zimmer biomet holdings, inc. 3rd quarter 2017 earnings .../media/files/z... · 3rd quarter 2017...

Zimmer Biomet Holdings, Inc. 3rd Quarter 2017 Earnings Call Presentation

November 1, 2017

2

Cautionary Note on Forward-Looking Statements and Non-GAAP Financial Measures

• Our discussions during this presentation will include forward-looking statements concerning, among other things, our anticipated future

operating and financial performance, business plans and prospects, product and service offerings, including new product launches and potential clinical successes, capital allocation plans and priorities, business development plans and priorities and the benefits expected from our acquisitions and other business development activities. Such statements are based upon the current beliefs and expectations of management and are subject to significant risks, uncertainties and changes in circumstances that could cause actual outcomes and results to differ materially. For a list and description of some of such risks and uncertainties, see our Annual Report on Form 10-K for the year ended December 31, 2016, including in the section thereof captioned “Risk Factors”, as well as our subsequent reports on Form 8-K and Form 10-Q, all of which are available at www.sec.gov and www.zimmerbiomet.com. The forward-looking statements in this presentation speak only as of the original date of this presentation and we undertake no obligation to update or revise any of these statements.

• Also, this presentation refers to certain financial measures that differ from financial measures calculated in accordance with U.S. generally

accepted accounting principles (GAAP). Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the Appendix to this presentation. Investors and other readers should consider non-GAAP financial measures only as supplements to, and not as substitutes for or superior to, the measures of financial performance prepared in accordance with GAAP.

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Table of Contents

2017 Guidance and Outlook

2017 Q3 Financial Summary

Company Overview

Appendix

2017 Q3 Financial Summary

5

3rd Quarter 2017 Net Sales Results Product Category Performance

Geographic Region Performance

(1) Includes approximately 30 basis points of contribution from the LDR acquisition and a negative impact of approximately 130 basis points as a result of having one less billing day during the quarter.

(2) Excludes approximately 30 basis points of contribution from the LDR acquisition and a negative impact of approximately 130 basis points as a result of having one less billing day during the quarter.

(3) Non-GAAP financial measure; see reconciliation.

Region (in millions)

Americas $1,142 -3.0% $3,586 1.4%

Europe 381 -0.4% 1,272 0.4%

Asia Pacific 295 5.2% 892 6.0%

Total $1,818 -1.2% $5,750 1.8%

Constant Currency % Change (3)Net Sales

Q3 Year to Date

Net SalesConstant Currency %

Change (3)

(1)

Product (in millions)

Knees $624 -1.7% $2,006 -0.8%

Hips 434 -1.7% 1,380 0.2%

S.E.T. 407 1.1% 1,255 3.7%

Dental 93 -4.4% 311 -3.4%

Spine & CMF 185 0.3% 565 20.1%

Other 75 -5.3% 233 -4.5%

Total $1,818 -1.2% $5,750 1.8%

Ex LDR, Billing Day Adjusted -0.2%

Constant Currency % Change (3)

Q3 Year to Date

Net SalesNet SalesConstant Currency %

Change (3)

(1)

(2)

6

Reconstructive Product Category

• Persona® Partial Knee System launched in September • Persona® The Personalized Knee System continues to drive growth • New products key catalyst in 2018 including Cementless, PSI X-Ray Guides, and Revision • Growth impacted by continued supply constraints from the Warsaw North Campus

KNEES

• Strong demand for G7® Acetabular System • First Clinical Graphics case performed in Q3 • OsseoTi ® Porous Metal Technology continues success in G7 ® Dual Mobility Construct

• Growth impacted by continued supply constraints from the Warsaw North Campus

HIPS

Persona® Personalized Knee System

Arcos® Modular Femoral Revision System

Taperloc® Complete Hip System

(1) Non-GAAP financial measure; see reconciliation

Persona® Partial Knee System

USD (millions)

Americas 383$ -3.9% 1,217$ -2.2%

EMEA 135 0.6% 463 -0.1%

APAC 106 3.9% 326 3.8%

Total Knees 624$ -1.7% 2,006$ -0.8%

Revenue RevenueConstant Currency

% Change (1)Constant Currency

% Change (1)

Q3 Year to Date

USD (millions)

Americas 228$ -4.7% 720$ -1.9%

EMEA 115 -1.5% 382 -0.6%

APAC 91 6.1% 278 7.2%

Total Hips 434$ -1.7% 1,380$ 0.2%

Revenue RevenueConstant Currency

% Change (1)Constant Currency

% Change (1)

Q3 Year to Date

7

USD (millions)

