Zimmer Holdings, Inc. 2009 Form 10-K Summary
Business context and reporting period
Zimmer Holdings, Inc. designs, manufactures and markets orthopaedic reconstructive, dental, spine, trauma and related surgical products, with operations in more than 25 countries and sales in more than 100 countries. Reportable regions are the Americas, Europe and Asia Pacific. The filing covers the fiscal year ended December 31, 2009; fourth-quarter data are unaudited.
Direct channel accounts represented approximately 80% of 2009 net sales. Regional sales were $2,372.4 million in the Americas, $1,119.2 million in Europe and $603.8 million in Asia Pacific.
Key financial metrics
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Net sales | $4,095.4 million | $4,121.1 million | (1%) |
| Gross profit | $3,104.6 million | $3,123.8 million | (1%) |
| Gross margin | 75.8% | 75.8% | Flat |
| Operating profit | $1,018.8 million | $1,090.0 million | (7%) |
| Operating margin | 24.9% | 26.5% | Down 1.6 points |
| Net earnings attributable to Zimmer | $717.4 million | $848.6 million | (15%) |
| Diluted EPS | $3.32 | $3.72 | (11%) |
| Operating cash flow | $1,117.5 million | $1,038.1 million | +8% |
The consolidated statement reports 2009 net earnings of $717.4 million and 2008 net earnings of $849.5 million before noncontrolling interests; attributable earnings were $717.4 million and $848.6 million, respectively.
- Product-category sales: reconstructive $3,124.7 million, dental $204.7 million, trauma $234.8 million, spine $253.6 million, and orthopaedic surgical products and other $277.6 million.
- R&D expense increased to $205.4 million, or 5.0% of sales, from $192.3 million and 4.7% of sales.
- SG&A increased to $1,729.2 million from $1,704.0 million and reached 42.2% of sales.
- Cash and cash equivalents were $691.7 million at year-end, compared with $212.6 million in 2008. Certificates of deposit totaled $66.4 million.
- Trade receivable days improved to 56 from 59, and inventory days declined to 302 from 344.
- Total assets were $7,785.5 million; stockholders’ equity was $5,638.7 million.
- Long-term debt was $1,127.6 million, including $998.8 million of senior notes and $128.8 million drawn under the revolving credit facility. No short-term debt was outstanding.
- The $1,350 million revolving facility had $1,221.2 million of availability at year-end; the company reported compliance with all covenants.
- Fourth-quarter 2009 net sales were $1,107.3 million, gross profit was $832.9 million, net earnings attributable to Zimmer were $155.2 million and diluted EPS was $0.74.
Material changes versus the prior comparable period
- Sales declined 1% as 2% volume and mix growth was offset by 1% lower pricing and a 2% foreign-exchange headwind. Americas sales increased 1%, Asia Pacific increased 3%, and Europe declined 5%.
- Reconstructive sales declined 1%; knees were flat, hips declined 4%, and extremities increased 12%. Dental declined 10%, while trauma increased 6% and spine increased 10%.
- Operating profit declined primarily because of higher operating expenses, including a $73.0 million goodwill impairment charge for the U.S. Spine reporting unit.
- Net earnings also reflected higher interest expense following the 2009 debt issuance and a higher effective tax rate of 28.1%, versus 24.3% in 2008.
- Operating cash flow increased despite cash outflows related to healthcare-professional payments, employee bonuses and product-liability payments.
- Investing cash use decreased to $381.2 million from $924.2 million, primarily because 2008 included the $363.0 million Abbott Spine acquisition and higher capital spending.
- The company repurchased $923.7 million of common stock in 2009, or approximately 19.8 million shares, compared with $737.0 million in 2008.
Guidance, outlook, risks and unusual items
- Management expected 2010 knee and hip procedure growth in the mid-single digits in the Americas and Asia Pacific, with flat to slightly positive growth in large developed European markets.
- Management expected 2010 global pricing declines of approximately 1% to 2%, R&D investment of 5% to 6% of sales and gross margin of approximately 75%, assuming year-end 2009 currency rates.
- Management expected 2010 interest expense to increase because of the $1.0 billion senior-notes offering, partly offset by the benefit of share repurchases.
- New products and regulatory clearances included the Continuum Acetabular System, Zimmer MMC Cup and Zimmer Patient Specific Instruments. The company expected the sales benefit from launches to be weighted toward the second half of 2010.
- The Durom Cup suspension and related product-liability matters adversely affected hip growth. The company recorded an additional $35.0 million provision in 2009; the related reserve was $71.9 million at year-end, with most payments expected within three years.
- The U.S. Spine business faced competition, reimbursement challenges and uncertainty after an FDA advisory panel issued a non-approvable recommendation concerning additional Dynesys uses. Further goodwill impairment remains possible if projected cash flows or margins deteriorate.
- The company remains subject to a Corporate Integrity Agreement through 2012. A material breach could result in exclusion from federal healthcare programs.
- The company was cooperating with ongoing SEC and Department of Justice investigations concerning potential Foreign Corrupt Practices Act violations, including voluntary disclosures involving third-party distributors in two South American countries.
- Other risks include product liability, regulatory approval and compliance, reimbursement and pricing pressure, dependence on agents and distributors, foreign-exchange exposure, intellectual-property litigation, supplier concentration, healthcare reform and putative securities and ERISA class actions.
- Unusual 2009 items included $75.3 million of acquisition, integration, realignment and other costs, a $32.1 million net curtailment and settlement gain, and $73.0 million of goodwill impairment.
Most important facts for investors to verify
- Reconcile the decline in earnings and operating margin after adjusting for the U.S. Spine goodwill impairment, Durom Cup provisions, realignment costs and pension-related gain.
- Assess whether orthopedic procedure volumes and market share recovered as expected, particularly in hips and knees.
- Monitor Durom Cup claims, product-liability accrual adequacy and any additional litigation exposure.
- Track the SEC and DOJ FCPA investigation, Corporate Integrity Agreement compliance and potential sanctions.
- Evaluate U.S. Spine performance, Dynesys reimbursement and regulatory developments, and the risk of further impairment.
- Confirm 2010 pricing, gross-margin, R&D and capital-spending assumptions against subsequent filings.
- Review leverage, fixed-rate senior-note obligations, revolving-facility covenants and the remaining $211.1 million share-repurchase authorization.
- Consider foreign-currency sensitivity, international reimbursement pressures and the company’s ability to convert strong operating cash flow into sustainable earnings growth.