美国
证券交易委员会
华盛顿特区20549
表单
证券交易所法案(1934年)
截至2021年6月30日的季度报告
委员会文件号
(根据其章程规定的注册人准确名称)
（国家或其他管辖区的 公司成立或组织） |
（美国国内国税局雇主 唯一识别号码） |
，（主要行政办公地址）
电话:(
在法案第12(b)条的规定下注册的证券：
每一类的名称 |
交易标志 |
在其上注册的交易所的名称 |
请在检查标记处注明注册人（1）是否已在证券交易法第13或15（d）条所规定的过去12个月（或注册人需要提交此类报告的较短期间）内提交了所有必须提交的报告，并且（2）自过去90天以来一直受到此类提交要求的限制。
在检查标记中表明注册人是否已经在过去的12个月内（或者为注册人需要提交这些文件的较短期间）根据S-T法规405规定，递交了每个互动数据文件。
请勾选是否注册人是大型加速报告人、加速报告人、非加速报告人、小型报告公司或新兴成长公司。请参考交易所法案120亿.2中“大型加速报告人”、“加速报告人”、“小型报告公司”和“新兴成长公司”的定义。
☒ |
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加速文件提交人 |
☐ |
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非加速文件提交人 |
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较小的报告公司 |
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新兴成长公司 |
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如果是新兴成长型公司，请在复选框中打勾，以确定注册人是否选择不使用在1934年证券交易法第13(a)条项下提供的任何新的或修订的财务会计准准则的延长过渡期。 ☐
请在复选标志处注明公司是否为壳公司（根据交易所法令第12b-2条的定义）。 是 ☐ 不
截至2024年10月25日，
齐默巴奥米特控股公司
10-Q表格索引
2024年9月30日
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第 1 项。 |
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第 2 项。 |
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第 3 项。 |
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第 1 项。 |
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第 1A 项。 |
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第 2 项。 |
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第 3 项。 |
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第 4 项。 |
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第 5 项。 |
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第 6 项。 |
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2
第一部分– 财务信息财务信息
第 1 项。财务口头声明
齐默巴奥米特控股公司及其子公司
简明合并 综合损失表 收益报表
(以百万计，除每股金额外，未经审计)
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三个月之内结束 |
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九个月结束 |
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2020年9月30日 |
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2020年9月30日 |
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2024 |
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2023 |
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，不包括无形资产摊销 |
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无形资产摊销 |
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研发 |
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销售、一般及行政费用 |
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重组和其他成本削减措施 |
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收购、整合、出售和相关 |
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营业费用 |
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营业利润 |
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其他收入，净额 |
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利息费用，净额 |
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所得税前利润 |
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所得税（益）费用 |
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净收益 |
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减：归属于非控股权益的净收益 |
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齐默巴奥米特控股公司净收益 |
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$ |
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每股普通股收益 |
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基本 |
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$ |
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稀释的 |
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$ |
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加权平均普通股数 |
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基本 |
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稀释的 |
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随附说明是这些简明合并财务报表的一部分。
3
齐默巴奥米特控股公司及其子公司
综合收益的压缩综合财务状况表综合收益的情况
(以百万计，未经审计)
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三个月之内结束 |
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九个月结束 |
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2020年9月30日 |
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2020年9月30日 |
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2024 |
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2023 |
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2024 |
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2023 |
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齐默巴奥米特控股公司净收益 |
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$ |
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其他全面收益（亏损）： |
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外币累计翻译调整，扣除税后 |
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未实现现金流量套期交易（亏损）收益，扣除税后 |
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避险重新分类调整，税后净额 |
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往期服务成本和未确认精算假设调整，税后净额 |
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其他综合收益（税后净额）总额 |
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归属于的综合收益 |
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齐默巴奥米特控股 |
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$ |
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$ |
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随附说明是这些简明合并财务报表的一部分。
4
齐默巴奥米特控股公司及其子公司
压缩的综合资产负债表TED资产负债表
(以百万为单位，除每股金额外，未经审计)
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2020年9月30日 |
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12月31日 |
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2024 |
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2023 |
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资产 |
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流动资产： |
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现金及现金等价物 |
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$ |
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应收帐款，减信用损失准备金 |
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存货 |
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预付费用和其他流动资产 |
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流动资产合计 |
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物业、厂房和设备，净值 |
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商誉 |
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无形资产, 净额 |
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其他 |
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总资产 |
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$ |
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$ |
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负债和股东权益 |
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流动负债: |
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应付账款 |
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$ |
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其他流动负债 |
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开多次数 |
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总流动负债 |
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其他长期负债 |
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长期债务 |
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总负债 |
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(注15) |
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股东权益： |
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齐默巴奥米特控股股东权益： |
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普通股，每股面值为 $0.0001； |
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实收资本 |
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保留盈余 |
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累计其他综合损失 |
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库存股票， |
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齐默巴奥米特控股公司股东权益总额 |
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非控股权益 |
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股东权益总计 |
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负债和股东权益总计 |
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$ |
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$ |
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随附说明是这些简明合并财务报表的一部分。
5
ZIMMER BIOMEt 持有INGS，INC. 及其子公司
简明合并 综合损失表 股东权益表
(以百万计，除每股金额外，未经审计)
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齐默巴奥米特控股股东 |
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累积的 |
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其他 |
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总费用 |
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普通股份。 |
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实收资本 |
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留存收益 |
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综合 |
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库藏股 |
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非控制权益 |
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股东权益 |
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数量 |
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数量 |
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资本 |
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收益 |
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（损失）收益 |
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数量 |
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数量 |
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利息 |
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股权 |
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2024年7月1日余额 |
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$ |
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净收益 |
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其他综合损失 |
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宣布现金分红派息 |
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股票补偿计划 |
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股份回购 |
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2024年9月30日的余额 |
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$ |
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2023年7月1日余额 |
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净收益 |
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其他综合损失 |
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宣布现金分红派息 |
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股票补偿计划 |
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2023年9月30日结余 |
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2024年1月1日的余额为 |
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净收益 |
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其他综合损失 |
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|
|
- |
|
|
|
( |
) |
宣布现金分红派息 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
股票补偿计划 |
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|||||
Embody公司的收购考虑 |
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|||
股份回购 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
2024年9月30日的余额 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
|
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
2023年1月1日的余额 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
|
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||||||
净收益 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|||
其他综合损失 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
宣布现金分红派息 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
股票补偿计划 |
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|||||
Embody公司的收购考虑 |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
||||
股份回购 |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
2023年9月30日结余 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
|
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||||||
随附说明是这些简明合并财务报表的一部分。
6
ZIMMER BioMet 控股有限公司和子公司
简明合并财务报表现金流量表
(以百万计，未经审计)
|
|
|
|
|||||
|
|
截至9月30日的九个月 |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
来自经营活动的现金流量： |
|
|
|
|
|
|
||
净收益 |
|
$ |
|
|
$ |
|
||
调整以协调净收益与提供的现金 |
|
|
|
|
|
|
||
折旧和摊销 |
|
|
|
|
|
|
||
股权酬金 |
|
|
|
|
|
|
||
经营性资产和负债的变化，已获取资产和负债净额 |
|
|
|
|
|
|
||
所得税 |
|
|
( |
) |
|
|
|
|
应收账款 |
|
|
( |
) |
|
|
|
|
存货 |
|
|
( |
) |
|
|
( |
) |
应付账款及应计费用 |
|
|
( |
) |
|
|
( |
) |
其他资产和负债 |
|
|
( |
) |
|
|
( |
) |
经营活动提供的净现金 |
|
|
|
|
|
|
||
投资性活动提供的现金流量： |
|
|
|
|
|
|
||
添加到仪器 |
|
|
( |
) |
|
|
( |
) |
其他固定资产的追加 |
|
|
( |
) |
|
|
( |
) |
净投资套期保值结算 |
|
|
|
|
|
|
||
业务组合投资，已获取现金净额 |
|
|
( |
) |
|
|
( |
) |
购置无形资产 |
|
|
( |
) |
|
|
( |
) |
其他投资活动 |
|
|
( |
) |
|
|
|
|
投资活动中使用的净现金 |
|
|
( |
) |
|
|
( |
) |
筹资活动提供的现金流量： |
|
|
|
|
|
|
||
循环设施的净支付 |
|
|
( |
) |
|
|
( |
) |
优先票据的收入 |
|
|
|
|
|
|
||
赎回高级票据 |
|
|
|
|
|
( |
) |
|
分期贷款支付 |
|
|
|
|
|
( |
) |
|
分红派息给股东的款项 |
|
|
( |
) |
|
|
( |
) |
员工股票补偿计划的收益 |
|
|
|
|
|
|
||
业务组合的应计款项支付 |
|
|
( |
) |
|
|
( |
) |
业务组合中的递延支付款项 |
|
|
( |
) |
|
|
( |
) |
回购普通股 |
|
|
( |
) |
|
|
( |
) |
其他融资活动 |
|
|
( |
) |
|
|
( |
) |
融资活动产生的净现金流量 |
|
|
( |
) |
|
|
( |
) |
汇率对现金及现金等价物的影响 |
|
|
|
|
|
( |
) |
|
现金及现金等价物的变动 |
|
|
|
|
|
( |
) |
