Item 1. Financial Statements

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Item 1. Financial Statements

ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(in millions, except per share amounts, unaudited)

Three Months EndedSix Months Ended
June 30,June 30,
2023202220232022
Net Sales$1,869.6$1,781.8$3,700.6$3,445.0
Cost of products sold, excluding intangible asset amortization525.5511.01,026.31,011.0
Intangible asset amortization138.2133.0271.6263.8
Research and development118.199.4228.5196.3
Selling, general and administrative725.8695.21,441.81,379.7
Intangible asset impairment-3.0-3.0
Restructuring and other cost reduction initiatives24.457.066.3100.9
Quality remediation-7.8-14.3
Acquisition, integration, divestiture and related7.9(5.5)9.1(3.3)
Operating expenses1,539.91,500.93,043.62,965.7
Operating Profit329.6280.9656.9479.3
Other (expense) income, net(1.2)(42.6)6.5(98.7)
Interest expense, net(51.6)(38.8)(99.8)(79.9)
Earnings from continuing operations before income taxes276.8199.5563.6300.7
Provision for income taxes from continuing operations66.945.5121.073.5
Net Earnings from continuing operations209.9154.0442.6227.2
Less: Net earnings attributable to noncontrolling interest0.20.30.50.5
Net Earnings from Continuing Operations of Zimmer Biomet Holdings, Inc.209.6153.7442.1226.7
Loss from discontinued operations, net of taxes---(58.8)
Net Earnings of Zimmer Biomet Holdings, Inc.$209.6$153.7$442.1$167.9
Earnings Per Common Share - Basic
Earnings from continuing operations$1.00$0.73$2.12$1.08
Loss from discontinued operations---(0.28)
Net Earnings Per Common Share - Basic$1.00$0.73$2.12$0.80
Earnings Per Common Share - Diluted
Earnings from continuing operations$1.00$0.73$2.10$1.08
Loss from discontinued operations---(0.28)
Net Earnings Per Common Share - Diluted$1.00$0.73$2.10$0.80
Weighted Average Common Shares Outstanding
Basic208.6209.6209.0209.4
Diluted209.9210.3210.1210.2

The accompanying notes are an integral part of these condensed consolidated financial statements.

ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEM****ENTS OF COMPREHENSIVE INCOME

(in millions, unaudited)

Three Months EndedSix Months Ended
June 30,June 30,
2023202220232022
Net Earnings of Zimmer Biomet Holdings, Inc.$209.6$153.7$442.1$167.9
Other Comprehensive Income (Loss):
Foreign currency cumulative translation adjustments, net of tax(26.5)(92.1)(14.1)(90.8)
Unrealized cash flow hedge gains, net of tax47.165.655.979.3
Reclassification adjustments on hedges, net of tax(19.3)(9.7)(38.3)(14.0)
Adjustments to prior service cost and unrecognized actuarial assumptions, net of tax(1.1)2.6(2.0)3.5
Total Other Comprehensive Income (Loss)0.2(33.6)1.5(22.0)
Comprehensive Income Attributable to
Zimmer Biomet Holdings, Inc.$209.8$120.1$443.6$145.9

The accompanying notes are an integral part of these condensed consolidated financial statements.

ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDA****TED BALANCE SHEETS

(in millions, except share amounts, unaudited)

June 30,December 31,
20232022
ASSETS
Current Assets:
Cash and cash equivalents$319.8$375.7
Accounts receivable, less allowance for credit losses1,367.31,381.5
Inventories2,275.82,147.2
Prepaid expenses and other current assets425.1522.9
Total Current Assets4,387.94,427.3
Property, plant and equipment, net1,975.01,872.5
Goodwill8,743.78,580.2
Intangible assets, net5,027.75,063.8
Other assets1,160.01,122.2
Total Assets$21,294.3$21,066.0
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable$354.6$354.1
Income taxes payable81.638.5
Other current liabilities1,277.61,421.3
Current portion of long-term debt520.0544.3
Total Current Liabilities2,233.72,358.2
Deferred income taxes, net474.9474.8
Long-term income tax payable375.7421.2
Other long-term liabilities642.0632.6
Long-term debt5,189.45,152.2
Total Liabilities8,915.89,039.0
Commitments and Contingencies (Note 16)
Stockholders' Equity:
Zimmer Biomet Holdings, Inc. Stockholders' Equity:
Common stock, $0.01 par value, one billion shares authorized, 315.8 million shares as of June 30, 2023 (313.8 million as of December 31, 2022) issued3.23.1
Paid-in capital9,766.09,504.4
Retained earnings9,902.39,559.3
Accumulated other comprehensive loss(177.8)(179.3)
Treasury stock, 107.0 million shares as of June 30, 2023 (104.8 million as of December 31, 2022)(7,122.2)(6,867.2)
Total Zimmer Biomet Holdings, Inc. stockholders' equity12,371.512,020.3
Noncontrolling interest7.16.7
Total Stockholders' Equity12,378.612,027.0
Total Liabilities and Stockholders' Equity$21,294.3$21,066.0

The accompanying notes are an integral part of these condensed consolidated financial statements.

ZIMMER BIOMET HOLD****INGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in millions, except per share amounts, unaudited)

Zimmer Biomet Holdings, Inc. Stockholders
Accumulated
OtherTotal
Common SharesPaid-inRetainedComprehensiveTreasury SharesNoncontrollingStockholders'
NumberAmountCapitalEarnings(Loss) IncomeNumberAmountInterestEquity
Balance April 1, 2023315.4$3.2$9,692.4$9,741.7$(178.0)(106.9)$(7,108.6)$6.9$12,157.6
Net earnings---209.6---0.2209.8
Other comprehensive income----0.2---0.2
Cash dividends declared ($0.24 per share)---(50.1)----(50.1)
Stock compensation plans0.3-58.11.1--0.7-59.9
Embody, Inc. acquisition consideration0.1-15.5-----15.5
Share repurchases-----(0.1)(14.3)-(14.3)
Balance June 30, 2023315.8$3.2$9,766.0$9,902.3$(177.8)(107.0)$(7,122.2)$7.1$12,378.6
Balance April 1, 2022313.4$3.1$9,385.7$9,503.1$(158.9)(103.8)$(6,717.5)$5.9$12,021.4
Net earnings---153.7---0.3154.0
Other comprehensive loss----(33.6)---(33.6)
Cash dividends declared ($0.24 per share)---(50.3)----(50.3)
Stock compensation plans--33.1-----33.1
Balance June 30, 2022313.4$3.1$9,418.8$9,606.5$(192.5)(103.8)$(6,717.5)$6.2$12,124.6
Balance January 1, 2023313.8$3.1$9,504.4$9,559.3$(179.3)(104.8)$(6,867.2)$6.7$12,027.0
Net earnings---442.1---0.5442.6
Other comprehensive income----1.5---1.5
Cash dividends declared ($0.24 per share)---(100.5)----(100.5)
Stock compensation plans0.8-113.51.4--1.0-115.9
Embody, Inc. acquisition consideration1.20.1150.4-----150.5
Share repurchases--(2.3)--(2.2)(256.0)-(258.3)
Balance June 30, 2023315.8$3.2$9,766.0$9,902.3$(177.8)(107.0)$(7,122.2)$7.112,378.6
Balance January 1, 2022312.8$3.1$9,314.8$10,292.2$(231.6)(103.8)$(6,717.8)$5.7$12,666.4
Net earnings---167.9---0.5168.4
Other comprehensive loss----(22.0)---(22.0)
Cash dividends declared ($0.24 per share)---(100.6)----(100.6)
Reclassifications of net investment hedges----25.9---25.9
Spinoff of ZimVie Inc.---(753.1)35.2---(717.9)
Stock compensation plans0.6-104.00.1--0.3-104.4
Balance June 30, 2022313.4$3.1$9,418.8$9,606.5$(192.5)(103.8)$(6,717.5)$6.2$12,124.6

The accompanying notes are an integral part of these condensed consolidated financial statements.

ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED S****TATEMENTS OF CASH FLOWS

(in millions, unaudited)

For the Six Months Ended June 30,
20232022
Cash flows provided by (used in) operating activities from continuing operations:
Net earnings from continuing operations$442.6$227.2
Adjustments to reconcile net earnings from continuing operations to cash provided by operating activities from continuing operations:
Depreciation and amortization469.3466.5
Share-based compensation58.950.8
Intangible asset impairment-3.0
(Gain) loss on investment in ZimVie Inc.(2.5)84.3
Changes in operating assets and liabilities, net of acquired assets and liabilities
Income taxes13.813.0
Receivables8.0(81.8)
Inventories(148.0)(26.4)
Accounts payable and accrued liabilities(185.2)(49.9)
Other assets and liabilities(1.3)(25.5)
Net cash provided by operating activities from continuing operations655.6661.2
Cash flows provided by (used in) investing activities from continuing operations:
Additions to instruments(168.3)(120.6)
Additions to other property, plant and equipment(144.0)(77.3)
Net investment hedge settlements19.033.9
Acquisition of intellectual property rights(73.3)-
Business combination investments, net of acquired cash(32.9)(99.8)
Other investing activities7.0(60.5)
Net cash used in investing activities from continuing operations(392.5)(324.3)
Cash flows provided by (used in) financing activities from continuing operations:
Proceeds from revolving facility570.0220.0
Payments on revolving facility(425.0)(220.0)
Redemption of senior notes(86.3)(750.0)
Payment on term loan(33.9)-
Dividends paid to stockholders(100.6)(100.5)
Proceeds from employee stock compensation plans61.145.0
Distribution from ZimVie Inc.-540.6
Business combination contingent consideration payments(10.3)-
Deferred business combination payments(4.0)-
Repurchase of common stock(281.9)-
Other financing activities(5.2)(3.5)
Net cash used in financing activities from continuing operations(316.1)(268.4)
Cash flows provided by (used in) discontinued operations:
Net cash used in operating activities-(71.5)
Net cash used in investing activities-(7.2)
Net cash used in financing activities-(68.1)
Net cash used in discontinued operations-(146.8)
Effect of exchange rates on cash and cash equivalents(2.9)(13.8)
Decrease in cash and cash equivalents(55.9)(92.1)
Cash and cash equivalents, beginning of year (includes $100.4 at January 1, 2022 of discontinued operations cash)375.7478.5
Cash and cash equivalents, end of period$319.8$386.4

The accompanying notes are an integral part of these condensed consolidated financial statements.

ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CON****SOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The financial data presented herein is unaudited and should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2022.

In our opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented. The December 31, 2022 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). Results for interim periods should not be considered indicative of results for the full year.

Amounts reported in millions within this Quarterly Report on Form 10-Q are computed based on the actual amounts. As a result, the sum of the components may not equal the total amount reported in millions due to rounding. In addition, certain columns and rows within tables may not sum to the totals due to the use of rounded numbers. Percentages presented are calculated from the underlying unrounded amounts.

Risks and Uncertainties - Our results have been and may continue to be impacted by the COVID-19 global pandemic. The vast majority of our net sales are derived from products used in elective surgical procedures which may get deferred due to precautions in certain markets if there is a surge in infections. Although the effects of the COVID-19 pandemic on our operating results continue to subside, the pandemic could still have an unfavorable effect on our financial position, results of operations and cash flows in the near term.

Spinoff - On March 1, 2022, we completed the previously announced separation of our spine and dental businesses into a new public company through the distribution by Zimmer Biomet of 80.3% of the outstanding shares of common stock of ZimVie Inc. (“ZimVie”) to Zimmer Biomet’s stockholders. We disposed of our remaining shares of ZimVie in February 2023. The historical results of our spine and dental businesses that were contributed to ZimVie in the spinoff have been reflected as discontinued operations in our condensed consolidated financial statements through the date of the spinoff in 2022 as the spinoff represented a strategic shift in our business that had a major effect on operations and financial results. The disclosures presented in our notes to the interim condensed consolidated financial statements are presented on a continuing operations basis.

The words “we,” “us,” “our” and similar words, “Zimmer Biomet” and “the Company” refer to Zimmer Biomet Holdings, Inc. and its subsidiaries. “Zimmer Biomet Holdings” refers to the parent company only.

We reclassified the loss on investment in ZimVie in the prior period condensed consolidated statement of cash flows to conform to the current period presentation.

2. Discontinued Operations and Related ZimVie Matters

On March 1, 2022, we completed the previously announced separation of our spine and dental businesses through the distribution of 80.3% of the outstanding shares of common stock of ZimVie to our stockholders at the close of business on February 15, 2022 (the “Record Date”). The distribution was made in the amount of one share of ZimVie common stock for every ten shares of our common stock owned by our stockholders at the close of business on the Record Date. Fractional shares of ZimVie common stock were not issued but instead were aggregated and sold in the open market with the proceeds being distributed pro rata in lieu of such fractional shares.

In the fourth quarter of 2021, ZimVie entered into a credit agreement with a financial institution providing for revolving loans of up to $175.0 million and term loan borrowings of up to $595.0 million. On February 28, 2022, prior to separation, ZimVie borrowed the entire $595.0 million available under the term loan. Approximately $540.6 million of this amount was paid by ZimVie to Zimmer Biomet in the form of a dividend at separation which is included in our cash flows from financing activities in the condensed consolidated statements of cash flows. We used proceeds from the dividend, along with cash on hand and proceeds from a draw on our revolving credit facility, to repay our 3.150% Senior Notes due 2022 which had an outstanding principal balance of $750.0 million.

In connection with the spinoff, we entered into definitive agreements with ZimVie that, among other things, set forth the terms and conditions of the separation and distribution. These agreements include a Transition Services Agreement (the “TSA”), a Transition Manufacturing and Supply Agreement (the “TMA”), a Reverse Transition Manufacturing and Supply Agreement (the “Reverse TMA”), and various other agreements each dated as of March 1, 2022.

Pursuant to the TSA, both we and ZimVie agree to provide certain services to each other, on an interim, transitional basis from and after the separation and the distribution. The services include certain regulatory services, commercial services, operational services, tax services, clinical affairs services, information technology services, finance and accounting services and human resource and employee benefits services. The remuneration to be paid for such services is generally intended to allow the company providing the services to recover all of its costs and expenses of providing such services. The TSA will terminate on the expiration of the term of the last service provided thereunder, which will generally be no later than March 31, 2025. However, we expect most TSA services will be completed by the end of 2023.

Pursuant to the TMA and the Reverse TMA, Zimmer Biomet or ZimVie, as the case may be, will manufacture or cause to be manufactured certain products for the other party, on an interim, transitional basis. Pursuant to such agreements, Zimmer Biomet or ZimVie, as the case may be, will be required to purchase certain minimum amounts of products from the other party. Each of the TMA and the Reverse TMA has a two-year term, with a one-year extension possible upon mutual agreement of the parties.

We recognize any gains or losses from the TSA and TMA agreements in the Acquisition, integration, divestiture and related line item in our condensed consolidated statements of earnings. Amounts included in the condensed consolidated statements of earnings related to these agreements for the three and six-month periods ended June 30, 2023 and 2022 were immaterial.

We initially retained approximately 5.1 million common shares of ZimVie in connection with the spinoff, representing approximately 19.7 percent of ZimVie's outstanding common shares on the separation date. Given our inability to exert significant influence over ZimVie, we recognized this investment at fair value in prepaid expenses and other current assets on our condensed consolidated balance sheet. Changes to the fair value of the investment were recognized in non-operating other (expense) income, net, in subsequent periods. We disposed of these shares in February 2023. In the six-month period ended June 30, 2023, we recognized a gain of $2.5 million related to our investment in ZimVie. In the three and six-month periods ended June 30, 2022, we recognized losses of $33.3 million and $84.3 million, respectively, related to our investment in ZimVie.

On August 31, 2022, we borrowed an aggregate principal amount of $83.0 million under a short-term credit agreement (the "Short-Term Term Loan”) with a third-party financial institution, the proceeds of which were used to repay certain of our existing indebtedness. On September 1, 2022, we entered into a forward exchange agreement and pledge agreement (collectively the “Forward Exchange Agreement”) with the same financial institution to deliver to them our 5.1 million shares of ZimVie common stock in the first quarter of 2023. We pledged our 5.1 million shares of ZimVie common stock to the financial institution as collateral for our obligations under the Short-Term Term Loan and the Forward Exchange Agreement.

In February 2023, we repaid in full the Short-Term Term Loan by transferring our ZimVie common shares to the financial institution counterparty to settle the Forward Exchange Agreement and by paying $33.9 million in cash, representing an amount determined by the difference between the average daily volume-weighted average price of the ZimVie shares over the outstanding term of the Forward Exchange Agreement and the principal amount of $83.0 million. The transfer of our ZimVie common shares as part of the settlement resulted in a $49.1 million noncash financing activity for the six-month period ended June 30, 2023.

The Forward Exchange Agreement was accounted for at fair value, with changes in fair value recognized in non-operating other (expense) income, net and was included in the net gain related to our investment in ZimVie for the six month-period ended June 30, 2023, as discussed above. The most significant input into the valuation of the Forward Exchange Agreement was the market price of the ZimVie shares. The fair value of the Forward Exchange Agreement as of December 31, 2022 was $1.1 million and was included within prepaid expenses and other current assets on our condensed consolidated balance sheet.

As discussed in Note 1, Basis of Presentation, the results of our spine and dental businesses have been reflected as discontinued operations through the date of the spinoff in the prior year period. Details of loss from discontinued operations included in our condensed consolidated statements of earnings are as follows (in millions):

Six Months Ended
June 30,
2022
Net Sales$147.8
Cost of products sold, excluding intangible asset amortization53.5
Intangible asset amortization14.0
Research and development10.5
Selling, general and administrative89.4
Restructuring and other cost reduction initiatives0.4
Acquisition, integration, divestiture and related40.9
Other expense, net0.3
Loss from discontinued operations before income taxes(61.2)
Benefit for income taxes from discontinued operations(2.4)
Loss from discontinued operations, net of tax$(58.8)

In a pro rata spinoff of consolidated subsidiaries, the distribution of the assets and liabilities are recognized through equity instead of net earnings. Accordingly, we recognized the distribution of net assets to ZimVie in retained earnings. Additionally, the dividend we received from ZimVie at the separation was also recognized in retained earnings.

