Zimmer Biomet Holdings 10-Q 2023-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED September 30, 2023

Commission File Number 001-16407

ZIMMER BIOMET HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

345 East Main Street**,** Warsaw**,** IN 46580

(Address of principal executive offices)

Telephone: (574) 373-3333

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 2, 2023, 208,980,711 shares of the registrant’s $.01 par value common stock were outstanding.

ZIMMER BIOMET HOLDINGS, INC.

INDEX TO FORM 10-Q

September 30, 2023

Part I – Financ****ial Information

ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(in millions, except per share amounts, unaudited)

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)

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)

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The following discussion and analysis should be read in conjunction with the interim condensed consolidated financial statements and corresponding notes included elsewhere in this Form 10-Q. 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.

On March 1, 2022, we completed the spinoff of our spine and dental businesses into ZimVie. The historical results of our spine and dental businesses have been reflected as discontinued operations in our condensed consolidated financial statements through the date of the spinoff in 2022. See Note 2 to our interim condensed consolidated financial statements included in Part I, Item 1 of this report for additional information. The discussions in the following discussion and analysis are presented on a continuing operations basis unless otherwise noted.

Executive Level Overview

Results for the Three and Nine-Month Periods ended September 30, 2023

We continue to recover from the effects of the COVID-19 global pandemic. In the three and nine-month periods ended September 30, 2023, we experienced fewer disruptions to elective surgical procedures from the pandemic as compared to the three and nine-month periods ended September 30, 2022 when the Omicron variant and staffing shortages caused widespread deferrals of procedures. In addition, improvements in our supply chain, recovery from patients who deferred surgical procedures during the pandemic, new product introductions and commercial execution have contributed to our net sales growth. As a result, our net sales increased by 5.0 percent and 6.6 percent in the three and nine-month periods ended September 30, 2023, respectively, when compared to the same prior year periods. Our year-over-year net sales growth in the three-month period was aided by a positive 0.3 percent from changes in foreign currency exchange rates while the nine-month period experienced a negative 1.3 percent impact from changes in foreign currency exchange rates. Our year-over-year net sales growth in the first quarter of 2023 was higher than in the second and third quarters, as the disruptions to elective surgical procedures were more pronounced in the first quarter of 2022 than the second and third quarters of 2022. In addition, the third quarter of 2023 included fewer weekdays for surgical procedures to occur when compared to the number of weekdays in the third quarter of 2022.

Our net earnings were $162.7 million and $604.8 million in the three and nine-month periods ended September 30, 2023, respectively, compared to $194.0 million and $361.9 million in the same prior year periods, respectively. The decline in earnings in the three-month period ended September 30, 2023 when compared to the same prior year period was primarily due to investments in research and development ("R&D") and commercial initiatives in the 2023 period to drive future growth as well as the fact that the prior year period included a tax benefit of approximately $81 million from a final agreement with Swiss authorities for certain tax years. The increase in net earnings in the nine-month period ended September 30, 2023 when compared to the same prior year period was driven by the increase in net sales combined with lower litigation-related, restructuring-related and quality remediation-related charges. In addition, the prior year nine-month period included an unrealized investment loss of $114.3 million on our investment in ZimVie. These benefits were partially offset by increased investment in R&D and commercial initiatives to drive future growth.

2023 Outlook

We expect revenue growth in 2023 to be driven by a combination of market growth, procedure volume recovery from COVID-19, new product introductions and commercial execution. Based on recent foreign currency exchange rates we expect foreign currency to negatively affect net sales growth in 2023, but at a lower level than experienced in 2022. We expect that supply chain and inflation pressures will continue in 2023, but with supply chain pressure easing at the end of the year and with inflation stable to the level experienced at the end of 2022. We estimate our operating expenses in 2023 will be impacted by the expected non-reoccurrence of goodwill impairment charges and lower quality remediation expenses due to the completion of our remediation milestones. We expect our interest expense, net, will increase primarily due to higher interest rates. We also expect our non-operating other (expense) income, net, will be more favorable in 2023 since the 2022 expense was primarily driven by an investment loss in the shares of ZimVie that we held following the spinoff, which we disposed of in February 2023.