|
年初现金及现金等价物余额 |
|
|
|
|
|
|
||
现金及现金等价物期末余额 |
|
$ |
|
|
$ |
|
||
随附说明是这些简明合并财务报表的一部分。
7
齐默巴奥米特控股公司及其子公司
临时简短会议注意事项合并财务报表
(未经审计)
1. 报告基础
此处呈现的财务数据未经审计，应与2024年8月7日提交的本公司第8-k表格文件中附带的合并财务报表和附注一起阅读。在2024年3月31日结束的季度，我们首席经营决策者审阅的业务部门营业利润指标已经进行了修订。这些修订并未导致我们的营运部门或可报告部门发生变化。相反，某些成本在我们的业务单位之间被重新分配，导致我们的营运部门的营业利润指标发生变化。以前属于我们美洲营运部门的某些产品类别总部成本，主要是研发和市场营销，现在已包含在公司项目中，而来自我们营运部门的某些支持功能成本现在已包含在公司项目中。公司项目既不视为营运部门，也不视为可报告部门。2024年8月7日提交的本公司第8-k表格文件仅用于重新整理我们在截至2023年12月31日的年度10-k表格文件中包含的财务信息和相关披露，以反映我们的营运部门的营业利润指标的变化。
在我们看来，随附的未经审计的简明合并财务报表包括所有调整，仅包括正常循环调整，以便公平陈述所呈现的中期财务状况、经营成果和现金流量。截至2023年12月31日的简明合并资产负债表数据来源于审计财务报表，但未包括美国通用会计准则（“GAAP”）要求的所有披露内容。中期数据不应被视为全年结果的指标。
本季度10-Q表格中报告的金额均以百万计算。因此，各项元件的总和可能由于四舍五入而不等于报告的总金额。此外，表格内的某些列和行合计可能由于使用四舍五入的数字而不相等。所呈现的百分比是根据基础未进行舍入的金额计算的。
“我们”、“我们的”和类似字词，“齐默巴奥米特”和“公司”指的是齐默巴奥米特控股公司及其子公司。“齐默巴奥米特控股”仅指母公司。
我们将重新分类某些之前期间的金额以符合当前期间的展示。
2. 重要会计政策
使用估计 - 附带的未经审计的简明合并基本报表按照通用会计准则编制，根据该准则，我们需要进行可能影响资产和负债金额的估计和假设，并在基本报表日期报告资产和负债的金额以及附表资产和负债的金额和财务期间收入和费用的金额。我们已对我们的资产和负债的认定做出了最佳估计。实际结果可能与这些估计有实质性差异。
尚未采用的会计准则 - 2023年11月，财务会计准则委员会（“FASB”）发布了《会计准则修订（ASU）2023-07》，改进报告段披露，这是对ASC主题280 - 段报告的修正。ASU要求提供更详细和细分的段信息，包括报告段费用类别和每个可报告段金额的披露。ASU还要求某些年度披露也在中间期进行。ASU于2023年12月15日后开始的财政年度有效，并于2024年12月15日后开始的财政年度的中间期适用。指导意见将进行回顾性应用，除非回顾性采纳不切实际。我们目前正在评估这项ASU对我们披露的影响。我们将从2024年12月31日结束的年度10-k表开始执行这项ASU。
2023年12月，FASB发布《ASU 2023-09》，改进所得税披露，这是对ASC主题740 - 所得税的修正。ASU通过要求提供有关实体有效税率调和更详细的细分信息以及要求提供有关所得税的额外披露和细分，以及其他改进所得税披露有效性的修正来提高所得税披露的透明度。ASU于2024年12月15日后开始的财政年度有效。指导意见将前瞻性应用，并可以选择回顾性应用指导意见。允许提前采纳这项ASU。我们目前正在评估这项ASU对我们的基本报表和披露的影响。
8
3. 营业收入
按地区划分的净销售额如下（单位：百万美元）：
|
|
三个月之内结束 |
|
|
九个月结束 |
|
||||||||||
|
|
2020年9月30日 |
|
|
2020年9月30日 |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
美国 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
国际 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
总费用 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
按产品类别划分的净销售额如下（单位：百万美元）：
|
|
三个月之内结束 |
|
|
九个月结束 |
|
||||||||||
|
|
2020年9月30日 |
|
|
2020年9月30日 |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
膝盖 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
臀部 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
SEt |
|
|
|
|
|
|
|
|
|
|
|
|
||||
其他 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
总费用 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
S.E.t.包括体育医学、四肢、创伤、颅颌面和胸腔（“CMFT”）产品类别的销售。其他包括来自我们的科技、外科和水泥产品类别的销售。
这个净销售报告与我们的可报告营业部门有所不同，后者基于我们的高级管理组织结构以及我们如何分配资源以实现营业利润目标。我们的每个可报告营业部门都销售上述所有产品类别。因此，与上述报告和我们的可报告营业部门唯一的区别在于地理分组。
4. 重组
2023年12月，我们的管理层批准了一项旨在优化我们的成本结构并推动公司整体效率的新全球重组计划（“2023重组计划”）。预计2023重组计划将导致总额约 $
|
|
员工 |
|
|
|
|
|
|
|
|
|
|
||||
|
|
终止 |
|
|
合同 |
|
|
|
|
|
|
|
||||
|
|
福利 |
|
|
终止协议 |
|
|
其他 |
|
|
总费用 |
|
||||
2024年9月30日结束的三个月发生的费用 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
2023年12月31日的余额 |
|
$ |
|
|
$ |
- |
|
|
$ |
|
|
$ |
|
|||
2024年9月30日结束的九个月发生的费用 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
现金支付 |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
外币兑换率变动 |
|
|
|
|
|
- |
|
|
|
|
|
|
|
|||
非现金交易活动 |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
||
2024年9月30日余额 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
2023年重组计划开始以来发生的费用 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
预计将在2023年重组计划中确认的费用 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
9
In December 2021, our management approved a global restructuring program (the “2021 Restructuring Plan”) intended to further reduce costs and to reorganize our global operations in preparation for the spinoff of ZimVie. The 2021 Restructuring Plan is expected to result in total pre-tax restructuring charges of approximately $
|
|
Employee |
|
|
|
|
|
|
|
|
|
|
||||
|
|
Termination |
|
|
Contract |
|
|
|
|
|
|
|
||||
|
|
Benefits |
|
|
Terminations |
|
|
Other |
|
|
Total |
|
||||
Expenses incurred in the three months ended September 30, 2024 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Balance, December 31, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Expenses incurred in the nine months ended September 30, 2024 |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Cash payments |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance, September 30, 2024 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Expense incurred since the start of the 2021 Restructuring Plan |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Expense estimated to be recognized for the 2021 Restructuring Plan |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
In December 2019, our Board of Directors approved, and we initiated, a global restructuring program (the “2019 Restructuring Plan”) with an objective of reducing structural costs to allow us to further invest in higher priority growth opportunities. The 2019 Restructuring Plan is expected to result in total pre-tax restructuring charges of approximately $
The following tables summarize the location on our condensed consolidated statement of earnings and type of cost for our 2019 Restructuring Plan (in millions):
|
|
Three Months Ended September 30, 2024 |
|
|||||||||||||
|
|
Employee |
|
|
|
|
|
|
|
|
|
|
||||
|
|
Termination |
|
|
Contract |
|
|
|
|
|
|
|
||||
|
|
Benefits |
|
|
Terminations |
|
|
Other |
|
|
Total |
|
||||
sold, excluding intangible asset amortization |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
|
|
$ |
|
||
Restructuring and other cost reduction initiatives |
|
|
|
|
|
- |
|
|
|
|
|
|
|
|||
|
|
$ |
|
|
$ |
- |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Nine Months Ended September 30, 2024 |
|
|||||||||||||
|
|
Employee |
|
|
|
|
|
|
|
|
|
|
||||
|
|
Termination |
|
|
Contract |
|
|
|
|
|
|
|
||||
|
|
Benefits |
|
|
Terminations |
|
|
Other |
|
|
Total |
|
||||
sold, excluding intangible asset amortization |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
|
|
$ |
|
||
Restructuring and other cost reduction initiatives |
|
|
|
|
|
- |
|
|
|
|
|
|
|
|||
|
|
$ |
|
|
$ |
- |
|
|
$ |
|
|
$ |
|
|||
The following table summarizes the liabilities recognized related to the 2019 Restructuring Plan (in millions):
10
|
|
Employee |
|
|
|
|
|
|
|
|
|
|
||||
|
|
Termination |
|
|
Contract |
|
|
|
|
|
|
|
||||
|
|
Benefits |
|
|
Terminations |
|
|
Other |
|
|
Total |
|
||||
Balance, December 31, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Expenses incurred in the nine months ended September 30, 2024 |
|
|
|
|
|
- |
|
|
|
|
|
|
|
|||
Cash payments |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Foreign currency exchange rate changes |
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
||
Balance, September 30, 2024 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Expense incurred since the start of the 2019 Restructuring Plan |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Expense estimated to be recognized for the 2019 Restructuring Plan |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
We do not include restructuring charges in the operating profit of our reportable segments. We report the expenses for other cost reduction and optimization initiatives in our “Restructuring and other cost reduction initiatives” financial statement line item because these activities also have the goal of reducing costs across the organization. However, since the cost reduction initiative expenses are not considered restructuring, they have been excluded from the amounts presented in this note.
5. Inventories
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
|
|
(in millions) |
|
|||||
Finished goods |
|
$ |
|
|
$ |
|
||
Work in progress |
|
|
|
|
|
|
||
Raw materials |
|
|
|
|
|
|
||
Inventories |
|
$ |
|
|
$ |
|
||
6. Property, Plant and Equipment
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
|
|
(in millions) |
|
|||||
Land |
|
$ |
|
|
$ |
|
||
Buildings and equipment |
|
|
|
|
|
|
||
Capitalized software costs |
|
|
|
|
|
|
||
Instruments |
|
|
|
|
|
|
||
Construction in progress |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
Property, plant and equipment, net |
|
$ |
|
|
$ |
|
||
We had $
7. Acquisitions
On
On
11
On
Initial consideration related to these three acquisitions was $
The goodwill related to these acquisitions represents the excess of the consideration transferred over the fair value of the net assets acquired. The goodwill related to these acquisitions is generated from the operational synergies, cross-selling opportunities and future development we expect to achieve from the technologies acquired.
The purchase price allocations for the three acquisitions described above are preliminary as of September 30, 2024. We need additional time to evaluate the technology and tax attributes of those transactions, which may change the recognized intangible assets and tax assets and liabilities. There may be differences between the preliminary estimates of fair value and the final acquisition accounting. The final estimates of fair value are expected to be completed as soon as possible, but no later than one year after the respective acquisition dates.
The following table summarizes the estimates of fair value of the assets acquired and liabilities assumed related to the three acquisitions described above (in millions):
Current assets |
|
$ |
|
|
Intangible assets subject to amortization: |
|
|
|
|
Technology |
|
|
|
|
Trademarks and trade names |
|
|
|
|
Customer relationships |
|
|
|
|
Intangible assets not subject to amortization: |
|
|
|
|
In-process research and development (IPR&D) |
|
|
|
|
Goodwill |
|
|
|
|
Other assets |
|
|
|
|
Total assets acquired |
|
|
|
|
Current liabilities |
|
|
|
|
Deferred income taxes |
|
|
|
|
Other long-term liabilities |
|
|
|
|
Total liabilities assumed |
|
|
|
|
Net assets acquired |
|
$ |
|
|
The weighted average amortization periods selected for technology, trademarks and trade names and customer relationships were
On
On
12
On
On
These four acquisitions are collectively referred to in this report as the “2023 acquisitions”. Refer to Note 10 for information regarding the issuance of common stock and cash payments related to the contingent consideration liabilities that have occurred subsequent to the acquisition dates.
The goodwill related to the 2023 acquisitions represents the excess of the consideration transferred over the fair value of the net assets acquired. The goodwill related to the 2023 acquisitions is generated from the operational synergies and cross-selling opportunities we expect to achieve from the technologies acquired. A portion of the goodwill is expected to be deductible for U.S. income tax purposes. The goodwill related to the Embody, the October 2023 and the November 2023 acquisitions is included in the Americas operating segment and the Americas Orthopedics reporting unit. The goodwill related to the April 2023 acquisition is included in the Asia Pacific operating segment and reporting unit. The goodwill related to the first two of the 2023 acquisition was the only significant activity related to our consolidated goodwill balance in the three and nine-month periods ended September 30, 2023, other than changes related to foreign currency exchange rate translation adjustments.
The purchase price allocations for the Embody acquisition, the October 2023 acquisition and the April 2023 acquisition were final as of September 30, 2024. The purchase price allocation for the November 2023 acquisition is preliminary as of September 30, 2024. We need additional time to evaluate the tax attributes of the transaction, which may change the recognized tax assets and liabilities. There may be differences between the preliminary estimates of fair value and the final acquisition accounting. The final estimates of fair value are expected to be completed as soon as possible, but no later than one year after the acquisition date.
The following table summarizes the estimates of fair value of the assets acquired and liabilities assumed related to the 2023 acquisitions (in millions):
Current assets |
|
$ |
|
|
Intangible assets subject to amortization: |
|
|
|
|
Technology |
|
|
|
|
Trademarks and trade names |
|
|
|
|
Customer relationships |
|
|
|
|
Intangible assets not subject to amortization: |
|
|
|
|
IPR&D |
|
|
|
|
Goodwill |
|
|
|
|
Other assets |
|
|
|
|
Total assets acquired |
|
|
|
|
Current liabilities |
|
|
|
|
Deferred income taxes |
|
|
|
|
Total liabilities assumed |
|
|
|
|
Net assets acquired |
|
$ |
|
|
The weighted average amortization periods selected for technology, customer relationships and trademarks and trade names were
13
In the three and nine-month periods ended September 30, 2024, there were no material adjustments to the preliminary values of any of the acquisitions.