3. Significant Accounting Policies

Use of Estimates - The accompanying unaudited condensed consolidated financial statements are prepared in conformity with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We have made our best estimates, as appropriate under GAAP, in the recognition of our assets and liabilities. Actual results could differ materially from these estimates.

Accounting Pronouncements Not Yet Adopted - There are no recently issued accounting pronouncements that we have not yet adopted that are expected to have a material effect on our financial position, results of operations or cash flows.

4. Revenue

Net sales by geography are as follows (in millions):

Three Months EndedSix Months Ended
June 30,June 30,
2023202220232022
United States$1,068.9$1,017.6$2,129.2$1,958.8
International800.7764.21,571.41,486.2
Total$1,869.6$1,781.8$3,700.6$3,445.0

Net sales by product category are as follows (in millions):

Three Months EndedSix Months Ended
June 30,June 30,
2023202220232022
Knees$771.4$704.9$1,533.9$1,367.7
Hips504.3487.2997.1938.2
S.E.T.442.7446.4876.1863.2
Other151.2143.3293.5275.9
Total$1,869.6$1,781.8$3,700.6$3,445.0

S.E.T. includes sales from our Sports Medicine, Extremities, Trauma, Craniomaxillofacial and Thoracic ("CMFT") product categories. Other includes sales from our Technology, Surgical and Bone Cement product categories.

This net sales presentation 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. Each of our reportable operating

segments sells all the product categories noted above. Accordingly, the only difference from the presentation above and our reportable operating segments are the geographic groupings.

5. Restructuring

In December 2021, our management approved a global restructuring program (the “2021 Restructuring Plan”) intended to further reduce costs and to reorganize our global operations in preparation for the spinoff of ZimVie. The 2021 Restructuring Plan is expected to result in total pre-tax restructuring charges of approximately $185 million. The pre-tax restructuring charges consist of employee termination benefits; contract terminations for sales agents; and other charges, such as consulting fees and project management expenses. The following table summarizes the liabilities recognized related to the 2021 Restructuring Plan (in millions):

Employee
TerminationContract
BenefitsTerminationsOtherTotal
Expenses incurred in the three months ended June 30, 2023$1.5$1.9$2.6$6.0
Balance, December 31, 2022$10.5$25.0$3.1$38.6
Expenses incurred in the six months ended June 30, 20233.916.24.124.2
Cash payments(6.6)(17.7)(3.1)(27.4)
Foreign currency exchange rate changes0.20.6-0.8
Balance, June 30, 2023$8.0$24.1$4.1$36.2
Expense incurred since the start of the 2021 Restructuring Plan$57.0$68.0$31.0$156.0
Expense estimated to be recognized for the 2021 Restructuring Plan$70.0$80.0$35.0$185.0

In December 2019, our Board of Directors approved, and we initiated, a global restructuring program (the “2019 Restructuring Plan”) with an objective of reducing structural 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. The pre-tax restructuring charges consist of employee termination benefits; contract terminations for facilities and sales agents; and other charges, such as consulting fees, project management expenses and relocation costs, including costs to close a manufacturing facility. The following table summarizes the liabilities recognized related to the 2019 Restructuring Plan (in millions):

Employee
TerminationContract
BenefitsTerminationsOtherTotal
Expenses incurred in the three months ended June 30, 2023$(1.1)$-$9.4$8.3
Balance, December 31, 2022$28.9$9.0$6.4$44.3
Expenses incurred in the six months ended June 30, 2023(1.1)-15.514.4
Cash payments(2.5)(1.9)(17.4)(21.8)
Foreign currency exchange rate changes0.9-0.11.0
Balance, June 30, 2023$26.2$7.1$4.6$37.9
Expense incurred since the start of the 2019 Restructuring Plan$107.2$35.0$150.1$292.3
Expense estimated to be recognized for the 2019 Restructuring Plan$135.0$35.0$180.0$350.0

We do not include restructuring charges in the operating profit of our reportable segments.

In our condensed consolidated statement of earnings, we report restructuring charges in our “Restructuring and other cost reduction initiatives” financial statement line item. We report the expenses for other cost reduction and optimization initiatives with restructuring expenses because these activities also have the goal of reducing costs across the organization. However, since the cost reduction initiative expenses are not considered restructuring, they have been excluded from the amounts presented in this note.

6. Inventories

June 30,December 31,
20232022
(in millions)
Finished goods$1,727.2$1,655.0
Work in progress256.3230.9
Raw materials292.3261.3
Inventories$2,275.8$2,147.2

7. Property, Plant and Equipment

June 30,December 31,
20232022
(in millions)
Land$17.6$19.2
Buildings and equipment2,151.22,093.4
Capitalized software costs541.9518.2
Instruments3,808.03,683.5
Construction in progress198.6144.1
6,717.36,458.4
Accumulated depreciation(4,742.3)(4,585.9)
Property, plant and equipment, net$1,975.0$1,872.5

We had $15.7 million and $17.0 million of property, plant and equipment included in accounts payable as of June 30, 2023 and December 31, 2022, respectively.

8. Acquisitions

On February 14, 2023, we completed the acquisition of all the outstanding shares of Embody, Inc. ("Embody"), a medical device company focused on soft tissue healing, that expands our portfolio for the sports medicine market. Initial consideration consisted of the issuance of 1.1 million shares of our common stock valued at $135.0 million and $19.5 million of cash for a total value of $154.5 million. The fair value of our common stock was determined to be $127.34 per share, which represented the average of our high and low stock prices on the acquisition date. To minimize dilution from issuing shares for the Embody acquisition, we repurchased 1.9 million shares of our common stock in the three-month period ended March 31, 2023. The Embody acquisition includes additional consideration of up to $120.0 million in fair value of our common shares and cash, subject to achieving a future regulatory milestone after closing and commercial milestones based on sales growth over a three-year period. We assigned a fair value of $94.0 million for this contingent consideration as of the acquisition date. The estimated fair value of the contingent consideration liability was calculated based on the probability of achieving the specified regulatory milestone and by simulating numerous potential outcomes for the commercial milestones and discounting to present value the estimated payments.

On April 28, 2023, we completed the acquisition of all the outstanding shares of a privately held orthopedics medical device company that expands our portfolio in the orthopedics market ("April acquisition"). The initial consideration consisted of $15.0 million of cash and includes consideration of up to $8.0 million in cash, subject to achieving future regulatory milestones.

These acquisitions are collectively referred to in this report as the “2023 acquisitions”. Refer to Note 11 for information regarding the issuance of common stock and cash payments related to the contingent consideration liabilities that have occurred subsequent to the acquisition dates.

The goodwill related to the 2023 acquisitions represents the excess of the consideration transferred over the fair value of the net assets acquired. The goodwill related to the 2023 acquisitions is generated from the operational synergies and cross-selling opportunities we expect to achieve from the technologies acquired. The goodwill related to the 2023 acquisitions is not expected to be deductible for tax purposes. The goodwill related to the Embody acquisition is included in the Americas operating segment and the Americas Orthopedics reporting unit. The goodwill related to the April acquisition is included in the Asia Pacific operating segment and reporting unit. The goodwill related to the 2023 acquisitions was the only significant activity related to our consolidated goodwill balance in the three and six-month periods ended June 30, 2023, other than changes related to foreign currency exchange rate translation adjustments.

The purchase price allocations for the 2023 acquisitions are preliminary as of June 30, 2023. We need additional time to evaluate the tax attributes of the transactions, which may change the recognized assets and liabilities. There may be differences between the preliminary estimates of fair value and the final acquisition accounting. The final estimates of fair value are expected to be completed as soon as possible, but no later than one year after the respective acquisition dates.

The following table summarizes the preliminary estimates of fair value of the assets acquired and liabilities assumed related to the 2023 acquisitions (in millions):

Current assets$4.9
Intangible assets subject to amortization:
Technology97.3
Customer relationships9.4
Intangible assets not subject to amortization:
In-process research and development (IPR&D)36.3
Goodwill155.0
Other assets4.9
Total assets acquired307.9
Current liabilities1.2
Deferred income taxes35.2
Total liabilities assumed36.4
Net assets acquired$271.5

The amortization periods selected for technology and customer relationships were 15 years and 5 years, respectively. Upon receiving regulatory approval subsequent to the Embody acquisition date, the $36.3 million of IPR&D was reclassified to a definite-lived intangible asset and began amortizing over the applicable estimated useful life.

In the three and six-month periods ended June 30, 2023, there were no material adjustments to the preliminary values of the 2023 acquisitions.

