Business Context and Reporting Period
Zimmer Biomet Holdings, Inc. filed this Form 8-K on January 28, 2016, to disclose revisions to its historical financial statements for the years ended December 31, 2012, 2013, and 2014. The filing also includes historical financial statements for LVB Acquisition, Inc. (LVB) and pro forma combined financial information for the Company and LVB. The revisions address two specific accounting errors discovered in the third quarter of 2015: (1) an accumulation of errors in accounts payable accruals dating back to 2012, and (2) an incorrect calculation of gain on the divestiture of certain Biomet product lines in the quarter ended June 30, 2015.
Key Financial Metrics and Revisions
The filing provides a comparative summary of "As Reported" versus "As Revised" figures for the years ended December 31, 2012, 2013, and 2014. The following table highlights the material adjustments to Net Earnings and Earnings Per Share (Diluted) in millions, except per share amounts:
| Year Ended Dec 31 | Net Earnings (As Reported) | Net Earnings (Adjustment) | Net Earnings (As Revised) | EPS Diluted (As Reported) | EPS Diluted (As Revised) |
|---|---|---|---|---|---|
| 2014 | $719.0 | $0.2 | $719.2 | $4.19 | $4.20 |
| 2013 | $759.2 | $19.4 | $778.6 | $4.43 | $4.54 |
| 2012 | $752.9 | $(21.0) | $731.9 | $4.29 | $4.17 |
Balance sheet revisions for December 31, 2014, include an increase in Inventories of $24.3 million and a decrease in Accounts Payable of $21.9 million. Total Assets increased by $23.3 million to $9,658.0 million, while Total Liabilities decreased by $5.8 million to $3,106.3 million.
Material Changes Versus Prior Periods
The primary material change is the correction of historical data rather than new operational performance. The cumulative corrections were deemed material to the financial statements for the three-month period ended September 30, 2015, prompting the restatement of prior periods. Key adjustments include:
- 2013: Net earnings increased by $19.4 million, primarily driven by a $27.0 million increase in earnings before income taxes due to the correction of the divestiture gain calculation.
- 2012: Net earnings decreased by $21.0 million, reflecting a $12.2 million reduction in earnings before income taxes.
- 2014: Net earnings saw a negligible increase of $0.2 million.
Management Commentary, Risks, and Contingencies
Management concluded that while the individual errors were not material to any previously issued financial statements, the cumulative corrections were material to the period ended September 30, 2015. Consequently, the Company revised prior periods rather than recognizing the corrections in the current period. The filing notes that the pro forma financial information for the year ended December 31, 2014, reflects these revisions alongside revisions to LVB's financial information. The filing does not provide updated guidance or outlook beyond the restatement of historical data and refers investors to subsequent 10-Q filings for events occurring after the 2014 10-K.
Important Facts for Investor Verification
- Verify the impact of the $21.9 million reduction in Accounts Payable on the Company's working capital and liquidity ratios for 2014.
- Confirm the methodology used to calculate the fair value of assets for the divestiture gain correction in 2013.
- Review the pro forma combined financial statements (Exhibit 99.2) to understand the combined financial position of Zimmer Biomet and LVB Acquisition, Inc.
- Check subsequent 10-Q filings for any further adjustments or operational updates not covered in this restatement.