We have not included pro forma information and certain other information under GAAP for any of the acquisitions described in this Note because they did not have a material impact on our financial position or results of operations.
In the nine-month period ended September 30, 2024, we recognized intangible assets of $
In the nine-month period ended September 30, 2023, we entered into agreements to acquire intellectual property rights through the buyout of certain licensing arrangements. These new agreements and the related payments replace the variable royalty payments that otherwise would have been due under the terms of previous licensing arrangements through 2030. These new agreements benefit us by expanding our ownership of intellectual property that we may use in the future. We recognized intangible assets of $
8. Debt
Our debt consisted of the following (in millions):
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Current portion of long-term debt |
|
|
|
|
|
|
||
Uncommitted Credit Facility |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|||
|
$ |
|
|
$ |
- |
|
||
Total current portion of long-term debt |
|
$ |
|
|
$ |
|
||
Long-term debt |
|
|
|
|
|
|
||
|
$ |
- |
|
|
$ |
|
||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
- |
|
||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
Debt discount and issuance costs |
|
|
( |
) |
|
|
( |
) |
Adjustment related to interest rate swaps |
|
|
( |
) |
|
|
( |
) |
Total long-term debt |
|
$ |
|
|
$ |
|
||
On August 15, 2024, we completed the offering of $
In the nine-month period ended September 30, 2023, we redeemed $
14
On June 28, 2024, we entered into a new five-year revolving credit agreement (the “2024 Five-Year Credit Agreement”) and a new 364-day revolving credit agreement (the “2024 364-Day Revolving Credit Agreement”), as described below. Borrowings under these credit agreements will be used for general corporate purposes.
The 2024 Five-Year Credit Agreement contains a
The 2024 Five-Year Credit Agreement will mature on
Borrowings under the 2024 Five-Year Credit Agreement bear interest at floating rates, based upon either an adjusted term secured overnight financing rate (“Term SOFR”) for the applicable interest period or an alternate base rate, in each case, plus an applicable margin determined by reference to our senior unsecured long-term debt credit rating. We pay a facility fee on the aggregate amount of the 2024 Five-Year Revolving Facility at a rate determined by reference to our senior unsecured long-term debt credit rating.
The 2024 Five-Year Credit Agreement contains customary affirmative and negative covenants and events of default for unsecured financing arrangements, including, among other things, limitations on consolidations, mergers, and sales of assets. The 2024 Five-Year Credit Agreement also requires us to maintain a consolidated indebtedness to consolidated EBITDA ratio of no greater than
The 2024 364-Day Revolving Credit Agreement is an unsecured revolving credit facility in the principal amount of $
The 2024 364-Day Revolving Facility will mature on
The 2024 364-Day Revolving Credit Agreement 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. The 2024 364-Day Revolving Credit Agreement also requires us to maintain a consolidated indebtedness to consolidated EBITDA ratio of no greater than
On August 28, 2023, we entered into an uncommitted facility letter (the "Uncommitted Credit Facility"), which provides that from time to time, we may request, and the lender in its absolute and sole discretion may provide, short-term loans. Borrowings under the Uncommitted Credit Facility may be used only for general corporate and working capital purposes. The Uncommitted Credit Facility provides that the aggregate principal amount of outstanding borrowings at any time shall not exceed $
15
Borrowings under our revolving credit facilities have been executed with underlying notes that have maturities of three months or less. At maturity of the underlying note, we elect to either repay the note, borrow the same amount, or some combination thereof. On our condensed consolidated statements of cash flows, we present the borrowings and repayments of these underlying notes as net cash inflows or outflows due to their short-term nature.
9. Accumulated Other Comprehensive Income
Accumulated other comprehensive income (loss) (“AOCI”) refers to certain gains and losses that under GAAP are included in comprehensive income but are excluded from net earnings as these amounts are initially recorded as an adjustment to stockholders’ equity. Amounts in AOCI may be reclassified to net earnings upon the occurrence of certain events.
Our AOCI is comprised of foreign currency translation adjustments, unrealized gains and losses on cash flow hedges and unrecognized prior service costs and gains and losses in actuarial assumptions related to our defined benefit plans. Foreign currency translation adjustments are reclassified to net earnings upon sale or upon a complete or substantially complete liquidation of an investment in a foreign entity. Unrealized gains and losses on cash flow hedges are reclassified to net earnings when the hedged item affects net earnings. Amounts related to defined benefit plans that are in AOCI are reclassified over the service periods of employees in the plan.
The following table shows the changes in the components of AOCI gains (losses), net of tax (in millions):
|
|
Foreign |
|
|
Cash |
|
|
Defined |
|
|
|
|
||||
|
|
Currency |
|
|
Flow |
|
|
Benefit |
|
|
Total |
|
||||
|
|
Translation |
|
|
Hedges |
|
|
Plan Items |
|
|
AOCI |
|
||||
Balance at December 31, 2023 |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
AOCI before reclassifications |
|
|
|
|
|
|
|
|
- |
|
|
|
|
|||
Reclassifications to statements of earnings |
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance at September 30, 2024 |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
The following table shows the reclassification adjustments from AOCI (in millions):
|
|
Amount of Gain (Loss) |
|
|
|
|||||||||||||
|
|
Reclassified from AOCI |
|
|
|
|||||||||||||
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
|
Location on |
||||||||||
Component of AOCI |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
|
Statements of Earnings |
||||
Cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
exchange forward contracts |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Cost of products sold |
||||
Forward starting interest rate swaps |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total before tax |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Net of tax |
||||
Defined benefit plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Prior service cost and unrecognized actuarial loss |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Other income, net |
||||
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
Provision for income taxes |
||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Net of tax |
||||
Total reclassifications |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Net of tax |
||||
16
The following table shows the tax effects on each component of AOCI recognized in our condensed consolidated statements of comprehensive income (in millions):
|
|
Three Months Ended September 30, 2024 |
|
|
Nine Months Ended September 30, 2024 |
|
||||||||||||||||||
|
|
Before Tax |
|
|
Tax |
|
|
Net of Tax |
|
|
Before Tax |
|
|
Tax |
|
|
Net of Tax |
|
||||||
Foreign currency cumulative translation adjustments |
|
$ |
|
|
|
( |
) |
|
$ |
|
|
$ |
|
|
|
( |
) |
|
$ |
|
||||
Unrealized cash flow hedge gains |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Reclassification adjustments on cash flow hedges |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Adjustments to prior service cost and unrecognized actuarial assumptions |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Total Other Comprehensive Income (Loss) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
Three Months Ended September 30, 2023 |
|
|
Nine Months Ended September 30, 2023 |
|
||||||||||||||||||
|
|
Before Tax |
|
|
Tax |
|
|
Net of Tax |
|
|
Before Tax |
|
|
Tax |
|
|
Net of Tax |
|
||||||
Foreign currency cumulative translation adjustments |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
Unrealized cash flow hedge gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Reclassification adjustments on cash flow hedges |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Adjustments to prior service cost and unrecognized actuarial assumptions |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total Other Comprehensive Income (Loss) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
||||
10. Fair Value Measurement of Assets and Liabilities
The following financial assets and liabilities are recorded at fair value on a recurring basis (in millions):
|
|
As of September 30, 2024 |
|
|||||||||||||
|
|
|
|
|
Fair Value Measurements at Reporting Date Using: |
|
||||||||||
Description |
|
Recorded |
|
|
Quoted Prices |
|
|
Significant |
|
|
Significant |
|
||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivatives designated as hedges, current and long-term |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
$ |
|
|
$ |
- |
|
|
$ |
|
|
$ |
- |
|
|||
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|||
Total Assets |
|
$ |
|
|
$ |
- |
|
|
$ |
|
|
$ |
- |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivatives designated as hedges, current and long-term |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
$ |
|
|
$ |
- |
|
|
$ |
|
|
$ |
- |
|
|||
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|||
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|||
Contingent consideration related to acquisitions |
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
||
Total Liabilities |
|
$ |
|
|
$ |
- |
|
|
$ |
|
|
$ |
|
|||
17
|
|
As of December 31, 2023 |
|
|||||||||||||
|
|
|
|
|
Fair Value Measurements at Reporting Date Using: |
|
||||||||||
Description |
|
Recorded |
|
|
Quoted Prices |
|
|
Significant |
|
|
Significant |
|
||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivatives designated as hedges, current and long-term |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
$ |
|
|
$ |
- |
|
|
$ |
|
|
$ |
- |
|
|||
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|||
Derivatives not designated as hedges, current and long-term |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|||
Total Assets |
|
$ |
|
|
$ |
- |
|
|
$ |
|
|
$ |
- |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivatives designated as hedges, current and long-term |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
$ |
|
|
$ |
- |
|
|
$ |
|
|
$ |
- |
|
|||
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|||
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|||
Derivatives not designated as hedges, current and long-term |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|||
Contingent consideration related to acquisitions |
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
||
Total Liabilities |
|
$ |
|
|
$ |
- |
|
|
$ |
|
|
$ |
|
|||
We value our foreign currency forward contracts using a market approach based on foreign currency exchange rates obtained from active markets, and we perform ongoing assessments of counterparty credit risk.
We value our interest rate swaps using a market approach based on publicly available market yield curves and the terms of our swaps, and we perform ongoing assessments of counterparty credit risk. The valuation of our cross-currency interest rate swaps also includes consideration of foreign currency exchange rates.
Contingent payments related to acquisitions consist of sales-based payments and regulatory milestones, and are valued using discounted cash flow techniques. The fair value of sales-based payments is based upon significant unobservable inputs such as probability-weighted future revenue estimates and simulating the numerous potential outcomes, and changes as revenue estimates increase or decrease. The fair value of the regulatory milestones is based on the probability of success in obtaining the specified regulatory approval.
Contingent payments related to the Embody acquisition are to be settled by issuance of our common stock and cash payments. The Embody acquisition is discussed in Note 7. During the nine-month period ended September 30, 2024, we issued
The following table provides a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis in the tables above that used significant unobservable inputs (Level 3) (in millions):
|
|
Level 3 - Liabilities |
|
|
Contingent payments related to acquisitions |
|
|
|
|
Beginning balance December 31, 2023 |
|
$ |
|
|
New contingent consideration related to acquisitions |
|
|
|
|
|
|
|
||
Settlements |
|
|
( |
) |
Foreign currency impact |
|
|
|
|
Ending balance September 30, 2024 |
|
$ |
|
|
18
Changes in estimates for contingent payments related to acquisitions are recognized in the Acquisition, integration, divestiture and related line item on our condensed consolidated statements of earnings.
11. Derivative Instruments and Hedging Activities
We are exposed to certain market risks relating to our ongoing business operations, including foreign currency exchange rate risk, commodity price risk, interest rate risk and credit risk. We manage our exposure to these and other market risks through regular operating and financing activities. Currently, the only risks that we manage through the use of derivative instruments are interest rate risk and foreign currency exchange rate risk.
