Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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The following discussion and analysis should be read in conjunction with the consolidated financial statements and the corresponding notes included elsewhere in this Annual Report on Form 10-K. 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. The following discussion, analysis and comparisons generally focus on the operating results for the years ended December 31, 2020 and 2019. Discussion, analysis and comparisons of the years ended December 31, 2019 and 2018 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2019.

EXECUTIVE LEVEL OVERVIEW

Impact of the COVID-19 Global Pandemic

Our results have been 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. This resulted in net sales declines of 9.7 percent and 38.3 percent in the first and second quarters of 2020, respectively, when compared to the same prior year periods. In the third quarter of 2020, various levels of recovery in elective surgical procedures occurred resulting in net sales growth of 2.0 percent when compared to the same prior year period. However, in the fourth quarter of 2020 we saw the pandemic worsen and elective surgical procedures were deferred again, especially late in the quarter. This was particularly prevalent in EMEA. As a result, our net sales declined in the fourth quarter of 2020 by 1.9 percent when compared to the same prior year period.

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 have temporarily suspended or limited production at certain manufacturing facilities. However, to date we have not experienced significant disruptions in our supply chain, or in our ability to meet our customer demands.

2020 Financial Highlights

In 2020, our net sales decreased by 12.0 percent compared to 2019 due to the deferral of elective surgical procedures from the COVID-19 pandemic. We recognized a net loss of $138.9 million in the year ended December 31, 2020. The loss was largely attributable to the impacts of COVID-19, which caused lower net sales and was the primary driver behind $645.0 million of goodwill and intangible asset impairment charges. The temporarily suspended or limited production at certain manufacturing facilities resulted 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. Pursuant to our 2019 Restructuring Plan, we also incurred higher restructuring and other cost reduction initiative expenses in 2020 when compared to 2019. Lastly, in 2020 we recognized net litigation-related charges of $159.8 million compared to net litigation-related charges of $41.5 million in 2019. These unfavorable items were partially offset by savings from our 2019 Restructuring Plan and lower costs for travel, meetings and other projects due to COVID-19.

2021 Outlook

We believe the COVID-19 surges that occurred late in 2020 will continue to negatively impact our net sales in 2021. However, at this time we are optimistic the rollout of vaccines around the world will change those dynamics and elective surgical procedures will be able to return to pre-pandemic levels at some point during 2021. Additionally, since the clinical need for many of our products does not go away, it is possible once patients and hospitals have confidence to return to elective surgical procedures the patient backlog from deferred procedures may have a positive effect on the underlying market growth. However, the consequences of COVID-19 continue to be fluid, and it is difficult to predict its ongoing impacts to our business and broader economic and market environments.

If the negative impacts of COVID-19 on our net sales subsides, we believe we can improve our operating profit margin since our fixed costs would not increase proportionally to net sales.

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 towards 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.

Net Sales by Geography

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

		Year Ended December 31,												Volume/								Foreign
		2020				2019				% (Dec)				Mix				Price				Exchange
Americas		$	4,335.4			$	4,875.8				(11.1	)	%		(7.9	)	%		(3.1	)	%		(0.1	)	%
EMEA			1,391.3				1,746.9				(20.4	)			(20.5	)			(0.8	)			0.9
Asia Pacific			1,297.8				1,359.5				(4.5	)			(4.5	)			(1.5	)			1.5
Total		$	7,024.5			$	7,982.2				(12.0	)			(10.0	)			(2.4	)			0.4

		Year Ended December 31,												Volume/								Foreign
		2019				2018				% Inc/(Dec)				Mix				Price				Exchange
Americas		$	4,875.8			$	4,837.2				0.8		%		4.0		%		(3.0	)	%		(0.2	)	%
EMEA			1,746.9				1,801.9				(3.1	)			4.3				(2.1	)			(5.3	)
Asia Pacific			1,359.5				1,293.8				5.1				9.1				(2.2	)			(1.8	)
Total		$	7,982.2			$	7,932.9				0.6				4.9				(2.7	)			(1.6	)

“Foreign Exchange” used in the tables in this report represents the effect of changes in foreign currency exchange rates on sales.

