Zimmer Biomet Holdings, Inc. 3rd Quarter 2017 Earnings Call Presentation
November 1, 2017
2
Cautionary Note on Forward-Looking Statements and Non-GAAP Financial Measures
• Our discussions during this presentation will include forward-looking statements concerning, among other things, our anticipated future
operating and financial performance, business plans and prospects, product and service offerings, including new product launches and potential clinical successes, capital allocation plans and priorities, business development plans and priorities and the benefits expected from our acquisitions and other business development activities. Such statements are based upon the current beliefs and expectations of management and are subject to significant risks, uncertainties and changes in circumstances that could cause actual outcomes and results to differ materially. For a list and description of some of such risks and uncertainties, see our Annual Report on Form 10-K for the year ended December 31, 2016, including in the section thereof captioned “Risk Factors”, as well as our subsequent reports on Form 8-K and Form 10-Q, all of which are available at www.sec.gov and www.zimmerbiomet.com. The forward-looking statements in this presentation speak only as of the original date of this presentation and we undertake no obligation to update or revise any of these statements.
• Also, this presentation refers to certain financial measures that differ from financial measures calculated in accordance with U.S. generally
accepted accounting principles (GAAP). Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the Appendix to this presentation. Investors and other readers should consider non-GAAP financial measures only as supplements to, and not as substitutes for or superior to, the measures of financial performance prepared in accordance with GAAP.
3
Table of Contents
2017 Guidance and Outlook
2017 Q3 Financial Summary
Company Overview
Appendix
2017 Q3 Financial Summary
5
3rd Quarter 2017 Net Sales Results Product Category Performance
Geographic Region Performance
(1) Includes approximately 30 basis points of contribution from the LDR acquisition and a negative impact of approximately 130 basis points as a result of having one less billing day during the quarter.
(2) Excludes approximately 30 basis points of contribution from the LDR acquisition and a negative impact of approximately 130 basis points as a result of having one less billing day during the quarter.
(3) Non-GAAP financial measure; see reconciliation.
Region (in millions)
Americas $1,142 -3.0% $3,586 1.4%
Europe 381 -0.4% 1,272 0.4%
Asia Pacific 295 5.2% 892 6.0%
Total $1,818 -1.2% $5,750 1.8%
Constant Currency % Change (3)Net Sales
Q3 Year to Date
Net SalesConstant Currency %
Change (3)
(1)
Product (in millions)
Knees $624 -1.7% $2,006 -0.8%
Hips 434 -1.7% 1,380 0.2%
S.E.T. 407 1.1% 1,255 3.7%
Dental 93 -4.4% 311 -3.4%
Spine & CMF 185 0.3% 565 20.1%
Other 75 -5.3% 233 -4.5%
Total $1,818 -1.2% $5,750 1.8%
Ex LDR, Billing Day Adjusted -0.2%
Constant Currency % Change (3)
Q3 Year to Date
Net SalesNet SalesConstant Currency %
Change (3)
(1)
(2)
6
Reconstructive Product Category
• Persona® Partial Knee System launched in September • Persona® The Personalized Knee System continues to drive growth • New products key catalyst in 2018 including Cementless, PSI X-Ray Guides, and Revision • Growth impacted by continued supply constraints from the Warsaw North Campus
KNEES
• Strong demand for G7® Acetabular System • First Clinical Graphics case performed in Q3 • OsseoTi ® Porous Metal Technology continues success in G7 ® Dual Mobility Construct
• Growth impacted by continued supply constraints from the Warsaw North Campus
HIPS
Persona® Personalized Knee System
Arcos® Modular Femoral Revision System
Taperloc® Complete Hip System
(1) Non-GAAP financial measure; see reconciliation
Persona® Partial Knee System
USD (millions)
Americas 383$ -3.9% 1,217$ -2.2%
EMEA 135 0.6% 463 -0.1%
APAC 106 3.9% 326 3.8%
Total Knees 624$ -1.7% 2,006$ -0.8%
Revenue RevenueConstant Currency
% Change (1)Constant Currency
% Change (1)
Q3 Year to Date
USD (millions)
Americas 228$ -4.7% 720$ -1.9%
EMEA 115 -1.5% 382 -0.6%
APAC 91 6.1% 278 7.2%
Total Hips 434$ -1.7% 1,380$ 0.2%