Interest Rate Risk
Derivatives Designated as Fair Value Hedges
We currently use fixed-to-variable interest rate swaps to manage our exposure to interest rate risk from our cash investments and debt portfolio. These derivative instruments are designated as fair value hedges under GAAP. Changes in the fair value of the derivative instrument are recorded in current earnings and are offset by gains or losses on the underlying debt instrument.
As of September 30, 2024 and December 31, 2023, the following amounts were recorded on our condensed consolidated balance sheets related to cumulative basis adjustments for fair value hedges (in millions):
|
|
Carrying Amount of the Hedged Liabilities |
|
|
|
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liabilities |
|
||||||||||
Balance Sheet Line Item |
|
September 30, 2024 |
|
|
December 31, 2023 |
|
|
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||||
Long-term debt |
|
$ |
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
||
Derivatives Designated as Cash Flow Hedges
In 2014, we entered into forward starting interest rate swaps that were designated as cash flow hedges of our
Foreign Currency Exchange Rate Risk
We operate on a global basis and are exposed to the risk that our financial condition, results of operations and cash flows could be adversely affected by changes in foreign currency exchange rates. To reduce the potential effects of foreign currency exchange rate movements on net earnings, we enter into derivative financial instruments in the form of foreign currency exchange forward contracts with major financial institutions. We also designated our Euro Notes as net investment hedges of investments in foreign subsidiaries. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and net assets denominated in Euros, Swiss Francs, Japanese Yen, British Pounds, Chinese Renminbi, Canadian Dollars, Australian Dollars, Korean Won, Swedish Krona, Czech Koruna, Thai Baht, Taiwan Dollars, South African Rand, Russian Rubles, Indian Rupees, Turkish Lira, Polish Zloty, Danish Krone, and Norwegian Krone. We do not use derivative financial instruments for trading or speculative purposes.
Derivatives Designated as Net Investment Hedges
We are exposed to the impact of foreign exchange rate fluctuations in the investments in our wholly-owned foreign subsidiaries that are denominated in currencies other than the U.S. Dollar. In order to mitigate the volatility in foreign exchange rates, we issued Euro Notes in December 2016 and November 2019 and designated
At September 30, 2024, we had receive-fixed-rate, pay-fixed-rate cross-currency interest swaps with notional amounts outstanding of Euro
19
net cash received or paid related to the receive-fixed-rate, pay-fixed-rate component of the cross-currency interest rate swaps is reflected in investing cash flows in our condensed consolidated statements of cash flows. In the nine-month period ended September 30, 2024, Euro
Derivatives Designated as Cash Flow Hedges
Our revenues are generated in various currencies throughout the world. However, a significant amount of our inventory is produced in U.S. Dollars. Therefore, movements in foreign currency exchange rates may have different proportional effects on our revenues compared to our cost of products sold. To minimize the effects of foreign currency exchange rate movements on cash flows, we hedge intercompany sales of inventory expected to occur within the next
We perform quarterly assessments of hedge effectiveness by verifying and documenting the critical terms of the hedge instrument and confirming that forecasted transactions have not changed significantly. We also assess on a quarterly basis whether there have been adverse developments regarding the risk of a counterparty default. For derivatives which qualify as hedges of future cash flows, the gains and losses are temporarily recorded in AOCI and then recognized in cost of products sold when the hedged item affects net earnings. On our condensed consolidated statements of cash flows, the settlements of these cash flow hedges are recognized in operating cash flows.
For foreign currency exchange forward contracts and options outstanding at September 30, 2024, we had obligations to purchase U.S. Dollars and sell Euros, Japanese Yen, British Pounds, Canadian Dollars, Australian Dollars, Korean Won, Swedish Krona, Czech Koruna, Thai Baht, Taiwan Dollars, South African Rand, Indian Rupees, Polish Zloty, Danish Krone, and Norwegian Krone and obligations to purchase Swiss Francs and sell U.S. Dollars. These derivatives mature at dates ranging from October 2024 through February 2027. As of September 30, 2024, the notional amounts of outstanding forward contracts and options entered into with third parties to purchase U.S. Dollars were $
Derivatives Not Designated as Hedging Instruments
We enter into foreign currency forward exchange contracts with terms of one to three months to manage currency exposures for monetary assets and liabilities denominated in a currency other than an entity’s functional currency. As a result, any foreign currency remeasurement gains/losses recognized in earnings are generally offset with gains/losses on the foreign currency forward exchange contracts in the same reporting period. The net amount of these offsetting gains/losses is recorded in other income, net. Any outstanding contracts are recorded on the balance sheet at fair value as of the end of the reporting period. The notional amounts of these contracts are generally in a range of $
Income Statement Presentation
Derivatives Designated as Cash Flow Hedges
Derivative instruments designated as cash flow hedges had the following effects, before taxes, on AOCI and net earnings on our condensed consolidated statements of earnings, condensed consolidated statements of comprehensive income and condensed consolidated balance sheets (in millions):
|
|
Amount of Gain (Loss) |
|
|
|
|
Amount of Gain (Loss) |
|
||||||||||||||||||||||||||
|
|
Recognized in AOCI |
|
|
|
|
Reclassified from AOCI |
|
||||||||||||||||||||||||||
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||||||||||||
|
|
September 30, |
|
|
September 30, |
|
|
Location on |
|
September 30, |
|
|
September 30, |
|
||||||||||||||||||||
Derivative Instrument |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
|
Statements of Earnings |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||||||
Foreign exchange |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
Forward starting |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
20
The fair value of outstanding derivative instruments designated as cash flow hedges and recorded on our condensed consolidated balance sheet at September 30, 2024, together with settled derivatives where the hedged item has not yet affected earnings, was a net unrealized gain of $
The following table presents the effect of fair value, cash flow and net investment hedge accounting on our condensed consolidated statements of earnings (in millions):
|
|
Location and Amount of Gain/(Loss) Recognized in Income on Fair Value, Cash Flow and Net Investment Hedging Relationships |
|
|||||||||||||||||||||||||||||
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
||||||||||||||||||||
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of |
|
|
|
|||||||||||||||
|
|
Products |
|
|
Expense, |
|
|
Products |
|
|
Expense, |
|
|
Products |
|
|
Expense, |
|
|
Products |
|
|
Expense, |
|
||||||||
|
|
Sold |
|
|
Net |
|
|
Sold |
|
|
Net |
|
|
Sold |
|
|
Net |
|
|
Sold |
|
|
Net |
|
||||||||
Total amounts of income and expense line items presented in the statements of earnings in which the effects of fair value, cash flow and net investment hedges are recorded |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||||
The effects of fair value, cash flow and net investment hedging: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Gain (loss) on fair value hedging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Interest rate swaps |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Gain (loss) on cash flow hedging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Foreign exchange forward contracts |
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
||||
Forward starting interest rate swaps |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Gain on net investment hedging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Cross-currency interest rate swaps |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
||||
Derivatives Not Designated as Hedging Instruments
The following gains (losses) from these derivative instruments were recognized on our condensed consolidated statements of earnings (in millions):
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
Location on |
|
September 30, |
|
|
September 30, |
|
||||||||||
Derivative Instrument |
|
Statements of Earnings |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Foreign exchange forward contracts |
|
Other income, net |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|||
These gains/(losses) do not reflect offsetting gains of $
21
Balance Sheet Presentation
As of September 30, 2024 and December 31, 2023, all derivatives designated as fair value hedges, cash flow hedges and net investment hedges are recorded at fair value on our condensed consolidated balance sheets. On our condensed consolidated balance sheets, we recognize individual forward contracts with the same counterparty on a net asset/liability basis if we have a master netting agreement with the counterparty. Under these master netting agreements, we are able to settle derivative instrument assets and liabilities with the same counterparty in a single transaction, instead of settling each derivative instrument separately. We have master netting agreements with substantially all of our counterparties.
|
|
As of September 30, 2024 |
|
|
As of December 31, 2023 |
|
||||||
|
|
Balance |
|
|
|
|
Balance |
|
|
|
||
|
|
Sheet |
|
Fair |
|
|
Sheet |
|
Fair |
|
||
|
|
Location |
|
Value |
|
|
Location |
|
Value |
|
||
Asset Derivatives Designated as Hedges |
|
|
|
|
|
|
|
|
|
|
||
Foreign exchange forward contracts |
|
Other current assets |
|
$ |
|
|
Other current assets |
|
$ |
|
||
Foreign exchange forward contracts |
|
Other assets |
|
|
|
|
Other assets |
|
|
|
||
Cross-currency interest rate swaps |
|
Other assets |
|
|
|
|
Other assets |
|
|
|
||
Total asset derivatives |
|
|
|
$ |
|
|
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
Asset Derivatives Not Designated as Hedges |
|
|
|
|
|
|
|
|
|
|
||
Foreign exchange forward contracts |
|
Other current assets |
|
$ |
- |
|
|
Other current assets |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Liability Derivatives Designated as Hedges |
|
|
|
|
|
|
|
|
|
|
||
Foreign exchange forward contracts |
|
Other current liabilities |
|
$ |
|
|
Other current liabilities |
|
$ |
|
||
Cross-currency interest rate swaps |
|
Other current liabilities |
|
|
|
|
Other current liabilities |
|
|
|
||
Foreign exchange forward contracts |
|
Other long-term liabilities |
|
|
|
|
Other long-term liabilities |
|
|
|
||
Cross-currency interest rate swaps |
|
Other long-term liabilities |
|
|
|
|
Other long-term liabilities |
|
|
|
||
Interest rate swaps |
|
Other long-term liabilities |
|
|
|
|
Other long-term liabilities |
|
|
|
||
Total liability derivatives |
|
|
|
$ |
|
|
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
Liability Derivatives Not Designated as Hedges |
|
|
|
|
|
|
|
|
|
|
||
Foreign exchange forward contracts |
|
Other current liabilities |
|
$ |
- |
|
|
Other current liabilities |
|
$ |
|
|
The table below presents the effects of our master netting agreements on our condensed consolidated balance sheets (in millions):
|
|
|
|
As of September 30, 2024 |
|
|
As of December 31, 2023 |
|
||||||||||||||||||
Description |
|
Location |
|
Gross |
|
|
Offset |
|
|
Net Amount in |
|
|
Gross |
|
|
Offset |
|
|
Net Amount in |
|
||||||
Asset Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Cash flow hedges |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
Cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Derivatives Not Designated as Hedges |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Liability Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Derivatives Not Designated as Hedges |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
||||
22
The following net investment hedge gains (losses) were recognized on our condensed consolidated statements of comprehensive income (in millions):
|
|
Amount of Gain (Loss) |
|
|||||||||||||
|
|
Recognized in AOCI |
|
|||||||||||||
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
Derivative Instrument |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Euro Notes |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Cross-currency interest rate swaps |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
12. Income Taxes
We operate on a global basis and are subject to numerous and complex tax laws and regulations. Additionally, tax laws continue to undergo rapid changes in both application and interpretation by various countries, including state aid interpretations and initiatives led by the Organisation for Economic Cooperation and Development ("OECD"). Our income tax filings are subject to examinations by taxing authorities throughout the world. Income tax audits may require an extended period of time to reach resolution and may result in significant income tax adjustments when interpretation of tax laws or allocation of company profits is disputed. Although ultimate timing is uncertain, the net amount of tax liability for unrecognized tax benefits may change within the next twelve months due to changes in audit status, expiration of statutes of limitations, settlements of tax assessments and other events. Management’s best estimate of such change is within the range of a $
We are under continuous audit by the IRS and have disputes with the IRS and other foreign taxing authorities in the jurisdictions where we operate. In addition, some jurisdictions in which we operate require payment of disputed taxes to petition a court or taxing authority, or we may elect to make such payments prior to final resolution. We record any prepayments as income tax receivables when we believe our position is more likely than not to be upheld. We assess our position on these disputes at each reporting period. During the course of these audits and disputes, we receive proposed adjustments from taxing authorities that may be material. Therefore, there is a possibility that an adverse outcome in these audits or disputes could have a material effect on our results of operations and financial condition. Our U.S. federal income tax returns have been audited through 2019.