On April 18, 2022, we completed the acquisition of all the outstanding shares of a privately held sternal closure company. The acquisition was completed primarily to expand our product offerings in the CMFT market. The total aggregate cash consideration paid at closing was $100.0 million, with an additional $11.0 million of deferred payments to be made over the following two years of which $4.0 million was paid in the six-month period ended June 30, 2023.

The goodwill related to this acquisition represents the excess of the consideration transferred over the fair value of the net assets acquired. The goodwill is related to the operational synergies we expect to achieve from combining the companies and the cash flows from future, undefined, development projects. The goodwill is included in the Americas operating segment and the Americas CMFT reporting unit. A portion of the goodwill is expected to be deductible for U.S. income tax purposes.

The following table summarizes the aggregate final estimates of fair value of the assets acquired and liabilities assumed related to this acquisition (in millions):

Current assets$3.8
Intangible assets subject to amortization:
Technology42.8
Customer relationships12.3
Goodwill48.3
Other assets4.9
Total assets acquired112.1
Current liabilities1.1
Total liabilities assumed1.1
Net assets acquired$111.0

The amortization periods selected for technology and customer relationships were 10 years and 4 years, respectively.

We have not included pro forma information and certain other information under GAAP for these acquisitions because they did not have a material impact on our financial position or results of operations.

In the six-month period ended June 30, 2023, we entered into agreements to acquire intellectual property through the buyout of certain licensing arrangements. These new agreements and the related payments replace the variable royalty payments that otherwise would have been due under the terms of previous licensing arrangements through 2030. These new agreements benefit us by expanding our ownership of intellectual property that we may use in the future. We recognized intangible assets of $80.5 million related to these agreements which will be amortized through 2030. The fixed, contractual payments under these agreements have mostly been paid. We have recognized a current liability for the remaining portion of the fixed payments that will be made primarily in the third quarter of 2023.

9. Debt

Our debt consisted of the following (in millions):

June 30,December 31,
20232022
Current portion of long-term debt
Short-Term Term Loan$-$83.0
2022 Five-Year Credit Agreement520.0375.0
3.700% Senior Notes due 2023-86.3
Total current portion of long-term debt$520.0$544.3
Long-term debt
1.450% Senior Notes due 2024850.0850.0
3.550% Senior Notes due 2025863.0863.0
3.050% Senior Notes due 2026600.0600.0
3.550% Senior Notes due 2030257.5257.5
2.600% Senior Notes due 2031750.0750.0
4.250% Senior Notes due 2035253.4253.4
5.750% Senior Notes due 2039317.8317.8
4.450% Senior Notes due 2045395.4395.4
2.425% Euro Notes due 2026545.5533.6
1.164% Euro Notes due 2027545.5533.6
Debt discount and issuance costs(27.1)(30.1)
Adjustment related to interest rate swaps(161.6)(172.0)
Total long-term debt$5,189.4$5,152.2

At June 30, 2023, our total current and non-current debt of $5.7 billion consisted of $5.4 billion aggregate principal amount of our senior notes, which included €1.0 billion Euro-denominated senior notes (“Euro Notes”), and $520.0 million of outstanding borrowings under the 2022 Five-Year Revolving Facility (defined below), partially offset by debt discount and issuance costs of $27.1 million and fair value adjustments related to interest rate swaps totaling $161.6 million.

In the six-month period ended June 30, 2023, we redeemed the $83.0 million outstanding principal amount of our Short-Term Term Loan and the $86.3 million outstanding principal amount of our 3.700% Senior Notes due 2023.

On July 7, 2023, we entered into a new five-year revolving credit agreement (the “2023 Five-Year Credit Agreement”) and a new 364-day revolving credit agreement (the “2023 364-Day Revolving Credit Agreement”), as described below. Borrowings under these credit agreements will be used for general corporate purposes.

The 2023 Five-Year Credit Agreement contains a five-year unsecured revolving facility of $1.5 billion (the “2023 Five-Year Revolving Facility”). The 2023 Five-Year Credit Agreement replaced the previous revolving credit agreement entered into on August 19, 2022 (the “2022 Five-Year Credit Agreement”), which contained a five-year unsecured revolving facility of $1.5 billion (the “2022 Five-Year Revolving Facility”). There was $520.0 million in aggregate outstanding borrowings under the 2022 Five-Year Credit Agreement at the time it was terminated, which borrowings were repaid through borrowings under the 2023 Five-Year Credit Agreement on July 7, 2023 in the same amount and on the same terms.

The 2023 Five-Year Credit Agreement will mature on July 7, 2028, with two one-year extensions exercisable at our discretion and subject to required lender consent. The 2023 Five-Year Credit Agreement also includes an uncommitted incremental feature allowing us to request an increase of the facility by an aggregate amount of up to $500.0 million.

Borrowings under the 2023 Five-Year Credit Agreement bear interest at floating rates, based upon either an adjusted term secured overnight financing rate (“Term SOFR”) for the applicable interest period or an alternate base rate, in each case, plus an applicable margin determined by reference to our senior unsecured long-term debt credit rating. We pay a facility fee on the aggregate

amount of the 2023 Five-Year Revolving Facility at a rate determined by reference to our senior unsecured long-term debt credit rating. The 2023 Five-Year Credit Agreement contains customary affirmative and negative covenants and events of default for unsecured financing arrangements, including, among other things, limitations on consolidations, mergers, and sales of assets. The 2023 Five-Year Credit Agreement also requires us to maintain a consolidated indebtedness to consolidated EBITDA ratio of no greater than 4.5 to 1.0 as of the last day of any period of four consecutive fiscal quarters (with such ratio subject to increase to 5.0 to 1.0 for a period of time in connection with a qualified material acquisition and certain other restrictions). We were in compliance with all covenants under the 2022 Five-Year Credit Agreement as of June 30, 2023. As of June 30, 2023, there were outstanding borrowings of $520.0 million under the 2022 Five-Year Credit Agreement.

The 2023 364-Day Revolving Credit Agreement is an unsecured revolving credit facility in the principal amount of $1.0 billion (the “2023 364-Day Revolving Facility”). The 2023 364-Day Revolving Credit Agreement replaced a credit agreement entered into on August 19, 2022, which was also a 364- day unsecured revolving credit facility of $1.0 billion (the “2022 364-Day Revolving Facility”). There were no borrowings outstanding under the 2022 364-Day Revolving Facility when it was terminated.

The 2023 364-Day Revolving Facility will mature on July 5, 2024. Borrowings under the 2023 364-Day Revolving Credit Agreement bear interest at floating rates based upon either an adjusted Term SOFR for the applicable interest period or an alternate base rate, in each case, plus an applicable margin determined by reference to our senior unsecured long-term debt credit rating. We pay a facility fee on the aggregate amount of the 2023 364-Day Revolving Facility at a rate determined by reference to our senior unsecured long-term debt credit rating. The 2023 364-Day Revolving Credit Agreement contains customary affirmative and negative covenants and events of default for an unsecured financing arrangement including, among other things, limitations on consolidations, mergers, and sales of assets. The 2023 364-Day Revolving Credit Agreement also requires us to maintain a consolidated indebtedness to consolidated EBITDA ratio of no greater than 4.5 to 1.0 as of the last day of any period of four consecutive fiscal quarters (with such ratio subject to increase to 5.0 to 1.0 in connection with a qualified material acquisition and certain other restrictions). We were in compliance with all covenants under the 2022 364-Day Revolving Credit Agreement as of June 30, 2023. As of June 30, 2023, there were no outstanding borrowings under the 2022 364-Day Revolving Credit Agreement.

The estimated fair value of our senior notes, which includes our Euro notes, as of June 30, 2023, based on quoted prices for the specific securities from transactions in over-the-counter markets (Level 2), was $4,913.2 million. The carrying value of the outstanding $520.0 million principal balance of the 2022 Five-Year Credit Agreement approximates its fair value as it bears interest at short-term market rates.

10. Accumulated Other Comprehensive Income

Accumulated other comprehensive income (loss) (“AOCI”) refers to certain gains and losses that under GAAP are included in comprehensive income but are excluded from net earnings as these amounts are initially recorded as an adjustment to stockholders’ equity. Amounts in AOCI may be reclassified to net earnings upon the occurrence of certain events.

Our AOCI is comprised of foreign currency translation adjustments, unrealized gains and losses on cash flow hedges and unrecognized prior service costs and gains and losses in actuarial assumptions related to our defined benefit plans. Foreign currency translation adjustments are reclassified to net earnings upon sale or upon a complete or substantially complete liquidation of an investment in a foreign entity. In the six-month period ended June 30, 2022, due to the spinoff of ZimVie, certain foreign entities were completely liquidated. In a pro rata spinoff of consolidated subsidiaries’ assets and liabilities, the distribution of these net assets is recognized through equity instead of net earnings. Therefore, the foreign currency translation adjustments of those entities that were completely liquidated were reclassified to retained earnings. Similarly, we had entered into instruments designated as net investment hedges against certain of these same foreign entities. We reclassified the portion of the net investment hedge gains (losses) deferred in foreign currency translation adjustments related to those entities to retained earnings. Unrealized gains and losses on cash flow hedges are reclassified to net earnings when the hedged item affects net earnings. Amounts related to defined benefit plans that are in AOCI are reclassified over the service periods of employees in the plan.