Revenue RevenueConstant Currency
% Change (1)Constant Currency
% Change (1)
Q3 Year to Date
7
USD (millions)
S.E.T. $407 1.1% $1,255 3.7%
Q3 Year to Date
RevenueConstant Currency
% Change (1) RevenueConstant Currency
% Change (1)
S.E.T. Product Category
• DVT product line continues to drive growth • Strong, above market regional performances in Americas and EMEA • IntelliCart™ System, evaluated in 250+ sites, receiving very positive
feedback
SURGICAL IntelliCart™ System
• 2018 product launches of Augmented Baseplate and Stemless
Shoulder growth accelerators • Growth impacted by continued supply constraints from the Warsaw
North Campus
EXTREMITIES Comprehensive® Total
Shoulder System
• Strong growth in APAC and EMEA • Continued buildout of specialized sales force • Growth impacted by continued supply constraints from the Warsaw
North Campus
TRAUMA NCB® Periprosthetic
Femur Plating System
• Gel-One® Cross-Linked Hyaluronate continues to drive growth • Specialized reps remain focused on driving Sports Medicine growth • Growth impacted by continued supply constraints from the Warsaw
North Campus
SPORTS MEDICINE
Gel-One®
Cross-Linked Hyaluronate
• Partnership with Nextremity benefits our product portfolio • Continued buildout of specialized sales force • A.L.P.S. ® saw steady demand
FOOT & ANKLE A.L.P.S.® Total Foot System
S.E.T. GLOBAL REVENUE
(1) Non-GAAP financial measure; see reconciliation
8
USD (millions)
Dental $93 -4.4% $311 -3.4%
RevenueConstant Currency
% Change (1) RevenueConstant Currency
% Change (1)
Q3 Year to Date
USD (millions)
Spine & CMF $185 0.3% $565 20.1%
Q3 Year to Date
RevenueConstant Currency
% Change (1) RevenueConstant Currency
% Change (1)
Spine, CMF & Dental Product Categories
SPINE & CMF GLOBAL REVENUE
• Mobi-C® continued to deliver significant growth
• Focused on cross-sell opportunities and mitigating channel dis-synergies
• Vitality® Spinal System provides steady growth
SPINE Mobi-C® Cervical Disc
• Continued to see steady sales for RibFix Blu Thoracic Fixation System, as
well as our SternaLock® Blu and SternaLock® 360 Primary Closure systems
CMF SternaLock® Blu Closure
System
DENTAL GLOBAL REVENUE
• Realigning portfolio to meet market needs
• Global commercial strategy execution underway DENTAL Osseotite® Implant
(1) Non-GAAP financial measure; see reconciliation
9
Leading in Innovation
Joint Preservation
Motion Preservation
Personalized Procedures
Diagnostics & Infection
Persona® Partial Knee (September 2017) • Fixed bearing partial knee • Clearance received in major markets across the globe
Persona® TM Tibia Knee (2H 2018) • Cementless knee utilizing clinically proven Trabecular Metal
Persona® Revision Knee (2H 2018 Limited Launch) • Adds revision offering to Persona portfolio
Medtech ROSA (2H 2018 Limited Launch) • Fully functional demo complete for Knee application • ROSA® cadaver lab held in Warsaw • Key Design Principles: X-Ray based, time net neutral, soft tissue balancing
Stemless Shoulder (2018)
Hip Preservation Portfolio • Entire continuum of care for Hip preservation • Clinical Graphics for hip application received clearance in March 2017
X-Ray Based Knee PSI Guides (2018) • Received CE mark and pursuing FDA clearance for full launch
Product Pipeline Persona®
Partial Knee System
• Mobi-C® Cervical Disc • VISCO-3™ • Quattro® Link Rotator Cuff Repair
Innovating to Minimize Complications
Reduce Surgery Times
Improve Efficiencies
Optimize Outcomes
Enhance Patient
Experiences
Recent Launches & Additions
10
Key 3rd Quarter Financials
(1) Includes approximately 30 basis points of contribution from the LDR acquisition and a negative impact of approximately 130 basis points as a result of having one less billing day during the quarter.
(2) Excluding the impact of foreign exchange, Adj. Net Earnings (3) and Adj. Diluted EPS (3) grew 0.2% and (0.6)%, respectively.
(3) Non-GAAP financial measure; see reconciliation
(4) Includes instrument depreciation
Key Call-Outs:
• Gross Profit – YoY quarterly performance impacted due to the impact of price declines, product mix, additional manufacturing costs and lower gains from our cash flow hedging program.
• SG&A – Continue to incur higher freight expenses due to expedited product shipments, partially offset by savings from synergy capture initiatives.
