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MarketScreener Homepage  >  Equities  >  Nyse  >  Zimmer Biomet Holdings    ZBH

ZIMMER BIOMET HOLDINGS

(ZBH)
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ZIMMER BIOMET : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/05/2020 | 06:09am EST
The following discussion and analysis should be read in conjunction with the
interim condensed consolidated financial statements and corresponding notes
included elsewhere in this Form 10-Q. Certain percentages presented in this
discussion and analysis are calculated from the underlying whole-dollar amounts
and, therefore, may not recalculate from the rounded numbers used for disclosure
purposes.

Executive Level Overview

Impact of the COVID-19 Global Pandemic


Our results have been and are expected to continue to be significantly impacted
by the COVID-19 global pandemic. The vast majority of our net sales are derived
from products used in elective surgical procedures. As COVID-19 rapidly started
to spread throughout the world in early 2020, our net sales decreased
dramatically as countries took precautions to prevent the spread of the virus
with lockdowns and stay-at-home measures and as hospitals deferred elective
surgical procedures.



The consequences of COVID-19 continue to be extremely fluid and there are many
market dynamics and impacts that we are unable to identify or quantify at this
time. We were encouraged by certain developments in the second quarter, but
COVID-19 continues to bring near-term uncertainty. In the second quarter, April
was the lowest month for elective surgical procedures, with sequential
improvement in May and June. Based upon current indications, we expect that
sequential improvement will continue through the third and fourth quarters, but
possibly at a more modest pace than occurred from April to June. There are many
positive and negative variables and uncertainties that could impact our
near-term performance, including the number of patients who deferred procedures
returning to their surgeons, patients who will continue to defer procedures due
to concerns of contracting the virus, patients affected by job losses and/or
loss of insurance coverage, and a return of the virus to markets that had
partially or mostly recovered. However, we believe that hospitals are now better
prepared and informed to handle the virus than they were in March, including
personal protective equipment availability, but that preparedness and
availability is subject to change.



With the deferral of elective surgical procedures, we have taken prudent
measures in an effort to maintain an adequate financial profile to have access
to capital to fund the business during these unprecedented times. Late in 2019,
we initiated the 2019 Restructuring Plan to reduce our costs. In response to the
COVID-19 pandemic, we have temporarily reduced discretionary spending such as
travel, meetings and other project spend that can be delayed with limited
long-term detriment to the business, and we temporarily suspended or limited
production at certain manufacturing facilities. However, we have not experienced
significant disruptions in our supply chain, or in our ability to meet our
customer demands.  We are also utilizing government wage assistance programs in
certain global markets and other policy support mechanisms, including tax relief
provisions in the U.S. CARES Act.

Results for the Three and Six-Month Periods ended June 30, 2020


Primarily as a result of the COVID-19 pandemic, our net sales decreased by 38.3
percent and 24.1 percent in the three and six-month periods ended June 30, 2020,
respectively, compared to the same prior year periods. We recognized a net loss
in the three and six-month periods ended June 30, 2020, driven by lower sales
due to the COVID-19 pandemic, in addition to goodwill and intangible asset
impairment charges totaling $33.0 million and $645.0 million, respectively. We
temporarily suspended or limited production at certain manufacturing facilities,
resulting in us immediately expensing $67.6 million in the three and six-month
periods ended June 30, 2020 that related to certain fixed overhead costs and
hourly production worker labor expenses that are included in the cost of
inventory when these facilities are operating at normal capacity. We also
incurred higher restructuring and other cost reduction initiative expenses in
the 2020 periods when compared to the same prior year periods. Lastly, in the
six-month period ended June 30, 2020, we recognized litigation-related charges
of $81.1 million compared to net litigation gains of $18.3 million in the same
prior year period.



Results of Operations

We analyze sales by three geographies, the Americas, EMEA and Asia Pacific, and
by the following product categories: Knees; Hips; S.E.T.; Dental, Spine & CMFT;
and Other. This sales analysis differs from our reportable operating segments,
which are based upon our senior management organizational structure and how we
allocate resources toward achieving operating profit goals. We analyze sales by
geography because the underlying market trends in any particular geography tend
to be similar across product categories and because we primarily sell the same
products in all geographies. Our business is seasonal in nature to some extent,
as many of our products are used in elective surgical procedures, which
typically decline during the summer months and can increase at the end of the
year once annual deductibles have been met on health insurance plans. In 2020,
it is uncertain if this seasonal pattern will be similar to previous years due
to COVID-19 and its related impacts.