Net Sales by Product Category

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

		Year Ended December 31,												Volume/								Foreign
		2020				2019				% (Dec)				Mix				Price				Exchange
Knees		$	2,389.8			$	2,810.1				(15.0	)	%		(12.6	)	%		(2.7	)	%		0.3		%
Hips			1,750.5				1,931.5				(9.4	)			(7.1	)			(2.8	)			0.5
S.E.T.			1,322.0				1,444.1				(8.4	)			(6.5	)			(2.3	)			0.4
Dental, Spine & CMFT			1,043.7				1,161.3				(10.1	)			(9.4	)			(1.2	)			0.5
Other			518.5				635.2				(18.4	)			(16.9	)			(1.9	)			0.4
Total		$	7,024.5			$	7,982.2				(12.0	)			(10.0	)			(2.4	)			0.4

		Year Ended December 31,												Volume/								Foreign
		2019				2018				% Inc/(Dec)				Mix				Price				Exchange
Knees		$	2,810.1			$	2,773.7				1.3		%		6.2		%		(3.0	)	%		(1.9	)	%
Hips			1,931.5				1,918.9				0.7				5.6				(3.1	)			(1.8	)
S.E.T.			1,444.1				1,401.2				3.1				6.0				(1.6	)			(1.3	)
Dental, Spine & CMFT			1,161.3				1,175.1				(1.2	)			2.1				(2.0	)			(1.3	)
Other			635.2				664.0				(4.3	)			0.8				(4.0	)			(1.1	)
Total		$	7,982.2			$	7,932.9				0.6				4.9				(2.7	)			(1.6	)

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

		Year Ended December 31,
		2020				2019				2018				2020 vs. 2019 % (Dec)				2019 vs. 2018 % Inc/(Dec)
Knees
Americas		$	1,461.1			$	1,676.6			$	1,642.7				(12.9	)	%		2.1		%
EMEA			487.0				654.1				672.3				(25.6	)			(2.7	)
Asia Pacific			441.7				479.4				458.7				(7.8	)			4.5
Total		$	2,389.8			$	2,810.1			$	2,773.7				(15.0	)			1.3
Hips
Americas		$	941.5			$	1,016.3			$	996.3				(7.4	)	%		2.0		%
EMEA			407.8				499.8				519.9				(18.4	)			(3.9	)
Asia Pacific			401.2				415.4				402.7				(3.4	)			3.2
Total		$	1,750.5			$	1,931.5			$	1,918.9				(9.4	)			0.7

Demand (Volume/Mix) Trends

Changes in volume and mix of product sales had a negative effect of 10.0 percent on year-over-year sales during the year ended December 31, 2020. Volume trends were negative in the first and second quarters of 2020 as the COVID-19 pandemic resulted in the deferral of elective surgical procedures. In the third quarter of 2020, we experienced various levels of recovery in elective surgical procedures, resulting in positive volume and mix compared to the same prior year period. However, in the fourth quarter of 2020 as the pandemic surged, volume trends again were negative compared to the same prior year period in many regions and we expect this trend to continue into 2021 until vaccines or other preventative measures lessen the spread of infection and patient reluctance.

Based upon country dynamics, volume changes varied by region in 2020. In the Americas, the U.S. volume trends varied from state-to-state depending on local infection rates and preventative measures. In EMEA, stay-at-home measures were far more prevalent than other geographies, especially in the second and fourth quarters, resulting in EMEA volume and mix trends being the worst among our geographic regions for the full year. In Asia Pacific, containment of the COVID-19 virus varied from country-to-country, but overall volume and mix trends were positive in Asia Pacific in the second half of 2020 as our three largest markets of Japan, China and Australia/New Zealand all had sales growth in the fourth quarter of 2020.

Pricing Trends

Global selling prices had a negative effect of 2.4 percent on year-over-year sales during 2020. In the majority of countries in which we operate, we continue to experience pricing pressure from governmental healthcare cost containment efforts and from local hospitals and health systems.

Foreign Currency Exchange Rates

In 2020, changes in foreign currency exchange rates had a positive effect of 0.4 percent on year-over-year sales. If foreign currency exchange rates remain at levels consistent with recent rates, we estimate they will have a less than 1 percent positive effect on sales in 2021 for the full year.