S.E.T. $407 1.1% $1,255 3.7%

Q3 Year to Date

RevenueConstant Currency

% Change (1) RevenueConstant Currency

% Change (1)

S.E.T. Product Category

• DVT product line continues to drive growth • Strong, above market regional performances in Americas and EMEA • IntelliCart™ System, evaluated in 250+ sites, receiving very positive

feedback

SURGICAL IntelliCart™ System

• 2018 product launches of Augmented Baseplate and Stemless

Shoulder growth accelerators • Growth impacted by continued supply constraints from the Warsaw

North Campus

EXTREMITIES Comprehensive® Total

Shoulder System

• Strong growth in APAC and EMEA • Continued buildout of specialized sales force • Growth impacted by continued supply constraints from the Warsaw

North Campus

TRAUMA NCB® Periprosthetic

Femur Plating System

• Gel-One® Cross-Linked Hyaluronate continues to drive growth • Specialized reps remain focused on driving Sports Medicine growth • Growth impacted by continued supply constraints from the Warsaw

North Campus

SPORTS MEDICINE

Gel-One®

Cross-Linked Hyaluronate

• Partnership with Nextremity benefits our product portfolio • Continued buildout of specialized sales force • A.L.P.S. ® saw steady demand

FOOT & ANKLE A.L.P.S.® Total Foot System

S.E.T. GLOBAL REVENUE


8

USD (millions)

Dental $93 -4.4% $311 -3.4%



% Change (1)

Q3 Year to Date

USD (millions)

Spine & CMF $185 0.3% $565 20.1%

Q3 Year to Date



% Change (1)

Spine, CMF & Dental Product Categories

SPINE & CMF GLOBAL REVENUE

• Mobi-C® continued to deliver significant growth

• Focused on cross-sell opportunities and mitigating channel dis-synergies

• Vitality® Spinal System provides steady growth

SPINE Mobi-C® Cervical Disc

• Continued to see steady sales for RibFix Blu Thoracic Fixation System, as

well as our SternaLock® Blu and SternaLock® 360 Primary Closure systems

CMF SternaLock® Blu Closure

System

DENTAL GLOBAL REVENUE

• Realigning portfolio to meet market needs

• Global commercial strategy execution underway DENTAL Osseotite® Implant


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Leading in Innovation

Joint Preservation

Motion Preservation

Personalized Procedures

Diagnostics & Infection

Persona® Partial Knee (September 2017) • Fixed bearing partial knee • Clearance received in major markets across the globe

Persona® TM Tibia Knee (2H 2018) • Cementless knee utilizing clinically proven Trabecular Metal

Persona® Revision Knee (2H 2018 Limited Launch) • Adds revision offering to Persona portfolio

Medtech ROSA (2H 2018 Limited Launch) • Fully functional demo complete for Knee application • ROSA® cadaver lab held in Warsaw • Key Design Principles: X-Ray based, time net neutral, soft tissue balancing

Stemless Shoulder (2018)

Hip Preservation Portfolio • Entire continuum of care for Hip preservation • Clinical Graphics for hip application received clearance in March 2017

X-Ray Based Knee PSI Guides (2018) • Received CE mark and pursuing FDA clearance for full launch

Product Pipeline Persona®

Partial Knee System

• Mobi-C® Cervical Disc • VISCO-3™ • Quattro® Link Rotator Cuff Repair

Innovating to Minimize Complications

Reduce Surgery Times

Improve Efficiencies

Optimize Outcomes

Enhance Patient

Experiences

Recent Launches & Additions

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Key 3rd Quarter Financials

(1) Includes approximately 30 basis points of contribution from the LDR acquisition and a negative impact of approximately 130 basis points as a result of having one less billing day during the quarter.

(2) Excluding the impact of foreign exchange, Adj. Net Earnings (3) and Adj. Diluted EPS (3) grew 0.2% and (0.6)%, respectively.


(4) Includes instrument depreciation

Key Call-Outs:

• Gross Profit – YoY quarterly performance impacted due to the impact of price declines, product mix, additional manufacturing costs and lower gains from our cash flow hedging program.

• SG&A – Continue to incur higher freight expenses due to expedited product shipments, partially offset by savings from synergy capture initiatives.