Results of Operations

We review sales by two geographies, the United States and International, and by the following product categories: Knees; Hips; S.E.T. (Sports Medicine, Extremities, Trauma, Craniomaxillofacial and Thoracic); and Other. This sales analysis differs from our reportable operating segments, which are based upon our senior management organizational structure and how we allocate resources toward achieving operating profit goals. We review sales by these geographies because the underlying market trends in any particular geography tend to be similar across product categories, because we primarily sell the same products in all geographies and many of

our competitors publicly report in this manner. Our business is seasonal in nature to some extent, as many of our products are used in elective surgical procedures, which typically decline during the summer months and can increase at the end of the year once annual deductibles have been met on health insurance plans.

Net Sales by Geography

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

Net Sales by Product Category

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

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

Demand (Volume and Mix) Trends

Changes in volume and mix of product sales had positive effects of 4.7 percent and 8.7 percent on year-over-year sales during the three and nine-month periods ended September 30, 2023, respectively. We saw recovery of elective surgical procedures across most of our major markets driving volume growth. In addition, new product introductions contributed positively to volume and mix trends.

Pricing Trends

Global selling prices had a minimal effect and a negative effect of 0.8 percent on year-over-year sales during the three and nine-month periods ended September 30, 2023, respectively. The majority of countries in which we operate continue to experience pricing pressure from local hospitals, health systems, and governmental healthcare cost containment efforts. However, we have had some success in reducing the negative effects of pricing due to internal initiatives and being able to pass some inflationary impacts on to customers.

Foreign Currency Exchange Rates

For the three and nine-month periods ended September 30, 2023, changes in foreign currency exchange rates had a positive effect of 0.3 percent and a negative effect of 1.3 percent, respectively, on year-over-year sales. If foreign currency exchange rates remain at levels consistent with recent rates, we estimate there will be a negative impact of approximately 1.0 percent on full-year 2023 sales.

Geography

The 6.0 percent and 7.8 percent net sales growth in the U.S. in the three and nine-month periods ended September 30, 2023, respectively, were driven by recovery in surgical procedures as COVID-19 cases caused fewer disruptions, especially in the Knees and Hips categories. Internationally, net sales increased by 3.6 percent and 5.1 percent during the three and nine-month periods ended September 30, 2023, respectively, when compared to the same prior year periods. These increases were similarly driven by recovery in surgical procedures as COVID-19 cases caused fewer disruptions across most of our major markets. Our International sales were positively affected by 0.7 percent and negatively affected by 3.0 percent in the three and nine-month periods ended September 30, 2023, respectively, due to changes in foreign currency exchange rates.

Product Categories

Knees net sales grew 7.5 percent and 10.6 percent in the three and nine-month periods ended September 30, 2023, respectively, when compared to the same prior year periods. Hips net sales declined 0.6 percent and increased 4.0 percent in the three and nine-month periods ended September 30, 2023, respectively, when compared to the same prior year periods. The net sales of Knees and Hips benefited from the recovery in elective surgical procedures, improvements in our supply chain and new product introductions. However, Hips net sales declined in the three-month period ended September 30, 2023 when compared to the same prior year period primarily due to certain bulk sales that were made internationally in the prior year period. Knees net sales were positively affected by 0.2 percent and negatively affected by 1.4 percent in the three and nine-month periods ended September 30, 2023, respectively, due to changes in foreign currency exchange rates. Hips net sales were minimally affected and negatively affected by 1.6 percent in the three and nine-month periods ended September 30, 2023, respectively, due to changes in foreign currency exchange rates. The 3.3 percent and 2.1 percent increases in S.E.T. net sales for the three and nine-month periods ended September 30, 2023, respectively, was the

result of growth in our sports medicine, upper extremities, and craniomaxillofacial and thoracic products, partially offset by lower volumes in other S.E.T. products and unfavorable changes in reimbursement for certain restorative therapy products. Other net sales grew 17.2 percent and 10.0 percent in the three and nine-month periods ended September 30, 2023, respectively, driven by net sales for our ROSA® robot.