The following table shows the changes in the components of AOCI gains (losses), net of tax (in millions):

ForeignCashDefined
CurrencyFlowBenefitTotal
TranslationHedgesPlan ItemsAOCI
Balance at December 31, 2022$(169.3)$69.6$(79.6)$(179.3)
AOCI before reclassifications(14.1)55.9-41.8
Reclassifications to statements of earnings-(38.3)(2.0)(40.3)
Balance at June 30, 2023$(183.4)$87.2$(81.6)$(177.8)

The following table shows the reclassification adjustments from AOCI (in millions):

Amount of Gain (Loss)
Reclassified from AOCI
Three Months EndedSix Months Ended
June 30,June 30,Location on
Component of AOCI2023202220232022Statements of Earnings
Cash flow hedges
Foreign exchange forward contracts$23.5$11.4$46.6$16.5Cost of products sold
Forward starting interest rate swaps(0.2)(0.2)(0.4)(0.4)Interest expense, net
23.311.246.216.1Total before tax
4.01.57.92.1Provision for income taxes
$19.3$9.7$38.3$14.0Net of tax
Defined benefit plans
Prior service cost and unrecognized actuarial loss$1.3$(3.4)$2.3$(4.7)Other (expense) income, net
0.2(0.8)0.3(1.2)Provision for income taxes
$1.1$(2.6)$2.0$(3.5)Net of tax
Total reclassifications$20.4$7.1$40.3$10.5Net of tax

The following table shows the tax effects on each component of AOCI recognized in our condensed consolidated statements of comprehensive income (in millions):

Three Months Ended June 30, 2023Six Months Ended June 30, 2023
Before TaxTaxNet of TaxBefore TaxTaxNet of Tax
Foreign currency cumulative translation adjustments$(26.4)0.1$(26.5)$(18.9)(4.8)$(14.1)
Unrealized cash flow hedge gains56.79.647.167.811.955.9
Reclassification adjustments on cash flow hedges(23.3)(4.0)(19.3)(46.2)(7.9)(38.3)
Adjustments to prior service cost and unrecognized actuarial assumptions(1.3)(0.2)(1.1)(2.3)(0.3)(2.0)
Total Other Comprehensive Income (Loss)$5.7$5.5$0.2$0.4$(1.1)$1.5
Three Months Ended June 30, 2022Six Months Ended June 30, 2022
Before TaxTaxNet of TaxBefore TaxTaxNet of Tax
Foreign currency cumulative translation adjustments$(42.6)$49.5$(92.1)$(38.9)$51.9$(90.8)
Unrealized cash flow hedge gains79.213.665.6100.220.979.3
Reclassification adjustments on cash flow hedges(11.2)(1.5)(9.7)(16.1)(2.1)(14.0)
Adjustments to prior service cost and unrecognized actuarial assumptions3.40.82.64.71.23.5
Total Other Comprehensive Income (Loss)$28.8$62.4$(33.6)$49.9$71.9$(22.0)

11. Fair Value Measurement of Assets and Liabilities

The following financial assets and liabilities are recorded at fair value on a recurring basis (in millions):

As of June 30, 2023
Fair Value Measurements at Reporting Date Using:
DescriptionRecorded BalanceQuoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3)
Assets
Derivatives designated as hedges, current and long-term
Foreign currency forward contracts$90.2$-$90.2$-
Cross-currency interest rate swaps4.4-4.4-
Derivatives not designated as hedges, current and long-term
Foreign currency forward contracts0.3-0.3-
Total Assets$94.9$-$94.9$-
Liabilities
Derivatives designated as hedges, current and long-term
Foreign currency forward contracts$1.3$-$1.3$-
Cross-currency interest rate swaps46.5-46.5-
Interest rate swaps161.6-161.6-
Contingent consideration related to acquisitions97.8--97.8
Total Liabilities$307.2$-$209.4$97.8
As of December 31, 2022
Fair Value Measurements at Reporting Date Using:
DescriptionRecorded BalanceQuoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3)
Assets
Derivatives designated as hedges, current and long-term
Foreign currency forward contracts$72.8$-$72.8$-
Cross-currency interest rate swaps6.8-6.8-
Derivatives not designated as hedges, current and long-term
Foreign currency forward contracts1.8-1.8-
Forward Exchange Agreement1.1-1.1-
Investment in ZimVie45.545.5--
Total Assets$128.0$45.5$82.5$-
Liabilities
Derivatives designated as hedges, current and long-term
Foreign currency forward contracts$5.5$-$5.5$-
Cross-currency interest rate swaps49.6-49.6-
Interest rate swaps172.0-172.0-
Derivatives not designated as hedges, current and long-term
Foreign currency forward contracts3.3-3.3-
Contingent consideration related to acquisitions17.4--17.4
Total Liabilities$247.8$-$230.4$17.4

We value our foreign currency forward contracts using a market approach based on foreign currency exchange rates obtained from active markets, and we perform ongoing assessments of counterparty credit risk.

We value our interest rate swaps using a market approach based on publicly available market yield curves and the terms of our swaps, and we perform ongoing assessments of counterparty credit risk. The valuation of our cross-currency interest rate swaps also includes consideration of foreign currency exchange rates.

In connection with the spinoff, we retained approximately 5.1 million unregistered common shares of ZimVie, representing 19.7 percent of ZimVie's common stock on the separation date. At December 31, 2022, we valued these shares based upon the market share price of ZimVie less a discount to reflect that the shares were not registered. We disposed of these shares in February 2023.

The value of the Forward Exchange Agreement as of December 31, 2022, was based upon the historical volume-weighted average price of ZimVie stock since the inception of the agreement with simulations of how the ZimVie stock might perform until the scheduled settlement date.

Contingent payments related to acquisitions consist of sales-based payments and regulatory milestones, and are valued using discounted cash flow techniques. The fair value of sales-based payments is based upon probability-weighted future revenue estimates and simulating the numerous potential outcomes, and increases as revenue estimates increase. The fair value of the regulatory milestones is based on the probability of success in obtaining the specified regulatory approval.

Contingent payments related to the Embody acquisition are to be settled by issuance of our common stock and cash payments. The Embody acquisition is discussed in Note 8. During the three-month period ended June 30, 2023, we issued 0.1 million shares of our common stock valued at $15.5 million and paid $0.7 million of cash as the regulatory milestone related to the Embody acquisition was achieved. The fair value of common stock was determined to be $143.84 per share, which represented the average of our high and low stock prices on the settlement date. To minimize dilution from issuing shares for the milestone settlement, we repurchased 0.1 million shares of our common stock in June of 2023.

The following table provides a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis in the tables above that used significant unobservable inputs (Level 3) (in millions):

Level 3 - Liabilities
Contingent payments related to acquisitions
Beginning balance December 31, 2022$17.4
New contingent consideration related to the 2023 acquisitions102.0
Change in estimates7.2
Settlements(28.8)
Ending balance June 30, 2023$97.8

Changes in estimates for contingent payments related to acquisitions are recognized in the Acquisition, integration, divestiture and related line item on our condensed consolidated statements of earnings.

12. Derivative Instruments and Hedging Activities

We are exposed to certain market risks relating to our ongoing business operations, including foreign currency exchange rate risk, commodity price risk, interest rate risk and credit risk. We manage our exposure to these and other market risks through regular operating and financing activities. Currently, the only risks that we manage through the use of derivative instruments are interest rate risk and foreign currency exchange rate risk.

Interest Rate Risk

Derivatives Designated as Fair Value Hedges

We currently use fixed-to-variable interest rate swaps to manage our exposure to interest rate risk from our cash investments and debt portfolio. These derivative instruments are designated as fair value hedges under GAAP. Changes in the fair value of the derivative instrument are recorded in current earnings and are offset by gains or losses on the underlying debt instrument.

As of June 30, 2023 and December 31, 2022, the following amounts were recorded on our condensed consolidated balance sheets related to cumulative basis adjustments for fair value hedges (in millions):

Carrying Amount of the Hedged LiabilitiesCumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liabilities
Balance Sheet Line ItemJune 30, 2023December 31, 2022June 30, 2023December 31, 2022
Long-term debt$834.3$823.9$(161.6)$(172.0)

Derivatives Designated as Cash Flow Hedges

In 2014, we entered into forward starting interest rate swaps that were designated as cash flow hedges of our thirty-year tranche of senior notes due 2045 we expected to issue in 2015. The forward starting interest rate swaps mitigated the risk of changes in interest rates prior to the completion of the notes offering. The interest rate swaps were settled, and the remaining loss to be recognized at June 30, 2023 was $24.3 million, which will be recognized using the effective interest rate method over the remaining maturity period of the hedged notes.