Metric (in millions) 2017 Q3 2016 Q3 Y/Y Growth

Net Sales $1,818.1 $1,832.8 -0.8%

Adj. Gross Profit (3) 73.0% 75.1% -

R&D (% of sales) 5.0% 5.2% -

SG&A (% of sales) 38.2% 39.7% -

Adj. Operating Margin (3) 29.8% 30.2% -

Adj. Net Earnings (2)(3) $349.9 $362.4 -3.4%

Adj. Diluted EPS (2)(3) $1.72 $1.79 -3.9%

Free Cash Flow (3) $344.4 $202.2 -

(1)

(4)

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Free Cash Flow

($ In millions)YTD 2017 YTD 2016 Inc/(Dec) vs PY

Operating Cash Flow 1,179 1,005 174

CapExInstruments (256) (251) Traditional PP&E (109) (130) Total CapEx (365) (381)

Free Cash Flow (1) 814 624 190

Beginning Cash Balance (12/31/2016) 634 Ending Cash Balance (09/30/2017) 481

Beginning Debt Balance (12/31/2016) 11,241 Ending Debt Balance (09/30/2017) 10,425


2017 Guidance and Outlook

13

Q4 2017 FY2017Growth Growth

Reported 0.0% to 2.0% 1.0% to 1.5%

FX Impact -180 bps -10 bps

Constant Currency (1) (1.8)% to 0.2% 0.9% to 1.4%

LDR Impact - -120 bps

Constant Currency, Excluding LDR (1) (1.8)% to 0.2% (0.3)% to 0.2%

Billing Day - 20 bps 40 bps

Constant Currency, Excluding LDR, Billing Day Adjusted (1) (2.0)% to 0.0% 0.1% to 0.6%

Metric

2017 Revenue Guidance


14

2017 Guidance

Metric ($ in millions, excluding EPS data)

Q4 2017 FY2017

Constant Currency Revenue Growth (1)(3) (1.8)% to 0.2% 0.9% to 1.4%

Revenue $2,010 to $2,050 $7,760 to $7,800

Free Cash Flow $1,125 to $1,225

GAAP EPS $0.94 to $1.08 $3.80 to $3.93

Adj. Diluted EPS (2)(3) $2.08 to $2.14 $8.01 to $8.07

(1) Q4 2017 includes approximately 20-basis-point positive impact from billing days compared to the prior year. Full Year 2017 includes 120 basis points of acquired revenue from the LDR transaction as well as approximately 40-basis-point negative impact from billing days.

(2) This EPS range on the full year represents 0.6% to 1.4% growth over the prior year, or 4% to 5% excluding the negative impact of foreign exchange. (3)


Company Overview

16

Leading Musculoskeletal Portfolio

HIP

S.E.T.

SPINE & CRANIOMAXILLOFACIAL (CMF) & THORACIC

DENTAL

KNEE

Products for face and skull reconstruction, back and neck pain caused by deformities or injuries of the spine, and stabilization of the chest following open heart surgery

Products for biologics, extremities, sports medicine, surgical, trauma, foot and ankle and Zimmer Biomet Signature Solutions

Products for primary hip joint replacement, as well as revision procedures

Products for early intervention, bone preservation and full and partial knee replacement surgeries, including primary joint replacement and revision procedures

Dental reconstructive implants, prosthetic products and products for soft tissue and bone rehabilitation

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Broad Portfolio of Solutions in the Musculoskeletal Market

Dental $4.2B Market

9%-11% Est. Share

S.E.T.* $15.0B Market

10%-11% Est. Share

Knee $7.5B Market

36%-37% Est. Share

Hip $6.0B Market

31%-32% Est. Share

CMF / Thoracic $1.1B Market

14%-16% Est. Share

*Surgical, Sports Medicine, Foot & Ankle, Extremities and Trauma Market shares based on internal and sell-side analysts’ estimates

Spine $9.0B Market

5%-7% Est. Share

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Drivers of Sustainable Market Growth

• Favorable global demographics − Increasing percentage of

population 65 and older

• Supportive utilization trends − Penetration opportunity in

developed markets

• Expanding access to healthcare in emerging markets − Utilization at a fraction of

developed market rates

Growing global musculoskeletal market of ~$50B

Procedure Volume Share of World Population 65 and Older

World Population 65 and Older

Sou

rce:

Uni

ted

Nat

ions

Pop

ulat

ion

Div

isio

n

523M

714M

969M

1,25

2M

1,48

7M

2010 2020 2030 2040 2050

7.6%

9.3%

11.7%

14.2%

16.2%

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Leading Musculoskeletal Portfolio

KNEE & HIP

S.E.T.

