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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)

11/06/2020 | 04:20pm 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 may 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. In the third quarter of 2020, various levels of recovery of elective
surgical procedures resulted in net sales growth of 2.0 percent when compared to
the same prior year period. This was significantly improved from the first and
second quarters of 2020 when our net sales declined by 9.7 percent and 38.3
percent, respectively, when compared to the same prior year periods.



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 third quarter, but
COVID-19 continues to bring near-term uncertainty. For example, despite net
sales growth of 2.0 percent in the third quarter of 2020, we saw the recovery
curve flatten in the latter part of the third quarter. There are many variables
and uncertainties that could impact our near-term performance, including a
resurgence of the virus, policy actions, patient fear and economic downturn.



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. 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.

Results for the Three and Nine-Month Periods ended September 30, 2020


Our net sales increased by 2.0 percent in the three-month period ended September
30, 2020 compared to the same prior year period. As discussed previously, we saw
a recovery in elective surgical procedures, especially in the U.S. and certain
parts of Asia Pacific, that drove net sales growth in the third quarter of
2020. However, in the nine-month period ended September 30, 2020 our net sales
decreased by 15.7 percent due to the significant deferral of elective surgical
procedures in the first and second quarters. While we recognized net income of
$242.5 million in the three-month period ended September 30, 2020, we had a net
loss of $472.6 million in the nine-month period ended September 30, 2020. In the
three-month period, net income was lower than in the prior year primarily due to
a provisional net tax benefit of $263.8 million related to Switzerland tax
reform recorded in the 2019 period. This unfavorable headwind was partially
offset by lower expenses from specific cost reductions taken due to COVID-19,
such as lower travel and entertainment expenses, the continued impact of the
2019 Restructuring Plan, lower litigation-related charges and lower charges
related to our compliance with the DPA. Our net loss in the nine-month period
ended September 30, 2020 was largely attributable to $645.0 million of goodwill
and intangible asset impairment charges. Additionally, our results declined in
the nine-month period ended September 30, 2020 resulting from lower sales due to
the COVID-19 pandemic. We have also temporarily suspended or limited production
at certain manufacturing facilities, resulting in higher costs of products sold
that relate 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 nine-month period ended September 30, 2020,
we recognized litigation-related charges of $100.4 million compared to net
litigation-related charges of $24.5 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

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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.

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
                    September 30,                               Volume /                  Foreign
                 2020          2019         % Inc / (Dec)         Mix         Price      Exchange
Americas       $ 1,216.5$ 1,179.2                 3.2   %        6.7   %   (3.4 ) %      (0.1 ) %
EMEA               366.2         374.6                (2.3 )         (4.8 )     (0.9 )         3.4
Asia Pacific       346.6         338.6                 2.3            2.1       (1.4 )         1.6
Total          $ 1,929.3$ 1,892.4                 2.0            3.7       (2.6 )         0.9


                  Nine Months Ended
                    September 30,                               Volume /                  Foreign
                 2020          2019            % (Dec)            Mix         Price      Exchange
Americas       $ 3,051.5$ 3,587.6               (14.9 ) %      (11.9 ) %   (2.9 ) %      (0.1 ) %
EMEA               983.0       1,276.5               (23.0 )        (21.5 )     (1.2 )        (0.3 )
Asia Pacific       904.7         992.4                (8.8 )         (7.8 )     (1.2 )         0.2
Total          $ 4,939.2$ 5,856.5               (15.7 )        (13.4 )     (2.2 )        (0.1 )




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

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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
                            September 30,                               Volume /                     Foreign
                         2020          2019         % Inc / (Dec)         Mix           Price        Exchange
Knees                  $   648.7$   651.9                (0.5 ) %        1.4   %      (2.8 ) %        0.9   %
Hips                       484.1         459.2                 5.4            7.3          (2.9 )          1.0
S.E.T.                     359.9         348.5                 3.3            4.9          (2.4 )          0.8
Dental, Spine & CMFT       295.5         275.5                 7.3            9.0          (2.5 )          0.8
Other                      141.1         157.3               (10.3 )        (10.1 )        (1.0 )          0.8
Total                  $ 1,929.3$ 1,892.4                 2.0            3.7          (2.6 )          0.9