Foreign Currency Exchange Rate Risk

We operate on a global basis and are exposed to the risk that our financial condition, results of operations and cash flows could be adversely affected by changes in foreign currency exchange rates. To reduce the potential effects of foreign currency exchange rate movements on net earnings, we enter into derivative financial instruments in the form of foreign currency exchange forward contracts with major financial institutions. We also designated our Euro Notes as net investment hedges of investments in foreign subsidiaries. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and net assets denominated in Euros, Swiss Francs, Japanese Yen, British Pounds, Canadian Dollars, Australian Dollars, Korean Won, Swedish Krona, Czech Koruna, Thai Baht, Taiwan Dollars, South African Rand, Russian Rubles, Indian Rupees, Turkish Lira, Polish Zloty, Danish Krone, and Norwegian Krone. We do not use derivative financial instruments for trading or speculative purposes.

Derivatives Designated as Net Investment Hedges

We are exposed to the impact of foreign exchange rate fluctuations in the investments in our wholly-owned foreign subsidiaries that are denominated in currencies other than the U.S. Dollar. In order to mitigate the volatility in foreign exchange rates, we issued Euro Notes in December 2016 and November 2019 and designated 100 percent of the Euro Notes to hedge our net investment in certain wholly-owned foreign subsidiaries that have a functional currency of the Euro. All changes in the fair value of a hedging instrument designated as a net investment hedge are recorded as a component of AOCI in the condensed consolidated balance sheets.

At June 30, 2023, we had receive-fixed-rate, pay-fixed-rate cross-currency interest swaps with notional amounts outstanding of Euro 700 million, Japanese Yen 54.1 billion and Swiss Franc 125 million. These transactions further hedge our net investment in certain wholly-owned foreign subsidiaries that have a functional currency of Euro, Japanese Yen and Swiss Franc. All changes in the fair value of a derivative instrument designated as a net investment hedge are recorded as a component of AOCI in the condensed consolidated balance sheets. The portion of this change related to the excluded component will be amortized into earnings over the life of the derivative while the remainder will be recorded in AOCI until the hedged net investment is sold or substantially liquidated. We recognize the excluded component in interest expense, net on our condensed consolidated statements of earnings. The net cash received related to the receive-fixed-rate, pay-fixed-rate component of the cross-currency interest rate swaps is reflected in investing cash flows in our condensed consolidated statements of cash flows. In the six-month period ended June 30, 2023, Euro 100 million and Swiss Franc 50 million of these cross-currency interest rate swaps matured at a gain of $6.0 million and loss of $3.0 million, respectively. The settlement of these gains and losses with the counterparties is reflected in investing cash flows in our condensed consolidated statements of cash flows and will remain in AOCI on our condensed consolidated balance sheet until the hedged net investment is sold or substantially liquidated.

Derivatives Designated as Cash Flow Hedges

Our revenues are generated in various currencies throughout the world. However, a significant amount of our inventory is produced in U.S. Dollars. Therefore, movements in foreign currency exchange rates may have different proportional effects on our revenues compared to our cost of products sold. To minimize the effects of foreign currency exchange rate movements on cash flows, we hedge intercompany sales of inventory expected to occur within the next 30 months with foreign currency exchange forward contracts. We designate these derivative instruments as cash flow hedges.

We perform quarterly assessments of hedge effectiveness by verifying and documenting the critical terms of the hedge instrument and confirming that forecasted transactions have not changed significantly. We also assess on a quarterly basis whether there have been adverse developments regarding the risk of a counterparty default. For derivatives which qualify as hedges of future cash flows, the gains and losses are temporarily recorded in AOCI and then recognized in cost of products sold when the hedged item affects net earnings. On our condensed consolidated statements of cash flows, the settlements of these cash flow hedges are recognized in operating cash flows.

For foreign currency exchange forward contracts and options outstanding at June 30, 2023, we had obligations to purchase U.S. Dollars and sell Euros, Japanese Yen, British Pounds, Canadian Dollars, Australian Dollars, Korean Won, Swedish Krona, Czech Koruna, Thai Baht, Taiwan Dollars, South African Rand, Russian Rubles, Indian Rupees, Polish Zloty, Danish Krone, and Norwegian Krone and obligations to purchase Swiss Francs and sell U.S. Dollars. These derivatives mature at dates ranging from July 2023 through December 2025. As of June 30, 2023, the notional amounts of outstanding forward contracts and options entered into with third parties to purchase U.S. Dollars were $1,504.9 million. As of June 30, 2023, the notional amounts of outstanding forward contracts and options entered into with third parties to purchase Swiss Francs were $455.5 million.

Derivatives Not Designated as Hedging Instruments

We enter into foreign currency forward exchange contracts with terms of one to three months to manage currency exposures for monetary assets and liabilities denominated in a currency other than an entity’s functional currency. As a result, any foreign currency remeasurement gains/losses recognized in earnings are generally offset with gains/losses on the foreign currency forward exchange contracts in the same reporting period. The net amount of these offsetting gains/losses is recorded in other (expense) income, net. Any outstanding contracts are recorded on the balance sheet at fair value as of the end of the reporting period. The notional amounts of these contracts are typically in a range of $1.25 billion to $1.75 billion per quarter.

As discussed in Note 2, we entered into the Forward Exchange Agreement as part of our pledge to transfer our ZimVie shares to a third-party financial institution, which occurred in February 2023.

Income Statement Presentation

Derivatives Designated as Cash Flow Hedges

Derivative instruments designated as cash flow hedges had the following effects, before taxes, on AOCI and net earnings on our consolidated statements of earnings, consolidated statements of comprehensive income and consolidated balance sheets (in millions):

Amount of Gain (Loss)Amount of Gain (Loss)
Recognized in AOCIReclassified from AOCI
Three Months EndedSix Months EndedThree Months EndedSix Months Ended
June 30,June 30,Location onJune 30,June 30,
Derivative Instrument2023202220232022Statements of Earnings2023202220232022
Foreign exchange forward contracts$56.7$79.2$67.8$100.2Cost of products sold$23.5$11.4$46.6$16.5
Forward starting interest rate swaps----Interest expense, net(0.2)(0.2)(0.4)(0.4)
$56.7$79.2$67.8$100.2$23.3$11.2$46.2$16.1

The fair value of outstanding derivative instruments designated as cash flow hedges and recorded on our condensed consolidated balance sheet at June 30, 2023, together with settled derivatives where the hedged item has not yet affected earnings, was a net unrealized gain of $101.8 million, or $87.2 million after taxes, which is deferred in AOCI. A gain of $79.4 million, or $65.3 million after taxes, is expected to be reclassified to earnings in cost of products sold and a loss of $0.7 million, or $0.5 million after taxes, is expected to be reclassified to earnings in interest expense, net over the next twelve months.

The following table presents the effect of fair value, cash flow and net investment hedge accounting on our condensed consolidated statements of earnings (in millions):

Location and Amount of Gain/(Loss) Recognized in Income on Fair Value, Cash Flow and Net Investment Hedging Relationships
Three Months EndedThree Months EndedSix Months EndedSix Months Ended
June 30, 2023June 30, 2022June 30, 2023June 30, 2022
Cost ofInterestCost ofInterestCost ofInterestCost ofInterest
ProductsExpense,ProductsExpense,ProductsExpense,ProductsExpense,
SoldNetSoldNetSoldNetSoldNet
Total amounts of income and expense line items presented in the statements of earnings in which the effects of fair value, cash flow and net investment hedges are recorded$525.5$(51.6)$511.0$(38.8)$1,026.3$(99.8)$1,011.0$(79.9)
The effects of fair value, cash flow and net investment hedging:
Gain (loss) on fair value hedging relationships
Interest rate swaps-(9.3)-1.2-(17.5)-4.0
Gain (loss) on cash flow hedging relationships
Foreign exchange forward contracts23.5-11.4-46.6-16.5-
Forward starting interest rate swaps-(0.2)-(0.2)-(0.4)-(0.4)
Gain on net investment hedging relationships
Cross-currency interest rate swaps-8.2-5.3-17.2-11.8

Derivatives Not Designated as Hedging Instruments

The following gains / (losses) from these derivative instruments were recognized on our condensed consolidated statements of earnings (in millions):

Three Months EndedSix Months Ended
Location onJune 30,June 30,
Derivative InstrumentStatements of Earnings2023202220232022
Foreign exchange forward contractsOther (expense) income, net$3.8$(6.7)$0.2$(15.2)

These gains / (losses) do not reflect offsetting losses of $14.2 million in the three-month period ended June 30, 2023, offsetting gains of $0.8 million in the three-month period ended June 30, 2022, offsetting losses of $13.8 million in the six-month period ended June 30, 2023, and offsetting gains of $8.5 million in the six-month period ended June 30, 2022, recognized in other (expense) income, net as a result of foreign currency remeasurement of monetary assets and liabilities denominated in a currency other than an entity’s functional currency.