Metric (in millions) 2017 Q3 2016 Q3 Y/Y Growth
Net Sales $1,818.1 $1,832.8 -0.8%
Adj. Gross Profit (3) 73.0% 75.1% -
R&D (% of sales) 5.0% 5.2% -
SG&A (% of sales) 38.2% 39.7% -
Adj. Operating Margin (3) 29.8% 30.2% -
Adj. Net Earnings (2)(3) $349.9 $362.4 -3.4%
Adj. Diluted EPS (2)(3) $1.72 $1.79 -3.9%
Free Cash Flow (3) $344.4 $202.2 -
(1)
(4)
11
Free Cash Flow
($ In millions)YTD 2017 YTD 2016 Inc/(Dec) vs PY
Operating Cash Flow 1,179 1,005 174
CapExInstruments (256) (251) Traditional PP&E (109) (130) Total CapEx (365) (381)
Free Cash Flow (1) 814 624 190
Beginning Cash Balance (12/31/2016) 634 Ending Cash Balance (09/30/2017) 481
Beginning Debt Balance (12/31/2016) 11,241 Ending Debt Balance (09/30/2017) 10,425
(1) Non-GAAP financial measure; see reconciliation
2017 Guidance and Outlook
13
Q4 2017 FY2017Growth Growth
Reported 0.0% to 2.0% 1.0% to 1.5%
FX Impact -180 bps -10 bps
Constant Currency (1) (1.8)% to 0.2% 0.9% to 1.4%
LDR Impact - -120 bps
Constant Currency, Excluding LDR (1) (1.8)% to 0.2% (0.3)% to 0.2%
Billing Day - 20 bps 40 bps
Constant Currency, Excluding LDR, Billing Day Adjusted (1) (2.0)% to 0.0% 0.1% to 0.6%
Metric
2017 Revenue Guidance
(1) Non-GAAP financial measure; see reconciliation
14
2017 Guidance
Metric ($ in millions, excluding EPS data)
Q4 2017 FY2017
Constant Currency Revenue Growth (1)(3) (1.8)% to 0.2% 0.9% to 1.4%
Revenue $2,010 to $2,050 $7,760 to $7,800
Free Cash Flow $1,125 to $1,225
GAAP EPS $0.94 to $1.08 $3.80 to $3.93
Adj. Diluted EPS (2)(3) $2.08 to $2.14 $8.01 to $8.07
(1) Q4 2017 includes approximately 20-basis-point positive impact from billing days compared to the prior year. Full Year 2017 includes 120 basis points of acquired revenue from the LDR transaction as well as approximately 40-basis-point negative impact from billing days.
(2) This EPS range on the full year represents 0.6% to 1.4% growth over the prior year, or 4% to 5% excluding the negative impact of foreign exchange. (3)
(3) Non-GAAP financial measure; see reconciliation
Company Overview
16
Leading Musculoskeletal Portfolio
HIP
S.E.T.
SPINE & CRANIOMAXILLOFACIAL (CMF) & THORACIC
DENTAL
KNEE
Products for face and skull reconstruction, back and neck pain caused by deformities or injuries of the spine, and stabilization of the chest following open heart surgery
Products for biologics, extremities, sports medicine, surgical, trauma, foot and ankle and Zimmer Biomet Signature Solutions
Products for primary hip joint replacement, as well as revision procedures
Products for early intervention, bone preservation and full and partial knee replacement surgeries, including primary joint replacement and revision procedures
Dental reconstructive implants, prosthetic products and products for soft tissue and bone rehabilitation
17
Broad Portfolio of Solutions in the Musculoskeletal Market
Dental $4.2B Market
9%-11% Est. Share
S.E.T.* $15.0B Market
10%-11% Est. Share
Knee $7.5B Market
36%-37% Est. Share
Hip $6.0B Market
31%-32% Est. Share
CMF / Thoracic $1.1B Market
14%-16% Est. Share
*Surgical, Sports Medicine, Foot & Ankle, Extremities and Trauma Market shares based on internal and sell-side analysts’ estimates
Spine $9.0B Market
5%-7% Est. Share
18
Drivers of Sustainable Market Growth
• Favorable global demographics − Increasing percentage of
population 65 and older
• Supportive utilization trends − Penetration opportunity in
developed markets
• Expanding access to healthcare in emerging markets − Utilization at a fraction of
developed market rates
Growing global musculoskeletal market of ~$50B
Procedure Volume Share of World Population 65 and Older
World Population 65 and Older
Sou
rce:
Uni
ted
Nat
ions
Pop
ulat
ion
Div
isio
n
523M
714M
969M
1,25
2M
1,48
7M
2010 2020 2030 2040 2050
7.6%
9.3%
11.7%
14.2%
16.2%
19
Leading Musculoskeletal Portfolio
KNEE & HIP
S.E.T.