                                       30

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Net Sales by Geography

The following tables present our net sales by geography and the components of the percentage changes (dollars in millions):




                 Three Months Ended
                      June 30,                           Volume /                  Foreign
                 2020          2019        % (Dec)         Mix         Price      Exchange
Americas       $   733.7$ 1,214.3        (39.6 ) %      (36.9 ) %   (2.6 ) %      (0.1 ) %
EMEA               218.7         438.0        (50.1 )        (48.7 )     (0.3 )        (1.1 )
Asia Pacific       273.7         336.3        (18.6 )        (17.2 )     (1.0 )        (0.4 )
Total          $ 1,226.1$ 1,988.6        (38.3 )        (36.2 )     (1.8 )        (0.3 )


                  Six Months Ended
                      June 30,                           Volume /          
       Foreign
                 2020          2019        % (Dec)         Mix         Price      Exchange
Americas       $ 1,835.0$ 2,408.4        (23.8 ) %      (21.0 ) %   (2.7 ) %      (0.1 ) %
EMEA               616.8         901.9        (31.6 )        (28.5 )     (1.3 )        (1.8 )
Asia Pacific       558.1         653.8        (14.6 )        (13.0 )     (1.0 )        (0.6 )
Total          $ 3,009.9$ 3,964.1        (24.1 )        (21.4 )     (2.1 )        (0.6 )




"Foreign Exchange," as used in the tables in this report, represents the effect of changes in foreign currency exchange rates on sales.

Net Sales by Product Category

The following tables present our net sales by product category and the components of the percentage changes (dollars in millions):



                         Three Months Ended
                              June 30,                           Volume /                  Foreign
                         2020          2019        % (Dec)         Mix         Price      Exchange
Knees                  $   374.2$   703.5        (46.8 ) %      (44.2 ) %   (2.3 ) %      (0.3 ) %
Hips                       329.7         478.5        (31.1 )        (28.5 )     (2.2 )        (0.4 )
S.E.T.                     252.6         357.0        (29.2 )        (26.0 )     (2.7 )        (0.5 )
Dental, Spine & CMFT       182.5         292.4        (37.6 )        (38.1 )      0.7          (0.2 )
Other                       87.1         157.2        (44.5 )        (42.9 )     (1.4 )        (0.2 )
Total                  $ 1,226.1$ 1,988.6        (38.3 )        (36.2 )     (1.8 )        (0.3 )



                          Six Months Ended
                              June 30,                           Volume /                  Foreign
                         2020          2019        % (Dec)         Mix         Price      Exchange
Knees                  $ 1,004.0$ 1,397.6        (28.2 ) %      (25.2 ) %   (2.3 ) %      (0.7 ) %
Hips                       762.3         961.9        (20.8 )        (17.5 )     (2.6 )        (0.7 )
S.E.T.                     586.2         713.8        (17.9 )        (15.1 )     (2.2 )        (0.6 )
Dental, Spine & CMFT       434.2         579.7        (25.1 )        (24.1 )     (0.6 )        (0.4 )
Other                      223.2         311.1        (28.2 )        (25.9 )     (1.9 )        (0.4 )
Total                  $ 3,009.9$ 3,964.1        (24.1 )        (21.4 )     (2.1 )        (0.6 )




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The following table presents our net sales by geography for our Knees and Hips product categories, which represent our most significant product categories (dollars in millions):




                     Three Months Ended June 30,                          

Six Months Ended June 30,

                      2020                2019          % (Dec)            2020                2019         % (Dec)
Knees
Americas          $       221.0$       414.5        (46.7 ) %   $       601.3$      823.7        (27.0 ) %
EMEA                       65.2               163.4        (60.1 )             217.9              339.1        (35.7 )
Asia Pacific               88.0               125.6        (29.9 )             184.8              234.8        (21.3 )
Total             $       374.2$       703.5        (46.8 )     $     1,004.0$    1,397.6        (28.2 )
Hips
Americas          $       170.7$       253.3        (32.6 ) %   $       403.2$      500.4        (19.4 ) %
EMEA                       70.8               125.9        (43.7 )             182.2              259.0        (29.7 )
Asia Pacific               88.2                99.3        (11.3 )             176.9              202.5        (12.7 )
Total             $       329.7$       478.5        (31.1 )     $       762.3$      961.9        (20.8 )



Demand (Volume and Mix) Trends


Declines in volume and changes in the mix of product sales had a negative effect
of 36.2 percent and 21.4 percent on year-over-year sales during the three and
six-month periods ended June 30, 2020, respectively. Volumes declined from the
deferral of many elective surgical procedures due to COVID-19. Based on current
indications, we expect to see sequential improvement to these negative trends
through the third and fourth quarters, but possibly at a more modest pace than
occurred from April to June.

Based upon country dynamics, volume declines varied by region. In Asia Pacific,
Japan is our largest market and did not experience as much of an impact from
COVID-19 as other countries. Additionally, in China the volume declines started
to occur in February, allowing time for better sequential improvement in the
second quarter. In the Americas, we saw stronger than expected recovery in May
and June. In the U.S., we are seeing second waves of steep infection
growth. However, we clearly see that healthcare systems, in general, are better
equipped to address the pandemic such that we are not seeing an erosion of
elective procedures at the same levels as observed in April. In EMEA, the return
to elective surgical procedures was slower than other regions, but continued to
improve throughout the quarter in our major markets.

Pricing Trends


Global selling prices had a negative effect of 1.8 percent and 2.1 percent on
year-over-year sales during the three and six-month periods ended June 30, 2020,
respectively. The majority of countries in which we operate continue to
experience pricing pressure from governmental healthcare cost containment
efforts and from local hospitals and health systems.

