III
|
|
|
|
ITEM 10. |
|
Directors and Executive Officers of the Registrant |
The information required by this Item concerning directors and
executive officers of the Company is incorporated herein by
reference from the Company’s definitive Proxy Statement for
its 2005 Annual Meeting of Stockholders which will be filed with
the Commission pursuant to Regulation 14A and the
information included under the caption “Executive Officers
of the Company” in Part I hereof.
|
|
|
|
ITEM 11. |
|
Executive Compensation |
The information required by this Item concerning remuneration of
the Company’s officers and directors and information
concerning material transactions involving such officers and
directors is incorporated herein by reference from the
Company’s definitive Proxy Statement for its 2005 Annual
Meeting of Stockholders which will be filed with the Commission
pursuant to Regulation 14A within 120 days after the
end of the Company’s most recent fiscal year.
|
|
|
|
ITEM 12. |
|
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters |
The information required by this Item concerning the stock
ownership of management and five percent beneficial owners and
related stockholder matters, including equity compensation plan
information, is incorporated herein by reference from the
Company’s definitive Proxy Statement for its 2005 Annual
Meeting of Stockholders which will be filed with the Commission
pursuant to Regulation 14A within 120 days after the
end of the Company’s most recent fiscal year.
|
|
|
|
ITEM 13. |
|
Certain Relationships and Related Transactions |
The information required by this Item concerning certain
relationships and related transactions is incorporated herein by
reference from the Company’s definitive Proxy Statement for
its 2005 Annual Meeting of Stockholders which will be filed with
the Commission pursuant to Regulation 14A within
120 days after the end of the Company’s most recent
fiscal year.
|
|
|
|
ITEM 14. |
|
Principal Accounting Fees and Services |
The information required by this Item concerning principal
accounting fees and services is incorporated herein by reference
from the Company’s definitive Proxy Statement for its 2005
Annual Meeting of Stockholders which will be filed with the
Commission pursuant to Regulation 14A within 120 days
after the end of the Company’s most recent fiscal year.
62
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Part IV
|
|
|
|
ITEM 15. |
|
Exhibits and Financial Statement Schedules |
(a) 1. Financial Statements
The following consolidated financial statements of the Company
and its subsidiaries are set forth in Part II, Item 8.
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Earnings for the Years Ended
December 31, 2004, 2003 and 2002
Consolidated Balance Sheets as of December 31, 2004 and 2003
Consolidated Statements of Stockholders’ Equity for the
Years Ended December 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
|
|
| |
Schedule II. Valuation and Qualifying Accounts |
| |
| |
Other financial statement schedules are omitted because they
are not applicable or the required information is shown in the
financial statements or the notes thereto. |
3. Exhibits
|
|
| |
A list of exhibits required to be filed as part of this report
is set forth in the Index to Exhibits, which immediately
precedes such exhibits, and is incorporated herein by reference. |
63
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
| |
By: |
/s/ J. Raymond Elliott
|
|
|
| |
|
| |
J. Raymond Elliott |
| |
Chairman of the Board
President and Chief Executive Officer |
Dated: March 11, 2005
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
| |
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
| |
/s/ J. Raymond Elliott
J.
Raymond Elliott |
|
Chairman of the Board, President, Chief Executive Officer and
Director (Principal Executive Officer) |
|
March 11, 2005 |
| |
/s/ Sam R. Leno
Sam
R. Leno |
|
Executive Vice President, Corporate Finance and Operations and
Chief Financial Officer (Principal Financial Officer) |
|
March 11, 2005 |
| |
/s/ James T. Crines
James
T. Crines |
|
Senior Vice President, Finance/ Controller and Information
Technology (Principal Accounting Officer) |
|
March 11, 2005 |
| |
/s/ Larry C. Glasscock
Larry
C. Glasscock |
|
Director |
|
March 11, 2005 |
| |
/s/ Regina E.
Herzlinger
Regina
E. Herzlinger |
|
Director |
|
March 11, 2005 |
| |
/s/ John L. McGoldrick
John
L. McGoldrick |
|
Director |
|
March 11, 2005 |
| |
/s/ Augustus A.