SPINE & CMF
DENTAL
*S.E.T. = Surgical, Sports Medicine, Foot & Ankle, Extremities and Trauma
Global market share leader
Diverse and fast growing category
Innovative products and solutions
Complete implant and regenerative portfolio
• 2016 Revenue of $4,620 million, 60% of ZBH business • 2016 Estimated Market Share of 33% to 34% • 2016 Estimated Market Growth of 3% to 4%
• 2016 Revenue of $1,645 million, 21% of ZBH business • 2016 Estimated Market Share of 10% to 11% • 2016 Estimated Market Growth of 4% to 6%
• 2016 Revenue of $662 million, 9% of ZBH business • 2016 Estimated Market Share of 5% to 7% • 2016 Estimated Market Growth of 1% to 3%
• 2016 Revenue of $428 million, 6% of ZBH business • 2016 Estimated Market Share of 9% to 11% • 2016 Estimated Market Growth of 4% to 5%
20
New
Timberline® MPF Lateral Fusion System
Arcos® Modular Femoral Revision System
DVR® Crosslock Distal Radius Plating System
& ePAK® Delivery System
Gel-One®
Cross-Linked Hyaluronate
Persona® Personalized Knee System
Vanguard® ID Total Knee System
G7® Acetabular System
Broad Portfolio
Quattro® Link Knotless Anchors
Mobi-C®
Comprehensive® Reverse
Shoulder System
Osseotite®
SternaLock Blu®
21
Guided by our Value Creation Framework
Market Leading Operating Margin:
• Leverage scale • Manufacturing and quality system optimization • Realize net synergies
Significant Free Cash Flow rates:
• Achievement of deleveraging goals • Value creating M&A • Returning value to stockholders
Opportunity to deliver 4%+ revenue growth by 2020:
• Innovative new products • Specialized sales forces • Expanding emerging markets presence
Operational Excellence
Disciplined Capital
Allocation
Growth
22
Key Strategies
Transforming Revenue Mix Strengthening presence in faster-growing product categories
Differentiated R&D
60+ new products and solutions launched in 2016 and 2017
Specialized Sales Channel
Leveraging scale and specialized reps to
accelerate growth
Disciplined Capital Allocation
Delivering value with strategic acquisitions
Free Cash Flow generation dedicated to further debt reduction and long-term shareholder friendly activities
23
Zimmer + Biomet = Transformative Combination
Revenue (in millions) Adj. Diluted EPS (1)
• Broad product portfolio
• Product combination enables key cross-sell & specialized channel focus
• 7.9% Adjusted EPS CAGR
• Innovative new products
• Internal and external portfolio development
• History of strong earnings growth and delivery of deal synergies
• Strong Free Cash Flow positioning ZBH for future flexibility
Key Strengths
(1) Non-GAAP financial measure; see reconciliation
$4,673
$6.40
$-
$3.00
$6.00
$9.00
$-
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
$10,000
2014 2015 2016 2017E
Revenue Adj. Diluted EPS
$7,760 - $7,800
$8.01 - $8.07
$5,998
$7,684$6.90
$7.96
24
M&A Strengthens Portfolio
17%
Knee 36%
Hips 25%
Platform Technologies Musculoskeletal Health Diversification
In 2016 Zimmer Biomet invested $1.5B on M&A transactions
25
Global Footprint: Operating Locations
Making a Global Impact In Patients’ Lives
• 39 Manufacturing sites globally • Sales in 100+ countries
Appendix
27
Reconciliation of Reported Net Sales % Change to Constant Currency % Change and % Change Excluding LDR Holding Corporation (unaudited)
Foreign ConstantExchange Currency
% Change Impact % ChangeGeographic Results
Americas (2.9) % 0.1 % (3.0) %EMEA 3.3 3.7 (0.4) Asia Pacific 2.4 (2.8) 5.2
Total (0.8) % 0.4 % (1.2) %
Product CategoriesKnees
Americas (3.8) % 0.1 % (3.9) %EMEA 3.7 3.1 0.6 Asia Pacific 2.3 (1.6) 3.9
Total (1.2) 0.5 (1.7) Hips
Americas (4.5) 0.2 (4.7) EMEA 2.4 3.9 (1.5) Asia Pacific 2.1 (4.0) 6.1
Total (1.4) 0.3 (1.7)
S.E.T 1.2 0.1 1.1 Dental (3.2) 1.2 (4.4) Spine & CMF 0.7 0.4 0.3 Other (4.8) 0.5 (5.3)
Total (0.8) % 0.4 % (1.2) %Impact of additional LDR Holding Corporation billing days in the 2017 period (0.3) - (0.3) % Change excluding LDR Holding Corporation (1.1) % 0.4 % (1.5) %
September 30, 2017For the Three Months Ended
28
Reconciliation of Reported Net Sales % Change to Constant Currency % Change and % Change Excluding LDR Holding Corporation (unaudited)
Foreign ConstantExchange Currency
% Change Impact % ChangeGeographic Results
Americas 1.5 % 0.1 % 1.4 %EMEA (1.0) (1.4) 0.4 Asia Pacific 4.8 (1.2) 6.0
Total 1.4 % (0.4) % 1.8 %
Product CategoriesKnees
Americas (2.2) % - % (2.2) %EMEA (2.2) (2.1) (0.1) Asia Pacific 3.5 (0.3) 3.8
Total (1.3) (0.5) (0.8)
HipsAmericas (1.9) - (1.9) EMEA (1.5) (0.9) (0.6) Asia Pacific 5.3 (1.9) 7.2
Total (0.4) (0.6) 0.2