Foreign Currency Exchange Rates


For the three and six-month periods ended June 30, 2020, changes in foreign
currency exchange rates had a negative effect of 0.3 percent and 0.6 percent on
year-over-year sales, respectively. If foreign currency exchange rates remain at
levels consistent with recent rates, we estimate there will be a negative impact
of less than 1 percent on full-year 2020 sales.

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Expenses as a Percentage of Net Sales



                                   Three Months Ended                             Six Months Ended
                                        June 30,               % Inc /                June 30,               % Inc /
                                   2020            2019         (Dec)           2020            2019          (Dec)
Cost of products sold,
excluding intangible asset
amortization                          34.6    %     29.2   %        5.4   %        30.3   %       28.6   %        1.7   %
Intangible asset amortization         12.0           7.4            4.6             9.8            7.3            2.5
Research and development               7.2           5.6            1.6             6.2            5.4            0.8
Selling, general and
administrative                        54.2          42.2           12.0            49.6           41.3            8.3
Goodwill and intangible asset
impairment                             2.7           3.5           (0.8 )          21.4            1.8           19.6
Restructuring and other cost
reduction initiatives                  2.3           0.3            2.0             2.4            0.3            2.1
Quality remediation                    0.8           1.1           (0.3 )           0.9            1.1           (0.2 )
Acquisition, integration and
related                                0.2           0.3           (0.1 )           0.2            0.3           (0.1 )
Operating (loss) profit              (14.0 )        10.3          (24.3 )         (20.9 )         14.0          (34.9 )




The increase in cost of products sold as a percentage of net sales for the three
and six-month periods ended June 30, 2020 compared to the same prior year
periods was primarily due to temporarily suspended or limited production at
certain manufacturing facilities resulting in us immediately expensing $67.6
million that related to certain fixed overhead costs and hourly production
worker labor expenses that are included in the cost of inventory when these
facilities are operating at normal capacity. Additionally, excess and obsolete
charges as a percentage of net sales increased as these charges did not decline
ratably with the significant decline in our net sales. These unfavorable items
were partially offset by a charge of $20.8 million incurred in the three and
six-month periods ended June 30, 2019 to terminate a long-term raw material
supply agreement. Additionally, hedge gains on our hedging program were higher
in the 2020 periods than in the same prior year periods.



Intangible asset amortization expense increased minimally in the three and
six-month periods ended June 30, 2020 compared to the same prior year periods
due to additional amortization from the agreement to buy out certain licensing
arrangements we entered into on April 1, 2019 and other small acquisitions made
in 2019.

Research and development ("R&D") expenses decreased, but R&D expenses as a
percentage of net sales increased, in the three and six-month periods ended
June 30, 2020 compared to the same prior year periods. The decrease in expenses
was primarily due to savings as a result of the 2019 Restructuring Plan and
lower spending on travel and certain project costs due to COVID-19. R&D expenses
as a percentage of net sales increased due to the lower sales from the impact of
COVID-19.

Selling, general and administrative ("SG&A") expenses decreased in the three and
six-month periods ended June 30, 2020 compared to the same prior year periods
primarily due to lower variable selling expenses from the significant decline in
our net sales, as well as specific cost reductions taken due to COVID-19 and the
continued early impact of the 2019 Restructuring Plan. In the six-month period
ended June 30, 2020 these lower variable selling expenses were partially offset
by higher litigation-related charges of $81.1 million compared to net litigation
gains of $18.3 million in the same prior year period. Since SG&A expenses
include many fixed expenses, the decline in sales due to COVID-19 resulted in an
increase in SG&A expenses as a percentage of net sales in the 2020 periods.

In the three and six-month periods ended June 30, 2020, we recognized goodwill
and intangible asset impairment charges of $33.0 million and $645.0 million,
respectively, including charges of $470.0 million and $142.0 million related to
our EMEA and Dental reporting units, respectively, in the first quarter of
2020. In the three and six-month periods ended June 30, 2019, we recognized
intangible asset impairment charges of $70.1 million. For more information
regarding these charges, see Note 7 to our interim condensed consolidated
financial statements included in Part I, Item 1 of this report.

In December 2019, our Board of Directors approved, and we initiated, the 2019
Restructuring Plan with an overall objective of reducing costs to allow us to
invest in higher priority growth opportunities. We recognized expenses of $28.0
million and $73.0 million in the three and six-month periods ended June 30,
2020, respectively, attributable to restructuring and other cost reduction
initiatives, primarily related to employee termination benefits, distributor
contract terminations, consulting and project management expenses associated
with the 2019 Restructuring Plan. For more information regarding these charges,
see Note 4 to our interim condensed consolidated financial statements included
in Part I, Item 1 of this report.

Our quality remediation expenses declined in the three and six-month periods
ended June 30, 2020 compared to the same prior year periods, due to the natural
regression of completing our remediation milestones. Acquisition, integration
and related expenses declined in the three and six -month periods ended June 30,
2020 compared to the same prior year periods, mainly due to the completion of
certain integration efforts.

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Other Income (Expense), Net, Interest Expense, Net, and Income Taxes

In the three and six-month periods ended June 30, 2020 and 2019, the increase in other income (expense), net, was primarily related to certain components of pension expense and changes to the fair value of our equity investments.