Expenses as a Percentage of Net Sales

Cost of products sold as a percentage of net sales increased in the three-month period ended September 30, 2023 when compared to the same prior year period, primarily due to higher excess and obsolete inventory charges. These inventory charges were partially offset by higher hedge gains recognized in the current year period as part of our hedging program, a mix shift to higher margin products and markets, and lower royalty expense. The reduction in royalty expense was partially the result of agreements we entered into to acquire intellectual property through the buyout of certain licensing arrangements.

The decline in cost of products sold as a percentage of net sales in the nine-month period ended September 30, 2023 compared to the same prior year period was primarily due to higher hedge gains recognized in the current year period as part of our hedging program, a mix shift to higher margin products and markets and lower royalty expense. These favorable items were partially offset by higher excess and obsolete inventory charges, inflationary cost pressures and lower average selling prices.

Intangible asset amortization expense increased in the three and nine-month periods ended September 30, 2023 compared to the same prior year periods due to the 2023 acquisitions and additional amortization from the buyout of certain licensing agreements.

R&D expenses increased in amount and as a percentage of net sales in the three and nine-month periods ended September 30, 2023 when compared to the same prior year periods. The increases were driven by higher personnel-related costs, higher spending on our initial compliance with the European Union Medical Device Regulation and other R&D investments.

Selling, general and administrative (“SG&A”) expenses increased in amount, but decreased as a percentage of net sales in the three and nine-month periods ended September 30, 2023 when compared to the same prior year periods. The increases in expenses were due to selling and distribution costs that are variable expenses which increase as net sales increase. Additionally, personnel-related costs were higher due to additional headcount investments and annual merit increases, and travel and entertainment costs were higher as we have increased these activities from lower pandemic levels. These higher costs were partially offset by lower share-based compensation expense in the 2023 periods due to the forfeiture of awards related to employee departures, and lower bad debt charges in the 2023 periods as we recognized higher bad debt charges in the 2022 periods that were partially related to the Russia/Ukraine conflict. Also, in the nine-month period ended September 30, 2023, litigation-related charges decreased to $3.8 million compared to $34.7 million in the same prior year period.

In December of 2021 and 2019, we initiated restructuring programs. The 2021 Restructuring Plan is intended to further reduce costs and to reorganize our global operations in preparation for the spinoff of ZimVie. The 2019 Restructuring Plan has an objective of reducing structural costs to allow us to invest in higher priority growth opportunities. We recognized expenses of $24.3 million and $28.3 million in the three-month periods ended September 30, 2023 and 2022, respectively, and $90.6 million and $129.2 million in the nine-month periods ended September 30, 2023 and 2022, respectively, primarily related to employee termination benefits, sales agent contract terminations, and consulting fees and project management expenses associated with these programs. The expenses were lower in the 2023 periods due to charges in the 2022 periods related to the restructuring program that had been initiated in

December 2021. For more information regarding these charges, see Note 5 to our interim condensed consolidated financial statements included in Part I, Item 1 of this report.

In the three and nine-month periods ended September 30, 2023, we did not recognize any significant quality remediation expenses as we completed our remediation milestones in late 2022 that addressed inspectional observations on Form 483 and a Warning Letter issued by the FDA at our Warsaw North Campus facility, among other matters.

Acquisition, integration, divestiture and related decreased in the three-month period ended September 30, 2023 when compared to the same prior year period and increased in the nine-month period ended September 30, 2023 when compared to the same prior year period. The decrease in the three-month period was primarily due to the fact that the 2022 period included an impairment of a leased asset that was historically utilized by ZimVie, but was assigned back to us post-separation. The increase in the nine-month period was due to increases in the fair value of contingent consideration.