                          Nine Months Ended
                            September 30,                               Volume /                     Foreign
                         2020          2019            % (Dec)            Mix           Price        Exchange
Knees                  $ 1,652.7$ 2,049.5               (19.4 ) %      (16.7 ) %      (2.5 ) %       (0.2 ) %
Hips                     1,246.4       1,421.1               (12.3 )         (9.5 )        (2.7 )         (0.1 )
S.E.T.                     946.1       1,062.3               (10.9 )         (8.5 )        (2.3 )         (0.1 )
Dental, Spine & CMFT       729.7         855.2               (14.7 )        (13.5 )        (1.2 )            -
Other                      364.3         468.4               (22.2 )        (20.6 )        (1.6 )            -
Total                  $ 4,939.2$ 5,856.5               (15.7 )        (13.4 )        (2.2 )         (0.1 )





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 September 30,                             Nine Months Ended September 30,
                                                                % Inc /
                        2020                     2019            (Dec)               2020                   2019           % (Dec)
Knees
Americas          $          402.6         $          399.2          0.9   %   $        1,003.9$        1,222.9        (17.9 ) %
EMEA                         126.6                    135.3         (6.4 )                344.5                  474.4        (27.4 )
Asia Pacific                 119.5                    117.4          1.7                  304.3                  352.2        (13.6 )
Total             $          648.7         $          651.9         (0.5 )     $        1,652.7$        2,049.5        (19.4 )
Hips
Americas          $          268.6         $          249.0          7.9   %   $          671.8       $          749.4        (10.3 ) %
EMEA                         109.7                    108.8          0.8                  291.9                  367.8        (20.6 )
Asia Pacific                 105.8                    101.4          4.4                  282.7                  303.9         (7.0 )
Total             $          484.1         $          459.2          5.4       $        1,246.4$        1,421.1        (12.3 )




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Demand (Volume and Mix) Trends


Changes in volume and mix of product sales had a positive effect of 3.7 percent
and negative effect of 13.4 percent on year-over-year sales during the three and
nine-month periods ended September 30, 2020, respectively. In the three-month
period ended September 30, 2020 we saw various levels of recovery in elective
surgical procedures. However, that recovery occurred primarily in July with the
recovery curve flattening in the latter part of the third quarter. Due to
multiple variables and uncertainties, we cannot predict whether there will be
further recovery, continued flattening or a contraction in the fourth quarter.

Based upon country dynamics, volume changes varied by region. In the Americas,
we saw stronger than expected recovery in the U.S. during the quarter, but the
other countries in the Americas mostly experienced net sales declines. In EMEA,
the return to elective surgical procedures was slower than in other
regions. While there was continued recovery in EMEA through the quarter, there
was a slowing of the recovery in September, which continues with the recent
COVID-19 surges and corresponding governmental policy actions in the
region. Developed countries excluding the United Kingdom showed the strongest
signs of recovery in the quarter. The United Kingdom and emerging markets
continue to be a significant drag on overall EMEA regional growth. In Asia
Pacific, there was strong recovery in China, and in Japan there was continued
stability, but it was not yet back to pre-COVID-19 volumes. Australia continued
to show progress, but was negatively impacted by surges late in the third
quarter. Finally, India continued to vastly underperform the rest of the Asia
Pacific region.

Pricing Trends

Global selling prices had a negative effect of 2.6 percent and 2.2 percent on
year-over-year sales during the three and nine-month periods ended September 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 nine-month periods ended September 30, 2020, changes in
foreign currency exchange rates had a positive effect of 0.9 percent and a
negative effect of 0.1 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 positive impact of less than 1 percent on full-year
2020 sales.