Interest expense, net, decreased in the three and six-month periods ended
June 30, 2020, compared to the same prior year periods, due to lower average
outstanding debt balances during the 2020 periods resulting from debt repayments
throughout 2019 and Euro notes that were issued in the fourth quarter of 2019
that were used to refinance debt with higher interest rates.

In the three and six-month periods ended June 30, 2020, our effective tax rate
("ETR") was 6.2 percent and 1.2 percent, respectively, compared to 6.0 percent
and 12.5 percent in the three and six-month periods ended June 30, 2019,
respectively. Our ETR in the 2020 and 2019 periods was below the typical
statutory tax rate for various reasons. The 6.2 percent ETR in the three-month
period ended June 30, 2020 was the result of the mix of some of our
jurisdictions recognizing earnings while others had losses. The 1.2 percent ETR
in the six-month period ended June 30, 2020 was primarily due to the $612.0
million goodwill impairment charge, which resulted in a loss before taxes, but
has no corresponding tax benefit, as well as the mix of earnings and losses
among our jurisdictions. The 6.0 percent ETR in the three-month period ended
June 30, 2019 was primarily due to the favorable resolution of certain tax
audits. The 12.5 percent ETR in the six-month period ended June 30, 2019 was
primarily due to the favorable resolution of certain tax audits as well as a
release of uncertain tax positions due to emerging foreign tax guidance in the
first quarter. 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, including the European Union rules on state aid; 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.

Segment Operating Profit

                                                                                    Operating Profit as a
                              Net Sales                Operating Profit            Percentage of Net Sales
                         Three Months Ended           Three Months Ended              Three Months Ended
                              June 30,                     June 30,                        June 30,
(dollars in
millions)                2020          2019           2020           2019           2020              2019
Americas and Global
Businesses             $   757.5$ 1,255.1$      83.0$   427.2            11.0    %        34.0   %
EMEA                       204.1         405.8            20.0         117.5             9.8             29.0
Asia Pacific               264.5         327.7            78.4         118.0            29.6             36.0


                                                                                    Operating Profit as a
                              Net Sales                Operating Profit            Percentage of Net Sales
                          Six Months Ended             Six Months Ended                Six Months Ended
                              June 30,                     June 30,                        June 30,
(dollars in
millions)                2020          2019           2020           2019           2020              2019
Americas and Global
Businesses             $ 1,894.1$ 2,490.7$     451.8$   817.2            23.9    %        32.8   %
EMEA                       575.4         834.7           128.8         256.7            22.4             30.8
Asia Pacific               540.4         638.7           171.0         231.5            31.6             36.2




Similar to our consolidated results, all of our segments were adversely affected
by COVID-19. In each of our segments, operating profit as a percentage of net
sales declined in the three and six-month periods ended June 30, 2020 compared
to the same prior year periods due to the effect of fixed operating expenses
that did not decline proportionally with lower net sales.



                                       34

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Non-GAAP Operating Performance Measures




We use financial measures that differ from financial measures determined in
accordance with GAAP to evaluate our operating performance. These non-GAAP
financial measures exclude, as applicable, certain inventory and
manufacturing-related charges including charges to discontinue certain product
lines; intangible asset amortization; goodwill and intangible asset impairment;
restructuring and other cost reduction initiative expenses; quality remediation
expenses; acquisition, integration and related expenses; certain litigation
gains and charges; expenses to establish initial compliance with the European
Union Medical Device Regulation; other charges; any related effects on our
income tax provision associated with these items; tax adjustments relating to
the impacts of tax only amortization in Switzerland; other certain tax
adjustments; and, with respect to earnings per share information, provide for
the effect of dilutive shares assuming net earnings in a period of a reported
net loss. We use these non-GAAP financial measures internally to evaluate the
performance of the business. Additionally, we believe these non-GAAP measures
provide meaningful incremental information to investors to consider when
evaluating our performance. We believe these measures offer the ability to make
period-to-period comparisons that are not impacted by certain items that can
cause dramatic changes in reported income but that do not impact the
fundamentals of our operations. The non-GAAP measures enable the evaluation of
operating results and trend analysis by allowing a reader to better identify
operating trends that may otherwise be masked or distorted by these types of
items that are excluded from the non-GAAP measures. In addition, adjusted
diluted earnings per share is used as a performance metric in our incentive
compensation programs.