Estimated Market Trends

The following table presents estimated* 2020 global market information (dollars in billions):

		Global				Global		Zimmer Biomet
		Market				Historic Market		Market
		Size**				% Growth***		Position**
Knees		$	9			Low-Single Digit			1
Hips			8			Low-Single Digit			1
S.E.T.			24			Mid-Single Digit			5
CMFT			3			Mid-Single Digit			3
Spine			11			Low-Single Digit			6
Dental			10			Mid-Single Digit			5

*	Estimates are not precise and are based on competitor annual filings, Wall Street equity research and Company estimates

**	Only includes the subsegments in these markets in which we compete

***	Represents historic growth in recent years, absent the effects of the COVID-19 pandemic, and excludes the effect of changes in foreign currency exchange rates on sales growth

Expenses as a Percent of Net Sales

		Year Ended December 31,
		2020				2019				2018				2020 vs. 2019 Inc/(Dec)				2019 vs. 2018 Inc/(Dec)
Cost of products sold, excluding intangible asset amortization			30.3		%		28.2		%		28.6		%		2.1		%		(0.4	)	%
Intangible asset amortization			8.5				7.3				7.5				1.2				(0.2	)
Research and development			5.3				5.6				4.9				(0.3	)			0.7
Selling, general and administrative			45.2				41.9				42.6				3.3				(0.7	)
Goodwill and intangible asset impairment			9.2				0.9				12.3				8.3				(11.4	)
Restructuring and other cost reduction initiatives			1.7				0.6				0.4				1.1				0.2
Quality remediation			0.7				1.0				1.9				(0.3	)			(0.9	)
Acquisition, integration and related			0.3				0.2				1.3				0.1				(1.1	)
Operating (Loss) Profit			(1.2	)			14.2				0.4				(15.4	)			13.8

Cost of Products Sold and Intangible Asset Amortization

We calculate gross profit as net sales minus cost of products sold and intangible asset amortization. Our gross margin percentage is gross profit divided by net sales. The following table sets forth the factors that contributed to the gross margin changes in each of 2020 and 2019 compared to the prior year:

		Year Ended December 31,
		2020				2019
Prior year gross margin			64.5	%			63.9	%
Lower average selling prices			(0.7	)			(0.7	)
Average cost per unit			0.4				(0.4	)
Excess and obsolete inventory charges			(0.5	)			0.1
Discontinued products inventory charges			(0.4	)			-
Royalties			0.1				0.4
Impact of foreign currency hedges			0.2				0.8
Temporarily suspended or limited production			(1.2	)			-
Intangible asset amortization			(1.2	)			0.2
Other			-				0.2
Current year gross margin			61.2	%			64.5	%

The decrease in gross margin percentage in 2020 compared to 2019 was primarily due to temporarily suspended or limited production at certain facilities, intangible asset amortization, lower average selling prices, excess and obsolete inventory charges and charges related to products we intend to discontinue. 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. Intangible asset amortization and excess and obsolete inventory charges did not decline ratably with the significant decline in our net sales and therefore were a significant impact to our gross margin percentage. The inventory charges on discontinued products are driven by overlapping product lines in our portfolio and we have plans to discontinue one of the product lines, or from decisions not to spend additional funds to keep certain products up-to-date with the latest quality standards or requirements, such as the European Union Medical Device Regulation (“EU MDR”), and so we have decided to discontinue those products.

Operating Expenses

Research & development (“R&D”) expenses decreased in both amount and as a percentage of net sales in 2020 compared to 2019 primarily due to savings as a result of the 2019 Restructuring Plan and lower spending on travel and lower spending on certain project costs, including the EU MDR, due to COVID-19.

Selling, general & administrative (“SG&A”) expenses decreased in 2020 compared to 2019, but increased as a percentage of net sales. SG&A expenses decreased due to lower variable selling and distribution expenses from the decline in our net sales, COVID-19 cost reductions for travel, consulting and other projects, savings from our 2019 Restructuring Plan and lower charges related to our compliance with the DPA. These favorable items were partially offset by higher litigation-related charges in 2020 compared to 2019. See Note 21 to our consolidated financial statements for additional information on these litigation matters. The increase in SG&A expenses as a percentage of net sales is due to various fixed expenses that did not decline ratably with the significant decline in our net sales.

In 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, and $33.0 million of intangible asset impairment charges. In 2019, we recognized intangible asset impairment charges of $70.1 million. For more information regarding these charges, see Note 11 to our consolidated financial statements.