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

In the three-month period ended September 30, 2023, we recognized a gain of $3.8 million in our other income (expense), net financial statement line item compared to a loss of $25.4 million in the same prior year period. The year-over-year change was primarily due to a loss of $30.0 million recognized in the prior year related to our investment in ZimVie, while in the current year we disposed of our shares in February 2023 so there was no impact from this investment in the three-month period ended September 30, 2023. In the nine-month period ended September 30, 2023, we recognized a gain of $10.3 million in our other income (expense), net financial statement line item compared to a loss of $124.1 million in the same prior year period. In the nine-month period ended September 30, 2023, we recognized a gain of $2.5 million on our investment in ZimVie prior to our disposition of those shares compared to a loss of $114.3 million in the same prior year period.

Interest expense, net, increased in the three and nine-month periods ended September 30, 2023 when compared to the same prior year periods. The increases were primarily from higher debt borrowings in the current year periods to fund share repurchases and make other investments. In addition, in the current year periods we incurred losses on our fixed-to-variable interest rate swaps compared to gains in the prior year periods.

In the three and nine-month periods ended September 30, 2023, our effective tax rate (“ETR”) was 25.7 percent and 22.7 percent, respectively, compared to negative 9.3 percent and positive 11.9 percent in the three and nine-month periods ended September 30, 2022, respectively. The 25.7 percent and 22.7 percent ETR in the three and nine-month periods ended September 30, 2023, respectively, was primarily driven by discrete tax effects of the filing of certain tax returns and reorganizing the ownership structure of certain wholly-owned subsidiaries in the second quarter of 2023. The negative 9.3 percent and positive 11.9 percent ETR in the three and nine-month periods ended September 30, 2022, respectively, was primarily driven by a favorable tax audit settlement and finalization of the Swiss TRAF step-up, which was partially offset by the loss on our investment in ZimVie which was 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 generally 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; and the expiration of certain statutes of limitations. Currently, we cannot reasonably estimate the impact of these items on our financial results. The European Union member states enacted the OECD Pillar Two Directive that generally provides for a 15% minimum tax rate. The first European Directive effective date for certain aspects of Pillar Two is January 1, 2024 and the Undertaxed Profits Rule aspect of Pillar Two will be effective on January 1, 2025. The implementation of the OECD Pillar Two rules may increase our ETR in future periods.

Segment Operating Profit

Americas

In the Americas, operating profit increased, but operating profit as a percentage of net sales decreased, in both the three and nine-month periods ended September 30, 2023 when compared to the same prior year periods. The increase in operating profit in both current year periods was primarily due to higher net sales driven by continued recovery of elective surgical procedures and new product introductions. However, operating profit as a percentage of net sales decreased in both current year periods due to higher carrying expenses from inventory at consigned locations, and continued investments in R&D, including personnel-related costs, which were partially offset by lower royalty expenses as a result of agreements we entered into to acquire intellectual property through the buyout of certain licensing arrangements. The decline in operating profit as a percentage of net sales was more pronounced in the three-month period compared to the nine-month period primarily due to higher carrying expenses from inventory at consigned locations in the third quarter of 2023 compared to the first two quarters of 2023.

EMEA

In EMEA, operating profit and operating profit as a percentage of net sales increased in both the three and nine-month periods ended September 30, 2023 when compared to the same prior year periods. The increases were due to higher net sales driven by continued recovery of elective surgical procedures and improved pricing, lower bad debt charges and operating profit leverage from certain costs that do not increase as net sales increase.

Asia Pacific

In Asia Pacific, operating profit and operating profit as a percentage of net sales increased in the three and nine-month periods ended September 30, 2023 when compared to the same prior year periods. In Asia Pacific, changes in foreign currency exchange rates have had a larger impact on our results than in our other operating segments. While net sales declined in the three and nine-month periods ended September 30, 2023 when compared to the same prior year periods due to changes in foreign currency exchange rates, the negative net sales impact was partially offset by higher hedge gains recognized in the current year periods from our hedging program. As a result, net sales volume growth and operating leverage from certain costs that do not increase as net sales increase resulted in operating profit and operating profit as a percentage of sales increasing in the 2023 periods.