S.E.T 3.3 (0.4) 3.7 Dental (3.5) (0.1) (3.4) Spine & CMF 20.1 - 20.1 Other (4.9) (0.4) (4.5)
Total 1.4 % (0.4) % 1.8 %Impact of additional LDR Holding Corporation billing days in the 2017 period (1.6) - (1.6) % Change excluding LDR Holding Corporation (0.2) % (0.4) % 0.2 %
For the Nine Months EndedSeptember 30, 2017
29
Reconciliation of Cash Flow from Operating Activities to Free Cash Flow
Three Months Ended Three Months Ended Three Months Ended Nine Months Ended March 31, 2017 June 30, 2017 September 30, 2017 September 30, 2017
Net cash provided by operating activities 275.4$ 440.5$ 463.5$ 1,179.4$ Additions to instruments (86.4) (86.2) (83.1) (255.7) Additions to other property, plant and equipment (43.1) (30.7) (36.0) (109.8) Free cash flow 145.9$ 323.6$ 344.4$ 813.9$
For the Quarterly and Year-to-Date Periods in Calendar Year Ending December 31, 2017(in millions, unaudited)
Three Months Ended Three Months Ended Three Months Ended Nine Months Ended March 31, 2016 June 30, 2016 September 30, 2016 September 30, 2016
Net cash provided by operating activities 272.8$ 379.6$ 352.6$ 1,005.0$ Additions to instruments (85.1) (72.2) (94.0) (251.3) Additions to other property, plant and equipment (27.6) (46.1) (56.4) (130.1) Free cash flow 160.1$ 261.3$ 202.2$ 623.6$
For the Quarterly and Year-to-Date Periods in Calendar Year Ending December 31, 2016(in millions, unaudited)
30
Reconciliation of Gross Profit & Margin to Adjusted Gross Profit & Margin
Three Months Ended Three Months Ended Three Months Ended Nine Months Ended March 31, 2017 June 30, 2017 September 30, 2017 September 30, 2017
Net Sales 1,977.3$ 1,954.4$ 1,818.1$ 5,749.8$
Cost of products sold, excluding intangible asset amortization 512.9 527.7 500.9 1,541.5
Intangible asset amortization 152.0 147.7 152.7 452.4
Gross profit 1,312.4$ 1,279.0$ 1,164.5$ 3,755.9$ Inventory step-up and other inventory and manufacturing related charges 23.2 24.9 10.4 58.5 Intangible asset amortization 152.0 147.7 152.7 452.4 Adjusted gross profit 1,487.6$ 1,451.6$ 1,327.6$ 4,266.8$
Gross margin 66.4 % 65.4 % 64.1 % 65.3 %Inventory step-up and other inventory and manufacturing related charges 1.1 1.3 0.5 1.0 Intangible asset amortization 7.7 7.6 8.4 7.9 Adjusted gross margin 75.2 % 74.3 % 73.0 % 74.2 %
For the Quarterly and Year-to-Date Periods in Calendar Year Ending December 31, 2017(in millions, unaudited)
31
Reconciliation of Gross Profit & Margin to Adjusted Gross Profit & Margin
Three Months Ended Three Months Ended Three Months Ended Three Months Ended Year Ended
March 31, 2016 June 30, 2016 September 30, 2016 December 31, 2016 December 31, 2016
Net Sales 1,904.0$ 1,934.0$ 1,832.8$ 2,013.1$ 7,683.9$
Cost of products sold, excluding intangible asset amortization 640.6 640.1 479.3 621.8 2,381.8
Intangible asset amortization 126.6 133.8 164.3 141.2 565.9
Gross profit 1,136.8$ 1,160.1$ 1,189.2$ 1,250.1$ 4,736.2$ Inventory step-up and other inventory and manufacturing related charges 178.3 156.6 22.8 111.4 469.1 Intangible asset amortization 126.6 133.8 164.3 141.2 565.9 Adjusted gross profit 1,441.7$ 1,450.5$ 1,376.3$ 1,502.7$ 5,771.2$
Gross margin 59.7 % 60.0 % 64.9 % 62.1 % 61.6 %Inventory step-up and other inventory and manufacturing related charges 9.4 8.1 1.2 5.5 6.1 Intangible asset amortization 6.6 6.9 9.0 7.0 7.4 Adjusted gross margin 75.7 % 75.0 % 75.1 % 74.6 % 75.1 %
For the Quarterly and Year-to-Date Periods in Calendar Year Ending December 31, 2016(in millions, unaudited)
32
Reconciliation of Operating Profit & Margin to Adjusted Operating Profit & Margin
Three Months Ended Three Months Ended Three Months Ended Nine Months Ended March 31, 2017 June 30, 2017 September 30, 2017 September 30, 2017
Operating profit 350.4$ 282.3$ 213.4$ 846.1$ Inventory step-up and other inventory and manufacturing related charges 23.2 24.9 10.4 58.5 Intangible asset amortization 152.0 147.7 152.7 452.4 Special items 110.1 158.6 165.4 434.1 Adjusted operating profit 635.7$ 613.5$ 541.9$ 1,791.1$
Operating profit margin 17.7 % 14.4 % 11.7 % 14.7 %Inventory step-up and other inventory and manufacturing related charges 1.1 1.3 0.5 1.0 Intangible asset amortization 7.7 7.6 8.4 7.9 Special items 5.6 8.1 9.2 7.5 Adjusted operating profit margin 32.1 % 31.4 % 29.8 % 31.1 %
For the Quarterly and Year-to-Date Periods in Calendar Year Ending December 31, 2017(in millions, unaudited)
33
Reconciliation of Operating Profit & Margin to Adjusted Operating Profit & Margin
Three Months Ended Three Months Ended Three Months Ended Three Months Ended Year Ended
March 31, 2016 June 30, 2016 September 30, 2016 December 31, 2016 December 31, 2016