Expenses as a Percentage of Net Sales



                                   Three Months Ended                              Nine Months Ended
                                     September 30,              % Inc /              September 30,             % Inc /
                                  2020             2019          (Dec)           2020             2019          (Dec)
Cost of products sold,
excluding intangible asset
amortization                         29.5    %      28.3   %         1.2   %        30.0    %       28.5   %        1.5   %
Intangible asset amortization         7.8            7.7             0.1             9.0             7.5            1.5
Research and development              4.5            6.0            (1.5 )           5.5             5.6           (0.1 )
Selling, general and
administrative                       40.9           43.7            (2.8 )          46.2            42.0            4.2
Goodwill and intangible asset
impairment                              -              -               -            13.1             1.2           11.9
Restructuring and other cost
reduction initiatives                 0.8            0.3             0.5             1.8             0.3            1.5
Quality remediation                   0.5            1.1            (0.6 )           0.7             1.1           (0.4 )
Acquisition, integration and
related                               0.5           (0.1 )           0.6             0.3             0.1            0.2
Operating profit (loss)              15.5           13.0             2.5            (6.7 )          13.7          (20.4 )




The increase in cost of products sold as a percentage of net sales for the
three-month period ended September 30, 2020 compared to the same prior year
period was primarily due to temporarily suspended or limited production at
certain manufacturing facilities, a refund for U.S. medical device excise taxes
received in the 2019 period, and lower average selling prices. These unfavorable
items were partially offset by a favorable geographic mix of sales in countries
that have higher gross profit margins. The temporary suspension or limited
production at certain manufacturing facilities resulted in us immediately
expensing 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. The refund of a portion of the U.S. medical device
excise tax in 2019 was the result of a change in the methodology we used to
calculate the constructive sales price upon which the taxes were paid.



The increase in cost of products sold as a percentage of net sales for the
nine-month period ended September 30, 2020 compared to the same prior year
period included the same factors as discussed for the three-month period ended
September 30. In addition, excess and obsolete charges as a percentage of net
sales increased in the nine-month period ended September 30, 2020 as these
charges did not decline ratably with the significant decline in our net
sales. The nine-month period ended September 30, 2019

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included a charge of $20.8 million to terminate a long-term raw material supply
agreement. Therefore, the absence of this charge in the nine-month period ended
September 30, 2020 had a favorable effect on the year-over-year comparison.



Intangible asset amortization expense increased minimally in the three and nine-month periods ended September 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 in both amount and as a
percentage of net sales in the three and nine-month periods ended September 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. In the nine-month
period ended September 30, 2020, the decline in expenses as a percentage of net
sales compared to the same prior year period is less significant than the
three-month period ended September 30, 2020 due to the lower year-over-year
sales from the impact of COVID-19 in the nine-month period as compared to higher
year-over-year sales in the three-month period.

Selling, general and administrative ("SG&A") expenses and SG&A expenses as a
percentage of net sales decreased in the three-month period ended September 30,
2020 compared to the same prior year period primarily due to specific cost
reductions taken due to COVID-19, such as lower travel and entertainment
expenses, the continued impact of the 2019 Restructuring Plan, lower
litigation-related charges and lower charges related to our compliance with the
DPA.

SG&A expenses decreased in the nine-month period ended September 30, 2020
compared to the same prior year period, but increased as a percentage of net
sales. SG&A expenses decreased due to lower variable selling expenses from the
decline in our net sales, COVID-19 cost reductions, the impact from the 2019
Restructuring Plan and lower charges related our compliance with the
DPA. However, since SG&A expenses include many fixed expenses, the decline in
year-over-year sales in the nine-month period due to COVID-19 resulted in an
increase in SG&A expenses as a percentage of net sales.