Liquidity and Capital Resources

As of September 30, 2023, we had $292.1 million in cash and cash equivalents. In addition, we had $1.0 billion available to borrow under our 2023 364-Day Credit Agreement, and $1.4 billion available under our 2023 Five-Year Revolving Facility. The terms of the 2023 364-Day Credit Agreement and the 2023 Five-Year Revolving Facility are described further in Note 9 to our interim condensed consolidated financial statements included in Part I, Item 1 of this report.

We believe that cash flows from operations, our cash and cash equivalents on hand, and available borrowings under our revolving credit facilities will be sufficient to meet our ongoing liquidity requirements for at least the next twelve months. However, 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 from continuing operations were $993.2 million in the nine-month period ended September 30, 2023, compared to $1,112.0 million in the same prior year period. The decrease in the 2023 period was driven by higher investments in inventory when compared to the 2022 period as well as higher litigation, income tax and bonus payments in the 2023 period. These unfavorable items were partially offset by higher earnings and lower restructuring-related payments.

Cash flows used in investing activities from continuing operations were $558.1 million in the nine-month period ended September 30, 2023, compared to $409.5 million in the same prior year period. Instrument and property, plant and equipment additions reflected ongoing investments in our product portfolio, including new product introductions, optimization of our manufacturing and logistics networks, investments in enterprise resource planning software and a new corporate jet. In addition, in the nine-month period ended September 30, 2023 we paid $86.4 million to acquire intellectual property through the buyout of certain licensing arrangements and $32.9 million related to the 2023 acquisitions.

Cash flows used in financing activities from continuing operations were $512.1 million in the nine-month period ended September 30, 2023, compared to $462.3 million in the same prior year period. We used cash on hand to repurchase $281.9 million of our common stock. We also repaid a net $20.0 million on our various revolving credit facilities and $120.2 million of other debt obligations that were due in the first quarter of 2023. In the 2022 period, at the ZimVie spinoff date, we received $540.6 million as partial consideration for the contribution of assets in connection with the separation. We used these proceeds, together with borrowings on our five-year revolving facility and cash on hand, to redeem the full $750.0 million of senior notes that were due April 1, 2022. We also repaid $242.9 million outstanding on our Japanese term loans in the third quarter of 2022 when they became due.

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

As of September 30, 2023, $250.7 million of our cash and cash equivalents were held in jurisdictions outside of the U.S. Of this amount, $36.2 million is denominated in U.S. Dollars and, therefore, bears no foreign currency translation risk. The remaining amount is denominated in currencies of the various countries where we operate. We generally intend to limit distributions from foreign subsidiaries to earnings previously taxed in the U.S., primarily as a result of the transition tax or tax on Global Intangible Low-Taxed Income (“GILTI”), as we would not be subject to further U.S. federal tax. In addition to the previously taxed earnings, we have intercompany notes available to repatriate.

Our concentrations of credit risks with respect to trade accounts receivable are limited due to the large number of customers and their dispersion across a number of geographic areas and by frequent monitoring of the creditworthiness of the customers to whom credit is granted in the normal course of business. Substantially all of our trade receivables are concentrated in the public and private hospital and healthcare industry in the U.S. and internationally or with distributors or dealers who operate in international markets and, accordingly, are exposed to their respective business, economic and country-specific variables.

Material Cash Requirements from Known Contractual and Other Obligations

At September 30, 2023, we had outstanding debt of $5,482.4 million, of which $355.0 million was classified as current debt. The $355.0 million of current debt is outstanding under our revolving credit facilities, and we expect to repay such debt over the next twelve months. We believe we can satisfy these debt obligations with cash generated from our operations.