SPINE & CMF

DENTAL

*S.E.T. = Surgical, Sports Medicine, Foot & Ankle, Extremities and Trauma

Global market share leader

Diverse and fast growing category

Innovative products and solutions

Complete implant and regenerative portfolio

• 2016 Revenue of $4,620 million, 60% of ZBH business • 2016 Estimated Market Share of 33% to 34% • 2016 Estimated Market Growth of 3% to 4%

• 2016 Revenue of $1,645 million, 21% of ZBH business • 2016 Estimated Market Share of 10% to 11% • 2016 Estimated Market Growth of 4% to 6%

• 2016 Revenue of $662 million, 9% of ZBH business • 2016 Estimated Market Share of 5% to 7% • 2016 Estimated Market Growth of 1% to 3%

• 2016 Revenue of $428 million, 6% of ZBH business • 2016 Estimated Market Share of 9% to 11% • 2016 Estimated Market Growth of 4% to 5%

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New

Timberline® MPF Lateral Fusion System

Arcos® Modular Femoral Revision System

DVR® Crosslock Distal Radius Plating System

& ePAK® Delivery System

Gel-One®

Cross-Linked Hyaluronate

Persona® Personalized Knee System

Vanguard® ID Total Knee System

G7® Acetabular System

Broad Portfolio

Quattro® Link Knotless Anchors

Mobi-C®

Comprehensive® Reverse

Shoulder System

Osseotite®

SternaLock Blu®

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Guided by our Value Creation Framework

Market Leading Operating Margin:

• Leverage scale • Manufacturing and quality system optimization • Realize net synergies

Significant Free Cash Flow rates:

• Achievement of deleveraging goals • Value creating M&A • Returning value to stockholders

Opportunity to deliver 4%+ revenue growth by 2020:

• Innovative new products • Specialized sales forces • Expanding emerging markets presence

Operational Excellence

Disciplined Capital

Allocation

Growth

22

Key Strategies

Transforming Revenue Mix Strengthening presence in faster-growing product categories

Differentiated R&D

60+ new products and solutions launched in 2016 and 2017

Specialized Sales Channel

Leveraging scale and specialized reps to

accelerate growth

Disciplined Capital Allocation

Delivering value with strategic acquisitions

Free Cash Flow generation dedicated to further debt reduction and long-term shareholder friendly activities

23

Zimmer + Biomet = Transformative Combination

Revenue (in millions) Adj. Diluted EPS (1)

• Broad product portfolio

• Product combination enables key cross-sell & specialized channel focus

• 7.9% Adjusted EPS CAGR

• Innovative new products

• Internal and external portfolio development

• History of strong earnings growth and delivery of deal synergies

• Strong Free Cash Flow positioning ZBH for future flexibility

Key Strengths


$4,673

$6.40

$-

$3.00

$6.00

$9.00

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

2014 2015 2016 2017E

Revenue Adj. Diluted EPS

$7,760 - $7,800

$8.01 - $8.07

$5,998

$7,684$6.90

$7.96

24

M&A Strengthens Portfolio

17%

Knee 36%

Hips 25%

Platform Technologies Musculoskeletal Health Diversification

In 2016 Zimmer Biomet invested $1.5B on M&A transactions

25

Global Footprint: Operating Locations

Making a Global Impact In Patients’ Lives

• 39 Manufacturing sites globally • Sales in 100+ countries

Appendix

27

Reconciliation of Reported Net Sales % Change to Constant Currency % Change and % Change Excluding LDR Holding Corporation (unaudited)

Foreign ConstantExchange Currency

% Change Impact % ChangeGeographic Results

Americas (2.9) % 0.1 % (3.0) %EMEA 3.3 3.7 (0.4) Asia Pacific 2.4 (2.8) 5.2

Total (0.8) % 0.4 % (1.2) %

Product CategoriesKnees

Americas (3.8) % 0.1 % (3.9) %EMEA 3.7 3.1 0.6 Asia Pacific 2.3 (1.6) 3.9

Total (1.2) 0.5 (1.7) Hips

Americas (4.5) 0.2 (4.7) EMEA 2.4 3.9 (1.5) Asia Pacific 2.1 (4.0) 6.1

Total (1.4) 0.3 (1.7)

S.E.T 1.2 0.1 1.1 Dental (3.2) 1.2 (4.4) Spine & CMF 0.7 0.4 0.3 Other (4.8) 0.5 (5.3)

Total (0.8) % 0.4 % (1.2) %Impact of additional LDR Holding Corporation billing days in the 2017 period (0.3) - (0.3) % Change excluding LDR Holding Corporation (1.1) % 0.4 % (1.5) %

September 30, 2017For the Three Months Ended

28

Reconciliation of Reported Net Sales % Change to Constant Currency % Change and % Change Excluding LDR Holding Corporation (unaudited)