In September 2024, we reached agreement with the IRS for tax years 2010-2012 primarily related to the reallocation of profits between certain U.S. and foreign subsidiaries. All issues related to these years are considered effectively settled.
The IRS has proposed adjustments for tax years 2013-2015, primarily related to transfer pricing involving our cost sharing agreement between the U.S. and Switzerland affiliated companies and the reallocation of profits between certain of our U.S. and foreign subsidiaries. This includes a proposed increase to our U.S. federal taxable income, which would result in additional tax expense related to 2013 of approximately $
The IRS has proposed adjustments for tax years 2016-2019, primarily related to the U.S. taxation of foreign earnings and profits, which could result in additional material tax expense if we are unsuccessful in defending our position. This includes a proposed increase to our U.S. federal taxable income, which would result in additional tax expense of approximately $
In the three and nine-month periods ended September 30, 2024, our effective tax rate (“ETR”) was negative
23
changes in tax rates, tax laws or their interpretation, including the European Union adoption of Pillar Two proposals which began to take effect in 2024; the outcome of various federal, state and foreign audits, appeals, and litigation; and the expiration of certain statutes of limitations. Currently, we cannot reasonably estimate the impact of these items on our financial results.
13. Earnings Per Share
The following is a reconciliation of weighted average shares for the basic and diluted shares computations (in millions):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Weighted average shares outstanding for basic net earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Effect of dilutive stock options and other equity awards |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average shares outstanding for diluted net earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
||||
During the three and nine-month periods ended September 30, 2024, an average of
14. Segment Information
We design, manufacture and market orthopedic reconstructive products; sports medicine, biologics, extremities and trauma products; craniomaxillofacial and thoracic products (“CMFT”); surgical products; and a suite of integrated digital and robotic technologies that leverage data, data analytics and artificial intelligence. Our chief operating decision maker (“CODM”) allocates resources to achieve our operating profit goals through
Our CODM evaluates performance based upon segment operating profit exclusive of operating expenses and income pertaining to intangible asset amortization, certain inventory and manufacturing-related charges, restructuring and other cost reduction initiatives, acquisition, integration, divestiture and related, litigation, certain European Union Medical Device Regulation (“EU MDR”) expenses, other charges and corporate functions (collectively referred to as “Corporate items”). Corporate functions include finance, corporate legal, information technology, human resources and other corporate departments as well as stock-based compensation and certain operations, distribution, quality assurance, regulatory assurance, research and development ("R&D") and marketing expenses. Intercompany transactions have been eliminated from segment operating profit.
Our Americas operating segment is comprised principally of the U.S. and includes other North, Central and South American markets. Our EMEA operating segment is comprised principally of Europe and includes the Middle East and African markets. Our Asia Pacific operating segment is comprised principally of Japan, China and Australia and includes other Asian and Pacific markets. The Americas, EMEA and Asia Pacific operating segments include the commercial operations as well as regional headquarter expenses to operate in those markets. Our operating segments do not include many centralized, product category expenses such as R&D and global marketing that benefit all regions.
In the three-month period ended March 31, 2024, the segment operating profit measures our CODM reviews were revised. Certain product category headquarter costs, primarily R&D and marketing, that were previously in our Americas operating segment are now included in Corporate items. In addition, certain support function costs from our operating segments are now included in Corporate items. We have reclassified these product category headquarter and support function expenses in the prior periods to conform to the current period presentation.
24
Net sales and operating profit by segment are as follows (in millions):
|
|
Net Sales |
|
|
Operating Profit |
|
||||||||||
|
|
Three Months Ended |
|
|
Three Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Americas |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
EMEA |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Asia Pacific |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
||||
Corporate items |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||
Intangible asset amortization |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||
Operating profit |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
||||
|
|
Net Sales |
|
|
Operating Profit |
|
||||||||||
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Americas |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
EMEA |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Asia Pacific |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
||||
Corporate items |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||
Intangible asset amortization |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||
Operating profit |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
||||
15. Commitments and Contingencies
From time to time, we are involved in various legal proceedings, including product liability, intellectual property, stockholder matters, tax disputes, commercial disputes, employment matters, whistleblower and qui tam claims and investigations, governmental proceedings and investigations, and other legal matters that arise in the normal course of our business, including those described below. On a quarterly and annual basis, we review relevant information with respect to loss contingencies and update our accruals, disclosures and estimates of reasonably possible losses or ranges of loss based on such reviews. We establish liabilities for loss contingencies on an undiscounted basis when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. For matters where a loss is believed to be reasonably possible, but not probable, or if no reasonable estimate of known or probable loss is available, no accrual has been made.
When determining the estimated loss or range of loss, significant judgment is required. Estimates of probable losses resulting from litigation and other contingencies are inherently difficult to predict, particularly when the matters are in early procedural stages with incomplete facts or legal discovery, involve unsubstantiated or indeterminate claims for damages, and/or potentially involve penalties, fines or punitive damages. In addition to the matters described herein, we remain subject to the risk of future governmental, regulatory and legal actions. Governmental and regulatory actions may lead to product recalls, injunctions and other restrictions on our operations and monetary sanctions, which may include substantial civil or criminal penalties. Actions involving intellectual property could result in a loss of patent protection or the ability to market products, which could lead to significant sales reductions or cost increases, or otherwise materially affect the results of our operations.
We recognize litigation-related charges and gains in Selling, general and administrative expense on our condensed consolidated statement of earnings. During the three and nine-month periods ended September 30, 2024, we recognized $
25
Litigation
Durom Cup-related claims: On July 22, 2008, we temporarily suspended marketing and distribution of the Durom Cup in the U.S. Subsequently, a number of product liability lawsuits were filed against us in various U.S. and foreign jurisdictions. The plaintiffs seek damages for personal injury, and they generally allege that the Durom Cup contains defects that result in complications and revision of the device. We have settled the majority of these claims in the U.S., but other lawsuits are pending in various foreign jurisdictions and additional claims may be asserted in the future. The majority of claims outside the U.S. are pending in Germany, Netherlands and Italy.
We rely on significant estimates in determining the provisions for Durom Cup-related claims, including our estimate of the number of claims that we will receive and the average amount we will pay per claim. The actual number of claims and the actual amount we pay per claim may differ from our estimates. For various reasons, we cannot reasonably estimate the possible loss or range of loss that may result from Durom Cup-related claims in excess of the losses we have accrued. Although we are vigorously defending these lawsuits, their ultimate resolution is uncertain. We accrued a litigation-related charge in this matter based on an estimate of the reasonably possible loss, as discussed above.
Zimmer M/L Taper, M/L Taper with Kinectiv Technology, and Versys Femoral Head-related claims (“Metal Reaction” claims): We are a defendant in a number of product liability lawsuits relating to our M/L Taper and M/L Taper with Kinectiv Technology hip stems, and Versys Femoral Head implants. The plaintiffs seek damages for personal injury, alleging that defects in the products lead to corrosion at the head/stem junction resulting in, among other things, pain, inflammation and revision surgery.
The majority of the cases are consolidated in an MDL that was created on October 3, 2018 in the U.S. District Court for the Southern District of New York (In Re: Zimmer M/L Taper Hip Prosthesis or M/L Taper Hip Prosthesis with Kinectiv Technology and Versys Femoral Head Products Liability Litigation). Most of the cases in the MDL have been resolved. Other related cases are pending in various state and federal courts and in courts in Canada, and additional claims may be asserted in the future. Although we are vigorously defending these lawsuits, their ultimate resolution is uncertain. We accrued a litigation-related charge in this matter based on an estimate of the reasonably possible loss, as discussed above.
Biomet metal-on-metal hip implant claims: Biomet is a defendant in a number of product liability lawsuits relating to metal-on-metal hip implants, most of which involve the M2a-Magnum hip system. Cases were originally consolidated in an MDL in the U.S. District Court for the Northern District of Indiana (In Re: Biomet M2a Magnum Hip Implant Product Liability Litigation), but the majority of the claims in the U.S. have been settled. Trials may still occur in the future, and although each case will be tried on its particular facts, a verdict and subsequent final judgment for the plaintiff in one or more of these cases could have a substantial impact on our potential liability. Lawsuits are pending in various foreign jurisdictions and additional claims are expected to be asserted. We continue to refine our estimates of the potential liability to resolve the remaining claims and lawsuits. Although we are vigorously defending these lawsuits, their ultimate resolution is uncertain. We accrued a litigation-related charge in this matter based on an estimate of the reasonably possible loss, as discussed above.
Other Contingencies
Contractual obligations: We have entered into development, distribution and other contractual arrangements that may result in future payments dependent upon various events such as the achievement of certain product R&D milestones, sales milestones, or, at our discretion, maintenance of exclusive rights to distribute a product. Since there is uncertainty on the timing or whether such payments will have to be made, they have not been recognized on our condensed consolidated balance sheets. These estimated payments could range from $
16. Subsequent Event
Subsequent to September 30, 2024, we acquired
26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the interim condensed consolidated financial statements and corresponding notes included elsewhere in this Form 10-Q. Amounts reported in millions within this Quarterly Report on Form 10-Q are computed based on the actual amounts. As a result, the sum of the components may not equal the total amount reported in millions due to rounding. In addition, certain columns and rows within tables may not sum to the totals due to the use of rounded numbers. Percentages presented are calculated from the underlying unrounded amounts.
Executive Level Overview
Results for the Three and Nine-Month Periods ended September 30, 2024
In the three and nine-month periods ended September 30, 2024, our net sales increased 4.0 percent and 3.7 percent, respectively, when compared to the same prior year periods. Net sales growth in both periods was driven by a combination of market growth, new product introductions and commercial execution across the organization. These favorable items were negatively impacted by our transition in July 2024 to a new enterprise resource planning ("ERP") software system for a significant portion of our U.S. and Canada sales and commercial operations. As a result of this ERP implementation, we experienced operational challenges which affected our ability to fulfill certain customer orders. This disruption mostly affected our U.S. net sales, but our International net sales were also impacted as shipments to our international affiliates were delayed. Through the quarter we saw improvement in our shipping levels to our end customers. We expect our shipping levels to return to similar levels that existed prior to the implementation by the end of the year. For the full year 2024, we estimate this ERP implementation will have less than a one percent impact to our net sales. In addition, our net sales experienced negative effects of 0.1 percent and 1.1 percent from changes in foreign currency exchange rates in the three and nine-month periods ended September 30, 2024, respectively.