White, III
Augustus
A. White, III |
|
Director |
|
March 11, 2005 |
64
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
Index to Exhibits
| |
|
|
| Exhibit No |
|
Description |
| |
|
3.1
|
|
Restated Certificate of Incorporation of Zimmer Holdings, Inc.
(incorporated herein by reference to Exhibit 3.1 to Current
Report on Form 8-K dated November 13, 2001) |
|
3.2
|
|
Certificate of Designations of Series A Participating
Cumulative Preferred Stock of Zimmer Holdings, Inc., dated as of
August 6, 2001 (incorporated herein by reference to
Exhibit 3.2 to Current Report on Form 8-K dated
November 13, 2001) |
|
3.3
|
|
Restated By-Laws of Zimmer Holdings, Inc., together with
Amendment No. 1 to the Restated By-Laws of Zimmer Holdings,
Inc. (incorporated herein by reference to Exhibit 3 to
Quarterly Report on Form 10-Q dated November 14, 2003) |
|
4.1
|
|
Specimen Common Stock certificate (incorporated herein by
reference to Exhibit 4.1 to Amendment No. 3 to
Registration Statement on Form 10 dated July 6, 2001) |
|
10.1*
|
|
Zimmer Holdings, Inc. 2001 Stock Incentive Plan (incorporated
herein by reference to Appendix B to the Registrant’s
definitive Proxy Statement on Schedule 14A dated
March 24, 2003) |
|
10.2*
|
|
Zimmer Holdings, Inc. Executive Performance Incentive Plan,
effective August 6, 2001 (incorporated herein by reference
to Appendix C to the Registrant’s definitive Proxy
Statement on Schedule 14A dated March 24, 2003) |
|
10.3*
|
|
Zimmer Holdings, Inc. Stock Plan for Non-Employee Directors,
effective August 6, 2001 (incorporated by reference to
Exhibit 10.6 to Current Report on Form 8-K dated
August 6, 2001) |
|
10.4*
|
|
Zimmer Holdings, Inc. Deferred Compensation Plan for
Non-Employee Directors, effective August 6, 2001
(incorporated herein by reference to Exhibit 10.7 to
Current Report on Form 8-K dated August 6, 2001) |
|
10.5
|
|
Three Year Competitive Advance and Revolving Credit Facility
among Zimmer Holdings, Inc., Zimmer, Inc., Zimmer K.K., Zimmer
LTD. and the lenders named therein, dated as of July 31,
2001 (incorporated herein by reference to Exhibit 10.1 to
Current Report on Form 8-K dated August 6, 2001) |
|
10.6
|
|
First Amendment to Three Year Competitive Advance and Revolving
Credit Facility among Zimmer Holdings, Inc., Zimmer, Inc.,
Zimmer K.K., Zimmer LTD. and the lenders named therein, dated as
of December 10, 2001 (incorporated herein by reference to
Exhibit 10.26 to Annual Report on Form 10-K dated
March 13, 2002) |
|
10.7
|
|
Guarantee Assumption Agreement, dated as of June 24, 2002,
made by each of the signatories thereto in favor of the lenders
named in the Three Year Competitive Advance and Revolving Credit
Facility Agreement dated as of July 31, 2001 (incorporated
herein by reference to Exhibit 10.1 to Quarterly Report on
Form 10-Q dated August 9, 2002) |
|
10.8*
|
|
Zimmer Holdings, Inc. Long-Term Disability Income Plan for
Highly Compensated Employees (incorporated herein by reference
to Exhibit 10.15 to Current Report on Form 8-K dated
November 13, 2001) |
|
10.9*
|
|
Change in Control Severance Agreement with J. Raymond
Elliott (incorporated herein by reference to Exhibit 10.2
to Quarterly Report on Form 10-Q dated May 8, 2002) |
|
10.10*
|
|
Change in Control Severance Agreement with Sam R. Leno, Bruno A.
