The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The financial data presented herein is unaudited and should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2021.
In our opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented. The December 31, 2021 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The December 31, 2021 recasted financial information for discontinued operations reporting, as further discussed in Note 2, has not been audited. Results for interim periods should not be considered indicative of results for the full year.
Risks and Uncertainties - Our results have been and are expected to continue to be impacted by the COVID-19 global pandemic. The vast majority of our net sales are derived from products used in elective surgical procedures which continue to be deferred due to precautions in certain markets and staffing shortages. The consequences of COVID-19 continue to be extremely fluid and there are many market dynamics that are difficult to predict. The COVID-19 pandemic may have an unfavorable effect on our financial position, results of operations and cash flows in the near term.
Spinoff - On March 1, 2022, we completed the previously announced separation of our spine and dental businesses into a new public company through the distribution by Zimmer Biomet of 80.3% of the outstanding shares of common stock of ZimVie Inc. (“ZimVie”) to Zimmer Biomet’s stockholders. The historical results of our spine and dental businesses that were contributed to ZimVie in the spinoff have been reflected as discontinued operations in our condensed consolidated financial statements through the date of the spinoff and in the prior year periods as the spinoff represents a strategic shift in our business that has a major effect on operations and financial results. As of December 31, 2021, the assets and liabilities associated with these businesses are classified as assets and liabilities of discontinued operations in the condensed consolidated balance sheet. The disclosures presented in our notes to the interim condensed consolidated financial statements are presented on a continuing operations basis.
The words “we,” “us,” “our” and similar words, “Zimmer Biomet” and “the Company” refer to Zimmer Biomet Holdings, Inc. and its subsidiaries. “Zimmer Biomet Holdings” refers to the parent company only.
2. Discontinued Operations
On March 1, 2022, we completed the previously announced separation of our spine and dental businesses through the distribution of 80.3% of the outstanding shares of common stock of ZimVie to our stockholders at the close of business on February 15, 2022 (the “Record Date”). The distribution was made in the amount of one share of ZimVie common stock for every ten shares of our common stock owned by our stockholders at the close of business on the Record Date. Fractional shares of ZimVie common stock were not issued but instead were aggregated and sold in the open market with the proceeds being distributed pro rata in lieu of such fractional shares.
In the fourth quarter of 2021, ZimVie entered into a credit agreement with a financial institution providing for revolving loans of up to $175.0 million and term loan borrowings of up to $595.0 million. On February 28, 2022, prior to separation, ZimVie borrowed the entire $595.0 million available under the term loan. Approximately $540.6 million of this amount was paid by ZimVie to Zimmer Biomet in the form of a dividend at separation which is included in our cash flows from financing activities in the condensed consolidated statements of cash flows. We used proceeds from the dividend, along with cash on hand and proceeds from a draw on our revolving credit facility, to repay our 3.150% Senior Notes due 2022 which had an outstanding principal balance of $750.0 million.
Also, in connection with the spinoff, we entered into definitive agreements with ZimVie that, among other things, set forth the terms and conditions of the separation and distribution. The agreements set forth the principles and actions taken or to be taken in connection with the separation and the distribution and provide a framework for our relationship with ZimVie from and after the separation and the distribution. The agreements include a Separation and Distribution Agreement, a Tax Matters Agreement, an Employee Matters Agreement, a Transition Services Agreement (the “TSA”), an Intellectual Property Matters Agreement, a Stockholder and Registration Rights Agreement, a Transition Manufacturing and Supply Agreement (the “TMA”), a Reverse Transition Manufacturing and Supply Agreement (the “Reverse TMA”) and a Transitional Trademark License Agreement, each dated as of March 1, 2022.
8
Pursuant to the TSA, both we and ZimVie agree to provide certain services to each other, on an interim, transitional basis from and after the separation and the distribution. The services include certain regulatory services, commercial services, operational services, tax services, clinical affairs services, information technology services, finance and accounting services and human resource and employee benefits services. The remuneration to be paid for such services is generally intended to allow the company providing the services to recover all of its costs and expenses of providing such services. The TSA will terminate on the expiration of the term of the last service provided thereunder, which will generally be no later than March 31, 2025. However, we expect most TSA services will be completed by the end of 2023.
Pursuant to the TMA and the Reverse TMA, Zimmer Biomet or ZimVie, as the case may be, will manufacture or cause to be manufactured certain products for the other party, on an interim, transitional basis. Pursuant to such agreements, Zimmer Biomet or ZimVie, as the case may be, will be required to purchase certain minimum amounts of products from the other party. Each of the TMA and the Reverse TMA has a two-year term, with a one-year extension possible upon mutual agreement of the parties.
We recognize any gains or losses from the TSA and TMA agreements in Acquisition, integration, divestiture and related expense in our condensed consolidated statements of earnings. Amounts included in the condensed consolidated statements of earnings related to these agreements for the three-month periods ended March 31, 2022 and 2021 were immaterial. Amounts due to and due from ZimVie were also immaterial as of March 31, 2022.
We retained 19.7 percent of the outstanding common shares of ZimVie. Given our inability to exert significant influence over ZimVie, we recognize this investment at fair value in prepaid expenses and other current assets on our condensed consolidated balance sheet. Changes to the fair value of the investment is recognized in non-operating other (expense) income, net.
As discussed in Note 1, Basis of Presentation, the results of our spine and dental businesses have been reflected as discontinued operations in the current year period through the date of the spinoff and in the prior year period. Details of earnings (loss) from discontinued operations included in our condensed consolidated statements of earnings are as follows (in millions):
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2022 |
|
|
2021 |
|
Net Sales |
|
$ |
147.8 |
|
|
$ |
245.9 |
|
Cost of products sold, excluding intangible asset amortization |
|
|
53.5 |
|
|
|
80.1 |
|
Intangible asset amortization |
|
|
14.0 |
|
|
|
21.9 |
|
Research and development |
|
|
10.5 |
|
|
|
13.4 |
|
Selling, general and administrative |
|
|
89.4 |
|
|
|
113.1 |
|
Restructuring and other cost reduction initiatives |
|
|
0.4 |
|
|
|
0.5 |
|
Acquisition, integration, divestiture and related |
|
|
40.9 |
|
|
|
7.8 |
|
Other expense, net |
|
|
0.3 |
|
|
|
2.5 |
|
(Loss) Earnings from discontinued operations before income taxes |
|
|
(61.2 |
) |
|
|
6.6 |
|
(Benefit) Provision for income taxes from discontinued operations |
|
|
(2.4 |
) |
|
|
1.9 |
|
(Loss) Earnings from discontinued operations, net of tax |
|
$ |
(58.8 |
) |
|
$ |
4.7 |
|
9
Details of assets and liabilities of discontinued operations are as follows (in millions):
|
|
December 31, |
|
|
|
2021 |
|
Cash and cash equivalents |
|
$ |
100.4 |
|
Accounts receivable, less allowance for credit losses |
|
|
145.3 |
|
Inventories |
|
|
246.5 |
|
Prepaid expenses and other current assets |
|
|
9.4 |
|
Total Current Assets of Discontinued Operations |
|
$ |
501.6 |
|
Property, plant and equipment, net |
|
$ |
179.9 |
|
Goodwill |
|
|
272.8 |
|
Intangible assets, net |
|
|
766.2 |
|
Other assets |
|
|
57.9 |
|
Total Noncurrent Assets of Discontinued Operations |
|
$ |
1,276.8 |
|
Accounts payable |
|
$ |
44.7 |
|
Income taxes payable |
|
|
3.1 |
|
Other current liabilities |
|
|
129.4 |
|
Total Current Liabilities of Discontinued Operations |
|
$ |
177.2 |
|
Deferred income taxes, net |
|
$ |
107.1 |
|
Other long-term liabilities |
|
|
61.3 |
|
Total Noncurrent Liabilities of Discontinued Operations |
|
$ |
168.4 |
|
In a pro rata spinoff of consolidated subsidiaries, the distribution of the assets and liabilities are recognized through equity instead of net earnings. Accordingly, we have recognized the distribution of net assets to ZimVie in retained earnings. Additionally, the dividend we received from ZimVie at the separation was also recognized in retained earnings.