Balance Sheet Presentation

As of June 30, 2023 and December 31, 2022, all derivatives designated as fair value hedges, cash flow hedges and net investment hedges are recorded at fair value on our condensed consolidated balance sheets. On our condensed consolidated balance sheets, we recognize individual forward contracts with the same counterparty on a net asset/liability basis if we have a master netting agreement with the counterparty. Under these master netting agreements, we are able to settle derivative instrument assets and liabilities with the same counterparty in a single transaction, instead of settling each derivative instrument separately. We have master netting agreements with substantially all of our counterparties. The fair value of derivative instruments on a gross basis is as follows (in millions):

As of June 30, 2023As of December 31, 2022
BalanceBalance
SheetFairSheetFair
LocationValueLocationValue
Asset Derivatives Designated as Hedges
Foreign exchange forward contractsOther current assets$78.8Other current assets$73.2
Cross-currency interest rate swapsOther current assets-Other current assets6.8
Foreign exchange forward contractsOther assets25.8Other assets16.6
Cross-currency interest rate swapsOther assets4.4Other assets-
Total asset derivatives$109.0$96.6
Asset Derivatives Not Designated as Hedges
Foreign exchange forward contractsOther current assets$0.3Other current assets$3.1
Forward Exchange AgreementOther current assets-Other current assets1.1
Total asset derivatives not designated as hedges$0.3$4.2
Liability Derivatives Designated as Hedges
Foreign exchange forward contractsOther current liabilities$8.8Other current liabilities$8.0
Cross-currency interest rate swapsOther current liabilities-Other current liabilities3.3
Foreign exchange forward contractsOther long-term liabilities6.9Other long-term liabilities14.5
Cross-currency interest rate swapsOther long-term liabilities46.5Other long-term liabilities46.3
Interest rate swapsOther long-term liabilities161.6Other long-term liabilities172.0
Total liability derivatives$223.8$244.1
Liability Derivatives Not Designated as Hedges
Foreign exchange forward contractsOther current liabilities$-Other current liabilities$4.6

The table below presents the effects of our master netting agreements on our condensed consolidated balance sheets (in millions):

As of June 30, 2023As of December 31, 2022
DescriptionLocationGross AmountOffsetNet Amount in Balance SheetGross AmountOffsetNet Amount in Balance Sheet
Asset Derivatives
Cash flow hedgesOther current assets$78.8$8.8$70.0$73.2$7.1$66.1
Cash flow hedgesOther assets25.85.620.216.69.96.7
Derivatives Not Designated as HedgesOther current assets0.3-0.33.11.31.8
Liability Derivatives
Cash flow hedgesOther current liabilities8.88.8-8.07.10.9
Cash flow hedgesOther long-term liabilities6.95.61.314.59.94.6
Derivatives Not Designated as HedgesOther current liabilities---4.61.33.3

The following net investment hedge gains (losses) were recognized on our condensed consolidated statements of comprehensive income (in millions):

Amount of Gain (Loss)
Recognized in AOCI
Three Months EndedSix Months Ended
June 30,June 30,
Derivative Instrument2023202220232022
Euro Notes$(4.6)$100.8$(23.8)$137.7
Cross-currency interest rate swaps8.239.43.751.7
$3.6$140.2$(20.1)$189.4

13. Income Taxes

We operate on a global basis and are subject to numerous and complex tax laws and regulations. Additionally, tax laws continue to undergo rapid changes in both application and interpretation by various countries, including state aid interpretations and initiatives led by the Organisation for Economic Cooperation and Development ("OECD"). Our income tax filings are subject to examinations by taxing authorities throughout the world. Income tax audits may require an extended period of time to reach resolution and may result in significant income tax adjustments when interpretation of tax laws or allocation of company profits is disputed. Although ultimate timing is uncertain, the net amount of tax liability for unrecognized tax benefits may change within the next twelve months due to changes in audit status, expiration of statutes of limitations, settlements of tax assessments and other events. Management’s best estimate of such change is within the range of a $400 million decrease to a $20 million increase.

We are under continuous audit by the IRS and have disputes with the IRS and other foreign taxing authorities in the jurisdictions where we operate. In addition, some jurisdictions in which we operate require payment of disputed taxes to petition a court or taxing authority, or we may elect to make such payments prior to final resolution. We record any prepayments as income tax receivables when we believe our position is more likely than not to be upheld. We assess our position on these disputes at each reporting period. During the course of these audits and disputes, we receive proposed adjustments from taxing authorities that may be material. Therefore, there is a possibility that an adverse outcome in these audits or disputes could have a material effect on our results of operations and financial condition. Our U.S. federal income tax returns have been audited through 2015 and are currently under audit for years 2016-2019.

The IRS has proposed adjustments for tax years 2010-2012, primarily related to reallocating profits between certain of our U.S. and foreign subsidiaries, which remain unsettled. We have disputed these adjustments and intend to continue to vigorously defend our positions as we pursue resolution through the administrative process with the IRS Independent Office of Appeals.

The IRS has proposed adjustments for tax years 2013-2015 relating to transfer pricing involving our cost sharing agreement between the U.S. and Switzerland affiliated companies and reallocating profits between certain of our U.S. and foreign subsidiaries. This includes a proposed increase to our U.S. federal taxable income, which would result in additional tax expense related to 2013 of approximately $370 million, subject to interest and penalties related to our cost sharing agreement. We strongly believe that the position of the IRS, with regard to this matter, is inconsistent with the applicable U.S. Treasury Regulations governing our cost sharing agreement. We intend to vigorously contest the adjustment, and we will pursue all available administrative and, if necessary, judicial remedies. If we pursue judicial remedies in the U.S. Tax Court for years 2013-2015, a number of years will likely elapse before such matters are finally resolved. No payment of any amount related to this matter is required to be made, if at all, until all applicable proceedings have been completed.

In the three and six-month periods ended June 30, 2023, our effective tax rate (“ETR”) was 24.2 percent and 21.5 percent, respectively, compared to 22.8 percent and 24.5 percent in the three and six-month periods ended June 30, 2022, respectively. The 24.2 percent and 21.5 percent ETR in the three and six-month periods ended June 30, 2023, respectively, was primarily driven by reorganizing the ownership structure of certain wholly-owned subsidiaries in the second quarter of 2023. The 22.8 percent and 24.5 percent ETR in the three and six-month periods ended June 30, 2022, respectively, was primarily driven by the loss on our investment in ZimVie which is not deductible for tax purposes. 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; the outcome of various federal, state and foreign audits; the expiration of certain statutes of limitations; and implementation of the OECD Pillar Two rules. Currently, we cannot reasonably estimate the impact of these items on our financial results.

14. Earnings Per Share

The following is a reconciliation of weighted average shares for the basic and diluted shares computations (in millions):

Three Months EndedSix Months Ended
June 30,June 30,
2023202220232022
Weighted average shares outstanding for basic net earnings per share208.6209.6209.0209.4
Effect of dilutive stock options and other equity awards1.30.71.10.8
Weighted average shares outstanding for diluted net earnings per share209.9210.3210.1210.2

During the three and six-month periods ended June 30, 2023, an average of 1.9 million and 2.0 million options, respectively, to purchase shares of common stock were not included in the computation of diluted earnings per share because the effect would have been antidilutive. During the three and six-month periods ended June 30, 2022, an average of 3.8 million and 3.3 million options, respectively, to purchase shares of common stock were not included for the same reason.

15. Segment Information

We design, manufacture and market orthopedic reconstructive products; sports medicine, biologics, extremities and trauma products; craniomaxillofacial and thoracic products (“CMFT”); surgical products; and a suite of integrated digital and robotic technologies that leverage data, data analytics and artificial intelligence. Our chief operating decision maker (“CODM”) allocates resources to achieve our operating profit goals through three operating segments. These operating segments, which also constitute our reportable segments, are Americas; EMEA; and Asia Pacific.

Our CODM evaluates performance based upon segment operating profit exclusive of operating expenses and income pertaining to intangible asset amortization, certain inventory and manufacturing-related charges, goodwill and intangible asset impairment, restructuring and other cost reduction initiatives, quality remediation, acquisition, integration, divestiture and related, litigation, certain European Union Medical Device Regulation (“EU MDR”) expenses, certain research and development ("R&D") agreements, other charges and corporate functions (collectively referred to as “Corporate items”). Corporate functions include finance, corporate legal, information technology, human resources and other corporate departments as well as stock-based compensation and certain operations, distribution, quality assurance and regulatory assurance expenses. Intercompany transactions have been eliminated from segment operating profit.

Our Americas operating segment is comprised principally of the U.S. and includes other North, Central and South American markets. This segment also includes research, development engineering, medical education, and brand management for our product category headquarter locations. Our EMEA operating segment is comprised principally of Europe and includes the Middle East and African markets. Our Asia Pacific operating segment is comprised principally of Japan, China and Australia and includes other Asian and Pacific markets. The EMEA and Asia Pacific operating segments include the commercial operations as well as regional headquarter expenses to operate in those markets. Since the Americas segment includes additional costs related to centralized product category headquarter expenses, profitability metrics in this operating segment are not comparable to the EMEA and Asia Pacific operating segments.