In the nine-month period ended September 30, 2020, we recognized goodwill and
intangible asset impairment charges of $645.0 million, 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 and $33.0 of intangible asset
impairment charges in the second quarter of 2020. In the nine-month period ended
September 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 $16.2
million and $89.2 million in the three and nine-month periods ended September
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 nine-month periods
ended September 30, 2020 compared to the same prior year periods, due to the
natural regression of completing our remediation milestones. Acquisition,
integration and related expenses increased in the three and nine-month periods
ended September 30, 2020 compared to the same prior year periods due to a small
acquisition in the 2020 periods.

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

In the three and nine-month periods ended September 30, 2020, we recognized income in other income (expense), net, compared to net expenses in the same prior year periods, primarily due to gains recognized from changes to the fair value of our equity investments and higher gains from certain components of pension expense in the 2020 periods.


Interest expense, net, decreased in the three and nine-month periods ended
September 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 nine-month periods ended September 30, 2020, our effective tax
rate ("ETR") was 3.8 percent and negative 0.3 percent, respectively. The 3.8
percent ETR in the three-month period ended September 30, 2020 was the result of
the mix of some of our jurisdictions recognizing earnings while others had
losses. The negative 0.3 percent ETR in the nine-month period ended September
30, 2020 was primarily due to the $612.0 million goodwill impairment charge,
which resulted in a loss before taxes, but had no corresponding tax benefit, as
well as the mix of earnings and losses among our jurisdictions. In the three and
nine-month periods ended September 30, 2019, our ETR was negative 134.1 percent
and negative 31.4 percent, respectively. We recognized net tax benefits in the
three and nine-month periods ended September 30, 2019, primarily due to
Switzerland tax reform that resulted in us

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recognizing a provisional net tax benefit of $263.8 million. 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
                            September 30,               September 30,                  September 30,
(dollars in
millions)                2020          2019           2020          2019           2020              2019
Americas and Global
Businesses             $ 1,253.5$ 1,212.3$    413.9$   394.3            33.0    %        32.5   %
EMEA                       339.7         351.8           84.6          93.7            24.9             26.6
Asia Pacific               336.1         328.3          113.4         109.6            33.7             33.4


                                                                                   Operating Profit as a
                              Net Sales                Operating Profit           Percentage of Net Sales
                          Nine Months Ended           Nine Months Ended              Nine Months Ended
                            September 30,               September 30,                  September 30,
(dollars in
millions)                2020          2019           2020          2019           2020              2019
Americas and Global
Businesses             $ 3,147.6$ 3,703.0$    865.7$ 1,211.5            27.5    %        32.7   %
EMEA                       915.1       1,186.5          213.4         350.4            23.3             29.5
Asia Pacific               876.5         967.0          284.4         341.1            32.4             35.3




In the three-month period ended September 30, 2020, the Americas and Global
Businesses and Asia Pacific operating profit as a percentage of net sales
increased compared to the same prior year period due to increased net sales
combined with the cost reductions taken due to COVID-19, such as lower travel
and entertainment expenses, and the continued impact of the 2019 Restructuring
Plan. In EMEA, the COVID-19 recovery has been slower than in other regions,
resulting in lower net sales in the three-month period ended September 30, 2020
when compared to the same prior year period. Due to fixed operating expenses
that did not decline proportionally with the decrease in net sales, EMEA's
operating profit as a percentage of net sales declined in the three-month period
ended September 30, 2020 when compared to the same prior year period.



In the nine-month period ended September 30, 2020, in each of our segments operating profit as a percentage of net sales declined compared to the same prior year period due to the effect of fixed operating expenses that did not decline proportionally with lower net sales from the impact of COVID-19.