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 $116.9 million and $50.0 million in the years ended December 31, 2020 and 2019, respectively, attributable to restructuring and other cost reduction initiatives, primarily related to employee termination benefits, distributor contract terminations, and consulting and project management expenses associated with the 2019 Restructuring Plan. For more information regarding these expenses, see Note 4 to our consolidated financial statements.

Our quality remediation expenses declined in 2020 compared to 2019 due to the natural regression of completing our remediation milestones. Acquisition, integration and related expenses increased in 2020 compared to 2019 due to the various acquisitions we made in 2020.

On February 5, 2021, we announced our intention to pursue a plan to spin off our Spine and Dental businesses to form NewCo. We expect to incur significant expenses in 2021 to execute this plan. The significant expenses primarily include third party consulting and project management to help us separate the legacy Zimmer Biomet and NewCo businesses and to comply with all the necessary actions needed for NewCo to become an independent, publicly-traded company. Consummation of the proposed spin-off is subject to certain conditions, including final approval of our Board of Directors, the receipt of a favorable opinion and IRS ruling with respect to the tax-free nature of the transaction, and the effectiveness of a Form 10 registration statement with the SEC. Therefore, we cannot provide assurance that we will be able to complete the spin-off on the terms or on the timeline that we announced, or at all.

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

In 2020, we recognized income in other income (expense), net, compared to net expenses in 2019, 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 2020.

Interest expense, net, declined in 2020 compared to 2019 due to lower average outstanding debt balances during 2020 resulting from debt repayments throughout 2019 and Euro notes issued in the fourth quarter of 2019 that were used to refinance debt with higher interest rates. Despite continued debt repayments, our interest expense, net, may

increase in 2021 due to cross-currency interest rate swaps that will mature in 2021. Based upon current market conditions, if we decide to enter into new swaps when the previous swaps mature in 2021, the new swaps would not be as favorable to us compared to the maturing swaps.

Our effective tax rate (“ETR”) on (loss) earnings before income taxes was 49.9 percent and negative 24.9 percent (a tax benefit was recognized on earnings before income taxes) for the years ended December 31, 2020 and 2019, respectively. In 2020, the income tax benefit was driven by changes in estimates to uncertain tax positions, favorable tax audit settlements, jurisdictional mix of earnings and losses, and a $43.0 million tax benefit from Switzerland’s Federal Act on Tax Reform and AHV Financing (“TRAF”). Other significant impacts to the ETR in 2020 included the $612.0 million goodwill impairment charge, which resulted in a loss before taxes, but had no corresponding tax benefit.

In 2019, we recognized an overall tax benefit in the year due to a $315.0 million benefit from Switzerland’s TRAF in addition to the tax impact of certain restructuring transactions in Switzerland. The TRAF was effective January 1, 2020 and includes the abolishment of various favorable federal and cantonal tax regimes. The TRAF provided transitional relief measures for companies that are losing the tax benefit of a ruling, including a "step-up" for amortizable goodwill, equal to the amount of future tax benefit they would have received under their existing ruling, subject to certain limitations.

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
		Year Ended December 31,												Year Ended December 31,												Year Ended December 31,
(dollars in millions)		2020				2019				2018				2020				2019				2018				2020				2019				2018
Americas and Global Businesses		$	4,479.0			$	5,035.3			$	5,000.4			$	1,316.9			$	1,689.7			$	1,706.9				29.4		%		33.6		%		34.1		%
EMEA			1,288.6				1,623.1				1,669.5				308.9				484.0				480.7				24.0				29.8				28.8
Asia Pacific			1,256.9				1,323.8				1,263.0				420.5				472.7				431.9				33.5				35.7				34.2

In 2020, the net sales and operating profit of all of our operating segments were adversely affected by the COVID-19 pandemic. In 2020, the operating profit as a percentage of net sales for each of our segments declined compared to prior years due to the effect of fixed operating expenses that did not decline proportionally with lower net sales from the impact of COVID-19.