Melzi, Bruce E. Peterson and David C. Dvorak (incorporated
herein by reference to Exhibit 10.3 to Quarterly Report on
Form 10-Q dated May 8, 2002) |
|
10.11*
|
|
Change in Control Severance Agreement with James T. Crines
(incorporated herein by reference to Exhibit 10.4 to
Quarterly Report on Form 10-Q dated May 8, 2002) |
|
10.12*
|
|
Change in Control Severance Agreement with Sheryl L. Conley
(incorporated herein by reference to Exhibit 10.2 to
Quarterly Report on Form 10-Q dated August 8, 2003) |
|
10.13
|
|
$26,000,000 Uncommitted Standard Instrument Line of Credit
between Zimmer, Inc. and subsidiaries and Bank of America, N.A.
and its affiliates and subsidiaries dated July 17, 2001
(incorporated herein by reference to Exhibit 10.23 to
Annual Report on Form 10-K dated March 13, 2002) |
|
10.14
|
|
Amendment No. 1 to Letter Agreement dated July 17,
2001 between Zimmer, Inc. and Bank of America, N.A. dated
July 26, 2001 (incorporated herein by reference to
Exhibit 10.24 to Annual Report on Form 10-K dated
March 13, 2002) |
|
10.15
|
|
Amendment No. 2 to Letter Agreement dated July 17,
2002 between Zimmer, Inc. and Bank of America, N.A. dated
February 5, 2002 (incorporated herein by reference to
Exhibit 10.1 to Quarterly Report on Form 10-Q dated
May 8, 2002) |
|
10.16
|
|
Amendment No. 3 to Letter Agreement dated as of
July 31, 2003 between Zimmer Holdings, Inc. and Bank of
America, N.A. (incorporated herein by reference to
Exhibit 10.2 to Quarterly Report on Form 10-Q dated
November 14, 2003) |
|
10.17
|
|
Uncommitted Credit Agreement between Zimmer, Inc. and Sumitomo
Mitsui Banking Corporation dated October 29, 2001
(incorporated herein by reference to Exhibit 10.25 to
Annual Report on Form 10-K dated March 13, 2002) |
65
Index to Exhibits
(Continued)
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
| |
|
|
| Exhibit No |
|
Description |
| |
|
10.18
|
|
First Amendment dated July 15, 2002 to the Uncommitted
Credit Agreement dated October 29, 2001 between Zimmer,
Inc. and Sumitomo Mitsui Banking Corporation (incorporated
herein by reference to Exhibit 10.1 to Quarterly Report on
Form 10-Q dated November 12, 2002) |
|
10.19
|
|
$20,000,000 Uncommitted Line of Credit between Zimmer Holdings,
Inc. and Fleet National Bank dated October 16, 2002
(incorporated herein by reference to Exhibit 10.2 to
Quarterly Report on Form 10-Q dated November 12, 2002) |
|
10.20
|
|
Tender Agreement, dated as of August 31, 2003, between
René Braginsky, Hans Kaiser, Zürich Versicherungs-
Gesellschaft, III Institutional Investors International
Corp. and Zimmer Holdings, Inc. (incorporated by reference to
Exhibit 99.1 to the Registrant’s Form 8-K dated
September 2, 2003) |
|
10.21
|
|
$1,350,000,000 Amended and Restated Revolving Credit and Term
Loan Agreement among Zimmer Holdings, Inc., Zimmer, Inc., Zimmer
K.K., Zimmer Ltd., the borrowing subsidiaries and the lenders
named therein, dated as of May 24, 2004 (incorporated by
reference to Exhibit 10.1 to the Registrant’s
Quarterly Report on Form 10-Q dated August 5, 2004) |
|
10.22
|
|
$400,000,000 364-Day Credit Agreement among Zimmer Holdings,
Inc., Zimmer, Inc., the borrowing subsidiaries and the lenders
named therein, dated as of May 24, 2004 (incorporated by
reference to Exhibit 10.2 to the Registrant’s
Quarterly Report on Form 10-Q dated August 5, 2004) |
|
10.23*
|
|
Zimmer Holdings, Inc. Supplemental Performance Incentive Plan
(incorporated by reference to Exhibit 10.3 to the
Registrant’s Quarterly Report on Form 10-Q dated
August 5, 2004) |
|
10.24*
|
|
Change in Control Severance Agreement with Jon E. Kramer