3. Significant Accounting Policies
Use of Estimates - The accompanying unaudited condensed consolidated financial statements are prepared in conformity with GAAP, which 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. We have made our best estimates, as appropriate under GAAP, in the recognition of our assets and liabilities. These estimates have considered the impact the COVID-19 pandemic may have on our financial position, results of operations and cash flows. Such estimates included, but were not limited to, variable consideration to our customers, our allowance for doubtful accounts for expected credit losses, the net realizable value of our inventory, the fair value of our goodwill and the recoverability of other long-lived assets. Actual results could differ materially from these estimates.
Other Expense (Income), Net - Other expense (income), net includes gains/(losses) on changes in fair value of our investments, gains/(losses) on remeasurement of monetary assets and liabilities denominated in a currency other than an entity’s functional currency and the related gains/(losses) on derivative instruments that are not designated as hedging instruments that we use to manage the currency exposures of these assets and liabilities, certain components of pension expense, and other non-operating gains/(losses). In the three-month period ended March 31, 2022, we recognized a loss of $51.0 million related to our investment in ZimVie. The initial value of our investment was based upon our 19.7 percent share of the carrying value of net assets transferred to ZimVie on the separation date. At March 31, 2022 we valued our investment at fair value based upon ZimVie’s share price on that date, less a discount to sell unregistered shares. In future reporting periods, we will continue to recognize our investment in ZimVie at fair value with any gains/losses recognized in other expense (income), net.
Accounting Pronouncements Recently Adopted
In July 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-05 Lessors – Certain Leases with Variable Lease Payments which is an amendment to Accounting Standards Codification Topic 842 – Leases (“ASC 842”). Under the prior ASC 842 guidance, variable payments were excluded from the measurement of the initial net investment in the lease if the payments do not depend on an index or a rate. For sales-type or direct financing leases, this could result in the recognition of a day-one loss for leases with entire or partial variable payments. ASU 2021-05 requires lessors to classify leases with entire or partial variable payments as operating leases if otherwise a day-one loss would be recognized. The ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those years. Early adoption of this ASU is permitted. The ASU can either be applied retrospectively to leases that were commenced or modified on or after the adoption of ASC 842 or applied prospectively to leases that commence or are modified after the adoption of ASU 2021-05. We adopted this standard as of January 1, 2022. The adoption of this standard did not have a material impact on our financial position, results of operations or cash flows.
Accounting Pronouncements Not Yet Adopted
10
In March 2020, the FASB issued ASU 2020-04 Reference Rate Reform (Topic 848). ASU 2020-04 provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. Early adoption of this ASU is permitted, and we may elect to apply the amendments prospectively through December 31, 2022. We are currently evaluating the impact this ASU will have on our financial statements.
There are no recently issued accounting pronouncements that we have not yet adopted that are expected to have a material effect on our financial position, results of operations or cash flows.
4. Revenue
Net sales by geography are as follows (in millions):
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2022 |
|
|
2021 |
|
United States |
|
$ |
941.2 |
|
|
$ |
889.2 |
|
International |
|
|
722.0 |
|
|
|
712.2 |
|
Total |
|
$ |
1,663.2 |
|
|
$ |
1,601.4 |
|
Net sales by product category are as follows (in millions):
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2022 |
|
|
2021 |
|
Knees |
|
$ |
662.8 |
|
|
$ |
614.3 |
|
Hips |
|
|
451.0 |
|
|
|
447.0 |
|
S.E.T. |
|
|
416.8 |
|
|
|
417.6 |
|
Other |
|
|
132.6 |
|
|
|
122.5 |
|
Total |
|
$ |
1,663.2 |
|
|
$ |
1,601.4 |
|
S.E.T. includes sales from our Sports Medicine, Extremities, Trauma, Craniomaxillofacial and Thoracic product categories. Other includes sales from our Technology, Surgical and Bone Cement product categories.
This net sales presentation 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. Each of our reportable operating segments sells all the product categories noted above. Accordingly, the only difference from the presentation above and our reportable operating segments are the geographic groupings.
11
5. Restructuring
In December 2021, we initiated a new global restructuring program (the “2021 Restructuring Plan”) to reorganize our operations in preparation for the planned spinoff of ZimVie with an objective of reducing costs. The 2021 Restructuring Plan is expected to result in total pre-tax restructuring charges of approximately $240 million and reduce gross annual pre-tax operating expenses by approximately $210 million by the end of 2024 as program benefits are realized. The pre-tax restructuring charges consist of employee termination benefits; contract terminations for sales agents; and other charges, such as consulting fees and project management expenses. The restructuring charges incurred in the three-month period ended March 31, 2022 primarily related to employee termination benefits, sales agent contract terminations, consulting fees and project management expenses. The following table summarizes the liabilities recognized related to the 2021 Restructuring Plan (in millions):
|
|
Employee |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination |
|
|
Contract |
|
|
|
|
|
|
|
|
|
|
|
Benefits |
|
|
Terminations |
|
|
Other |
|
|
Total |
|
Balance, December 31, 2021 |
|
$ |
19.5 |
|
|
$ |
2.3 |
|
|
$ |
10.3 |
|
|
$ |
32.1 |
|
Expenses incurred in the three months ended March 31, 2022 |
|
|
21.3 |
|
|
|
3.4 |
|
|
|
5.2 |
|
|
|
29.9 |
|
Cash payments |
|
|
(28.4 |
) |
|
|
(3.0 |
) |
|
|
(15.0 |
) |
|
|
(46.4 |
) |
Foreign currency exchange rate changes |
|
|
0.2 |
|
|
|
- |
|
|
|
- |
|
|
|
0.2 |
|
Balance, March 31, 2022 |
|
$ |
12.6 |
|
|
$ |
2.7 |
|
|
$ |
0.5 |
|
|
$ |
15.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense incurred since the start of the 2021 Restructuring Plan |
|
$ |
40.8 |
|
|
$ |
5.7 |
|
|
$ |
15.5 |
|
|
$ |
62.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense estimated to be recognized for the 2021 Restructuring Plan |
|
$ |
50.0 |
|
|
$ |
165.0 |
|
|
$ |
25.0 |
|
|
$ |
240.0 |
|
In December 2019, we initiated a global restructuring program (the “2019 Restructuring Plan”) with an objective of reducing 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 $350 million to $400 million and reduce gross annual pre-tax operating expenses by approximately $200 million to $300 million by the end of 2023 as program benefits are realized. The pre-tax restructuring charges consist of employee termination benefits; contract terminations for facilities and sales agents; and other charges, such as consulting fees, project management and relocation costs. The restructuring charges incurred in the three-month period ended March 31, 2022 primarily related to distributor contract terminations, consulting and project management. The following table summarizes the liabilities recognized related to the 2019 Restructuring Plan (in millions):
|
|
Employee |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination |
|
|
Contract |
|
|
|
|
|
|
|
|
|
|
|
Benefits |
|
|
Terminations |
|
|
Other |
|
|
Total |
|
Balance, December 31, 2021 |
|
$ |
14.8 |
|
|
$ |
16.5 |
|
|
$ |
- |
|
|
$ |
31.3 |
|
Expenses incurred in the three months ended March 31, 2022 |
|
|
(0.5 |
) |
|
|
1.1 |
|
|
|
9.4 |
|
|
|
10.0 |
|
Cash payments |
|
|
(3.0 |
) |
|
|
(2.5 |
) |
|
|
(5.1 |
) |
|
|
(10.6 |
) |
Foreign currency exchange rate changes |
|
|
(0.5 |
) |
|
|
(0.7 |
) |
|
|
(0.2 |
) |
|
|
(1.4 |
) |
Balance, March 31, 2022 |
|
$ |
10.8 |
|
|
$ |
14.4 |
|
|
$ |
4.1 |
|
|
$ |
29.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense incurred since the start of the 2019 Restructuring Plan |
|
$ |
85.4 |
|
|
$ |
35.4 |
|
|
$ |
112.1 |
|
|
$ |
232.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense estimated to be recognized for the 2019 Restructuring Plan |
|
$ |
180.0 |
|
|
$ |
40.0 |
|
|
$ |
155.0 |
|
|
$ |
375.0 |
|
For the expense estimated to be recognized for the 2019 Restructuring Plan, we have disclosed the midpoint in our estimated range of expenses.