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 EU MDR; other charges; any related effects on our income tax provision associated with these items; the impact of The Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”); 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 and diluted earnings per share to our non-GAAP adjusted net earnings and non-GAAP adjusted diluted earnings per share used for internal management purposes (in millions, except per share amounts):

		Year ended December 31,
		2020				2019				2018
Net (Loss) Earnings of Zimmer Biomet Holdings, Inc.		$	(138.9	)		$	1,131.6			$	(379.2	)
Inventory and manufacturing related charges(1)			54.2				53.9				32.5
Intangible asset amortization(2)			597.6				584.3				595.9
Goodwill and intangible asset impairment(3)			645.0				70.1				979.7
Restructuring and other cost reduction initiatives(4)			116.9				50.0				34.2
Quality remediation(5)			49.8				87.6				165.4
Acquisition, integration and related(6)			23.8				12.2				99.5
Litigation(7)			159.8				65.0				186.0
Litigation settlement gain(8)			-				(23.5	)			-
European Union Medical Device Regulation(9)			25.3				30.9				3.7
Other charges(10)			10.7				119.2				82.8
Taxes on above items (11)			(253.4	)			(226.2	)			(239.6	)
U.S. tax reform (12)			-				-				8.3
Swiss tax reform (13)			(5.0	)			(315.0	)			-
Other certain tax adjustments (14)			(104.2	)			(13.7	)			(3.8	)
Adjusted Net Earnings		$	1,181.6			$	1,626.4			$	1,565.4

		Year ended December 31,
		2020				2019				2018
Diluted (Loss) Earnings per share		$	(0.67	)		$	5.47			$	(1.86	)
Inventory and manufacturing related charges(1)			0.26				0.26				0.16
Intangible asset amortization(2)			2.89				2.83				2.93
Goodwill and intangible asset impairment(3)			3.12				0.34				4.81
Restructuring and other cost reduction initiatives(4)			0.56				0.24				0.17
Quality remediation(5)			0.24				0.42				0.81
Acquisition, integration and related(6)			0.12				0.06				0.49
Litigation(7)			0.77				0.31				0.91
Litigation settlement gain(8)			-				(0.11	)			-
European Union Medical Device Regulation(9)			0.12				0.15				0.02
Other charges(10)			0.05				0.58				0.41
Taxes on above items (11)			(1.22	)			(1.09	)			(1.18	)
U.S. tax reform (12)			-				-				0.04
Swiss tax reform (13)			(0.03	)			(1.52	)			-
Other certain tax adjustments (14)			(0.50	)			(0.07	)			(0.02	)
Effect of dilutive shares assuming net earnings(15)			(0.04	)			-				(0.05	)
Adjusted Diluted EPS		$	5.67			$	7.87			$	7.64

(1)

Inventory and manufacturing-related charges in 2020 and 2019 were primarily related to excess and obsolete inventory charges on certain product lines we intend to discontinue and other charges. The year ended December 31, 2019 also included a $20.8 million charge incurred to terminate a raw material supply agreement. The excess and obsolete inventory charges on certain product lines are driven by overlapping product lines in our portfolio and we have plans to discontinue one of the product lines, or from decisions not to spend additional funds to keep certain products up-to-date on the latest quality standards or requirements, such as the EU MDR, and so we have decided to discontinue such products. In 2018, the charges primarily related to inventory step-up. Inventory step-up expense represents the incremental expense of inventory sold

	recognized at its fair value after business combination accounting is applied versus the expense that would have been recognized if sold at its cost to manufacture.

(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 2020 we recognized goodwill impairment charges of $470.0 million and $142.0 million related to our EMEA and Dental reporting units, respectively. In 2018, we recognized a goodwill impairment charge of $975.9 million. The impairment was comprised of $401.2 million in our Spine reporting unit, $567.0 million in our EMEA reporting unit and $7.7 million in an insignificant reporting unit. In 2020, 2019 and 2018, we recognized $33.0 million, $70.1 million and $3.8 million, respectively, of intangible asset impairments from merger-related IPR&D intangible assets.

(4)	In December 2019, our Board of Directors approved, and we initiated, a new global restructuring program with an objective of reducing costs to allow us to further invest in higher priority growth opportunities. 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)	We exclude certain acquisition, integration and related gains and expenses from our non-GAAP results.