Our CODM does not review asset information by operating segment. Instead, our CODM reviews cash flow and other financial ratios by operating segment.

In the three-month period ended June 30, 2023, the segment operating profit measures our CODM reviews were revised. Certain support function costs from our operating segments are now included in Corporate items. We have reclassified these support function expenses in the prior periods to conform to the current period presentation.

Net sales and operating profit by segment are as follows (in millions):

Net SalesOperating Profit
Three Months EndedThree Months Ended
June 30,June 30,
2023202220232022
Americas$1,156.2$1,092.7$484.3$477.1
EMEA402.9379.9128.5104.3
Asia Pacific310.5309.2112.8110.0
Total$1,869.6$1,781.8
Corporate items(257.8)(274.5)
Intangible asset amortization(138.2)(133.0)
Intangible asset impairment-(3.0)
Operating profit$329.6$280.9
Net SalesOperating Profit
Six Months EndedSix Months Ended
June 30,June 30,
2023202220232022
Americas$2,297.5$2,097.0$963.3$881.5
EMEA828.5759.8274.9215.2
Asia Pacific574.6588.2200.6206.6
Total$3,700.6$3,445.0
Corporate items(510.3)(557.2)
Intangible asset amortization(271.6)(263.8)
Intangible asset impairment-(3.0)
Operating profit$656.9$479.3

16. Commitments and Contingencies

From time to time, we are involved in various legal proceedings, including product liability, intellectual property, stockholder matters, tax disputes, commercial disputes, employment matters, whistleblower and qui tam claims and investigations, governmental proceedings and investigations, and other legal matters that arise in the normal course of our business, including those described below. On a quarterly and annual basis, we review relevant information with respect to loss contingencies and update our accruals, disclosures and estimates of reasonably possible losses or ranges of loss based on such reviews. We establish liabilities for loss contingencies on an undiscounted basis when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. For matters where a loss is believed to be reasonably possible, but not probable, or if no reasonable estimate of known or probable loss is available, no accrual has been made. We recognize litigation-related charges and gains in Selling, general and administrative expense on our condensed consolidated statement of earnings. The ultimate cost of litigation could be materially different than the amount of the current estimates and accruals and could have a material adverse impact on our financial condition and results of operations.

When determining the estimated loss or range of loss, significant judgment is required. Estimates of probable losses resulting from litigation and other contingences are inherently difficult to predict, particularly when the matters are in early procedural stages with incomplete facts or legal discovery, involve unsubstantiated or indeterminate claims for damages, and/or potentially involve penalties, fines or punitive damages. In addition to the matters described herein, we remain subject to the risk of future governmental, regulatory and legal actions. Governmental and regulatory actions may lead to product recalls, injunctions and other restrictions on our operations and monetary sanctions, which may include substantial civil or criminal penalties. Actions involving intellectual property could result in a loss of patent protection or the ability to market products, which could lead to significant sales reductions or cost increases, or otherwise materially affect the results of our operations.

During the three and six-month periods ended June 30, 2023, we recognized a net litigation-related gain of $2.2 million and net litigation-related charges of $1.1 million, respectively. During the three and six-month periods ended June 30, 2022, we recognized $2.5 million and $35.7 million, respectively, of net litigation-related charges. At June 30, 2023 and December 31, 2022, accrued litigation liabilities were $264.4 million and $349.2 million, respectively. These litigation-related charges and accrued liabilities reflect all of our litigation-related contingencies and not just the matters discussed below.

Litigation

Durom Cup-related claims: On July 22, 2008, we temporarily suspended marketing and distribution of the Durom Cup in the U.S. Subsequently, a number of product liability lawsuits were filed against us in various U.S. and foreign jurisdictions. The plaintiffs seek damages for personal injury, and they generally allege that the Durom Cup contains defects that result in complications and revision of the device. We have settled the majority of these claims in the U.S., but other lawsuits are pending in various foreign jurisdictions and additional claims may be asserted in the future. The majority of claims outside the U.S. are pending in Germany, Netherlands and Italy.

We rely on significant estimates in determining the provisions for Durom Cup-related claims, including our estimate of the number of claims that we will receive and the average amount we will pay per claim. The actual number of claims and the actual amount we pay per claim may differ from our estimates. For various reasons, we cannot reasonably estimate the possible loss or range of loss that may result from Durom Cup-related claims in excess of the losses we have accrued. Although we are vigorously defending these lawsuits, their ultimate resolution is uncertain. We accrued a litigation-related charge in this matter based on an estimate of the reasonably possible loss, as discussed above.

Zimmer M/L Taper, M/L Taper with Kinectiv Technology, and Versys Femoral Head-related claims (“Metal Reaction” claims): We are a defendant in a number of product liability lawsuits relating to our M/L Taper and M/L Taper with Kinectiv Technology hip stems, and Versys Femoral Head implants. The plaintiffs seek damages for personal injury, alleging that defects in the products lead to corrosion at the head/stem junction resulting in, among other things, pain, inflammation and revision surgery.

The majority of the cases are consolidated in an MDL that was created on October 3, 2018 in the U.S. District Court for the Southern District of New York (In Re: Zimmer M/L Taper Hip Prosthesis or M/L Taper Hip Prosthesis with Kinectiv Technology and Versys Femoral Head Products Liability Litigation). Most of the cases in the MDL have been resolved. Other related cases are pending in various state and federal courts and in courts in Canada, and additional claims may be asserted in the future. Although we are vigorously defending these lawsuits, their ultimate resolution is uncertain. We accrued a litigation-related charge in this matter based on an estimate of the reasonably possible loss, as discussed above.

Biomet metal-on-metal hip implant claims: Biomet is a defendant in a number of product liability lawsuits relating to metal-on-metal hip implants, most of which involve the M2a-Magnum hip system. Cases were originally consolidated in an MDL in the U.S. District Court for the Northern District of Indiana (In Re: Biomet M2a Magnum Hip Implant Product Liability Litigation), but the majority of the claims in the U.S. have been settled. Trials may still occur in the future, and although each case will be tried on its particular facts, a verdict and subsequent final judgment for the plaintiff in one or more of these cases could have a substantial impact on our potential liability. Lawsuits are pending in various foreign jurisdictions and additional claims are expected to be asserted. We continue to refine our estimates of the potential liability to resolve the remaining claims and lawsuits. Although we are vigorously defending these lawsuits, their ultimate resolution is uncertain. We accrued a litigation-related charge in this matter based on an estimate of the reasonably possible loss, as discussed above.

Regulatory Matters, Government Investigations and Other Matters

FDA warning letter: In August 2018, we received a warning letter from the Food and Drug Administration ("FDA") related to observed non-conformities with current good manufacturing practice requirements of the Quality System Regulation (21 CFR Part 820) (“QSR”) at our legacy Biomet manufacturing facility in Warsaw, Indiana (this facility is sometimes referred to in this report as the “Warsaw North Campus”). We have provided detailed responses to the FDA as to our corrective actions and will continue to work expeditiously to address the issues identified by the FDA during inspections in Warsaw. As of June 30, 2023, the Warsaw warning letter remained pending. Until the violations cited in the pending warning letter are corrected, we may be subject to additional regulatory action by the FDA, as described more fully below. Additionally, requests for Certificates to Foreign Governments may not be granted and premarket approval applications for Class III devices to which the QSR deviations are reasonably related will not be approved until the violations have been corrected. In addition to responding to the warning letter described above, we are in the process of addressing various FDA Form 483 inspectional observations at certain of our manufacturing facilities, including observations issued by the FDA following an inspection of the Warsaw North Campus in January 2020, which inspection the FDA has classified as Voluntary Action Indicated (“VAI”). The ultimate outcome of these matters is presently uncertain. Among other available regulatory actions, the FDA may impose operating restrictions, including a ceasing of operations, at one or more facilities, enjoining and restraining certain violations of applicable law pertaining to products, seizure of products and assessing civil or criminal penalties against our officers, employees or us. The FDA could also issue a corporate warning letter or a recidivist warning letter or negotiate the entry of a consent decree of permanent injunction with us. The FDA may also recommend prosecution by the U.S. Department of Justice. Any adverse regulatory action, depending on its magnitude, may restrict us from effectively manufacturing, marketing and selling our products and could have a material adverse effect on our business, financial condition and results of operations.

Other Contingencies

Indemnifications: As part of the ZimVie spinoff, we agreed to indemnify ZimVie for certain legal and tax matters. Our responsibilities for legal indemnification are for specifically identified matters and are subject to a maximum amount, which is not significant for us. We have made an accrual based on an estimate of the probable loss for any legal indemnification. For tax matters, our indemnification is related to tax periods prior to the spinoff and any tax liabilities that may be incurred as part of the spinoff. We have maintained accruals based upon an estimate of any possible tax indemnifications.

Contractual obligations: We have entered into development, distribution and other contractual arrangements 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, they have not been recognized on our condensed consolidated balance sheets. These estimated payments could range from $25 million to approximately $435 million.

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