Foreign ConstantExchange Currency

% Change Impact % ChangeGeographic Results

Americas 1.5 % 0.1 % 1.4 %EMEA (1.0) (1.4) 0.4 Asia Pacific 4.8 (1.2) 6.0

Total 1.4 % (0.4) % 1.8 %

Product CategoriesKnees

Americas (2.2) % - % (2.2) %EMEA (2.2) (2.1) (0.1) Asia Pacific 3.5 (0.3) 3.8

Total (1.3) (0.5) (0.8)

HipsAmericas (1.9) - (1.9) EMEA (1.5) (0.9) (0.6) Asia Pacific 5.3 (1.9) 7.2

Total (0.4) (0.6) 0.2

S.E.T 3.3 (0.4) 3.7 Dental (3.5) (0.1) (3.4) Spine & CMF 20.1 - 20.1 Other (4.9) (0.4) (4.5)

Total 1.4 % (0.4) % 1.8 %Impact of additional LDR Holding Corporation billing days in the 2017 period (1.6) - (1.6) % Change excluding LDR Holding Corporation (0.2) % (0.4) % 0.2 %

For the Nine Months EndedSeptember 30, 2017

29

Reconciliation of Cash Flow from Operating Activities to Free Cash Flow

Three Months Ended Three Months Ended Three Months Ended Nine Months Ended March 31, 2017 June 30, 2017 September 30, 2017 September 30, 2017

Net cash provided by operating activities 275.4$ 440.5$ 463.5$ 1,179.4$ Additions to instruments (86.4) (86.2) (83.1) (255.7) Additions to other property, plant and equipment (43.1) (30.7) (36.0) (109.8) Free cash flow 145.9$ 323.6$ 344.4$ 813.9$

For the Quarterly and Year-to-Date Periods in Calendar Year Ending December 31, 2017(in millions, unaudited)


Net cash provided by operating activities 272.8$ 379.6$ 352.6$ 1,005.0$ Additions to instruments (85.1) (72.2) (94.0) (251.3) Additions to other property, plant and equipment (27.6) (46.1) (56.4) (130.1) Free cash flow 160.1$ 261.3$ 202.2$ 623.6$


30

Reconciliation of Gross Profit & Margin to Adjusted Gross Profit & Margin


Net Sales 1,977.3$ 1,954.4$ 1,818.1$ 5,749.8$

Cost of products sold, excluding intangible asset amortization 512.9 527.7 500.9 1,541.5

Intangible asset amortization 152.0 147.7 152.7 452.4

Gross profit 1,312.4$ 1,279.0$ 1,164.5$ 3,755.9$ Inventory step-up and other inventory and manufacturing related charges 23.2 24.9 10.4 58.5 Intangible asset amortization 152.0 147.7 152.7 452.4 Adjusted gross profit 1,487.6$ 1,451.6$ 1,327.6$ 4,266.8$

Gross margin 66.4 % 65.4 % 64.1 % 65.3 %Inventory step-up and other inventory and manufacturing related charges 1.1 1.3 0.5 1.0 Intangible asset amortization 7.7 7.6 8.4 7.9 Adjusted gross margin 75.2 % 74.3 % 73.0 % 74.2 %


31

Reconciliation of Gross Profit & Margin to Adjusted Gross Profit & Margin

Three Months Ended Three Months Ended Three Months Ended Three Months Ended Year Ended

March 31, 2016 June 30, 2016 September 30, 2016 December 31, 2016 December 31, 2016

Net Sales 1,904.0$ 1,934.0$ 1,832.8$ 2,013.1$ 7,683.9$

Cost of products sold, excluding intangible asset amortization 640.6 640.1 479.3 621.8 2,381.8

Intangible asset amortization 126.6 133.8 164.3 141.2 565.9

Gross profit 1,136.8$ 1,160.1$ 1,189.2$ 1,250.1$ 4,736.2$ Inventory step-up and other inventory and manufacturing related charges 178.3 156.6 22.8 111.4 469.1 Intangible asset amortization 126.6 133.8 164.3 141.2 565.9 Adjusted gross profit 1,441.7$ 1,450.5$ 1,376.3$ 1,502.7$ 5,771.2$

Gross margin 59.7 % 60.0 % 64.9 % 62.1 % 61.6 %Inventory step-up and other inventory and manufacturing related charges 9.4 8.1 1.2 5.5 6.1 Intangible asset amortization 6.6 6.9 9.0 7.0 7.4 Adjusted gross margin 75.7 % 75.0 % 75.1 % 74.6 % 75.1 %


32

Reconciliation of Operating Profit & Margin to Adjusted Operating Profit & Margin