We do not include restructuring charges in the operating profit of our reportable segments.
In our condensed consolidated statement of earnings, we report restructuring charges in our “Restructuring and other cost reduction initiatives” financial statement line item. We report the expenses for other cost reduction initiatives with restructuring expenses 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.
12
6. Inventories
|
|
March 31, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(in millions) |
|
Finished goods |
|
$ |
1,704.5 |
|
|
$ |
1,729.2 |
|
Work in progress |
|
|
200.9 |
|
|
|
175.5 |
|
Raw materials |
|
|
226.7 |
|
|
|
243.3 |
|
Inventories |
|
$ |
2,132.1 |
|
|
$ |
2,148.0 |
|
7. Property, Plant and Equipment
|
|
March 31, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(in millions) |
|
Land |
|
$ |
20.0 |
|
|
$ |
20.1 |
|
Buildings and equipment |
|
|
2,107.7 |
|
|
|
2,086.0 |
|
Capitalized software costs |
|
|
471.5 |
|
|
|
454.9 |
|
Instruments |
|
|
3,548.7 |
|
|
|
3,460.4 |
|
Construction in progress |
|
|
119.7 |
|
|
|
116.3 |
|
|
|
|
6,267.6 |
|
|
|
6,137.7 |
|
Accumulated depreciation |
|
|
(4,441.7 |
) |
|
|
(4,301.1 |
) |
Property, plant and equipment, net |
|
$ |
1,825.9 |
|
|
$ |
1,836.6 |
|
We had $12.9 million and $10.3 million of property, plant and equipment included in accounts payable as of March 31, 2022 and December 31, 2021, respectively.
8. Debt
Our debt consisted of the following (in millions):
|
|
March 31, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Current portion of long-term debt |
|
|
|
|
|
|
|
|
3.150% Senior Notes due 2022 |
|
$ |
- |
|
|
$ |
750.0 |
|
2021 Five-Year Credit Agreement |
|
|
100.0 |
|
|
|
- |
|
1.414% Euro Notes due 2022 |
|
|
556.3 |
|
|
|
568.6 |
|
Japan Term Loan A |
|
|
96.4 |
|
|
|
101.6 |
|
Japan Term Loan B |
|
|
175.5 |
|
|
|
184.9 |
|
3.700% Senior Notes due 2023 |
|
|
86.3 |
|
|
|
- |
|
Total current portion of long-term debt |
|
$ |
1,014.5 |
|
|
$ |
1,605.1 |
|
Long-term debt |
|
|
|
|
|
|
|
|
3.700% Senior Notes due 2023 |
|
|
- |
|
|
|
86.3 |
|
1.450% Senior Notes due 2024 |
|
|
850.0 |
|
|
|
850.0 |
|
3.550% Senior Notes due 2025 |
|
|
863.0 |
|
|
|
863.0 |
|
3.050% Senior Notes due 2026 |
|
|
600.0 |
|
|
|
600.0 |
|
3.550% Senior Notes due 2030 |
|
|
257.5 |
|
|
|
257.5 |
|
2.600% Senior Notes due 2031 |
|
|
750.0 |
|
|
|
750.0 |
|
4.250% Senior Notes due 2035 |
|
|
253.4 |
|
|
|
253.4 |
|
5.750% Senior Notes due 2039 |
|
|
317.8 |
|
|
|
317.8 |
|
4.450% Senior Notes due 2045 |
|
|
395.4 |
|
|
|
395.4 |
|
2.425% Euro Notes due 2026 |
|
|
556.3 |
|
|
|
568.6 |
|
1.164% Euro Notes due 2027 |
|
|
556.3 |
|
|
|
568.6 |
|
Debt discount and issuance costs |
|
|
(34.5 |
) |
|
|
(36.4 |
) |
Adjustment related to interest rate swaps |
|
|
(78.9 |
) |
|
|
(10.5 |
) |
Total long-term debt |
|
$ |
5,286.3 |
|
|
$ |
5,463.7 |
|
13
At March 31, 2022, our total current and non-current debt of $6.3 billion consisted of $6.0 billion aggregate principal amount of our senior notes, which included €1.5 billion Euro-denominated senior notes (“Euro Notes”), an ¥11.7 billion Japanese Yen term loan agreement (“Japan Term Loan A”) and a ¥21.3 billion Japanese Yen term loan agreement (“Japan Term Loan B”) that will each mature on September 27, 2022, and $100.0 million of outstanding borrowings under the 2021 Five-Year Revolving Facility (defined below), partially offset by debt discount and issuance costs of $34.5 million and fair value adjustments totaling $78.9 million.
On March 18, 2022, we redeemed the full $750.0 million outstanding principal amount of our 3.150% Senior Notes due 2022. A $100.0 million draw under the 2021 Five-Year Revolving Facility, together with cash on hand, were used to redeem these notes. $540.6 million of this cash on hand came from the dividend paid by ZimVie to Zimmer Biomet at separation.
In the three-month period ended March 31, 2021, we redeemed the $200.0 million outstanding principal amount of our floating rate notes due 2021.
On August 20, 2021, we entered into a new five-year revolving credit agreement (the “2021 Five-Year Credit Agreement”) and a new 364-day revolving credit agreement (the “2021 364-Day Revolving Credit Agreement”), as described below. Borrowings under these credit agreements will be used for general corporate purposes.
The 2021 Five-Year Credit Agreement contains a five-year unsecured revolving facility of $1.5 billion (the “2021 Five-Year Revolving Facility”). The 2021 Five-Year Credit Agreement replaces the previous revolving credit agreement (the “2019 Credit Agreement”), which contained a five-year unsecured multicurrency revolving facility of $1.5 billion (the “2019 Multicurrency Revolving Facility”). There were no borrowings outstanding under the 2019 Credit Agreement at the time it was terminated.
The 2021 Five-Year Credit Agreement will mature on August 20, 2026, with two one-year extensions exercisable at our discretion and subject to required lender consent. The 2021 Five-Year Credit Agreement also includes an uncommitted incremental feature allowing us to request an increase of the facility by an aggregate amount of up to $500.0 million. As of March 31, 2022, there was $100.0 million of outstanding borrowings under the 2021 Five-Year Revolving Facility.
Borrowings under the 2021 Five-Year Credit Agreement bear interest at floating rates, based upon either LIBOR for the applicable interest period or at 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 2021 Five-Year Revolving Facility at a rate determined by reference to our senior unsecured long-term debt credit rating. The 2021 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 Five-Year Credit Agreement also requires us to maintain a consolidated indebtedness to consolidated EBITDA ratio of no greater than 4.5 to 1.0 as of the last day of any period of four consecutive fiscal quarters (with such ratio subject to increase to 5.0 to 1.0 for a period of time in connection with a qualified material acquisition and certain other restrictions). We were in compliance with all covenants under the 2021 Five-Year Credit Agreement as of March 31, 2022.
The 2021 364-Day Revolving Credit Agreement is an unsecured revolving credit facility in the principal amount of $1.0 billion (the “2021 364-Day Revolving Facility”). The 2021 364-Day Revolving Credit Agreement replaced a credit agreement entered into on September 18, 2020 which was also a 364-day unsecured revolving credit facility of $1.0 billion (the “September 2020 Revolving Facility”). There were no borrowings outstanding under the September 2020 Revolving Facility when it was terminated.