The following are reconciliations from our GAAP net (loss) earnings and diluted
(loss) earnings per share to our non-GAAP adjusted net earnings and non-GAAP
adjusted diluted earnings per share used for internal management purposes (in
millions, except per share amounts):



                                      Three Months Ended               Six Months Ended
                                           June 30,                        June 30,
                                     2020            2019            2020            2019
Net (Loss) Earnings of Zimmer
Biomet Holdings, Inc.            $     (206.6 )$     133.7$    (715.1 )$     379.8
Inventory and
manufacturing-related
charges(1)                                1.4            34.1             2.0            36.1
Intangible asset
amortization(2)                         147.7           146.9           295.3           290.3
Goodwill and intangible asset
impairment(3)                            33.0            70.1           645.0            70.1
Restructuring and other cost
reduction initiatives(4)                 28.0             6.9            73.0            11.6
Quality remediation(5)                    9.9            23.4            25.8            43.1
Acquisition, integration and
related(6)                                2.2             5.1             6.6            11.1
Litigation(7)                             1.3             7.0            81.1             5.2
Litigation settlement gain(8)               -               -               -           (23.5 )
European Union Medical Device
Regulation(9)                             6.1             5.1            17.1             6.7
Other charges(10)                         7.3            41.3            13.9            63.4
Taxes on above items(11)                (23.5 )         (69.8 )         (93.7 )        (100.6 )
Tax adjustments relating to
the impacts of tax only
amortization in
Switzerland(12)                          (0.7 )             -            16.2               -
Other certain tax
adjustments(13)                           4.1            (6.1 )          (3.1 )         (11.4 )
Adjusted Net Earnings            $       10.2$     397.7$     364.1$     781.9




                                       35
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                                      Three Months Ended                 Six Months Ended
                                           June 30,                          June 30,
                                     2020             2019             2020            2019
Diluted (Loss) Earnings Per
Share                            $      (1.00 )$      0.65$      (3.46 )$      1.84
Inventory and
manufacturing-related
charges(1)                               0.01             0.17             0.01            0.18
Intangible asset
amortization(2)                          0.71             0.71             1.43            1.41
Goodwill and intangible asset
impairment(3)                            0.16             0.34             3.12            0.34
Restructuring and other cost
reduction initiatives(4)                 0.14             0.03             0.35            0.06
Quality remediation(5)                   0.05             0.11             0.12            0.21
Acquisition, integration and
related(6)                               0.01             0.02             0.03            0.05
Litigation(7)                            0.01             0.03             0.39            0.03
Litigation settlement gain(8)               -                -                -           (0.11 )
European Union Medical Device
Regulation(9)                            0.03             0.02             0.08            0.03
Other charges(10)                        0.04             0.21             0.07            0.31
Taxes on above items(11)                (0.13 )          (0.34 )          (0.44 )         (0.50 )
Tax adjustments relating to
the impacts of tax only
amortization in
Switzerland(12)                             -                -             0.08               -
Other certain tax
adjustments(13)                          0.02            (0.02 )          (0.02 )         (0.05 )
Effect of dilutive shares
assuming net earnings(14)                   -                -            (0.01 )             -
Adjusted Diluted Earnings Per
Share                            $       0.05$      1.93$       1.75$      3.80

(1) Inventory and manufacturing-related charges include excess and obsolete

inventory charges on certain product lines we intend to discontinue and other

inventory and manufacturing-related charges. In the 2019 periods, inventory

    and manufacturing-related charges also include a $20.8 million charge
    incurred to terminate a raw material supply agreement.



(2) We exclude intangible asset amortization from our non-GAAP financial measures

because we internally assess our performance against our peers without this

amortization. Due to various levels of acquisitions among our peers,

intangible asset amortization can vary significantly from company to company.

(3) In the first quarter of 2020, we recognized goodwill impairment charges of

$470.0 million and $142.0 million related to our EMEA and Dental reporting

units, respectively. In the second quarters of 2020 and 2019, we recognized

$33.0 million and $70.1 million, respectively, of in-process research and

    development ("IPR&D") intangible asset impairments on certain IPR&D
    projects.



(4) In December 2019, our Board of Directors approved, and we initiated, a new

global restructuring program that includes a reorganization of key businesses

and an overall effort to reduce costs in order to accelerate decision-making

and focus the organization on priorities to drive growth. Restructuring and

other cost reduction initiatives also include other cost reduction

initiatives that have the goal of reducing costs across the organization.

(5) We are addressing inspectional observations on Form 483 and a Warning Letter

issued by the U.S. Food and Drug Administration ("FDA") following its

previous inspections of our Warsaw North Campus facility, among other

matters. This quality remediation has required us to devote significant

financial resources and is for a discrete period of time. The majority of the

expenses are related to consultants who are helping us to update previous

    documents and redesign certain processes.



(6) The acquisition, integration and related gains and expenses we have excluded

from our non-GAAP financial measures resulted from various acquisitions.



                                       36

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(7) We are involved in routine patent litigation, product liability litigation,

commercial litigation and other various litigation matters. We review

litigation matters from both a qualitative and quantitative perspective to

determine if excluding the losses or gains will provide our investors with

useful incremental information. Litigation matters can vary in their

characteristics, frequency and significance to our operating results. The

litigation charges and gains excluded from our non-GAAP financial measures in

    the periods presented relate to product liability matters where we have
    received numerous claims on specific products, patent litigation and
    commercial litigation related to a common matter in multiple
    jurisdictions. In regards to the product liability matters, due to the

complexities involved and claims filed in multiple districts, the expenses

associated with these matters are significant to our operating results. Once

the litigation matter has been excluded from our non-GAAP financial measures

in a particular period, any additional expenses or gains from changes in

estimates are also excluded, even if they are not significant, to ensure

    consistency in our non-GAAP financial measures from period-to-period.