Operating profit 350.4$ 282.3$ 213.4$ 846.1$ Inventory step-up and other inventory and manufacturing related charges 23.2 24.9 10.4 58.5 Intangible asset amortization 152.0 147.7 152.7 452.4 Special items 110.1 158.6 165.4 434.1 Adjusted operating profit 635.7$ 613.5$ 541.9$ 1,791.1$

Operating profit margin 17.7 % 14.4 % 11.7 % 14.7 %Inventory step-up and other inventory and manufacturing related charges 1.1 1.3 0.5 1.0 Intangible asset amortization 7.7 7.6 8.4 7.9 Special items 5.6 8.1 9.2 7.5 Adjusted operating profit margin 32.1 % 31.4 % 29.8 % 31.1 %


33

Reconciliation of Operating Profit & Margin to Adjusted Operating Profit & Margin

Three Months Ended Three Months Ended Three Months Ended Three Months Ended Year Ended

March 31, 2016 June 30, 2016 September 30, 2016 December 31, 2016 December 31, 2016

Operating profit (loss) 245.5$ 201.6$ 195.5$ 183.3$ 825.9$ Inventory step-up and other inventory and manufacturing related charges 178.3 156.6 22.8 111.4 469.1 Intangible asset amortization 126.6 133.8 164.3 141.2 565.9 Special items 88.7 137.9 170.4 214.8 611.8 Adjusted operating profit 639.1$ 629.9$ 553.0$ 650.7$ 2,472.7$

Operating profit (loss) margin 12.9 % 10.4 % 10.7 % 9.1 % 10.7 %Inventory step-up and other inventory and manufacturing related charges 9.4 8.1 1.2 5.5 6.1 Intangible asset amortization 6.6 6.9 9.0 7.0 7.4 Special items 4.7 7.2 9.3 10.7 8.0 Adjusted operating profit margin 33.6 % 32.6 % 30.2 % 32.3 % 32.2 %


34

Reconciliation of Net Earnings to Adjusted Net Earnings

2017 2016Net Earnings of Zimmer Biomet Holdings, Inc. 98.8$ 158.8$ Inventory step-up and other inventory and manufacturing-related charges 10.4 22.8 Intangible asset amortization 152.7 164.3 Special items

Biomet merger-related 81.1 113.8 Other special items 84.3 56.6

Merger-related and other (income) expense in other expense, net (0.5) (2.6) Taxes on above items (1) (79.1) (111.6) Other certain tax adjustments (2) 2.2 (39.7) Adjusted Net Earnings 349.9$ 362.4$

(1) The tax effect for the U.S. jurisdiction is calculated based on an effective rate considering federal and state taxes, as well as permanent items. For jurisdictions outside the U.S., the tax effect is calculated based upon the statutory rates where the items were incurred.

(2) In 2017, other certain tax adjustments relate to net unfavorable resolutions of various tax matters. The 2016 adjustment primarily relates to a favorable adjustment to certain deferred tax liabilities recognized as part of acquisition-related accounting.

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017 and 2016(in millions, unaudited)

Three MonthsEnded September 30,

35

Reconciliation of Net Earnings to Adjusted Net Earnings

2017 2016Net Earnings of Zimmer Biomet Holdings, Inc. 582.4$ 236.3$ Inventory step-up and other inventory and manufacturing-related charges 58.5 357.7 Intangible asset amortization 452.4 424.7 Special items


Merger-related and other (income) expense in other expense, net 0.5 (1.1) Taxes on above items (1) (264.4) (297.0) Biomet merger-related measurement period tax adjustments (2) - 52.7 Other certain tax adjustments (3) (55.6) 6.4 Adjusted Net Earnings 1,207.9$ 1,176.7$


(2) The 2016 period includes negative effects from finalizing the tax accounts for the Biomet merger. Under the applicable U.S. GAAP rules, these measurement period adjustments are recognized on a prospective basis in the period of change.

(3) In 2017, other certain tax adjustments relate to a tax restructuring that lowered the tax rate on deferred tax liabilities recorded on intangible assets recognized in acquisition-related accounting, net favorable resolutions of various tax matters, and charges from internal restructuring transactions that provide the Company access to cash in a tax efficient manner. The 2016 adjustment primarily relates to a favorable adjustment to certain deferred tax liabilities recognized as part of acquisition-related accounting offset by internal restructuring transactions that provide the Company access to cash in a tax efficient manner.