Our net earnings were $249.1 million and $664.3 million in the three and nine-month periods ended September 30, 2024, respectively, compared to $162.7 million and $604.8 million in the same prior year periods, respectively. The increase in earnings in the three and nine-month periods was primarily due to a tax benefit recognized resulting from an agreement with the IRS for tax years 2010-2012, the net sales increase, lower expenses due to our 2023 Restructuring Plan and cost savings initiatives, and lower research and development ("R&D") spending on the European Union Medical Device Regulation ("EU MDR"). These favorable items were partially offset by charges from our 2023 Restructuring Plan which was instituted at the end of 2023 and continued into 2024, including $83.2 million in employee termination benefits-related charges recognized in the nine-month period ended September 30, 2024, and from additional expenses related to our U.S. and Canada ERP implementation.
2024 Outlook
We expect year-over-year revenue growth of mid-single digits in 2024 to be driven by a combination of market growth, new product introductions and commercial execution. Based on recent foreign currency exchange rates, we expect foreign currency to negatively affect year-over-year net sales by approximately 0.75 percent. We estimate operating profit will increase in 2024 when compared to 2023 due to higher net sales, leverage from fixed operating expenses and lower expenses due to our restructuring plans. However, we estimate these favorable items may be partially offset by higher intangible asset amortization and increased restructuring-related costs to implement our plans. We estimate our net interest expense will increase slightly due to higher interest rates. We expect our provision for income taxes will increase in 2024 when compared to 2023 due to larger favorable tax settlements in 2023.
Results of Operations
We review sales by two geographies, the United States and International, and by the following product categories: Knees; Hips; S.E.T. (Sports Medicine, Extremities, Trauma, Craniomaxillofacial and Thoracic); and Other. This sales analysis differs from our reportable operating segments, which are based upon our senior management organizational structure and how we allocate resources toward achieving operating profit goals. We review sales by these geographies because the underlying market trends in any particular geography tend to be similar across product categories, because we primarily sell the same products in all geographies and many of our competitors publicly report in this manner. Our business is seasonal in nature to some extent, as many of our products are used in elective surgical procedures, which typically decline during the summer months and can increase at the end of the year once annual deductibles have been met on health insurance plans.
27
Net Sales by Geography
The following tables present our net sales by geography and the percentage changes (dollars in millions):
|
|
Three Months Ended |
|
|
|
|
|
||||||
|
|
September 30, |
|
|
|
|
|
||||||
|
|
2024 |
|
|
2023 |
|
|
% Inc |
|
|
|||
United States |
|
$ |
1,052.3 |
|
|
$ |
1,031.4 |
|
|
|
2.0 |
|
% |
International |
|
|
771.9 |
|
|
|
722.2 |
|
|
|
6.9 |
|
|
Total |
|
$ |
1,824.2 |
|
|
$ |
1,753.6 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
Nine Months Ended |
|
|
|
|
|
||||||
|
|
September 30, |
|
|
|
|
|
||||||
|
|
2024 |
|
|
2023 |
|
|
% Inc |
|
|
|||
United States |
|
$ |
3,257.7 |
|
|
$ |
3,160.6 |
|
|
|
3.1 |
|
% |
International |
|
|
2,397.7 |
|
|
|
2,293.5 |
|
|
|
4.5 |
|
|
Total |
|
$ |
5,655.4 |
|
|
$ |
5,454.1 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Net Sales by Product Category
The following tables present our net sales by product category and the percentage changes (dollars in millions):
|
|
Three Months Ended |
|
|
|
|
|
||||||
|
|
September 30, |
|
|
|
|
|
||||||
|
|
2024 |
|
|
2023 |
|
|
% Inc / (Dec) |
|
|
|||
Knees |
|
$ |
745.1 |
|
|
$ |
706.3 |
|
|
|
5.5 |
|
% |
Hips |
|
|
481.5 |
|
|
|
465.3 |
|
|
|
3.5 |
|
|
S.E.T. |
|
|
454.2 |
|
|
|
423.2 |
|
|
|
7.3 |
|
|
Other |
|
|
143.4 |
|
|
|
158.8 |
|
|
|
(9.7 |
) |
|
Total |
|
$ |
1,824.2 |
|
|
$ |
1,753.6 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
Nine Months Ended |
|
|
|
|
|
||||||
|
|
September 30, |
|
|
|
|
|
||||||
|
|
2024 |
|
|
2023 |
|
|
% Inc |
|
|
|||
Knees |
|
$ |
2,334.3 |
|
|
$ |
2,240.1 |
|
|
|
4.2 |
|
% |
Hips |
|
|
1,479.1 |
|
|
|
1,462.5 |
|
|
|
1.1 |
|
|
S.E.T. |
|
|
1,376.4 |
|
|
|
1,299.3 |
|
|
|
5.9 |
|
|
Other |
|
|
465.6 |
|
|
|
452.2 |
|
|
|
3.0 |
|
|
Total |
|
$ |
5,655.4 |
|
|
$ |
5,454.1 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|||
The following tables present our net sales by geography for our Knees and Hips product categories, which represent our most significant product categories (dollars in millions):
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
||||||||||||
|
|
2024 |
|
|
2023 |
|
|
% Inc |
|
|
|
2024 |
|
|
2023 |
|
|
% Inc / (Dec) |
|
|
||||||
Knees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
United States |
|
$ |
425.4 |
|
|
$ |
413.3 |
|
|
|
2.9 |
|
% |
|
$ |
1,324.6 |
|
|
$ |
1,299.1 |
|
|
|
2.0 |
|
% |
International |
|
|
319.7 |
|
|
|
293.0 |
|
|
|
9.1 |
|
|
|
|
1,009.7 |
|
|
|
941.0 |
|
|
|
7.3 |
|
|
Total |
|
$ |
745.1 |
|
|
$ |
706.3 |
|
|
|
5.5 |
|
|
|
$ |
2,334.3 |
|
|
$ |
2,240.1 |
|
|
|
4.2 |
|
|
Hips |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
United States |
|
$ |
254.5 |
|
|
$ |
242.5 |
|
|
|
4.9 |
|
% |
|
$ |
768.3 |
|
|
$ |
749.2 |
|
|
|
2.6 |
|
% |
International |
|
|
227.0 |
|
|
|
222.8 |
|
|
|
1.9 |
|
|
|
|
710.8 |
|
|
|
713.3 |
|
|
|
(0.4 |
) |
|
Total |
|
$ |
481.5 |
|
|
$ |
465.3 |
|
|
|
3.5 |
|
|
|
$ |
1,479.1 |
|
|
$ |
1,462.5 |
|
|
|
1.1 |
|
|
28
Demand (Volume and Mix) Trends
Changes in volume and mix of product sales had positive effects of 3.4 percent and 4.2 percent on year-over-year sales during the three and nine-month periods ended September 30, 2024, respectively. Market growth and new product introductions contributed positively to volume and mix trends, but were partially offset by the operational challenges resulting from our ERP implementation.
Pricing Trends
Global selling prices had positive effects of 0.7 percent and 0.6 percent on year-over-year sales during the three and nine-month periods ended September 30, 2024, respectively. The majority of countries in which we operate continue to experience pricing pressure from local hospitals, health systems, and governmental healthcare cost containment efforts. However, we have had success in offsetting negative effects of pricing pressure due to internal initiatives and being able to pass some inflationary impacts on to customers.
Foreign Currency Exchange Rates
For the three and nine-month periods ended September 30, 2024, changes in foreign currency exchange rates had negative effects of 0.1 percent and 1.1 percent on year-over-year sales, respectively. If foreign currency exchange rates remain at levels consistent with recent rates, we estimate there will be a negative impact of approximately 0.75 percent on full-year 2024 sales.
Geography
The 2.0 percent and 3.1 percent net sales growth in the U.S. in the three and nine-month periods ended September 30, 2024, respectively, were driven by market growth in our Knees, Hips and S.E.T. product categories. However, net sales in the U.S. were negatively impacted by the implementation of a new ERP system which caused operational challenges in fulfilling customer orders. Internationally, net sales increased by 6.9 percent and 4.5 percent during the three and nine-month periods ended September 30, 2024, respectively, when compared to the same prior year periods. These increases were similarly driven by market growth in most of our international markets. Our International sales were negatively affected by 0.2 percent and 2.6 percent due to changes in foreign currency exchange rates in the three and nine-month periods ended September 30, 2024, respectively.
Product Categories
Knees and Hips net sales benefited from market growth and new product introductions in the three and nine-month periods ended September 30, 2024. Changes in foreign currency exchange rates had a minimal impact and a negative effect of 0.9 percent on Knees net sales in the three-month and nine-month periods ended September 30, 2024, respectively. Hips net sales were negatively affected by 0.2 percent and 1.6 percent in the three and nine-month periods ended September 30, 2024, respectively, due to changes in foreign currency exchange rates. S.E.T. net sales increases in the three and nine-month periods ended September 30, 2024 were primarily the result of growth in our sports medicine, upper extremities, and craniomaxillofacial and thoracic products. Other net sales declined in the three-month period ended September 30, 2024 due to the operational challenges from our ERP system implementation and from lower net sales of our ROSA® Robot. Other net sales grew in the nine-month period ended September 30, 2024, driven by net sales of our ROSA Robot in the first half of the year.
Expenses as a Percentage of Net Sales
|
|
Three Months Ended |
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
||||||||||||||
|
|
September 30, |
|
|
|
% Inc / |
|
|
|
September 30, |
|
|
|
% Inc / |
|
|
||||||||||||||
|
|
2024 |
|
|
|
2023 |
|
|
|
(Dec) |
|
|
|
2024 |
|
|
|
2023 |
|
|
|
(Dec) |
|
|
||||||
Cost of products sold, excluding intangible asset amortization |
|
|
29.5 |
|
% |
|
|
29.6 |
|
% |
|
|
(0.1 |
) |
% |
|
|
28.4 |
|
% |
|
|
28.3 |
|
% |
|
|
0.1 |
|
% |
Intangible asset amortization |
|
|
8.1 |
|
|
|
|
8.3 |
|
|
|
|
(0.2 |
) |
|
|
|
7.7 |
|
|
|
|
7.6 |
|
|
|
|
0.1 |
|
|
Research and development |
|
|
6.1 |
|
|
|
|
6.7 |
|
|
|
|
(0.6 |
) |
|
|
|
5.8 |
|
|
|
|
6.3 |
|
|
|
|
(0.5 |
) |
|
Selling, general and administrative |
|
|
38.9 |
|
|
|
|
38.5 |
|
|
|
|
0.4 |
|
|
|
|
38.6 |
|
|
|
|
38.8 |
|
|
|
|
(0.2 |
) |
|
Restructuring and other cost reduction initiatives |
|
|
1.8 |
|
|
|
|
1.4 |
|
|
|
|
0.4 |
|
|
|
|
3.5 |
|
|
|
|
1.7 |
|
|
|
|
1.8 |
|
|
Acquisition, integration, divestiture and related |
|
|
0.2 |
|
|
|
|
0.4 |
|
|
|
|
(0.2 |
) |
|
|
|
0.2 |
|
|
|
|
0.3 |
|
|
|
|
(0.1 |
) |
|
Operating profit |
|
|
15.3 |
|
|
|
|
15.2 |
|
|
|
|
0.1 |
|
|
|
|
15.9 |
|
|
|
|
16.9 |
|
|
|
|
(1.0 |
) |
|
29
Cost of products sold, excluding intangible asset amortization as a percentage of net sales decreased in the three-month period ended September 30, 2024 and increased in the nine-month period ended September 30, 2024, when compared to the same prior year periods. The decrease in the three-month period was primarily due to lower excess and obsolete inventory charges which was partially offset by higher manufacturing costs. The increase in the nine-month period was primarily due to higher manufacturing costs which were partially offset by lower royalty expense. The reduction in royalty expense was partially the result of agreements we entered into in 2023 to acquire intellectual property through the buyout of certain licensing arrangements, which are recognized as intangible assets and result in additional intangible asset amortization expense instead of royalty expense.