The 2021 364-Day Revolving Facility will mature on August 19, 2022. Borrowings under the 2021 364-Day Revolving Credit Agreement bear interest at floating rates based upon either LIBOR for the applicable interest period or at 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 2021 364-Day Revolving Facility at a rate determined by reference to our senior unsecured long-term debt credit rating. The 2021 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 2021 364-Day Revolving Credit Agreement also requires us to maintain a consolidated indebtedness to consolidated EBITDA ratio of no greater than 4.5 to 1.0 as of the last day of any period of four consecutive fiscal quarters (with such ratio subject to increase to 5.0 to 1.0 in connection with a qualified material acquisition and certain other restrictions). We were in compliance with all covenants under the 2021 364-Day Revolving Credit Agreement, as of March 31, 2022. As of March 31, 2022, there were no outstanding borrowings under the 2021 364-Day Revolving Credit Agreement.
The estimated fair value of our senior notes, which includes our Euro notes, as of March 31, 2022, based on quoted prices for the specific securities from transactions in over-the-counter markets (Level 2), was $5,995.2 million. The estimated fair value of Japan Term Loan A and Japan Term Loan B, in the aggregate, as of March 31, 2022, based upon publicly available market yield curves and the terms of the debt (Level 2), was $271.7 million. The $100.0 million carrying value of the outstanding principal balance of the 2021 Five-Year Revolving Facility approximates its fair value as it bears interest at short-term market rates.
14
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. In the three-month period ended March 31, 2022, due to the spinoff of ZimVie, certain foreign entities were completely liquidated. In a pro rata spinoff of consolidated subsidiaries’ assets and liabilities, the distribution of these net assets is recognized through equity instead of net earnings. Therefore, the foreign currency translation adjustments of those entities that were completely liquidated were reclassified to retained earnings. Similarly, we had entered into instruments designated as net investment hedges against certain of these same foreign entities. We reclassified the portion of the net investment hedge gains (losses) deferred in foreign currency translation adjustments related to those entities to retained earnings. 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, 2021 |
|
$ |
(107.1 |
) |
|
$ |
32.1 |
|
|
$ |
(156.6 |
) |
|
$ |
(231.6 |
) |
AOCI before reclassifications |
|
|
1.3 |
|
|
|
13.7 |
|
|
|
- |
|
|
|
15.0 |
|
Reclassifications to statements of earnings |
|
|
- |
|
|
|
(4.3 |
) |
|
|
0.9 |
|
|
|
(3.4 |
) |
Spinoff of ZimVie Inc. |
|
|
35.2 |
|
|
|
- |
|
|
|
- |
|
|
|
35.2 |
|
Reclassifications of net investment hedges to retained earnings |
|
|
25.9 |
|
|
|
- |
|
|
|
- |
|
|
|
25.9 |
|
Balance at March 31, 2022 |
|
$ |
(44.7 |
) |
|
$ |
41.5 |
|
|
$ |
(155.7 |
) |
|
$ |
(158.9 |
) |
The following table shows the reclassification adjustments from AOCI (in millions):
|
|
Amount of Gain (Loss) |
|
|
|
|
|
Reclassified from AOCI |
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
March 31, |
|
|
Location on |
Component of AOCI |
|
2022 |
|
|
2021 |
|
|
Statements of Earnings |
Cash flow hedges |
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
|
$ |
5.2 |
|
|
$ |
1.1 |
|
|
Cost of products sold |
Forward starting interest rate swaps |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
Interest expense, net |
|
|
|
5.0 |
|
|
|
0.9 |
|
|
Total before tax |
|
|
|
0.7 |
|
|
|
0.4 |
|
|
Provision (benefit) for income taxes |
|
|
$ |
4.3 |
|
|
$ |
0.5 |
|
|
Net of tax |
Defined benefit plans |
|
|
|
|
|
|
|
|
|
|
Prior service cost and unrecognized actuarial loss |
|
$ |
(1.3 |
) |
|
$ |
(1.5 |
) |
|
Other income, net |
|
|
|
(0.4 |
) |
|
|
(0.7 |
) |
|
Provision (benefit) for income taxes |
|
|
$ |
(0.9 |
) |
|
$ |
(0.8 |
) |
|
Net of tax |
Total reclassifications |
|
$ |
3.4 |
|
|
$ |
(0.3 |
) |
|
Net of tax |
15
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 March 31, 2022 |
|
|
|
Before Tax |
|
|
Tax |
|
|
Net of Tax |
|
Foreign currency cumulative translation adjustments |
|
$ |
(1.1 |
) |
|
$ |
(2.4 |
) |
|
$ |
1.3 |
|
Unrealized cash flow hedge gains |
|
|
21.0 |
|
|
|
7.3 |
|
|
|
13.7 |
|
Reclassification adjustments on cash flow hedges |
|
|
(5.0 |
) |
|
|
(0.7 |
) |
|
|
(4.3 |
) |
Adjustments to prior service cost and unrecognized actuarial assumptions |
|
|
1.3 |
|
|
|
0.4 |
|
|
|
0.9 |
|
Total Other Comprehensive Income |
|
$ |
16.2 |
|
|
$ |
4.6 |
|
|
$ |
11.6 |
|
|
|
Three Months Ended March 31, 2021 |
|
|
|
Before Tax |
|
|
Tax |
|
|
Net of Tax |
|
Foreign currency cumulative translation adjustments |
|
$ |
0.6 |
|
|
$ |
19.7 |
|
|
$ |
(19.1 |
) |
Unrealized cash flow hedge gains |
|
|
47.5 |
|
|
|
7.6 |
|
|
|
39.9 |
|
Reclassification adjustments on cash flow hedges |
|
|
(0.9 |
) |
|
|
(0.4 |
) |
|
|
(0.5 |
) |
Adjustments to prior service cost and unrecognized actuarial assumptions |
|
|
1.5 |
|
|
|
0.7 |
|
|
|
0.8 |
|
Total Other Comprehensive Income |
|
$ |
48.7 |
|
|
$ |
27.6 |
|
|
$ |
21.1 |
|
10. Fair Value Measurement of Assets and Liabilities
The following financial assets and liabilities related to continuing operations are recorded at fair value on a recurring basis (in millions):
|
|
As of March 31, 2022 |
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using: |
|
Description |
|
Recorded
Balance |
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1) |
|
|
Significant
Other
Observable
Inputs
(Level 2) |
|
|
Significant
Unobservable
Inputs
(Level 3) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedges, current and long-term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
|
$ |
64.2 |
|
|
$ |
- |
|
|
$ |
64.2 |
|
|
$ |
- |
|
Cross-currency interest rate swaps |
|
|
31.2 |
|
|
|
- |
|
|
|
31.2 |
|
|
|
- |
|
Investment in ZimVie |
|
|
111.4 |
|
|
|
111.4 |
|
|
|
- |
|
|
|
- |
|
Total Assets |
|
$ |
206.8 |
|
|
$ |
111.4 |
|
|
$ |
95.4 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedges, current and long-term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
|
$ |
0.6 |
|
|
$ |
- |
|
|
$ |
0.6 |
|
|
$ |
- |
|
Cross-currency interest rate swaps |
|
|
3.4 |
|
|
|
- |
|
|
|
3.4 |
|
|
|
- |
|
Interest rate swaps |
|
|
78.9 |
|
|
|
- |
|
|
|
78.9 |
|
|
|
- |
|
Contingent payments related to acquisitions |
|
|
32.2 |
|
|
|
- |
|
|
|
- |
|
|
|
32.2 |
|
Total Liabilities |
|
$ |
115.1 |
|
|
$ |
- |
|
|
$ |
82.9 |
|
|
$ |
32.2 |
|
16
|
|
As of December 31, 2021 |
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using: |
|
Description |
|
Recorded
Balance |
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1) |
|
|
Significant
Other
Observable
Inputs
(Level 2) |
|
|
Significant
Unobservable
Inputs
(Level 3) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedges, current and long-term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
|
$ |
52.4 |
|
|
$ |
- |
|
|
$ |
52.4 |
|
|
$ |
- |
|
Cross-currency interest rate swaps |
|
$ |
23.0 |
|
|
|
|
|
|
$ |
23.0 |
|
|
|
|
|
Derivatives not designated as hedges, current and long-term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
|
|
1.1 |
|
|
|
- |
|
|
|
1.1 |
|
|
|
- |
|
Total Assets |
|
$ |
76.5 |
|
|
$ |
- |
|
|
$ |
76.5 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedges, current and long-term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
|
$ |
0.3 |
|
|
$ |
- |
|
|
$ |
0.3 |
|
|
$ |
- |
|
Cross-currency interest rate swaps |
|
|
3.4 |
|
|
|
- |
|
|
|
3.4 |
|
|
|
- |
|
Interest rate swaps |
|
|
10.5 |
|
|
|
|
|
|
|
10.5 |
|
|
|
|
|
Derivatives not designated as hedges, current and long-term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
|
|
1.5 |
|
|
|
- |
|
|
|
1.5 |
|
|
|
- |
|
Contingent payments related to acquisitions |
|
|
35.6 |
|
|
|
- |
|
|
|
- |
|
|
|
35.6 |
|
Total Liabilities |
|
$ |
51.3 |
|
|
$ |
- |
|
|
$ |
15.7 |
|
|
$ |
35.6 |
|
17
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.