(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 EU MDR 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 Foreign Corrupt Practices Act 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. On February 9, 2021, the one-count criminal information filed against us in 2017 was dismissed with prejudice and the DPA concluded. 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)

The 2017 Tax Act resulted in a net favorable provisional adjustment due to the reduction of deferred tax liabilities for unremitted earnings and revaluation of deferred tax liabilities to a 21 percent rate, which was partially offset by provisional tax charges related to the toll charge provision of the 2017 Tax Act. In 2018, we finalized our estimates of the effects of the 2017 Tax Act based upon final guidance issued by U.S. tax authorities.

(13)	We recognized a tax benefit related to TRAF in addition to an impact from certain restructuring transactions in Switzerland. Also included are tax adjustments relating to the ongoing impacts of tax only amortization resulting from TRAF as well as certain restructuring transactions in Switzerland.

(14)

Other certain tax adjustments relate to various discrete tax period adjustments. In 2020, the adjustments were primarily related to the resolution of or changes in estimates of significant uncertain tax positions as a result of settlements or favorable rulings. In 2019 and 2018, the adjustments were primarily related to changes in tax rates on deferred tax liabilities recorded on intangible assets recognized in acquisition-related accounting and adjustments from internal restructuring transactions that provide us access to offshore funds in a tax efficient manner.

(15)	Due to the reported net loss for 2020 and 2018, the effect of dilutive shares assuming net earnings is shown as an adjustment. Diluted share count used in Adjusted Diluted EPS is (in millions):

		Year ended December 31, 2020				Year ended December 31, 2018
Diluted shares			207.0				203.5
Dilutive shares assuming net earnings			1.4				1.5
Adjusted diluted shares			208.4				205.0

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 net sales due to elective surgical procedure deferrals. We have taken prudent measures in an effort to maintain an adequate financial profile and to have access to capital to fund the business during these unprecedented times. These measures included reductions to discretionary spending such as travel, meetings and other project spend that can be delayed with limited long-term detriment to the business. However, we continued to incur fixed expenses that resulted in lower operating cash flows in 2020 when compared to 2019.

As of December 31, 2020, we had $802.1 million in cash and cash equivalents. In addition, we had $1.0 billion available to borrow under our revolving credit agreement entered into on September 18, 2020 (the “September 2020 Credit Agreement”) that contains a $1.0 billion 364-day unsecured revolving credit facility (the “September 2020 Revolving Facility”) and matures on September 17, 2021, and $1.5 billion available under our five-year unsecured multicurrency revolving facility of $1.5 billion (the “2019 Multicurrency Revolving Facility”) under the revolving credit agreement we entered into on November 1, 2019 (the “2019 Credit Agreement”) 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 13 to our consolidated financial statements.

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. Further, there can be no assurance that, if needed, we will be able to secure additional financing on terms favorable to us, if at all.

Sources of Liquidity

Cash flows provided by operating activities were $1,204.5 million in 2020 compared to $1,585.8 million and $1,747.4 million in 2019 and 2018, respectively. The decline in cash flow from operating activities in 2020 from 2019 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 2020 we terminated our accounts receivable purchase arrangements in the U.S. and Japan which we estimate negatively impacted operating cash flows by approximately $300 million. The 2019 period included a payment of approximately $168 million on a patent infringement lawsuit.

Cash flows used in investing activities were $613.8 million in 2020 compared to $729.3 million and $416.6 million in 2019 and 2018, respectively. 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 prioritized investments in 2020 which resulted in lower investments in property, plant and equipment, totaling $117.5 million when compared to $207.1 million in 2019. As further discussed in Note 10 to our consolidated financial statements, we made various acquisitions in 2020 requiring initial cash outlays of $235.5 million, net of acquired cash. In 2019, we paid $197.6 million to buy out certain licensing arrangements from third parties.

Cash flows used in financing activities were $421.8 million in 2020. In 2020, 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. Additionally, with cash flows generated from operations, in 2020 we prepaid $250.0 million of our floating rate senior notes that mature March 19, 2021. Further, the termination of certain accounts receivable purchase arrangements in 2020 resulted in $54.6 million of financing cash outflows to the purchasing financial institutions. These outflows represent the amount of unremitted cash that we had collected on sold accounts receivable as of December 31, 2019 that was repaid in 2020. Cash flows used in financing activities were $779.9 million in 2019. Our primary use of available cash in 2019 was for debt repayment. We received net proceeds of $549.2 million from the issuance of additional Euro-denominated senior notes which we used to repay $500.0 million of senior notes that became due on November 30, 2019. In January 2019, we borrowed an additional $200.0 million under a U.S. term loan (“U.S. Term Loan C”) and used those proceeds, along with cash on hand, to repay the remaining $225.0 million outstanding under the U.S. term loan (“U.S. Term Loan B”) provided for under our 2016 credit agreement. During 2019 we also repaid the $735.0 million outstanding balance under U.S. Term Loan C, with the remainder of the proceeds from the Euro-denominated senior notes issuance and cash from operations. Overall, we had approximately $710 million of net principal repayments on our senior notes and term loans in 2019.