For additional information on our debt, including types of debt, maturity dates, interest rates, debt covenants and available revolving credit facilities, see Note 9 to our interim condensed consolidated financial statements included in Part I, Item 1 of this report.

In March, May and August 2023, our Board of Directors declared a quarterly cash dividend of $0.24 per share. We expect to continue paying cash dividends on a quarterly basis; however, future dividends are subject to approval of the Board of Directors and may be adjusted as business needs or market conditions change.

In February 2016, our Board of Directors authorized a new $1.0 billion share repurchase program effective March 1, 2016, with no expiration date. As of September 30, 2023, $591.7 million remained authorized under this program.

As discussed in Note 5 to our interim condensed consolidated financial statements in Part I, Item 1 of this report, we have a 2021 Restructuring Plan and a 2019 Restructuring Plan. The 2021 Restructuring Plan is expected to result in total pre-tax restructuring charges of approximately $185 million, of which approximately $165 million was incurred through September 30, 2023. We expect to reduce gross annual pre-tax operating expenses by approximately $190 million relative to the 2021 baseline expenses by the end of 2024 as program benefits under the 2021 Restructuring Plan are realized. The 2019 Restructuring Plan is expected to result in total pre-tax restructuring charges of approximately $370 million, of which approximately $300 million was incurred through September 30, 2023. In our original estimates, we expected to reduce gross annual pre-tax operating expenses by approximately $180 million to $280 million relative to the 2019 baseline expenses by the end of 2023 as program benefits under the 2019 Restructuring Plan are realized. Our latest estimates indicate that we will be near the low end of that range.

As discussed in Note 13 to our interim condensed consolidated financial statements included in Part I, Item 1 of this report, the IRS has issued proposed adjustments for years 2010 through 2012, as well as 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 16 to our interim condensed consolidated financial statements included in Part I, Item 1 of this report, we are involved in various litigation matters. We estimate the total liabilities for all litigation matters was $241.4 million as of September 30, 2023. However, litigation is inherently uncertain, and upon resolution of any of these uncertainties, we may incur charges in excess of these estimates, and may in the future incur other material judgments or enter into other material settlements of claims. We expect to pay these liabilities over the next few years. Additionally, 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 $9 million to approximately $485 million.

As discussed in Note 17 to our interim condensed consolidated financial statements included in Part I, Item 1 of this report, we have entered into agreements to pay initial cash consideration of approximately $102 million in the fourth quarter of 2023 to acquire two privately held companies.

Recent Accounting Pronouncements

Information pertaining to recent accounting pronouncements can be found in Note 3 to our interim condensed consolidated financial statements included in Part I, Item 1 of this report.

Critical Accounting Estimates

The preparation of our financial statements is affected by the selection and application of accounting policies and methods, and also 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. Critical accounting estimates are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations. There were no changes in the three-month period ended September 30, 2023 to our critical accounting estimates as described in our Annual Report on Form 10-K for the year ended December 31, 2022.

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

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

the effects of business disruptions, either alone or in combination with other risks on our business and operations, such as those business disruptions associated with the COVID-19 pandemic;

the risks and uncertainties related to our ability to successfully execute our restructuring plans;

control of costs and expenses;

our ability to attract, retain and develop the highly skilled employees, senior management, independent agents and distributors we need to support our business;

the possibility that the anticipated synergies and other benefits from mergers and acquisitions will not be realized, or will not be realized within the expected time periods;

the risks and uncertainties related to our ability to successfully integrate the operations, products, employees and distributors of acquired companies;

the effect of the potential disruption of management’s attention from ongoing business operations due to integration matters related to mergers and acquisitions; the effect of mergers and acquisitions on our relationships with customers, suppliers and lenders and on our operating results and businesses generally;

the ability to form and implement alliances;

dependence on a limited number of suppliers for key raw materials and other inputs and for outsourced activities;

the risk of disruptions in the supply of materials and components used in manufacturing or sterilizing our products;

supply and prices of raw materials and products;

breaches or failures of our information technology systems or products, including by cyberattack, unauthorized access or theft;

challenges relating to changes in and compliance with governmental laws and regulations affecting our U.S. and international businesses, including regulations of the U.S. Food and Drug Administration (“FDA”) and foreign government regulators, such as more stringent requirements for regulatory clearance of products;

the outcome of government investigations in any jurisdiction;

dependence on new product development, technological advances and innovation;