Operating profit (loss) 245.5$ 201.6$ 195.5$ 183.3$ 825.9$ Inventory step-up and other inventory and manufacturing related charges 178.3 156.6 22.8 111.4 469.1 Intangible asset amortization 126.6 133.8 164.3 141.2 565.9 Special items 88.7 137.9 170.4 214.8 611.8 Adjusted operating profit 639.1$ 629.9$ 553.0$ 650.7$ 2,472.7$
Operating profit (loss) margin 12.9 % 10.4 % 10.7 % 9.1 % 10.7 %Inventory step-up and other inventory and manufacturing related charges 9.4 8.1 1.2 5.5 6.1 Intangible asset amortization 6.6 6.9 9.0 7.0 7.4 Special items 4.7 7.2 9.3 10.7 8.0 Adjusted operating profit margin 33.6 % 32.6 % 30.2 % 32.3 % 32.2 %
For the Quarterly and Year-to-Date Periods in Calendar Year Ending December 31, 2016(in millions, unaudited)
34
Reconciliation of Net Earnings to Adjusted Net Earnings
2017 2016Net Earnings of Zimmer Biomet Holdings, Inc. 98.8$ 158.8$ Inventory step-up and other inventory and manufacturing-related charges 10.4 22.8 Intangible asset amortization 152.7 164.3 Special items
Biomet merger-related 81.1 113.8 Other special items 84.3 56.6
Merger-related and other (income) expense in other expense, net (0.5) (2.6) Taxes on above items (1) (79.1) (111.6) Other certain tax adjustments (2) 2.2 (39.7) Adjusted Net Earnings 349.9$ 362.4$
(1) The tax effect for the U.S. jurisdiction is calculated based on an effective rate considering federal and state taxes, as well as permanent items. For jurisdictions outside the U.S., the tax effect is calculated based upon the statutory rates where the items were incurred.
(2) In 2017, other certain tax adjustments relate to net unfavorable resolutions of various tax matters. The 2016 adjustment primarily relates to a favorable adjustment to certain deferred tax liabilities recognized as part of acquisition-related accounting.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017 and 2016(in millions, unaudited)
Three MonthsEnded September 30,
35
Reconciliation of Net Earnings to Adjusted Net Earnings
2017 2016Net Earnings of Zimmer Biomet Holdings, Inc. 582.4$ 236.3$ Inventory step-up and other inventory and manufacturing-related charges 58.5 357.7 Intangible asset amortization 452.4 424.7 Special items
Biomet merger-related 206.3 313.5 Other special items 227.8 83.5
Merger-related and other (income) expense in other expense, net 0.5 (1.1) Taxes on above items (1) (264.4) (297.0) Biomet merger-related measurement period tax adjustments (2) - 52.7 Other certain tax adjustments (3) (55.6) 6.4 Adjusted Net Earnings 1,207.9$ 1,176.7$
(1) The tax effect for the U.S. jurisdiction is calculated based on an effective rate considering federal and state taxes, as well as permanent items. For jurisdictions outside the U.S., the tax effect is calculated based upon the statutory rates where the items were incurred.
(2) The 2016 period includes negative effects from finalizing the tax accounts for the Biomet merger. Under the applicable U.S. GAAP rules, these measurement period adjustments are recognized on a prospective basis in the period of change.
(3) In 2017, other certain tax adjustments relate to a tax restructuring that lowered the tax rate on deferred tax liabilities recorded on intangible assets recognized in acquisition-related accounting, net favorable resolutions of various tax matters, and charges from internal restructuring transactions that provide the Company access to cash in a tax efficient manner. The 2016 adjustment primarily relates to a favorable adjustment to certain deferred tax liabilities recognized as part of acquisition-related accounting offset by internal restructuring transactions that provide the Company access to cash in a tax efficient manner.
Ended September 30,
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016(in millions, unaudited)
Nine Months
36
Reconciliation of Diluted EPS to Adjusted EPS
2017 2016Diluted EPS 0.48$ 0.78$ Inventory step-up and other inventory and manufacturing-related charges 0.05 0.11 Intangible asset amortization 0.75 0.81 Special items
Biomet merger-related 0.40 0.56 Other special items 0.41 0.28
Merger-related expense in other expense, net - (0.01) Taxes on above items (1)
(0.38) (0.55)
Other certain tax adjustments (2)0.01 (0.19)
Adjusted Diluted EPS 1.72$ 1.79$
(1) The tax effect for the U.S. jurisdiction is calculated based on an effective rate considering federal and state taxes, as well as permanent items. For jurisdictions outside the U.S., the tax effect is calculated based upon the statutory rates where the items were incurred.