Ended September 30,

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016(in millions, unaudited)

Nine Months

36

Reconciliation of Diluted EPS to Adjusted EPS

2017 2016Diluted EPS 0.48$ 0.78$ Inventory step-up and other inventory and manufacturing-related charges 0.05 0.11 Intangible asset amortization 0.75 0.81 Special items


Merger-related expense in other expense, net - (0.01) Taxes on above items (1)

(0.38) (0.55)

Other certain tax adjustments (2)0.01 (0.19)

Adjusted Diluted EPS 1.72$ 1.79$


(2) In 2017, other certain tax adjustments relate to net unfavorable resolutions of various tax matters. The 2016 adjustment primarily relates to a favorable adjustment to certain deferred tax liabilities recognized as part of acquisition-related accounting.

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017 and 2016(unaudited)

Three MonthsEnded September 30,

37

Reconciliation of Diluted EPS to Adjusted EPS

2017 2016Diluted EPS 2.86$ 1.17$ Inventory step-up and other inventory and manufacturing-related charges 0.29 1.77 Intangible asset amortization 2.22 2.10 Special items


Merger-related and other expense in other expense, net - (0.01) Taxes on above items (1) (1.30) (1.47) Biomet merger-related measurement period tax adjustments (2) - 0.26 Other certain tax adjustments (3) (0.27) 0.04 Adjusted Diluted EPS 5.93$ 5.82$



(3) In 2017, other certain tax adjustments relate to a tax restructuring that lowered the tax rate on deferred tax liabilities recorded on intangible assets recognized in acquisition-related accounting, net favorable resolutions of various tax matters, and charges from internal restructuring transactions that provide the Company access to cash in a tax efficient manner. The 2016 adjustment primarily relates to a favorable adjustment to certain deferred tax liabilities recognized as part of acquisition-related accounting offset by internal restructuring transactions that provide the Company access to cash in a tax efficient manner.

Ended September 30,

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016(unaudited)

Nine Months

38

Reconciliation of 2017 Projected Revenue % Change to 2017 Projected Constant Currency % Change and Change Excluding LDR Holding Corporation (unaudited)

Projected Three Months Ended December 31, 2017: High LowRevenue % change 2.0 % - %Foreign exchange impact (1.8) (1.8)

Constant currency % change 0.2 % (1.8) %

Projected Year Ended December 31, 2017: High LowRevenue % change 1.5 % 1.0 %Foreign exchange impact (0.1) (0.1)

Constant currency % change 1.4 % 0.9 %Impact of LDR Holding Corporation (1.2) (1.2)

Constant currency % change excluding LDR Holding Corporation 0.2 % (0.3) %

39

Reconciliation of 2017 Projected Diluted EPS and Projected Adjusted Diluted EPS (unaudited)

Projected Three Months Ended December 31, 2017: High LowDiluted EPS 1.08$ 0.94$ Inventory step-up and other inventory and manufacturing related charges, intangible asset amortization, special items and other expense 1.48 1.60 Taxes on above items(1) and other certain tax adjustments (0.42) (0.46) Adjusted Diluted EPS 2.14$ 2.08$

Projected Year Ended December 31, 2017: High LowDiluted EPS 3.93$ 3.80$ Inventory step-up and other inventory and manufacturing related charges, intangible asset amortization, special items and other expense 6.14 6.24 Taxes on above items(1) and other certain tax adjustments (2.00) (2.03) Adjusted Diluted EPS 8.07$ 8.01$

(1) The tax effect for the U.S. jurisdiction is estimated based on an effective rate considering federal and state taxes, as well as permanent items. For jurisdictions outside the U.S., the tax effect is estimated based upon the statutory rates where the items are projected to be incurred.

40

Reconciliation of GAAP Net Earnings to non-GAAP Adjusted Net Earnings (unaudited)

2016 2015 2014

Net Earnings of Zimmer Biomet Holdings, Inc. 305.9$ 147.0$ 720.3$ Inventory step-up and other inventory and manufacturing related charges 469.1 348.8 36.3 Certain claims - 7.7 21.5 Intangible asset amortization 565.9 337.4 92.5 Special items Biomet merger-related 487.3 619.1 61.9 Other special items 124.5 212.7 279.2 Merger-related and other expense in other (expense) income, net 3.6 1.0 39.6 Debt extinguishment cost 53.3 22.0 - Interest expense on Biomet merger financing - 70.0 - Taxes on above items (1) (449.0) (487.6) (153.3) Biomet merger-related measurement period tax adjustments (2) 52.7 - - Other certain tax adjustments (3)

(2.5) 32.4 - Adjusted Net Earnings 1,610.8$ 1,310.5$ 1,098.0$



(3) Other certain tax adjustments primarily include internal restructuring transactions to integrate Biomet operations and facilitate access to offshore earnings, partially offset by resolution of certain matters with taxing authorities and adjustments to deferred tax liabilities recognized as part of acquisition-related accounting.