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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; the effect of Switzerland
tax reform; 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 earnings (loss) and diluted
earnings (loss) per share to our non-GAAP adjusted net earnings and non-GAAP
adjusted diluted earnings per share (in millions, except per share amounts):



                                      Three Months Ended                Nine Months Ended
                                         September 30,                    September 30,
                                     2020             2019            2020            2019
Net Earnings (Loss) of Zimmer
Biomet Holdings, Inc.            $      242.5$     431.1$    (472.6 )$     810.9
Inventory and
manufacturing-related
charges(1)                                2.3             11.6             4.3            47.7
Intangible asset
amortization(2)                         149.7            146.6           445.0           436.9
Goodwill and intangible asset
impairment(3)                               -                -           645.0            70.1
Restructuring and other cost
reduction initiatives(4)                 16.2              5.4            89.2            17.0
Quality remediation(5)                   10.0             21.5            35.8            64.6
Acquisition, integration and
related(6)                                9.1             (2.6 )          15.7             8.5
Litigation(7)                            19.3             42.8           100.4            48.0
Litigation settlement gain(8)               -                -               -           (23.5 )
European Union Medical Device
Regulation(9)                             2.0             11.4            19.1            18.1
Other charges(10)                        (8.3 )           18.4             5.6            81.8
Taxes on above items(11)                (58.4 )          (54.8 )        (152.1 )        (155.4 )
Tax adjustments relating to
the impacts of tax only
amortization in
Switzerland(12)                           1.9                -            18.1               -
Switzerland tax reform(13)               (6.5 )         (263.8 )          (6.5 )        (263.8 )
Other certain tax
adjustments(14)                          (3.0 )           (1.2 )          (6.1 )         (12.6 )
Adjusted Net Earnings            $      376.8$     366.4$     740.9$   1,148.3




                                       37
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                                      Three Months Ended                Nine Months Ended
                                         September 30,                    September 30,
                                     2020             2019             2020            2019
Diluted (Loss) Earnings Per
Share                            $       1.16$      2.08$      (2.29 )$      3.93
Inventory and
manufacturing-related
charges(1)                               0.01             0.06             0.02            0.23
Intangible asset
amortization(2)                          0.72             0.71             2.15            2.11
Goodwill and intangible asset
impairment(3)                               -                -             3.12            0.34
Restructuring and other cost
reduction initiatives(4)                 0.08             0.03             0.43            0.08
Quality remediation(5)                   0.05             0.10             0.17            0.31
Acquisition, integration and
related(6)                               0.04            (0.01 )           0.08            0.04
Litigation(7)                            0.09             0.21             0.49            0.23
Litigation settlement gain(8)               -                -                -           (0.11 )
European Union Medical Device
Regulation(9)                            0.01             0.05             0.09            0.09
Other charges(10)                       (0.04 )           0.09             0.03            0.40
Taxes on above items(11)                (0.28 )          (0.27 )          (0.74 )         (0.75 )
Tax adjustments relating to
the impacts of tax only
amortization in
Switzerland(12)                          0.01                -             0.09               -
Switzerland tax reform(13)              (0.03 )          (1.27 )          (0.03 )         (1.27 )
Other certain tax
adjustments(14)                         (0.01 )          (0.01 )          (0.03 )         (0.06 )
Effect of dilutive shares
assuming net earnings(15)                   -                -            (0.02 )             -
Adjusted Diluted Earnings Per
Share                            $       1.81$      1.77$       3.56$      5.57

(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 nine-month period ended

September 30, 2019, inventory and manufacturing-related charges also included

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.



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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, gains and losses from changes

in fair value on our equity investments, as well as our costs of complying

with our DPA with the U.S. government related to certain FCPA matters

involving Biomet and certain of its subsidiaries. Under the DPA, we were

subject to oversight by an independent compliance monitor, which monitorship

concluded in August 2020. We expect the one-count criminal information filed

     against us in 2017 to be dismissed with prejudice in February 2021 and the
     DPA to conclude at that time. 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) Switzerland passed the TRAF, effective January 1, 2020. Certain provisions

of the TRAF were enacted in the third quarter of 2019, resulting in

provisional adjustments to our deferred taxes, generating a net tax benefit.