(2) In 2017, other certain tax adjustments relate to net unfavorable resolutions of various tax matters. The 2016 adjustment primarily relates to a favorable adjustment to certain deferred tax liabilities recognized as part of acquisition-related accounting.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017 and 2016(unaudited)
Three MonthsEnded September 30,
37
Reconciliation of Diluted EPS to Adjusted EPS
2017 2016Diluted EPS 2.86$ 1.17$ Inventory step-up and other inventory and manufacturing-related charges 0.29 1.77 Intangible asset amortization 2.22 2.10 Special items
Biomet merger-related 1.01 1.55 Other special items 1.12 0.41
Merger-related and other expense in other expense, net - (0.01) Taxes on above items (1) (1.30) (1.47) Biomet merger-related measurement period tax adjustments (2) - 0.26 Other certain tax adjustments (3) (0.27) 0.04 Adjusted Diluted EPS 5.93$ 5.82$
(1) The tax effect for the U.S. jurisdiction is calculated based on an effective rate considering federal and state taxes, as well as permanent items. For jurisdictions outside the U.S., the tax effect is calculated based upon the statutory rates where the items were incurred.
(2) The 2016 period includes negative effects from finalizing the tax accounts for the Biomet merger. Under the applicable U.S. GAAP rules, these measurement period adjustments are recognized on a prospective basis in the period of change.
(3) In 2017, other certain tax adjustments relate to a tax restructuring that lowered the tax rate on deferred tax liabilities recorded on intangible assets recognized in acquisition-related accounting, net favorable resolutions of various tax matters, and charges from internal restructuring transactions that provide the Company access to cash in a tax efficient manner. The 2016 adjustment primarily relates to a favorable adjustment to certain deferred tax liabilities recognized as part of acquisition-related accounting offset by internal restructuring transactions that provide the Company access to cash in a tax efficient manner.
Ended September 30,
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016(unaudited)
Nine Months
38
Reconciliation of 2017 Projected Revenue % Change to 2017 Projected Constant Currency % Change and Change Excluding LDR Holding Corporation (unaudited)
Projected Three Months Ended December 31, 2017: High LowRevenue % change 2.0 % - %Foreign exchange impact (1.8) (1.8)
Constant currency % change 0.2 % (1.8) %
Projected Year Ended December 31, 2017: High LowRevenue % change 1.5 % 1.0 %Foreign exchange impact (0.1) (0.1)
Constant currency % change 1.4 % 0.9 %Impact of LDR Holding Corporation (1.2) (1.2)
Constant currency % change excluding LDR Holding Corporation 0.2 % (0.3) %
39
Reconciliation of 2017 Projected Diluted EPS and Projected Adjusted Diluted EPS (unaudited)
Projected Three Months Ended December 31, 2017: High LowDiluted EPS 1.08$ 0.94$ Inventory step-up and other inventory and manufacturing related charges, intangible asset amortization, special items and other expense 1.48 1.60 Taxes on above items(1) and other certain tax adjustments (0.42) (0.46) Adjusted Diluted EPS 2.14$ 2.08$
Projected Year Ended December 31, 2017: High LowDiluted EPS 3.93$ 3.80$ Inventory step-up and other inventory and manufacturing related charges, intangible asset amortization, special items and other expense 6.14 6.24 Taxes on above items(1) and other certain tax adjustments (2.00) (2.03) Adjusted Diluted EPS 8.07$ 8.01$
(1) The tax effect for the U.S. jurisdiction is estimated based on an effective rate considering federal and state taxes, as well as permanent items. For jurisdictions outside the U.S., the tax effect is estimated based upon the statutory rates where the items are projected to be incurred.
40
Reconciliation of GAAP Net Earnings to non-GAAP Adjusted Net Earnings (unaudited)
2016 2015 2014
Net Earnings of Zimmer Biomet Holdings, Inc. 305.9$ 147.0$ 720.3$ Inventory step-up and other inventory and manufacturing related charges 469.1 348.8 36.3 Certain claims - 7.7 21.5 Intangible asset amortization 565.9 337.4 92.5 Special items Biomet merger-related 487.3 619.1 61.9 Other special items 124.5 212.7 279.2 Merger-related and other expense in other (expense) income, net 3.6 1.0 39.6 Debt extinguishment cost 53.3 22.0 - Interest expense on Biomet merger financing - 70.0 - Taxes on above items (1) (449.0) (487.6) (153.3) Biomet merger-related measurement period tax adjustments (2) 52.7 - - Other certain tax adjustments (3)
(2.5) 32.4 - Adjusted Net Earnings 1,610.8$ 1,310.5$ 1,098.0$
(1) The tax effect for the U.S. jurisdiction is calculated based on an effective rate considering federal and state taxes, as well as permanent items. For jurisdictions outside the U.S., the tax effect is calculated based upon the statutory rates where the items were incurred.
(2) The 2016 period includes negative effects from finalizing the tax accounts for the Biomet merger. Under the applicable U.S. GAAP rules, these measurement period adjustments are recognized on a prospective basis in the period of change.
(3) Other certain tax adjustments primarily include internal restructuring transactions to integrate Biomet operations and facilitate access to offshore earnings, partially offset by resolution of certain matters with taxing authorities and adjustments to deferred tax liabilities recognized as part of acquisition-related accounting.