Year ended December 31,

41

Reconciliation of GAAP Diluted Earnings Per Share to non-GAAP Adjusted Diluted Earnings Per Share (unaudited)

2016 2015 2014

Diluted EPS 1.51$ 0.77$ 4.20$ Inventory step-up and other inventory and manufacturing related charges 2.32 1.84 0.21 Certain claims - 0.04 0.13 Intangible asset amortization 2.80 1.78 0.54 Special items Biomet merger-related 2.40 3.26 0.36 Other special items 0.62 1.12 1.63 Merger-related and other expense in other (expense) income, net 0.02 - 0.23 Debt extinguishment cost 0.26 0.12 - Interest expense on Biomet merger financing - 0.37 - Taxes on above items (1) (2.22) (2.57) (0.90) Biomet merger-related measurement period tax adjustments (2) 0.26 - - Other certain tax adjustments (3)

(0.01) 0.17 - Adjusted Diluted EPS 7.96$ 6.90$ 6.40$



(3) Other certain tax adjustments primarily include internal restructuring transactions to integrate Biomet operations and facilitate access to offshore earnings, partially offset by resolution of certain matters with taxing authorities and adjustments to deferred tax liabilities recognized as part of acquisition-related accounting.

Year ended December 31,

42

Reconciliation of Net Earnings and Diluted EPS to Adjusted Net Earnings and Adjusted Diluted EPS and Adjusted Net Earnings and Adjusted Diluted EPS Excluding the Estimated Effects of Changes in Foreign Currency Exchange Rates

Projected (High) Projected (Low) 2017 2017 2016 2017 2016 2017 2016

Net Earnings of Zimmer Biomet Holdings, Inc. / Diluted EPS 3.93$ 3.80$ 1.50$ 98.8$ 158.8$ 0.48$ 0.78$ Inventory step-up and other inventory and manufacturing related charges, intangible asset amortization, special items and other expense 6.14 6.24 8.41 328.0 354.9 1.61 1.75 Taxes on above items(1) and other certain tax adjustments (2.00) (2.03) (1.95) (76.9) (151.3) (0.37) (0.74) Adjusted Diluted EPS 8.07$ 8.01$ 7.96$ 349.9$ 362.4$ 1.72$ 1.79$

Incremental foreign currency exchange rate forward contract cash flow hedges(2) 0.32 0.32 17.8 0.08 Effects of changes in foreign currency exchange rates on functional currency translation (3)

(0.05) (0.05) (4.7) (0.02) Adjusted Diluted EPS excluding the estimated effects of changes in foreign currency exchange rates (4)

8.34$ 8.28$ 363.0$ 1.78$

Growth over prior year Adjusted Diluted EPS 5% 4% 0.2% -0.6%

(1)

(2)

(3)

(4)

Three Months Ended September 30,

FOR THE FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016 and THREE MONTHS ENDED SEPTEMBER 30, 2017 and 2016

EPS

Years Ended December 31, Three Months Ended September 30,

(unaudited)

NET EARNINGS EPS

The tax effect for the U.S. jurisdiction is calculated based on an effective rate considering federal and state taxes, as well as permanent items. For jurisdictions outside the U.S., the tax effect is calculated based upon the statutory rates where the items were or are projected to be incurred.

We enter into foreign currency exchange rate forward contracts to minimize the effects of foreign currency exchange rate movements on the cash flows from our intercompany sales of inventory. We designate these contracts as cash flow hedges and defer any gains or losses on these contracts until the inventory is sold to a third party. Based upon actual and estimated foreign currency exchange rates, we estimate that we will recognize lower hedge gains in the applicable periods when compared to the same prior year period.

Under U.S. GAAP, we consolidate our foreign operations by translating their statement of earnings in their functional currency into U.S. Dollars using average foreign currency exchange rates during the applicable time period. We have estimated the effects of changes in foreign currency exchange rates on our consolidated statement of earnings by translating the current period functional currency results using the same exchange rates from the prior year period. This estimate is complex and may not actually reflect the changes in our consolidated statement of earnings had foreign currency exchange rates not changed. This effect also includes the estimated tax impact on the foreign currency exchange forward contract cash flow hedges.

Adjusted Diluted EPS excluding the estimated effects of changes in foreign currency exchange rates excludes the effects of incremental changes in foreign currency exchange rate forward contract cash flow hedges, incremental changes in remeasurement of monetary assets and liabilities denominated in a currency other than its functional currency and the effects of changes in foreign currency exchange rates on functional currency translation.

zimmer biomet holdings, inc. 3rd quarter 2017 earnings .../media/files/z... · 3rd quarter 2017...

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