(incorporated by reference to the Registrant’s Quarterly
Report on Form 10-Q dated November 8, 2004) |
|
10.25*
|
|
Change in Control Severance Agreement with Richard Fritschi
(incorporated by reference to the Registrant’s Quarterly
Report on Form 10-Q dated November 8, 2004) |
|
10.26*
|
|
Employment Contract with Richard Fritschi (incorporated by
reference to the Registrant’s Quarterly Report on
Form 10-Q dated November 8, 2004) |
|
10.27*
|
|
Confidentiality, Non-Competition and Non-Solicitation Employment
Agreement with Richard Fritschi (incorporated by reference to
the Registrant’s Quarterly Report on Form 10-Q dated
November 8, 2004) |
|
10.28*
|
|
Form of Nonqualified Stock Option Grant Award Letter under the
Zimmer Holdings, Inc. 2001 Stock Incentive Plan (incorporated by
reference to Exhibit 10.1 to Current Report on
Form 8-K dated January 12, 2005) |
|
10.29*
|
|
Form of Restricted Stock Award Letter under the Zimmer Holdings,
Inc. 2001 Stock Incentive Plan (incorporated by reference to
Exhibit 10.2 to Current Report on Form 8-K dated
January 12, 2005) |
|
10.30*
|
|
Form of Nonqualified Performance-Conditioned Stock Option Grant
Award Letter under the Zimmer Holdings, Inc. Stock Incentive
Plan (incorporated by reference to Exhibit 10.1 to Current
Report on Form 8-K dated January 21, 2005) |
|
10.31*
|
|
Summary Compensation Sheet |
|
21
|
|
List of Subsidiaries of Zimmer Holdings, Inc. |
|
23
|
|
Consent of PricewaterhouseCoopers LLP |
|
31.1
|
|
Certification pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934 of the Chief Executive Officer,
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 |
|
31.2
|
|
Certification pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934 of the Chief Financial Officer,
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 |
|
32
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
|
99
|
|
Annual CEO Certification filed with the New York Stock Exchange
on June 8, 2004 |
* indicates management contracts or compensatory plans or
arrangements
66
|
|
| ZIMMER HOLDINGS, INC. AND SUBSIDIARIES |
2004 FORM 10-K |
|
|
| Valuation and Qualifying Accounts |
Schedule II |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(in millions) | |
| | |
| |
|
Balance at | |
|
Additions | |
|
|
|
Effects of | |
|
Acquired | |
|
Balance | |
|
Balance at | |
| |
|
Beginning | |
|
Charged to | |
|
Deductions | |
|
Foreign | |
|
Centerpulse | |
|
Sheet | |
|
End of | |
| Description |
|
of Period | |
|
Expense | |
|
to Reserve | |
|
Currency | |
|
Allowances | |
|
Reclass* | |
|
Period | |
| | |
|
Doubtful Accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2002
|
|
$ |
6.5 |
|
|
$ |
1.1 |
|
|
$ |
(0.8 |
) |
|
$ |
0.4 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
7.2 |
|
|
Year Ended December 31, 2003
|
|
|
7.2 |
|
|
|
2.6 |
|
|
|
(1.5 |
) |
|
|
1.7 |
|
|
|
19.5 |
|
|
|
– |
|
|
|
29.5 |
|
|
Year Ended December 31, 2004
|
|
|
29.5 |
|
|
|
4.9 |
|
|
|
(7.4 |
) |
|
|
1.4 |
|
|
|
– |
|
|
|
– |
|
|
|
28.4 |
|
|
Excess and Obsolete Inventory:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2002
|
|
$ |
43.3 |
|
|
$ |
6.0 |
|
|
$ |
(7.1 |
) |
|
$ |
3.3 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
45.5 |
|
|
Year Ended December 31, 2003
|
|
|
45.5 |
|
|
|
11.6 |
|
|
|
(11.7 |
) |
|
|
2.0 |
|
|
|
81.7 |
|
|
|
– |
|
|
|
129.1 |
|
|
Year Ended December 31, 2004
|
|
|
129.1 |
|
|
|
30.8 |
|
|
|
(14.1 |
) |
|
|
2.9 |
|
|
|
– |
|
|
|
(24.6 |
) |
|
|
124.1 |
|
|
|
| * |
In 2004, a balance sheet reclassification between gross
inventory and the reserve for excess and obsolete inventory was
recorded which had no effect on the net inventory balance. |
67