In connection with the spinoff, we retained a 19.7 percent ownership of ZimVie through unregistered shares of common stock. At each reporting date, we value these shares based upon the market share price of ZimVie less a discount to reflect that the shares are not registered.
Contingent payments related to acquisitions consist of sales-based payments, and are valued using discounted cash flow techniques. The fair value of sales-based payments is based upon probability-weighted future revenue estimates, and increases as revenue estimates increase.
The following table provides a reconciliation of the beginning and ending balances of items related to continuing operations 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, 2021 |
|
$ |
35.6 |
|
Change in estimates |
|
|
0.2 |
|
Settlements |
|
|
(3.5 |
) |
Foreign currency impact |
|
|
(0.1 |
) |
Ending balance March 31, 2022 |
|
$ |
32.2 |
|
Changes in estimates for contingent payments related to acquisitions included in continuing operations are recognized in Acquisition, integration, divestiture and related expenses on our condensed consolidated statements of earnings. There were no changes in estimates related to the contingent payment liabilities included in discontinued operations for the three months ended March 31, 2022 or 2021.
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 March 31, 2022 and December 31, 2021, 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 |
|
March 31, 2022 |
|
|
December 31, 2021 |
|
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
Long-term debt |
|
$ |
916.8 |
|
|
$ |
985.2 |
|
|
|
$ |
(78.9 |
) |
|
$ |
(10.5 |
) |
18
Derivatives Designated as Cash Flow Hedges
In 2014, we entered into forward starting interest rate swaps that were designated as cash flow hedges of our thirty-year tranche of senior notes due 2045 we expected to issue in 2015. The forward starting interest rate swaps mitigated the risk of changes in interest rates prior to the completion of the notes offering. The interest rate swaps were settled, and the remaining loss to be recognized at March 31, 2022 was $25.1 million, which will be recognized using the effective interest rate method over the remaining maturity period of the hedged notes.
Foreign Currency Exchange Rate Risk
We operate on a global basis and are exposed to the risk that our financial condition, results of operations and cash flows could be adversely affected by changes in foreign currency exchange rates. To reduce the potential effects of foreign currency exchange rate movements on net earnings, we enter into derivative financial instruments in the form of foreign currency exchange forward contracts with major financial institutions. We also designated our Euro Notes as net investment hedges of investments in foreign subsidiaries. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and net assets denominated in Euros, Swiss Francs, Japanese Yen, British Pounds, Canadian Dollars, Australian Dollars, Korean Won, Swedish Krona, Czech Koruna, Thai Baht, Taiwan Dollars, South African Rand, Russian Rubles, Indian Rupees, Turkish Lira, Polish Zloty, Danish Krone, and Norwegian Krone. We do not use derivative financial instruments for trading or speculative purposes.
Derivatives Designated as Net Investment Hedges
We are exposed to the impact of foreign exchange rate fluctuations in the investments in our wholly-owned foreign subsidiaries that are denominated in currencies other than the U.S. Dollar. In order to mitigate the volatility in foreign exchange rates, we issued Euro Notes in December 2016 and November 2019 and designated 100 percent of the Euro Notes to hedge our net investment in certain wholly-owned foreign subsidiaries that have a functional currency of the Euro. All changes in the fair value of a hedging instrument designated as a net investment hedge are recorded as a component of AOCI in the condensed consolidated balance sheets.
At March 31, 2022, we had receive-fixed-rate, pay-fixed-rate cross-currency interest swaps with notional amounts outstanding of Euro 550 million, Japanese Yen 7 billion and Swiss Franc 50 million. These transactions further hedge our net investment in certain wholly-owned foreign subsidiaries that have a functional currency of Euro, Japanese Yen and Swiss Franc. All changes in the fair value of a derivative instrument designated as a net investment hedge are recorded as a component of AOCI in the condensed consolidated balance sheets. The portion of this change related to the excluded component will be amortized into earnings over the life of the derivative while the remainder will be recorded in AOCI until the hedged net investment is sold or substantially liquidated. We recognize the excluded component in interest expense, net on our condensed consolidated statements of earnings. The net cash received related to the receive-fixed-rate, pay-fixed-rate component of the cross-currency interest rate swaps is reflected in investing cash flows in our condensed consolidated statements of cash flows. In the three-month period ended March 31, 2022, €125 million of these cross-currency interest rate swaps matured at a gain of $4.1 million. The settlement of this gain with the counterparties is reflected in investing cash flows in our condensed consolidated statements of cash flows and will remain in AOCI on our condensed consolidated balance sheet until the hedged net investment is sold or substantially liquidated.
Derivatives Designated as Cash Flow Hedges
Our revenues are generated in various currencies throughout the world. However, a significant amount of our inventory is produced in U.S. Dollars. Therefore, movements in foreign currency exchange rates may have different proportional effects on our revenues compared to our cost of products sold. To minimize the effects of foreign currency exchange rate movements on cash flows, we hedge intercompany sales of inventory expected to occur within the next 30 months with foreign currency exchange forward contracts. We designate these derivative instruments as cash flow hedges.
We perform quarterly assessments of hedge effectiveness by verifying and documenting the critical terms of the hedge instrument and confirming that forecasted transactions have not changed significantly. We also assess on a quarterly basis whether there have been adverse developments regarding the risk of a counterparty default. For derivatives which qualify as hedges of future cash flows, the gains and losses are temporarily recorded in AOCI and then recognized in cost of products sold when the hedged item affects net earnings. On our condensed consolidated statements of cash flows, the settlements of these cash flow hedges are recognized in operating cash flows.
For foreign currency exchange forward contracts and options outstanding at March 31, 2022, we had obligations to purchase U.S. Dollars and sell Euros, Japanese Yen, British Pounds, Canadian Dollars, Australian Dollars, Korean Won, Swedish Krona, Czech Koruna, Thai Baht, Taiwan Dollars, South African Rand, Russian Rubles, Indian Rupees, Polish Zloty, Danish Krone, and Norwegian Krone and obligations to purchase Swiss Francs and sell U.S. Dollars. These derivatives mature at dates ranging from April 2022 through August 2024. As of March 31, 2022, the notional amounts of outstanding forward contracts and options entered into with third parties to purchase U.S. Dollars were $1,243.3 million. As of March 31, 2022, the notional amounts of outstanding forward contracts and options entered into with third parties to purchase Swiss Francs were $351.2 million.
19
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 expense, 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 typically in a range of $1.5 billion to $2.0 billion per quarter.