(8) In the first quarter of 2019, we settled a patent infringement lawsuit out of

court, and the other party agreed to pay us an upfront, lump-sum amount for a

    non-exclusive license to the patent.



(9) The European Union Medical Device Regulation imposes significant additional

premarket and postmarket requirements. The new regulations provide a

transition period until May 2021 for currently-approved medical devices to

meet the additional requirements. For certain devices, this transition period

can be extended until May 2024. We are excluding from our non-GAAP financial

measures the incremental costs incurred to establish initial compliance with

    the regulations related to our currently-approved medical devices. The
    incremental costs primarily include third-party consulting necessary to
    supplement our internal resources.



(10) We have incurred other various expenses from specific events or projects

that we consider highly variable or that have a significant impact to our

operating results that we have excluded from our non-GAAP measures. These

include costs related to legal entity, distribution and manufacturing

optimization, including contract terminations, as well as our costs of

complying with our Deferred Prosecution Agreement ("DPA") with the U.S.

government related to certain Foreign Corrupt Practices Act matters

involving Biomet and certain of its subsidiaries. Under the DPA, which has a

three-year term, we are subject to oversight by an independent compliance

monitor, which monitorship commenced in August 2017. The excluded costs

include the fees paid to the independent compliance monitor and to external

     legal counsel assisting in the matter.



(11) Represents the tax effects on the previously specified items. 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.



(12) Represents tax adjustments relating to the impacts of tax only amortization

     resulting from Swiss Tax Reform as well as certain restructuring
     transactions in Switzerland.



(13) Other certain tax adjustments relate to various discrete tax period

     adjustments.



(14) Diluted share count used in Adjusted Diluted EPS:




                                      Three Months Ended       Six Months Ended
                                         June 30, 2020          June 30, 2020
Diluted shares                                      206.8                  206.6
Dilutive shares assuming net earnings                 1.0                    1.4
Adjusted diluted shares                             207.8                  208.0



Liquidity and Capital Resources


The COVID-19 pandemic has had, and will continue to have a significant, adverse
effect on our liquidity and capital resource needs, primarily driven by the
reduction in sales due to elective surgical procedure deferrals. We have taken
prudent measures in an effort to maintain an adequate financial profile to have
access to capital to fund the business during these unprecedented times,
including reductions to discretionary spending such as travel, meetings and
other project spend that can be delayed with limited long-term detriment to the
business. However, we continued to incur fixed expenses that resulted in
negative operating cash flows of $52.8 million in the three-month period ended
June 30, 2020.



                                       37
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As of June 30, 2020, we had $713.4 million in cash and cash equivalents. In
addition, we have $1.0 billion available to borrow under our 2020 Credit
Agreement that contains the 2020 Revolving Facility and matures on December 31,
2020, and $1.5 billion available under our 2019 Multicurrency Revolving Facility
that will mature on November 1, 2024. The terms of the 2019 Multicurrency
Revolving Facility and the 2020 Revolving Facility (collectively, the "Revolving
Facilities") are described further below and in Note 9 to our interim condensed
consolidated financial statements included in Part I, Item 1 of this report.



Based on the actions described above, we believe that cash flows from
operations, our cash and cash equivalents on hand, and available borrowings
under our Revolving Facilities will be sufficient to meet our ongoing liquidity
requirements for at least the next twelve months. At this time, we do not
anticipate needing to borrow against our Revolving Facilities to fund our
operations. However, due to the significant uncertainties of the COVID-19
pandemic, it is possible our needs may change. There can be no assurance that,
if needed, we will be able to secure additional financing if recovery from the
COVID-19 pandemic slows and has a sustained impact on our overall business and
liquidity.



Sources of Liquidity

Cash flows provided by operating activities were $398.1 million in the six-month
period ended June 30, 2020, compared to $584.6 million in the same prior year
period. The decline in cash flow from operating activities was primarily the
result of COVID-19 reducing our cash inflows due to lower net sales while we
continued to pay many fixed operating costs. However, we did take advantage of
the CARES Act and deferred certain tax payments which we expect to mostly pay in
the third quarter of 2020. The 2019 period included a payment of approximately
$168 million on a patent infringement lawsuit.

Cash flows used in investing activities were $206.5 million in the six-month
period ended June 30, 2020, compared to $427.7 million in the same prior year
period. Instrument and property, plant and equipment additions reflected ongoing
investments in our product portfolio and optimization of our manufacturing and
logistics network. In order to preserve cash, we are prioritizing necessary
investments which are reflected in the lower investments in property, plant and
equipment of $59.2 million in the 2020 period when compared to $96.7 million in
the 2019 period. In the 2019 period, we paid $197.6 million to buy out certain
licensing arrangements from third parties.

Cash flows used in financing activities were $92.9 million in the six-month
period ended June 30, 2020, compared to $298.8 million in the same prior year
period. In the 2020 period, we issued senior notes and received $1,497.1 million
in proceeds, which were used to pay our $1,500.0 million senior notes at
maturity on April 1, 2020. In the 2019 period, we had $225.0 million in net
repayments of term loans.