Intangible asset amortization expense increased in amount in the three and nine-month periods ended September 30, 2024 compared to the same prior year periods due to the 2023 acquisitions, the buyout of certain royalty-related licensing agreements as described above and other technology-based asset purchases.
R&D expenses decreased in amount and as a percentage of net sales in the three and nine-month periods ended September 30, 2024 when compared to the same prior year periods. The decreases were driven by lower spending on our initial compliance with the EU MDR as we continue to make progress on the approvals of our products, and savings from our 2023 Restructuring Plan.
Selling, general and administrative (“SG&A”) expenses increased in amount in the three and nine-month periods ended September 30, 2024 when compared to the same prior year periods. SG&A as a percentage of net sales increased in the three-month period, but decreased in the nine-month period ended September 30, 2024 when compared to the same prior year periods. The increase in amounts in both periods was due to selling and distribution costs that are variable expenses which increase as net sales increase. Additionally, we recognized higher share-based compensation expense in the 2024 periods as the 2023 periods included a benefit from the forfeiture of awards related to employee departures. Also in the 2024 periods, bad debt-related charges were higher driven by a bankruptcy at a significant U.S. healthcare system, instrument-related costs were higher due to new product introductions, and we recognized higher charges on various strategic initiatives. These higher costs were partially offset by lower expenses due to our 2023 Restructuring Plan, lower expenses from our cost savings initiatives and lower estimated annual bonus expenses.
In December of 2023, 2021 and 2019, we initiated global restructuring programs. We also have other cost reduction and optimization initiatives that have the goal of reducing costs across the organization. We recognized expenses of $32.2 million and $198.1 million in the three and nine-month periods ended September 30, 2024, respectively, and $24.3 million and $90.6 million in the three and nine-month periods ended September 30, 2023, respectively, primarily related to employee termination benefits, sales agent contract terminations, and consulting and project management expenses associated with these programs, as well as expenses related to other optimization initiatives. The expenses were higher in the 2024 periods when compared to the 2023 periods primarily due to additional expenses related to the 2023 Restructuring Plan that had just been initiated at the end of 2023 and additional expenses related to our U.S. and Canada ERP implementation. For more information regarding these expenses, see Note 4 to our interim condensed consolidated financial statements included in Part I, Item 1 of this report.
Acquisition, integration, divestiture and related expenses decreased in amount and as a percentage of net sales in the three and nine-month periods ended September 30, 2024 when compared to the same prior year periods, primarily due to changes in fair value estimates of contingent consideration.
Other Income, Net, Interest Expense, Net, and Income Taxes
In the three and nine-month periods ended September 30, 2024, we recognized gains of $5.1 million and $7.0 million, respectively, in our other income, net financial statement line item compared to gains of $3.8 million and $10.3 million in the same prior year periods, respectively. The changes in the three and nine-month periods were primarily driven by the timing of gains and losses recognized on our equity investments. In the three-month period ended September 30, 2024, we recognized higher gains from our investments when compared to the same prior year period while in the nine-month period ended September 30, 2024, we recognized losses compared to gains in the same prior year period.
Interest expense, net, increased in the three and nine-month periods ended September 30, 2024 when compared to the same prior year periods. The increased interest expense was due to higher average debt balances outstanding and losses incurred on our fixed-to-variable interest rate swaps in the current year periods.
In the three and nine-month periods ended September 30, 2024, our effective tax rate (“ETR”) was negative 8.2 percent and positive 11.0 percent, respectively, compared to positive 25.7 percent and positive 22.7 percent in the three and nine-month periods ended September 30, 2023, respectively. The negative 8.2 percent ETR and positive 11.0 percent in the three and nine-month periods ended September 30, 2024, respectively, were primarily driven by a net favorable impact of changes to unrecognized tax benefits. The positive 25.7 percent and positive 22.7 percent ETR in the three and nine-month periods ended September 30, 2023, respectively, was primarily driven by discrete tax effects of certain tax returns and the reorganization of the ownership structure of certain
30
wholly-owned subsidiaries in the second quarter of 2023. Absent discrete tax events, we expect our future ETR will be lower than the U.S. corporate income tax rate of 21.0 percent due to our mix of earnings between U.S. and foreign locations, which generally have lower corporate income tax rates. Our ETR in future periods could also potentially be impacted by: changes in our mix of pre-tax earnings; changes in tax rates, tax laws or their interpretation, including the European Union adoption of Pillar Two proposals which began to take effect in 2024; the outcome of various federal, state and foreign audits, appeals, and litigation; and the expiration of certain statutes of limitations. Currently, we cannot reasonably estimate the impact of these items on our financial results.
Segment Operating Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Profit as a |
|
|
|||||||||
|
|
Net Sales |
|
|
Operating Profit |
|
|
Percentage of Net Sales |
|
|
|||||||||||||||
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|||||||||||||||
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|||||||||||||||
(dollars in millions) |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
|
||||||
Americas |
|
$ |
1,135.9 |
|
|
$ |
1,113.6 |
|
|
$ |
605.5 |
|
|
$ |
594.2 |
|
|
|
53.3 |
|
% |
|
53.4 |
|
% |
EMEA |
|
|
376.2 |
|
|
|
337.9 |
|
|
|
121.7 |
|
|
|
101.0 |
|
|
|
32.3 |
|
|
|
29.9 |
|
|
Asia Pacific |
|
|
312.0 |
|
|
|
302.1 |
|
|
|
122.3 |
|
|
|
112.5 |
|
|
|
39.2 |
|
|
|
37.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Profit as a |
|
|
|||||||||
|
|
Net Sales |
|
|
Operating Profit |
|
|
Percentage of Net Sales |
|
|
|||||||||||||||
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|||||||||||||||
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|||||||||||||||
(dollars in millions) |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
|
||||||
Americas |
|
$ |
3,521.7 |
|
|
$ |
3,411.0 |
|
|
$ |
1,881.7 |
|
|
$ |
1,823.0 |
|
|
|
53.4 |
|
% |
|
53.4 |
|
% |
EMEA |
|
|
1,253.4 |
|
|
|
1,166.4 |
|
|
|
424.4 |
|
|
|
382.5 |
|
|
|
33.9 |
|
|
|
32.8 |
|
|
Asia Pacific |
|
|
880.3 |
|
|
|
876.7 |
|
|
|
336.7 |
|
|
|
318.0 |
|
|
|
38.2 |
|
|
|
36.3 |
|
|
Americas
In the Americas, operating profit increased in the three and nine-month periods ended September 30, 2024 when compared to the same prior year periods. Operating profit as a percentage of net sales was relatively consistent in the three and nine-month periods ended September 30, 2024 when compared to the same prior year periods. The increases in operating profit were primarily due to higher net sales driven by market growth and new product introductions, coupled with lower royalty expense as a result of agreements we entered into in 2023 to acquire intellectual property through the buyout of certain licensing arrangements. However, operating profit as a percentage of net sales did not similarly increase and remained relatively consistent due to investments in instruments to support new product introductions and higher bad debt-related charges in the current year periods.
EMEA
In EMEA, operating profit and operating profit as a percentage of net sales increased in the three and nine-month periods ended September 30, 2024 when compared to the same prior year periods. The increases were due to higher net sales driven by market growth and improved pricing, lower excess and obsolete inventory charges, reduced royalty expense as a result of agreements we entered into in 2023 to acquire intellectual property through the buyout of certain licensing arrangements, and lower expenses driven by our 2023 Restructuring Plan and cost savings initiatives.
Asia Pacific
In Asia Pacific, operating profit and operating profit as a percentage of net sales increased in the three and nine-month periods ended September 30, 2024 when compared to the same prior year periods. The increases were due to higher net sales driven by market growth and improved pricing, reduced royalty expense as a result of agreements we entered into in 2023 to acquire intellectual property through the buyout of certain licensing arrangements, and lower expenses driven by our 2023 Restructuring Plan and cost savings initiatives.
31
Liquidity and Capital Resources
As of September 30, 2024, we had $569.0 million in cash and cash equivalents. In addition, we had $1.0 billion available to borrow under our 2024 364-Day Credit Agreement, and $1.5 billion available under our 2024 Five-Year Revolving Facility. The terms of the 2024 364-Day Credit Agreement and the 2024 Five-Year Revolving Facility are described further in Note 8 to our interim condensed consolidated financial statements included in Part I, Item 1 of this report.
We believe that cash flows from operations, our cash and cash equivalents on hand, and available borrowings under our revolving credit facilities will be sufficient to meet our ongoing liquidity requirements for at least the next twelve months. However, it is possible our needs may change. Further, there can be no assurance that, if needed, we will be able to secure additional financing on terms favorable to us, if at all.
Sources of Liquidity
Cash flows provided by operating activities were $993.1 million in the nine-month period ended September 30, 2024, compared to $993.2 million in the same prior year period. The 2024 period featured higher bonus, income tax and restructuring-related payments as well as lower accounts receivable collections due to delayed invoicing from our U.S. and Canada ERP implementation. These unfavorable items were partially offset by lower inventory investments in the 2024 period when compared to the 2023 period.
Cash flows used in investing activities were $596.9 million in the nine-month period ended September 30, 2024, compared to $558.1 million in the same prior year period. Instrument and property, plant and equipment additions reflected ongoing investments in our product portfolio, including new product introductions, optimization of our manufacturing and logistics networks, and investments in enterprise resource planning software. The decline in property, plant and equipment additions was driven by lower enterprise resource planning software spend as that project is getting implemented, in addition to the prior year period including investment in a corporate aircraft which did not recur in the current year period. In addition, in the nine-month period ended September 30, 2024, we entered into agreements to acquire the ownership rights or gain access to various technologies that were recognized as intangible assets, acquired three businesses and invested in a debt security.
Cash flows used in financing activities were $243.9 million in the nine-month period ended September 30, 2024, compared to $512.1 million in the same prior year period. In the 2024 period, we issued senior notes for $700.0 million and used the proceeds, along with cash on hand, to repurchase $795.8 million of our common stock and repay a net $50.0 million under our Uncommitted Credit Facility. In the 2023 period, we used cash on hand to repurchase $281.9 million of our common stock. We also repaid a net $20.0 million on our various revolving credit facilities and $120.2 million of other debt obligations that were due in the first quarter of 2023.
We place our cash and cash equivalents in highly-rated financial institutions and limit the amount of credit exposure to any one entity. We invest only in high-quality financial instruments in accordance with our internal investment policy.
As of September 30, 2024, $415.9 million of our cash and cash equivalents were held in jurisdictions outside of the U.S. Of this amount, $64.6 million is denominated in U.S. Dollars and, therefore, bears no foreign currency translation risk. The remaining amount is denominated in currencies of the various countries where we operate. We generally intend to limit distributions from foreign subsidiaries earnings that were previously taxed in the U.S., as a result of the transition tax or tax on Global Intangible Low-Taxed Income (“GILTI”). These previously taxed earnings would not be subject to further U.S. federal tax.