Income Statement Presentation
Derivatives Designated as Cash Flow Hedges
Derivative instruments designated as cash flow hedges had the following effects, before taxes, on AOCI and net earnings on our condensed consolidated statements of earnings, condensed consolidated statements of comprehensive income and condensed consolidated balance sheets (in millions):
|
|
Amount of Gain (Loss) |
|
|
|
|
Amount of Gain (Loss) |
|
|
|
Recognized in AOCI |
|
|
|
|
Reclassified from AOCI |
|
|
|
Three Months Ended |
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
Location on |
|
March 31, |
|
Derivative Instrument |
|
2022 |
|
|
2021 |
|
|
Statements of Earnings |
|
2022 |
|
|
2021 |
|
Foreign exchange
forward contracts |
|
$ |
21.0 |
|
|
$ |
47.5 |
|
|
Cost of products sold |
|
$ |
5.2 |
|
|
$ |
1.1 |
|
Forward starting
interest rate swaps |
|
|
- |
|
|
|
- |
|
|
Interest expense, net |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
$ |
21.0 |
|
|
$ |
47.5 |
|
|
|
|
$ |
5.0 |
|
|
$ |
0.9 |
|
The fair value of outstanding derivative instruments designated as cash flow hedges and recorded on our condensed consolidated balance sheet at March 31, 2022, together with settled derivatives where the hedged item has not yet affected earnings, was a net unrealized gain of $49.8 million, or $41.5 million after taxes, which is deferred in AOCI. A gain of $35.9 million, or $30.6 million after taxes, is expected to be reclassified to earnings in cost of products sold and a loss of $0.7 million, or $0.5 million after taxes, is expected to be reclassified to earnings in interest expense, net over the next twelve months.
The following table presents the effect of fair value, 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 |
|
|
|
March 31, 2022 |
|
|
March 31, 2021 |
|
|
|
Cost of |
|
|
Interest |
|
|
Cost of |
|
|
Interest |
|
|
|
Products |
|
|
Expense, |
|
|
Products |
|
|
Expense, |
|
|
|
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 |
|
$ |
500.0 |
|
|
$ |
(41.1 |
) |
|
$ |
436.3 |
|
|
$ |
(52.3 |
) |
The effects of fair value, cash flow and net investment hedging: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on fair value hedging
relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued interest rate swaps |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.9 |
|
Interest rate swaps |
|
|
- |
|
|
|
2.9 |
|
|
|
- |
|
|
|
- |
|
Gain (loss) on cash flow hedging
relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
|
|
5.2 |
|
|
|
- |
|
|
|
1.1 |
|
|
|
- |
|
Forward starting interest rate swaps |
|
|
- |
|
|
|
(0.2 |
) |
|
|
- |
|
|
|
(0.2 |
) |
Gain on net investment hedging
relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency interest rate swaps |
|
|
- |
|
|
|
6.5 |
|
|
|
- |
|
|
|
13.3 |
|
20
Derivatives Not Designated as Hedging Instruments
The following losses from these derivative instruments were recognized on our condensed consolidated statements of earnings (in millions):
|
|
|
|
Three Months Ended |
|
|
|
Location on |
|
March 31, |
|
Derivative Instrument |
|
Statements of Earnings |
|
2022 |
|
|
2021 |
|
Foreign exchange forward contracts |
|
Other (expense) income, net |
|
$ |
(8.5 |
) |
|
$ |
(6.2 |
) |
These losses do not reflect offsetting gains of $7.7 million and $3.4 million in the three-month periods ended March 31, 2022 and 2021, respectively, recognized in other (expense) income, net as a result of foreign currency remeasurement of monetary assets and liabilities denominated in a currency other than an entity’s functional currency.
Balance Sheet Presentation
As of March 31, 2022 and December 31, 2021, 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 all of our counterparties. The fair value of derivative instruments on a gross basis is as follows (in millions):
|
|
As of March 31, 2022 |
|
|
As of December 31, 2021 |
|
|
|
Balance |
|
|
|
|
|
Balance |
|
|
|
|
|
|
Sheet |
|
Fair |
|
|
Sheet |
|
Fair |
|
|
|
Location |
|
Value |
|
|
Location |
|
Value |
|
Asset Derivatives Designated as Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
|
Other current assets |
|
$ |
57.2 |
|
|
Other current assets |
|
$ |
42.3 |
|
Cross-currency interest rate swaps |
|
Other current assets |
|
|
25.4 |
|
|
Other current assets |
|
|
16.3 |
|
Foreign exchange forward contracts |
|
Other assets |
|
|
20.4 |
|
|
Other assets |
|
|
20.9 |
|
Cross-currency interest rate swaps |
|
Other assets |
|
|
5.8 |
|
|
Other assets |
|
|
6.7 |
|
Total asset derivatives |
|
|
|
$ |
108.8 |
|
|
|
|
$ |
86.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives Not Designated as Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
|
Other current assets |
|
$ |
- |
|
|
Other current assets |
|
$ |
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives Designated as Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
|
Other current liabilities |
|
$ |
10.5 |
|
|
Other current liabilities |
|
$ |
9.6 |
|
Cross-currency interest rate swaps |
|
Other current liabilities |
|
|
3.4 |
|
|
Other current liabilities |
|
|
0.1 |
|
Foreign exchange forward contracts |
|
Other long-term liabilities |
|
|
3.5 |
|
|
Other long-term liabilities |
|
|
1.5 |
|
Cross-currency interest rate swaps |
|
Other long-term liabilities |
|
|
- |
|
|
Other long-term liabilities |
|
|
3.3 |
|
Interest rate swaps |
|
Other long-term liabilities |
|
|
78.9 |
|
|
Other long-term liabilities |
|
|
10.5 |
|
Total liability derivatives |
|
|
|
$ |
96.3 |
|
|
|
|
$ |
25.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives Not Designated as Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
|
Other current liabilities |
|
$ |
- |
|
|
Other current liabilities |
|
$ |
1.8 |
|
21
The table below presents the effects of our master netting agreements on our condensed consolidated balance sheets (in millions):
|
|
|
|
As of March 31, 2022 |
|
|
As of December 31, 2021 |
|
Description |
|
Location |
|
Gross
Amount |
|
|
Offset |
|
|
Net Amount in
Balance Sheet |
|
|
Gross
Amount |
|
|
Offset |
|
|
Net Amount in
Balance Sheet |
|
Asset Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges |
|
Other current assets |
|
$ |
57.2 |
|
|
$ |
10.2 |
|
|
$ |
47.0 |
|
|
$ |
42.3 |
|
|
$ |
9.5 |
|
|
$ |
32.8 |
|
Cash flow hedges |
|
Other assets |
|
|
20.4 |
|
|
|
3.2 |
|
|
|
17.2 |
|
|
|
20.9 |
|
|
|
1.3 |
|
|
|
19.6 |
|
Derivatives Not Designated as Hedges |
|
Other current assets |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1.4 |
|
|
|
0.3 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges |
|
Other current liabilities |
|
|
10.5 |
|
|
|
10.2 |
|
|
|
0.3 |
|
|
|
9.6 |
|
|
|
9.5 |
|
|
|
0.1 |
|
Cash flow hedges |
|
Other long-term liabilities |
|
|
3.5 |
|
|
|
3.2 |
|
|
|
0.3 |
|
|
|
1.5 |
|
|
|
1.3 |
|
|
|
0.2 |
|
Derivatives Not Designated as Hedges |
|
Other current liabilities |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
1.8 |
|
|
|
0.3 |
|
|
|
1.5 |
|
The following net investment hedge gains (losses) were recognized on our condensed consolidated statements of comprehensive income (in millions):
|
|
Amount of Gain |
|
|
|
Recognized in AOCI |
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
Derivative Instrument |
|
2022 |
|
|
2021 |
|
Euro Notes |
|
$ |
36.9 |
|
|
$ |
72.3 |
|
Cross-currency interest rate swaps |
|
|
12.3 |
|
|
|
65.6 |
|
|
|
$ |
49.2 |
|
|
$ |
137.9 |
|
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 Organization for Economic Cooperation and Development. Our income tax filings are subject to examinations by taxing authorities throughout the world. Income tax audits may require an extended period of time to reach resolution and may result in significant income tax adjustments when interpretation of tax laws or allocation of company profits is disputed. Although ultimate timing is uncertain, the net amount of tax liability for unrecognized tax benefits may change within the next twelve months due to changes in audit status, expiration of statutes of limitations, settlements of tax assessments and other events. Management’s best estimate of such change is within the range of a $140 million decrease to a $20 million increase.