At June 30, 2020, our outstanding debt consisted of senior notes and term loans as follows (principal shown in U.S. Dollars in millions):



                                       Interest
Type    Principal        Currency        Rate          Maturity Date
Notes        450.0     U.S. Dollar      Floating         March 19, 2021
Notes        300.0     U.S. Dollar         3.375      November 30, 2021
Notes        750.0     U.S. Dollar         3.150          April 1, 2022
Term         108.6     Japanese Yen        0.635     September 27, 2022
Term         197.8     Japanese Yen        0.635     September 27, 2022
Notes        561.6         Euro            1.414      December 13, 2022
Notes        300.0     U.S. Dollar         3.700         March 19, 2023
Notes      2,000.0     U.S. Dollar         3.550          April 1, 2025
Notes        600.0     U.S. Dollar         3.050       January 15, 2026
Notes        561.6         Euro            2.425      December 13, 2026
Notes        561.6         Euro            1.164      November 15, 2027
Notes        900.0     U.S. Dollar         3.550         March 20, 2030
Notes        253.4     U.S. Dollar         4.250        August 15, 2035
Notes        317.8     U.S. Dollar         5.750      November 30, 2039
Notes        395.4     U.S. Dollar         4.450        August 15, 2045




                                       38
--------------------------------------------------------------------------------
The 2019 Multicurrency Revolving Facility will mature on November 1, 2024. There
were no outstanding borrowings under the 2019 Multicurrency Revolving Facility
as of June 30, 2020, nor have we borrowed against it subsequent to then. Due to
the current and expected future adverse effects of COVID-19 on our operating
results, on April 23, 2020 we entered into an amendment to the 2019 Credit
Agreement to temporarily increase the maximum permitted Consolidated Leverage
Ratio, temporarily increase the interest rate margin applicable to revolving
loans and the facility fee, and make other administrative changes. We are
currently in compliance with our covenants under the 2019 Multicurrency
Revolving Facility. If we violate any covenants in the future, it is possible
the lenders may terminate their commitments and require us to repay any
outstanding borrowings immediately.

On April 23, 2020, we entered into the 2020 Credit Agreement, which contains the
2020 Revolving Facility, an unsecured revolving credit facility of $1.0
billion. The 2020 Credit Agreement matures on December 31, 2020. As of the date
of this filing, we do not expect to borrow under the 2020 Credit Agreement;
however, it will provide additional financial flexibility for our cash flow
needs if elective surgical procedures are deferred longer than we anticipate.

For additional information on our debt, see Note 9 to our interim condensed consolidated financial statements included in Part I, Item 1 of this report.


We place our cash and cash equivalents in highly-rated financial institutions
and limit the amount of credit exposure to any one entity. We invest only in
high-quality financial instruments in accordance with our internal investment
policy.

As of June 30, 2020, $216.3 million of our cash and cash equivalents were held
in jurisdictions outside of the U.S. Of this amount, $64.2 million is
denominated in U.S. Dollars and, therefore, bears no foreign currency
translation risk. The balance of these assets is denominated in currencies of
the various countries where we operate. We intend to repatriate at least $5.1
billion of unremitted earnings in future years.

Our concentrations of credit risks with respect to trade accounts receivable are
limited due to the large number of customers and their dispersion across a
number of geographic areas and by frequent monitoring of the creditworthiness of
the customers to whom credit is granted in the normal course of
business. Substantially all of our trade receivables are concentrated in the
public and private hospital and healthcare industry in the U.S. and
internationally or with distributors or dealers who operate in international
markets and, accordingly, are exposed to their respective business, economic and
country-specific variables. We have continued to collect on outstanding
receivables despite the measures hospitals have put in place to address
COVID-19. However, we are closely monitoring the financial stability of our
customers and the country-specific risks, including those customers in markets
with hospitals sponsored by the government.

In February and May 2020, our Board of Directors declared a quarterly cash
dividend of $0.24 per share. We have paid cash dividends on a quarterly basis
for more than five years; however, future dividends are subject to approval of
the Board of Directors and may be adjusted as business needs or market
conditions change. Due to the decline in our cash flows as a result of the
COVID-19 pandemic, our Board of Directors will continue to assess our cash
requirements and determine if our quarterly dividends will be impacted in the
future.

In February 2016, our Board of Directors authorized a new $1.0 billion share
repurchase program effective March 1, 2016, with no expiration date. The
previous program expired on February 29, 2016. As of June 30, 2020, all $1.0
billion remained authorized.

As discussed in Note 4 to our interim condensed consolidated financial
statements in Part I, Item 1 of this report, in December 2019, our Board of
Directors approved, and we initiated, 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,
with approximately $145 million of that total expected to be incurred by the end
of 2020. We expect to reduce gross annual pre-tax operating expenses by
approximately $200 million to $300 million by the end of 2023 as program
benefits under the 2019 Restructuring Plan are realized.

As discussed in Note 13 to our interim condensed consolidated financial
statements included in Part I, Item 1 of this report, the IRS has issued
proposed adjustments for years 2005 through 2012, as well as a draft NOPA for
years 2013 through 2015, reallocating profits between certain of our U.S. and
foreign subsidiaries. We have disputed these proposed adjustments and intend to
continue to vigorously defend our positions. Although the ultimate timing for
resolution of the disputed tax issues is uncertain, future payments may be
significant to our operating cash flows.