Our concentrations of credit risks with respect to trade accounts receivable are 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. Substantially all of our trade receivables are concentrated in the public and private hospital and healthcare industry in the U.S. and internationally or with distributors or dealers who operate in international markets and, accordingly, are exposed to their respective business, economic and country-specific variables.
Material Cash Requirements from Known Contractual and Other Obligations
At September 30, 2024, we had outstanding debt of $6,450.7 million, of which $1,713.0 million was classified as current debt. Of our current debt, $850.0 million of senior notes mature on November 22, 2024 and $863.0 million of senior notes mature on April 1, 2025. We believe we can satisfy these debt obligations with cash generated from our operations, by issuing new debt and/or by borrowing on our committed revolving credit facilities.
32
For additional information on our debt, including types of debt, maturity dates, interest rates, debt covenants and available revolving credit facilities, see Note 8 to our interim condensed consolidated financial statements included in Part I, Item 1 of this report.
In February, May and August 2024, our Board of Directors declared a quarterly cash dividend of $0.24 per share. We expect to continue paying cash dividends on a quarterly basis; however, future dividends are subject to approval of the Board of Directors and may be adjusted as business needs or market conditions change.
In May 2024, our Board of Directors authorized a $2.0 billion share repurchase program effective May 29, 2024, with no expiration date. As of September 30, 2024, $1,308.1 million remained authorized under the May 2024 program. Between October 1, 2024 and October 9, 2024, we repurchased an additional 0.6 million shares for $58.1 million, resulting in $1,250.0 million remaining authorized under the May 2024 program as of October 9, 2024. We used cash on hand to fund these repurchases.
As discussed in Note 4 to our interim condensed consolidated financial statements in Part I, Item 1 of this report, we are executing on a 2023 Restructuring Plan, a 2021 Restructuring Plan and a 2019 Restructuring Plan. The 2023 Restructuring Plan along with other related initiatives is expected to result in total pre-tax charges of $120 million to $135 million by the end of 2025, of which approximately $110 million was incurred through September 30, 2024. We expect to reduce gross annual pre-tax operating expenses by $175 million to $200 million relative to the 2023 baseline expenses by the end of 2025 as program benefits under the 2023 Restructuring Plan are realized. The 2021 Restructuring Plan is expected to result in total pre-tax restructuring charges of approximately $173 million by the end of 2024, of which approximately $171 million was incurred through September 30, 2024. We expect to reduce gross annual pre-tax operating expenses by approximately $190 million relative to the 2021 baseline expenses by the end of 2024 as program benefits under the 2021 Restructuring Plan are realized. The 2019 Restructuring Plan is expected to result in total pre-tax restructuring charges of approximately $400 million by the end of 2025, of which approximately $348 million was incurred through September 30, 2024. In our original estimates, we expected to reduce gross annual pre-tax operating expenses by approximately $180 million to $280 million relative to the 2019 baseline expenses by the end of 2023 as benefits under the 2019 Restructuring Plan were realized. Our latest estimates indicate that we will be near the low end of that range, and the full benefits will not be realized until we complete the closure of a manufacturing facility, which is expected to occur in 2025.
As discussed in Note 12 to our interim condensed consolidated financial statements included in Part I, Item 1 of this report, the IRS has issued proposed adjustments for years 2013 through 2015 and for years 2016 through 2019. We have disputed these proposed adjustments and intend to continue to vigorously defend our positions. Although the ultimate timing for resolution of the disputed tax issues is uncertain, future payments may be significant to our operating cash flows.
As discussed in Note 15 to our interim condensed consolidated financial statements included in Part I, Item 1 of this report, we are involved in various litigation matters. We estimate the total liabilities for all litigation matters was $155.3 million as of September 30, 2024. However, litigation is inherently uncertain, and upon resolution of any of these uncertainties, we may incur charges in excess of these estimates, and may in the future incur other material judgments or enter into other material settlements of claims. We expect to pay these liabilities over the next few years. Additionally, we have entered into development, distribution and other contractual arrangements that may result in future payments dependent upon various events such as the achievement of certain product R&D milestones, sales milestones, or, at our discretion, maintenance of exclusive rights to distribute a product. Since there is uncertainty on the timing or whether such payments will have to be made, they have not been recognized on our condensed consolidated balance sheets. These estimated payments could range from $0 to approximately $320 million.
Recent Accounting Pronouncements
Information pertaining to recent accounting pronouncements can be found in Note 2 to our interim condensed consolidated financial statements included in Part I, Item 1 of this report.
Critical Accounting Estimates
The preparation of our financial statements is affected by the selection and application of accounting policies and methods, and also requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Critical accounting estimates are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations. There were no changes in the three-month period ended September 30, 2024 to our critical accounting estimates as described in our Annual Report on Form 10-K for the year ended December 31, 2023.
33
Cautionary Note Regarding Forward-Looking Statements and Factors That May Affect Future Results
This quarterly report contains certain statements that are forward-looking statements within the meaning of federal securities laws. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. When used in this report, the words “may,” “will,” “can,” “should,” “would,” “could,” “anticipate,” “expect,” “plan,” “seek,” “believe,” “are confident that,” “look forward to,” “predict,” “estimate,” “potential,” “project,” “target,” “forecast,” “see,” “intend,” “design,” “strive,” “strategy,” “future,” “opportunity,” “assume,” “guide,” “position,” “continue” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are based on current beliefs, expectations and assumptions of management and are subject to significant risks, uncertainties and changes in circumstances that could cause actual results to differ materially from such forward-looking statements. These risks, uncertainties and changes in circumstances include, but are not limited to:
34
Our Annual Report on Form 10-K for the year ended December 31, 2023 and this Quarterly Report on Form 10-Q contain detailed discussions of these and other important factors under the heading “Risk Factors.” You should understand that it is not possible to predict or identify all factors that could cause actual results to differ materially from forward-looking statements. Consequently, you should not consider any list or discussion of such factors to be a complete set of all potential risks or uncertainties.
Forward-looking statements speak only as of the date they are made and we expressly disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
Readers of this report are cautioned not to rely on these forward-looking statements since there can be no assurance that these forward-looking statements will prove to be accurate. This cautionary statement is applicable to all forward-looking statements contained in this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes from the information provided in our Annual Report on Form 10-K for the year ended December 31, 2023.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective at a reasonable assurance level.
35
Changes in Internal Control Over Financial Reporting. In July 2024 we transitioned to a new ERP software system for a significant portion of our U.S. and Canada sales and commercial operations (the "ERP implementation"). The new ERP replaced our existing order entry, fulfillment and financial systems, resulting in material changes to our business processes and internal controls. This ERP implementation included changes to certain financial and commercial processes impacting key controls related to our internal controls over financial reporting. We have implemented and/or enhanced our internal control activities, where applicable, for any changes that occurred and will continue to monitor the impact on our processes, procedures, and internal control over financial reporting going forward. Except as it relates to our ERP implementation, there were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
36
Part II – Other Information
Item 1. Legal Proceedings
Information pertaining to legal proceedings can be found in Note 15 to our interim condensed consolidated financial statements included in Part I, Item 1 of this report and is incorporated herein by reference.
Item 1A. Risk Factors
You should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2023 (“2023 Form 10-K”) and the factors discussed below, which could materially affect our business, financial condition and results of operations. The risks described in our 2023 Form 10-K and below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition or results of operations.
The following risk factor is added to the "Risk Factors" section of our 2023 Form 10-K:
Challenges in the transition of certain of our enterprise resource planning ("ERP") systems have adversely affected our business and operations, and may have further adverse effects.
As a result of technology initiatives, changes in our system platforms and the ongoing integration of business acquisitions, we have been consolidating and integrating the ERP systems that we operate. At the beginning of our third quarter of fiscal 2024, we began transitioning certain distribution and sales systems in the Americas to a new ERP system, as part of this multi-year effort. We experienced challenges in the transition during the third quarter of 2024 which caused operational challenges in fulfilling customer orders. Some disruptions and delays associated with these ERP transition challenges may continue through the fourth quarter of 2024. Although we believe we have identified the root causes of the ERP-related challenges and have developed appropriate plans to remediate these challenges, there can be no assurance that we will remediate all of our ERP-related challenges successfully and in a timely manner, or that other challenges will not arise.
These ERP-related business interruptions caused several adverse consequences, including disruption to our ability to distribute product, difficulty in meeting customer demand, and delays in invoicing customers. These unanticipated ERP-related challenges have caused the transition to the new ERP system to be more expensive and time-consuming than we anticipated. In addition, some customers affected by these disruptions may have secured supply from alternative sources, and we must regain their trust and business. We have also experienced, and may continue to experience, decreases in productivity as our personnel continue to remediate issues in our new ERP system and related processes. Continuing disruptions, delays or deficiencies in the transition, design, and implementation of our ERP system, particularly any disruptions, delays or deficiencies that impact our operations, could have a material adverse effect on our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table summarizes repurchases of common stock settled during the three-month period ended September 30, 2024:
Period |
|
Total Number of Shares Purchased |
|
|
Average Price Paid per Share |
|
|
Total Number of Shares Purchased as a Part of Publicly Announced Program(1) |
|
|
Maximum Approximate Dollar Value of Shares that may yet be |
|
||||
July 2024 |
|
|
1,670,000 |
|
|
$ |
108.69 |
|
|
|
1,670,000 |
|
|
|
1,723,084,701 |
|
August 2024 |
|
|
1,961,000 |
|
|
|
111.16 |
|
|
|
1,961,000 |
|
|
|
1,505,105,711 |
|
September 2024 |
|
|
1,837,000 |
|
|
|
107.27 |
|
|
|
1,837,000 |
|
|
|
1,308,050,338 |
|
Total |
|
|
5,468,000 |
|
|
$ |
109.10 |
|
|
|
5,468,000 |
|
|
$ |
1,308,050,338 |
|
(1) In May 2024, our Board of Directors authorized a $2.0 billion share repurchase program effective May 29, 2024, with no expiration date. Subsequent to September 30, 2024 through October 9, 2024, we repurchased an additional 0.6 million shares for $58.1 million, resulting in $1,250.0 million remaining authorized under the May 2024 program as of October 9, 2024.
Item 3. Defaults Upon Senior Securities
None
37
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
During the three-month period ended September 30, 2024, no members of our Board of Directors or officers (as defined in Rule 16a-1(f) of the Exchange Act)
38
Item 6. Exhibits
The following exhibits are filed or furnished as part of this report:
3.1 |
|
|
|
|
|
3.2 |
|
|
|
|
|
4.1 |
|
|
|
|
|
4.2 |
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Form of 5.200% Notes due 2034 (incorporated by reference to Exhibit 4.1 above). |
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21 |
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31.1 |
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31.2 |
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32 |
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101 |
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Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document |
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104 |
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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39
SIGNATURES
Pursuant to the requirements 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.
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ZIMMER BIOMET HOLDINGS, INC. |
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(Registrant) |
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Date: October 30, 2024 |
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By: |
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/s/ Suketu Upadhyay |
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Suketu Upadhyay |
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Chief Financial Officer and Executive Vice President - Finance, Operations and Supply Chain |
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(Principal Financial Officer) |
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Date: October 30, 2024 |
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By: |
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/s/ Paul Stellato |
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Paul Stellato |
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Vice President, Controller and Chief Accounting Officer |
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(Principal Accounting Officer) |
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40