We are under continuous audit by the IRS and other taxing authorities. During the course of these audits, we receive proposed adjustments from taxing authorities that may be material. Therefore, there is a possibility that an adverse outcome in these audits could have a material effect on our results of operations and financial condition. Our U.S. Federal income tax returns have been audited through 2015 and are currently under audit for years 2016-2019.
In October 2020, we reached agreement with the IRS for tax years 2006-2012 related to the reallocation of profits between the U.S. and Puerto Rico as well as other miscellaneous adjustments.
The IRS has proposed adjustments for tax years 2010-2012, primarily related to reallocating profits between certain of our U.S. and foreign subsidiaries, which remain unsettled. We have disputed these adjustments and intend to continue to vigorously defend our positions as we pursue resolution through the administrative process with the IRS Independent Office of Appeals.
The IRS has proposed adjustments for tax years 2013-2015 relating to transfer pricing involving our cost sharing agreement between the U.S. and Switzerland affiliated companies and reallocating 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 $370 million, subject to interest and penalties related to our cost sharing agreement. We strongly believe that the position of the IRS, with regard to this matter, is inconsistent with the applicable U.S. Treasury regulations governing our cost sharing agreement. We do not expect changes to our reserves relative to these matters within the next twelve months. We intend to vigorously contest the adjustment, and we will pursue all available administrative and, if necessary, judicial remedies. If we pursue judicial remedies in the U.S. Tax Court for years 2013-2015, a number of years will likely elapse before such matters are finally resolved. No payment of any amount related to this matter is required to be made, if at all, until all applicable proceedings have been
22
completed.
A public referendum held in Switzerland passed the Federal Act on Tax Reform and AHV Financing (“TRAF”), effective January 1, 2020. The TRAF provides transitional relief measures for companies that are losing the tax benefit of a ruling, including a "step-up" for amortizable goodwill, equal to the amount of future tax benefit they would have received under their existing ruling, subject to certain limitations. This resulted in the recording of a deferred tax asset for future deductions of tax goodwill.
In the three-month period ended March 31, 2022, our effective tax rate (“ETR”) was 27.8 percent compared to 9.8 percent in the three-month period ended March 31, 2021. The 27.8 percent ETR in the three-month period ended March 31, 2022 was driven by the loss on our investment in ZimVie which is not deductible for tax purposes. The 9.8 percent ETR in the three-month period ended March 31, 2021 was the result of favorable discrete adjustments from the filing of Swiss tax returns and an excess tax benefit related to stock-based compensation. 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 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; the outcome of various federal, state and foreign audits; and the expiration of certain statutes of limitations. Currently, we cannot reasonably estimate the impact of these items on our financial results.
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 |
|
|
|
March 31, |
|
|
|
2022 |
|
|
2021 |
|
Weighted average shares outstanding for basic net earnings per share |
|
|
209.2 |
|
|
|
208.0 |
|
Effect of dilutive stock options and other equity awards |
|
|
0.9 |
|
|
|
2.2 |
|
Weighted average shares outstanding for diluted net earnings per share |
|
|
210.1 |
|
|
|
210.2 |
|
During the three-month periods ended March 31, 2022 and 2021, an average of 2.9 million options and 0.4 million options, respectively, to purchase shares of common stock were not included in the computation of diluted earnings per share because the effect would have been antidilutive.
14. Segment Information
We design, manufacture and market orthopedic reconstructive products; sports medicine, biologics, extremities and trauma products; craniomaxillofacial and thoracic products (“CMFT”); and related surgical products. Our chief operating decision maker (“CODM”) allocates resources to achieve our operating profit goals through three operating segments. These operating segments, which also constitute our reportable segments, are Americas; EMEA; and Asia Pacific.
Our CODM evaluates performance based upon segment operating profit exclusive of operating expenses pertaining to intangible asset amortization, certain inventory and manufacturing-related charges, goodwill and intangible asset impairment, restructuring and other cost reduction initiatives, quality remediation, acquisition, integration, divestiture and related, litigation, certain European Union Medical Device Regulation (“EU MDR”) expenses, certain R&D agreements, other charges and corporate functions (collectively referred to as “Corporate items”). Corporate functions include corporate legal, finance, information technology, human resources and other corporate departments as well as certain operations, distribution, quality assurance and regulatory assurance 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. This segment also includes research, development engineering, medical education, and brand management for our product category headquarter locations. 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 EMEA and Asia Pacific operating segments include the commercial operations as well as regional headquarter expenses to operate in those markets. Since the Americas segment includes additional costs related to centralized product category headquarter expenses, profitability metrics in this operating segment are not comparable to the EMEA and Asia Pacific operating segments.
Our CODM does not review asset information by operating segment. Instead, our CODM reviews cash flow and other financial ratios by operating segment.
Net sales and operating profit by segment are as follows (in millions):
23
|
|
Net Sales |
|
|
Operating Profit |
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Americas |
|
$ |
1,004.3 |
|
|
$ |
946.1 |
|
|
$ |
389.1 |
|
|
$ |
379.7 |
|
EMEA |
|
|
379.9 |
|
|
|
334.4 |
|
|
|
78.3 |
|
|
|
75.3 |
|
Asia Pacific |
|
|
279.0 |
|
|
|
320.9 |
|
|
|
82.9 |
|
|
|
114.6 |
|
Total |
|
$ |
1,663.2 |
|
|
$ |
1,601.4 |
|
|
|
|
|
|
|
|
|
Corporate items |
|
|
|
|
|
|
|
|
|
|
(221.1 |
) |
|
|
(177.3 |
) |
Intangible asset amortization |
|
|
|
|
|
|
|
|
|
|
(130.8 |
) |
|
|
(133.6 |
) |
Operating profit |
|
|
|
|
|
|
|
|
|
$ |
198.4 |
|
|
$ |
258.7 |
|
15. Commitments and Contingencies
On a quarterly and annual basis, we review relevant information with respect to loss contingencies and update our accruals, disclosures and estimates of reasonably possible losses or ranges of loss based on such reviews. We establish liabilities for loss contingencies 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 contingences 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. We recognize litigation-related charges and gains in Selling, general and administrative expense on our consolidated statement of earnings. During the three months ended March 31, 2022 and 2021, we recognized $33.2 million and $10.7 million, respectively, of net litigation-related charges. At March 31, 2022 and December 31, 2021, accrued litigation liabilities were $423.0 million and $409.3 million, respectively. These litigation-related charges and accrued liabilities reflect all of our litigation-related contingencies and not just the matters discussed below. The ultimate cost of litigation could be materially different than the amount of the current estimates and accruals and could have a material adverse impact on our financial condition and results of operations.
Litigation
Durom Cup-related claims: On July 22, 2008, we temporarily suspended marketing and distribution of the Durom Cup in the U.S. Subsequently, a number of product liability lawsuits were filed against us in various U.S. and foreign jurisdictions. The plaintiffs seek damages for personal injury, and they generally allege that the Durom Cup contains defects that result in complications and premature revision of the device. We have settled the majority of these claims and others are still pending. The majority of the pending U.S. lawsuits are currently in a federal Multidistrict Litigation (“MDL”) in the District of New Jersey (In Re: Zimmer Durom Hip Cup Products Liability Litigation). Litigation activity in the MDL is stayed pending finalization of the U.S. Durom Cup Settlement Program, an extrajudicial program created to resolve actions and claims of eligible U.S. plaintiffs and claimants. Other lawsuits are pending in various domestic and foreign jurisdictions, and additional claims may be asserted in the future. The majority of claims outside the U.S. are pending in Germany, Netherlands and Italy.
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 possible loss, as discussed above.