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

     adjustments.



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




                                       Nine Months Ended
                                      September 30, 2020
Diluted shares                                      206.8
Dilutive shares assuming net earnings                 1.4
Adjusted diluted shares                             208.2



Liquidity and Capital Resources


The COVID-19 pandemic has had an 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

                                       39

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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 lower operating cash flows in the nine-month period ended September 30, 2020 when compared to the same prior year period.




As of September 30, 2020, we had $967.3 million in cash and cash equivalents. In
addition, we have $1.0 billion available to borrow under our September 2020
Credit Agreement that contains the September 2020 Revolving Facility and matures
on September 17, 2021, 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 September 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 $779.4 million in the
nine-month period ended September 30, 2020, compared to $1,162.5 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. Additionally, in the
nine-month period ended September 30, 2020 we sold fewer of our accounts
receivables to a third party which we estimate negatively impacted operating
cash flows by approximately $230 million. The 2019 period included a payment of
approximately $168 million on a patent infringement lawsuit.

Cash flows used in investing activities were $297.9 million in the nine-month
period ended September 30, 2020, compared to $591.3 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 investments which are reflected in the lower investments in
property, plant and equipment of $89.8 million in the 2020 period when compared
to $155.3 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 $135.5 million in the nine-month
period ended September 30, 2020, compared to $597.2 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 $550.0 million in net
repayments of term loans.

                                       40

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At September 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         110.8     Japanese Yen        0.635     September 27, 2022
Term         201.7     Japanese Yen        0.635     September 27, 2022
Notes        586.3         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        586.3         Euro            2.425      December 13, 2026
Notes        586.3         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




The 2019 Multicurrency Revolving Facility will mature on November 1, 2024. There
were no outstanding borrowings under the 2019 Multicurrency Revolving Facility
as of September 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 a credit agreement which contained an
unsecured revolving credit facility of $1.0 billion. On September 18, 2020, this
credit agreement was terminated and we entered into the September 2020 Credit
Agreement, which contains the September 2020 Revolving Facility, an unsecured
revolving credit facility of $1.0 billion. The September 2020 Credit Agreement
matures on September 17, 2021. We are currently in compliance with our covenants
under the September 2020 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. There were no outstanding
borrowings under the September 2020 Revolving Facility as of September 30, 2020,
nor have we borrowed against it subsequent to then. As of the date of this
filing, we do not expect to borrow under the September 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 September 30, 2020, $349.9 million of our cash and cash equivalents were
held in jurisdictions outside of the U.S. Of this amount, $85.1 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.

                                       41

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In February, June and September 2020, our Board of Directors declared a quarterly cash dividend of $0.24 per share. We expect to continue paying cash dividends on a quarterly basis; however, future dividends are subject to approval of the Board of Directors and may be adjusted as business needs or market conditions change.


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 September 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 $155 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 2010 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. We do not expect the agreement reached
with the IRS for tax years 2006-2012 related to the reallocation of profits
between the U.S. and Puerto Rico as well as other miscellaneous adjustments to
have a material impact on our operating cash flows.

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.


As discussed in Note 17 to our interim condensed consolidated financial
statements included in Part I, Item 1 of this report, we entered into stock
purchase and merger agreements to acquire two companies. Subsequent to September
30, 2020, one of these transactions has closed while the other one is pending
regulatory approval as of the date of this filing. There is no assurance that
regulatory approval will be received, and if not received, the agreement will be
terminated. Assuming we receive regulatory approval, these acquisitions will
require initial aggregate consideration of approximately $225 million in the
fourth quarter of 2020 and deferred payments totaling approximately $145 million
in 2021.

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 nine-month periods ended September 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;


                                       42

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• 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;

• 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 Reports on Form 10-Q for the quarters ended March 31, 2020 and June
30, 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

                                       43

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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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