Year ended December 31,
41
Reconciliation of GAAP Diluted Earnings Per Share to non-GAAP Adjusted Diluted Earnings Per Share (unaudited)
2016 2015 2014
Diluted EPS 1.51$ 0.77$ 4.20$ Inventory step-up and other inventory and manufacturing related charges 2.32 1.84 0.21 Certain claims - 0.04 0.13 Intangible asset amortization 2.80 1.78 0.54 Special items Biomet merger-related 2.40 3.26 0.36 Other special items 0.62 1.12 1.63 Merger-related and other expense in other (expense) income, net 0.02 - 0.23 Debt extinguishment cost 0.26 0.12 - Interest expense on Biomet merger financing - 0.37 - Taxes on above items (1) (2.22) (2.57) (0.90) Biomet merger-related measurement period tax adjustments (2) 0.26 - - Other certain tax adjustments (3)
(0.01) 0.17 - Adjusted Diluted EPS 7.96$ 6.90$ 6.40$
(1) The tax effect for the U.S. jurisdiction is calculated based on an effective rate considering federal and state taxes, as well as permanent items. For jurisdictions outside the U.S., the tax effect is calculated based upon the statutory rates where the items were incurred.
(2) The 2016 period includes negative effects from finalizing the tax accounts for the Biomet merger. Under the applicable U.S. GAAP rules, these measurement period adjustments are recognized on a prospective basis in the period of change.
(3) Other certain tax adjustments primarily include internal restructuring transactions to integrate Biomet operations and facilitate access to offshore earnings, partially offset by resolution of certain matters with taxing authorities and adjustments to deferred tax liabilities recognized as part of acquisition-related accounting.
Year ended December 31,
42
Reconciliation of Net Earnings and Diluted EPS to Adjusted Net Earnings and Adjusted Diluted EPS and Adjusted Net Earnings and Adjusted Diluted EPS Excluding the Estimated Effects of Changes in Foreign Currency Exchange Rates
Projected (High) Projected (Low) 2017 2017 2016 2017 2016 2017 2016
Net Earnings of Zimmer Biomet Holdings, Inc. / Diluted EPS 3.93$ 3.80$ 1.50$ 98.8$ 158.8$ 0.48$ 0.78$ Inventory step-up and other inventory and manufacturing related charges, intangible asset amortization, special items and other expense 6.14 6.24 8.41 328.0 354.9 1.61 1.75 Taxes on above items(1) and other certain tax adjustments (2.00) (2.03) (1.95) (76.9) (151.3) (0.37) (0.74) Adjusted Diluted EPS 8.07$ 8.01$ 7.96$ 349.9$ 362.4$ 1.72$ 1.79$
Incremental foreign currency exchange rate forward contract cash flow hedges(2) 0.32 0.32 17.8 0.08 Effects of changes in foreign currency exchange rates on functional currency translation (3)
(0.05) (0.05) (4.7) (0.02) Adjusted Diluted EPS excluding the estimated effects of changes in foreign currency exchange rates (4)
8.34$ 8.28$ 363.0$ 1.78$
Growth over prior year Adjusted Diluted EPS 5% 4% 0.2% -0.6%
(1)
(2)
(3)
(4)
Three Months Ended September 30,
FOR THE FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016 and THREE MONTHS ENDED SEPTEMBER 30, 2017 and 2016
EPS
Years Ended December 31, Three Months Ended September 30,
(unaudited)
NET EARNINGS EPS
The tax effect for the U.S. jurisdiction is calculated based on an effective rate considering federal and state taxes, as well as permanent items. For jurisdictions outside the U.S., the tax effect is calculated based upon the statutory rates where the items were or are projected to be incurred.
We enter into foreign currency exchange rate forward contracts to minimize the effects of foreign currency exchange rate movements on the cash flows from our intercompany sales of inventory. We designate these contracts as cash flow hedges and defer any gains or losses on these contracts until the inventory is sold to a third party. Based upon actual and estimated foreign currency exchange rates, we estimate that we will recognize lower hedge gains in the applicable periods when compared to the same prior year period.
Under U.S. GAAP, we consolidate our foreign operations by translating their statement of earnings in their functional currency into U.S. Dollars using average foreign currency exchange rates during the applicable time period. We have estimated the effects of changes in foreign currency exchange rates on our consolidated statement of earnings by translating the current period functional currency results using the same exchange rates from the prior year period. This estimate is complex and may not actually reflect the changes in our consolidated statement of earnings had foreign currency exchange rates not changed. This effect also includes the estimated tax impact on the foreign currency exchange forward contract cash flow hedges.
Adjusted Diluted EPS excluding the estimated effects of changes in foreign currency exchange rates excludes the effects of incremental changes in foreign currency exchange rate forward contract cash flow hedges, incremental changes in remeasurement of monetary assets and liabilities denominated in a currency other than its functional currency and the effects of changes in foreign currency exchange rates on functional currency translation.
43