24
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). Other related cases are pending in various state and federal courts. Additional lawsuits are likely to be filed. The parties attended a mediation in February 2022, at which a settlement in principle was reached that would resolve substantially all MDL cases and certain state court cases. 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 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 are currently consolidated in an MDL in the U.S. District Court for the Northern District of Indiana (In Re: Biomet M2a Magnum Hip Implant Product Liability Litigation) and in various state, federal and foreign courts, with the majority of domestic state court cases pending in Indiana and Florida.
On February 3, 2014, Biomet announced the settlement of the MDL. Lawsuits filed in the MDL by April 15, 2014 were eligible to participate in the settlement. Those claims that did not settle via the MDL settlement program have re-commenced litigation in the MDL under a new case management plan, or have been or are in the process of being remanded to their originating jurisdictions. The settlement does not affect certain other claims relating to Biomet’s metal-on-metal hip products that are pending in various state and foreign courts, or other claims that may be filed in the future. Trials have commenced, and other trials are currently scheduled to occur in the future. 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. 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 possible loss, as discussed above.
Heraeus trade secret misappropriation lawsuits: As previously disclosed, in December 2008, Heraeus Kulzer GmbH (together with its affiliates, “Heraeus”) initiated legal proceedings in Germany against Biomet, Inc., Biomet Europe BV (now Zimmer Biomet Nederland BV), certain other entities and certain employees alleging that the defendants misappropriated Heraeus trade secrets when developing Biomet Europe’s Refobacin and Biomet Bone Cement line of cements. Heraeus and Zimmer Biomet subsequently filed additional trade secret misappropriation and related actions against one another variously in the United States and numerous European countries.
Based on various developments in these lawsuits in both the United States and Europe in the fourth quarter of 2021, the parties’ interests in exploring a negotiated resolution, and to avoid the continuing risks associated with potential negative outcomes, the projected legal spend and management distraction associated with continuing litigation, we determined that it was in the best interest of our company and our stockholders to settle all litigation with Heraeus globally. On March 3, 2022, Zimmer Biomet and Heraeus entered into a confidential settlement agreement to fully resolve all global disputes between and among them relating to both Heraeus’ alleged technical trade secrets misappropriation relating to bone cement and Zimmer Biomet’s alleged business trade secrets misappropriation relating to bone cement. Among other terms and conditions, the confidential settlement agreement includes the dismissal of all lawsuits by both parties, mutual general releases benefitting both parties, and mutual covenants not to sue, as well as no admission of wrongdoing by either party and no admission concerning the validity or existence of either parties’ alleged trade secrets. The release and covenant-not-to-sue terms extend to certain of our former and current suppliers who are third-party beneficiaries to the settlement agreement. Our accrued litigation expense was adjusted in the fourth quarter of 2021 to reflect the portion of the settlement in excess of existing accruals, and our settlement payment to Heraeus will be made in agreed installments over an approximately three-year period, which began upon the execution of the settlement agreement.
Shareholder Derivative Actions: On June 14, 2019 and July 29, 2019, two shareholder derivative actions, Green v. Begley et al. and Detectives Endowment Association Annuity Fund v. Begley et al., were filed in the Court of Chancery in the State of Delaware. On October 2, 2019 and October 11, 2019, two additional shareholder derivative actions, Karp v. Begley et al. and DiGaudio v. Begley et al., were filed in the U.S. District Court for the District of Delaware. The plaintiff in each action seeks to maintain the action purportedly on our behalf against certain of our current and former directors and officers (the “individual defendants”) and certain former stockholders of ours who sold shares of our common stock in various secondary public offerings in 2016 (the “private equity fund defendants”). The plaintiff in each action alleges, among other things, breaches of fiduciary duties against the individual defendants and insider trading against two individual defendants and the private equity fund defendants based on allegations that the defendants violated federal securities laws by making materially false and/or misleading statements and/or omissions about our compliance with U.S. Food and Drug Administration (“FDA”) regulations and our ability to continue to accelerate our organic revenue growth rate in the second half of 2016. On June 4, 2020, the plaintiffs in the Chancery Court actions filed a consolidated amended complaint adding three new counts and expanding the scope of the alleged materially false statements. On September 14, 2020, the defendants filed motions to dismiss the Chancery Court actions. Oral argument occurred on June 15, 2021. On August 15,
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2021, the Chancery Court granted the defendants’ motion to dismiss and dismissed the Chancery Court actions with prejudice. On September 22, 2021, the plaintiffs in the Chancery Court actions filed a Notice of Appeal to the Delaware Supreme Court; briefing concluded in January 2022 and oral argument is scheduled for May 25, 2022. On September 14, 2020, the plaintiffs in the U.S. District Court actions filed a consolidated amended complaint adding certain details to their allegations. On October 9, 2020, the U.S. District Court granted the parties’ joint motion to stay the U.S. District Court actions pending resolution of the Chancery Court actions. The plaintiffs in the Chancery Court and the U.S. District Court actions do not seek damages from us, but instead request damages on our behalf from the defendants of an unspecified amount, as well as attorneys’ fees, costs and other relief. We have not recorded an expense related to damages in connection with these matters because any potential loss is not currently probable or reasonably estimable, and we are unable to reasonably estimate the range of loss, if any, that may result from these matters.
Regulatory Matters, Government Investigations and Other Matters
FDA warning letter: In August 2018, we received a warning letter from the FDA related to observed non-conformities with current good manufacturing practice requirements of the Quality System Regulation (21 CFR Part 820) (“QSR”) at our legacy Biomet manufacturing facility in Warsaw, Indiana (this facility is sometimes referred to in this report as the “Warsaw North Campus”). We have provided detailed responses to the FDA as to our corrective actions and will continue to work expeditiously to address the issues identified by the FDA during inspections in Warsaw. As of March 31, 2022, the Warsaw warning letter remained pending. Until the violations cited in the pending warning letter are corrected, we may be subject to additional regulatory action by the FDA, as described more fully below. Additionally, requests for Certificates to Foreign Governments may not be granted and premarket approval applications for Class III devices to which the QSR deviations are reasonably related will not be approved until the violations have been corrected. In addition to responding to the warning letter described above, we are in the process of addressing various FDA Form 483 inspectional observations at certain of our manufacturing facilities, including observations issued by the FDA following an inspection of the Warsaw North Campus in January 2020, which inspection the FDA has classified as Voluntary Action Indicated (“VAI”). The ultimate outcome of these matters is presently uncertain. Among other available regulatory actions, the FDA may impose operating restrictions, including a ceasing of operations, at one or more facilities, enjoining and restraining certain violations of applicable law pertaining to products, seizure of products and assessing civil or criminal penalties against our officers, employees or us. The FDA could also issue a corporate warning letter or a recidivist warning letter or negotiate the entry of a consent decree of permanent injunction with us. The FDA may also recommend prosecution by the U.S. Department of Justice. Any adverse regulatory action, depending on its magnitude, may restrict us from effectively manufacturing, marketing and selling our products and could have a material adverse effect on our business, financial condition and results of operations.
Other Contingencies
Indemnifications: As part of the ZimVie spinoff, we agreed to indemnify ZimVie for certain legal and tax matters. Our responsibilities for legal indemnification are for specifically identified matters and are subject to a maximum amount, which is not significant for us. We have made an accrual based on an estimate of the possible loss for any legal indemnification. For tax matters, our indemnification is related to tax periods prior to the spinoff and any tax liabilities that may be incurred as part of the spinoff. We have maintained accruals based upon an estimate of any possible tax indemnifications.
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 $0 to approximately $360 million.
16. Subsequent Events
In April 2022, we acquired another company for approximately $100 million. In order to fund the acquisition, we borrowed an additional $100.0 million tranche under our 2021 Five-Year Revolving Facility. This acquisition is not expected to have a significant effect on our results of operations or financial position and therefore no further information has been provided.
In April 2022, we repaid the $100.0 million tranche under our 2021 Five-Year Revolving Facility that we previously borrowed, using cash on hand, leaving $100.0 million outstanding.
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