Also, as discussed in Note 16 to our interim condensed consolidated financial
statements included in Part I, Item 1 of this report, we are involved in various
litigation matters with respect to which we expect to continue paying
settlements over the next few years.

                                       39

--------------------------------------------------------------------------------

Recent Accounting Pronouncements


Information pertaining to recent accounting pronouncements can be found in Note
2 to our interim condensed consolidated financial statements included in Part I,
Item 1 of this report.

Critical Accounting Estimates

Our financial results are affected by the selection and application of accounting policies and methods. There were no changes in the three and six-month periods ended June 30, 2020 to the application of critical accounting policies as described in our Annual Report on Form 10-K for the year ended December 31, 2019.

Cautionary Note Regarding Forward-Looking Statements and Factors That May Affect Future Results


This quarterly report contains certain statements that are forward-looking
statements within the meaning of federal securities laws. Forward-looking
statements can be identified by the fact that they do not relate strictly to
historical or current facts. When used in this report, the words "may," "will,"
"can," "should," "would," "could," "anticipate," "expect," "plan," "seek,"
"believe," "are confident that," "predict," "estimate," "potential," "project,"
"target," "forecast," "intend," "strategy," "future," "opportunity," "assume,"
"guide," "position," "continue" and similar expressions are intended to identify
forward-looking statements. Forward-looking statements are based on current
beliefs, expectations and assumptions that are subject to significant risks,
uncertainties and changes in circumstances that could cause actual results to
differ materially from such forward-looking statements. These risks,
uncertainties and changes in circumstances include, but are not limited to:

• the effects of the COVID-19 global pandemic and other adverse public

health developments on the global economy, our business and operations and

the business and operations of our suppliers and customers, including the

        deferral of elective surgical procedures and our ability to collect
        accounts receivable;

• the risks and uncertainties related to our ability to successfully execute

our restructuring plans;

• the success of our quality and operational excellence initiatives,

including ongoing quality remediation efforts at our Warsaw North Campus

facility;

• the ability to remediate matters identified in inspectional observations

or warning letters issued by U.S. Food and Drug Administration (FDA),

while continuing to satisfy the demand for our products;

• compliance with the Deferred Prosecution Agreement entered into in January

2017;

• the impact of substantial indebtedness on our ability to service our debt

        obligations and/or refinance amounts outstanding under our debt
        obligations at maturity on terms favorable to us, or at all;

• the ability to retain the independent agents and distributors who market

our products;

• dependence on a limited number of suppliers for key raw materials and

outsourced activities;

• the possibility that the anticipated synergies and other benefits from

mergers and acquisitions will not be realized, or will not be realized

within the expected time periods;

• the risks and uncertainties related to our ability to successfully

integrate the operations, products, employees and distributors of acquired

companies;

• the effect of the potential disruption of management's attention from

ongoing business operations due to integration matters related to mergers

        and acquisitions;


    •   the effect of mergers and acquisitions on our relationships with
        customers, suppliers and lenders and on our operating results and
        businesses generally;

• challenges relating to changes in and compliance with governmental laws

and regulations affecting our U.S. and international businesses, including

        regulations of the FDA and foreign government regulators, such as more
        stringent requirements for regulatory clearance of products;


  • the outcome of government investigations;


  • competition;


  • pricing pressures;


    •   changes in customer demand for our products and services caused by
        demographic changes or other factors;


  • the impact of healthcare reform measures;


    •   reductions in reimbursement levels by third-party payors and cost
        containment efforts of healthcare purchasing organizations;


                                       40

--------------------------------------------------------------------------------

• dependence on new product development, technological advances and innovation;

• shifts in the product category or regional sales mix of our products and

        services;


  • supply and prices of raw materials and products;


  • control of costs and expenses;

• the ability to obtain and maintain adequate intellectual property protection;

• breaches or failures of our information technology systems or products,

        including by cyber-attack, unauthorized access or theft;


  • the ability to form and implement alliances;

• changes in tax obligations arising from tax reform measures, including

European Union rules on state aid, or examinations by tax authorities;

• product liability, intellectual property and commercial litigation losses;

• changes in general industry and market conditions, including domestic and

international growth rates;

• changes in general domestic and international economic conditions,

including interest rate and currency exchange rate fluctuations; and

• the impact of the ongoing financial and political uncertainty on countries

in the Euro zone on the ability to collect accounts receivable in affected

countries.



Our Annual Report on Form 10-K for the year ended December 31, 2019, our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and this
report contain detailed discussions of these and other important factors under
the heading "Risk Factors." You should understand that it is not possible to
predict or identify all factors that could cause actual results to differ
materially from forward-looking statements. Consequently, you should not
consider any list or discussion of such factors to be a complete set of all
potential risks or uncertainties.

Forward-looking statements speak only as of the date they are made and we expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Readers of this report are cautioned not to rely on these forward-looking statements since there can be no assurance that these forward-looking statements will prove to be accurate. This cautionary statement is applicable to all forward-looking statements contained in this report.

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