At December 31, 2020, we had outstanding debt of $8,126.5 million, of which $500.0 million was classified as current debt. As it relates to our current debt, following December 31, 2020, we prepaid the remaining $200.0 million principal amount outstanding on our floating rate senior notes due March 19, 2021. The remaining current debt consists of our $300.0 million senior notes due November 30, 2021. We believe we can satisfy this debt obligation with cash generated from our operations, by issuing new debt, and/or by borrowing on our revolving credit facilities.

For additional information on our debt, including types of debt, maturity dates, interest rates, debt covenants and available revolving credit facilities, see Note 13 to our consolidated financial statements.

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 December 31, 2020, $390.1 million of our cash and cash equivalents were held in jurisdictions outside of the U.S. Of this amount, $90.8 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 $5.5 billion of unremitted earnings in future years.

In February, June, September and December 2020, our Board of Directors declared cash dividends 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 $1.0 billion share repurchase program effective March 1, 2016, with no expiration date. As of December 31, 2020, all $1.0 billion remained authorized.

As discussed in Note 4 to our consolidated financial statements, 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, $145 million of which was incurred through December 31, 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 10 to our consolidated financial statements, we completed the acquisitions of A&E Medical Corporation and Relign Corp. in 2020. These acquisitions included guaranteed deferred payments totaling $145.0 million that we are obligated to make in 2021.

As discussed in Note 17 to our consolidated financial statements, the IRS has issued proposed adjustments for years 2010 through 2012, as well as proposed adjustments 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.

As discussed in Note 21 to our consolidated financial statements, we are involved in various litigation matters with respect to which we expect to continue paying settlements over the next few years.

CONTRACTUAL OBLIGATIONS

We have entered into contracts with various third parties in the normal course of business that will require future payments. The following table illustrates our contractual obligations and certain other commitments (in millions):

										2022				2024				2026
										and				and				and
Contractual Obligations		Total				2021				2023				2025				Thereafter
Long-term debt		$	8,171.6				500.0				1,981.4				2,000.0				3,690.2
Interest payments			1,846.8				207.8				396.7				344.9				897.4
Operating leases			313.9				80.2				105.0				65.0				63.7
Purchase obligations			518.4				253.4				171.4				93.2				0.4
Toll charge tax liability			279.2				-				56.7				136.6				85.9
Other long-term liabilities			310.7				-				223.3				22.4				65.0
Total contractual obligations		$	11,440.6			$	1,041.4			$	2,934.5			$	2,662.1			$	4,802.6

$124.4 million of the other long-term liabilities on our balance sheet as of December 31, 2020 are liabilities related to defined benefit pension plans. Defined benefit plan liabilities are based upon the underfunded status of the respective plans; they are not based upon future contributions. Due to uncertainties regarding future plan asset performance, changes in interest rates and our intentions with respect to voluntary contributions, we are unable to reasonably estimate future contributions beyond 2021. Therefore, this table does not include any amounts related to future contributions to our plans. See Note 16 to our consolidated financial statements for further information on our defined benefit plans.

Under the 2017 Tax Act, we have a $279.2 million liability remaining from a one-time tax on the mandatory deemed repatriation of post-1986 untaxed foreign earnings and profits (“toll charge”) for the deemed repatriation of unremitted foreign earnings. This amount was recorded in non-current income tax liabilities on our consolidated balance sheet as of December 31, 2020. We have elected to pay the toll charge in installments over eight years.

Also included in long-term liabilities on our consolidated balance sheets are liabilities related to unrecognized tax benefits and corresponding interest and penalties thereon. Due to the uncertainties inherent in these liabilities, such as the ultimate timing and resolution of tax audits, we are unable to reasonably estimate the amount or period in which potential tax payments related to these positions will be made. Therefore, this table does not include any obligations related to unrecognized tax benefits. See Note 17 to our consolidated financial statements for further information on these tax-related accounts.