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

competition;

pricing pressures;

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

the impact of healthcare reform and cost containment measures, including efforts sponsored by government agencies, legislative bodies, the private sector and healthcare purchasing organizations, through reductions in reimbursement levels and otherwise;

the impact of substantial indebtedness on our ability to service our debt obligations and/or refinance amounts outstanding under our debt obligations at maturity on terms favorable to us, or at all;

changes in tax obligations arising from examinations by tax authorities and from changes in tax laws in jurisdictions where we do business, including those expected to occur as a result of the “base erosion and profit shifting” project ("Pillar Two") undertaken by the Organisation for Economic Co-operation and Development and otherwise;

challenges to the tax-free nature of the ZimVie spinoff transaction and the subsequent liquidation of our retained interest in ZimVie;

the risk of additional tax liability due to the recategorization of our independent agents and distributors to employees;

the risk that material impairment of the carrying value of our intangible assets, including goodwill, could negatively affect our operating results;

changes in general domestic and international economic conditions, including interest rate and currency exchange rate fluctuations;

changes in general industry and market conditions, including domestic and international growth, inflation and currency exchange rates;

the domestic and international business impact of political, social and economic instability, tariffs, trade restrictions and embargoes, sanctions, wars, disputes and other conflicts, including on our ability to operate in, export from or collect accounts receivable in affected countries;

challenges relating to changes in and compliance with governmental laws and regulations affecting our U.S. and international businesses, including regulations of the FDA and foreign government regulators relating to medical products, healthcare fraud and abuse laws and data privacy and security laws;

the success of our quality and operational excellence initiatives;

the ability to remediate matters identified in inspectional observations or warning letters issued by the FDA and other regulators, while continuing to satisfy the demand for our products;

product liability, intellectual property and commercial litigation losses; and

the ability to obtain and maintain adequate intellectual property protection.

Our Annual Report on Form 10-K for the year ended December 31, 2022 and this Quarterly Report on Form 10-Q contain detailed discussions of these and other important factors under the heading “Risk Factors.” You should understand that it is not possible to predict or identify all factors that could cause actual results to differ materially from forward-looking statements. Consequently, you should not consider any list or discussion of such factors to be a complete set of all potential risks or uncertainties.

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

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

There have been no material changes from the information provided in our Annual Report on Form 10-K for the year ended December 31, 2022.

Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II – Oth****er Information

Item 1. Legal Proceedings

Information pertaining to legal proceedings can be found in Note 16 to our interim condensed consolidated financial statements included in Part I, Item 1 of this report and is incorporated herein by reference.

You should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”), which could materially affect our business, financial condition and results of operations. The risks described in our 2022 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition or results of operations.

Item 2. Unregistered Sales of Equi****ty Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

None

Item 3. Defaults Upo****n Senior Securities

None

Item 4. Mine Saf****ety Disclosures

Not applicable

During the three-month period ended September 30, 2023, the Audit Committee of our Board of Directors approved the engagement of PricewaterhouseCoopers LLP, our independent registered public accounting firm, to perform certain non-audit services. This disclosure is made pursuant to Section 10A(i)(2) of the Exchange Act, as added by Section 202 of the Sarbanes-Oxley Act of 2002.

During the three-month period ended September 30, 2023, no members of our Board of Directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted, amended or terminated any contract, instruction or written plan for the purchase or sale of our securities intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act or any non-Rule 10b5-1 trading arrangement, as defined in rules of the Securities and Exchange Commission.

The following exhibits are filed or furnished as part of this report:

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.