We have entered into various agreements that may result in future payments dependent upon various events such as the achievement of certain product R&D milestones, sales milestones, or, at our discretion, maintenance of exclusive rights to distribute a product. Since there is uncertainty on the timing or whether such payments will have to be made, we have not included them in this table. These estimated payments could range from $0 to $380 million.

CRITICAL ACCOUNTING ESTIMATES

Our financial results are affected by the selection and application of accounting policies and methods. Significant accounting policies which require management’s judgment are discussed below.

Excess Inventory and Instruments - We must determine as of each balance sheet date how much, if any, of our inventory may ultimately prove to be unsaleable or unsaleable at our carrying cost. Similarly, we must also determine if instruments on hand will be put to productive use or remain undeployed as a result of excess supply. Accordingly, inventory and instruments are written down to their net realizable value. To determine the appropriate net realizable value, we evaluate current stock levels in relation to historical and expected patterns of demand for all of our products and instrument systems and components. The basis for the determination is generally the same for all inventory and instrument items and categories except for work‑in‑process inventory, which is recorded at cost. Obsolete or discontinued items are generally destroyed and completely written off. Management evaluates the need for changes to the net realizable values of inventory and instruments based on market conditions, competitive offerings and other factors on a regular basis.

Income Taxes - Our income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect management’s best assessment of estimated future taxes to be paid. We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense.

We estimate income tax expense and income tax liabilities and assets by taxable jurisdiction. Realization of deferred tax assets in each taxable jurisdiction is dependent on our ability to generate future taxable income sufficient to realize the benefits. We evaluate deferred tax assets on an ongoing basis and provide valuation allowances unless we determine it is “more likely than not” that the deferred tax benefit will be realized.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. We are subject to regulatory review or audit in virtually all of those jurisdictions and those reviews and audits may require extended periods of time to resolve. We record our income tax provisions based on our knowledge of all relevant facts and circumstances, including existing tax laws, our experience with previous settlement agreements, the status of current examinations and our understanding of how the tax authorities view certain relevant industry and commercial matters.

We recognize tax liabilities in accordance with the Financial Accounting Standards Board (“FASB”) guidance on income taxes and we adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined.

Commitments and Contingencies - We are involved in various ongoing proceedings, legal actions and claims arising in the normal course of doing business, including litigation related to product, labor and intellectual property. We establish liabilities for loss contingencies when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Accruals for product liability and other claims are established with the assistance of internal and external legal counsel based on current information and historical settlement information for claims, related legal fees and for claims incurred but not reported.

Goodwill and Intangible Assets - We evaluate the carrying value of goodwill and indefinite life intangible assets annually, or whenever events or circumstances indicate the carrying value may not be recoverable. We evaluate the carrying value of finite life intangible assets whenever events or circumstances indicate the carrying value may not be recoverable. Significant assumptions are required to estimate the fair value of goodwill and intangible assets, most notably estimated future cash flows generated by these assets and risk-adjusted discount rates. As such, these fair value measurements use significant unobservable inputs. Changes to these assumptions could require us to record impairment charges on these assets.

In our annual impairment test in the fourth quarter of 2020, all our reporting units exceeded their carrying values by more than 10 percent. Fair value was determined using income and market approaches. Fair value under the income approach was determined by discounting to present value the estimated future cash flows of the reporting units. Significant assumptions are incorporated into the income approach, such as estimated growth rates and risk-adjusted discount rates. Fair value under the market approach utilized the guideline public company methodology, which uses valuation indicators determined from other businesses that are similar to our reporting units.

Future impairment in our reporting units could occur if the estimates used in the income and market approaches change. If our estimates of profitability in the reporting unit decline, the fair value estimate under the income approach will decline. Additionally, changes in the broader economic environment could cause changes to our estimated discount rates and comparable company valuation indicators, which may impact our estimated fair values.

Further, changes in foreign currency exchange rates could increase the cost of procuring inventory and services from foreign suppliers, which could reduce reporting unit profitability.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 2 to our consolidated financial statements for information on how recent accounting pronouncements have affected or may affect our financial position, results of operations or cash flows.