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

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 consolidated financial statements in our 2022 results through the date of the spinoff and in the prior year periods. In addition, as of December 31, 2021, the assets and liabilities associated with these businesses are classified as assets and liabilities of discontinued operations in our consolidated balance sheet. See Note 3 to our consolidated financial statements for additional information. The following discussion and analysis is presented on a continuing operations basis unless otherwise noted. Certain percentages presented in this discussion and analysis are calculated from the underlying whole-dollar amounts and therefore may not recalculate from the rounded numbers used for disclosure purposes.

The following discussion, analysis and comparisons generally focus on the operating results for the years ended December 31, 2022 and 2021. Discussion, analysis and comparisons of the years ended December 31, 2021 and 2020 that are not included in this Form 10-K can be found in (i) “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”) prior to the spinoff of ZimVie; and (ii) “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of Exhibit 99.1 filed with our Form 8-K on June 22, 2022, which Form 8-K was filed to recast certain items of the 2021 Form 10-K, including Part II, Item 7, to reflect the historical results of our spine and dental businesses as discontinued operations following the ZimVie spinoff.

EXECUTIVE LEVEL OVERVIEW

Impact of the COVID-19 Global Pandemic

Our results 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 that have typically declined during surges of the virus as governments and healthcare systems take actions in an effort to prevent the spread and provide sufficient hospital beds and other resources for COVID-19 patients. Additionally, we believe that staffing shortages at hospitals have contributed to the deferral of elective surgical procedures. In the year ended December 31, 2022, the Omicron variant resulted in fewer elective surgical procedures earlier in the year with recovery in procedures as the surge began to subside later in the first quarter and through the second quarter. In the second half of 2022, procedural volumes continued to improve across most markets relative to the first half of the year. However, in the fourth quarter we did experience more acute deferrals of elective surgical procedures in some markets, such as China, due to surges of the virus.

2022 Financial Highlights

In 2022, our net sales increased by 1.6 percent compared to 2021. Our net sales in 2022 were tempered by a negative 5.0 percent effect from changes in foreign currency exchange rates. We continued to see the return of elective surgical procedures across most markets when compared to the prior year, which was negatively affected by a surge of the COVID-19 virus in early 2021 before vaccines were widely available and later in the year by the Delta variant.

Our net earnings, including discontinued operations, were $231.4 million in 2022 compared to $401.6 million in 2021. In 2022, we recognized a goodwill impairment charge of $289.8 million, which was the primary driver for lower net earnings in 2022 when compared to 2021. Other significant unfavorable items in 2022 when compared to 2021 include an unrealized investment loss of $116.6 million due to a decline in the value of our investment in ZimVie, higher restructuring-related costs as we continued to execute on our 2019 and 2021 Restructuring Plans, and higher spending on travel and other activities which started to return to pre-pandemic levels. These unfavorable factors to net earnings were partially offset by higher net sales, hedge gains recognized from our hedging program, the favorable effects of our restructuring programs, lower litigation-related expenses, and the fact the 2021 period included a $165.1 million charge for the early extinguishment of debt and $65.0 million of charges related to certain agreements we entered into to gain access to or acquire third-party in-process research and development (“IPR&D”) projects.

2023 Outlook

We expect revenue growth in 2023 to be driven by a combination of market growth, procedure volume recovery from COVID-19 and new product introductions. We believe there will continue to be some deferrals of elective surgical procedures caused by COVID-19 surges and staffing shortages, but to a lesser extent in 2023 than in 2022. In addition, based on foreign currency exchange rates at the end of 2022 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 into 2023, but with supply chain pressure easing in the second half 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, lower quality remediation expenses due to the completion of our remediation milestones, and lower restructuring-related expenses related to our 2019 and 2021 Restructuring Plans. 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 decline 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 shares 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. Additionally, with sales to customers where title to product passes upon shipment, these customers may purchase items in large quantities if incentives are offered or if there are new product offerings in a market, which could cause period-to-period differences in sales. Due to the COVID-19 global pandemic, the typical seasonal patterns did not occur in 2020 or 2021, but started to return in 2022.

Net Sales by Geography

The following table presents net sales by geography and the percentage changes (dollars in millions):

Year Ended December 31,

Net Sales by Product Category

The following table presents net sales by product category and the percentage changes (dollars in millions):

Year Ended December 31,

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

Year Ended December 31,

Knees

Hips

Demand (Volume/Mix) Trends

Changes in volume and mix of product sales had a positive effect of 7.6 percent and 12.3 percent on year-over-year sales during the years ended December 31, 2022 and 2021, respectively. Volume trends were positive in 2022 as we saw recovery of elective surgical procedures, most notably in international markets, driving volume growth in tandem with new product introductions. In 2022, sales were negatively impacted by limitations due to global supply chain challenges.

Based upon country dynamics, volume changes varied by region in 2022. The volume increases in 2022 were largely a product of how much the COVID-19 pandemic negatively affected the various regions in 2021. In EMEA and Asia Pacific, deferral of elective surgical procedures were more prevalent than in the Americas in 2021. Additionally, in Asia Pacific in 2021, China sales were negatively impacted from a combination of variables related to the implementation of a nationwide volume-based procurement (“VBP”) process. The China VBP had a negative effect on volume due to inventory reductions by distributors and short-term deferral of procedures as patients waited to have a surgical procedure performed until after VBP pricing was effective in 2022.

Pricing Trends

Global selling prices had negative effects of 1.0 percent and 2.1 percent on year-over-year sales during 2022 and 2021, respectively. In the majority of countries in which we operate, we continue to experience pricing pressure from governmental healthcare cost containment efforts and from local hospitals and health systems. However, we have had some success in reducing the negative effects of pricing in 2022 due to internal initiatives and being able to pass some inflationary impacts on to customers.

Foreign Currency Exchange Rates

In 2022 and 2021, changes in foreign currency exchange rates had a negative effect of 5.0 percent and a positive effect of 1.2 percent, respectively, on year-over-year sales.

Geography

The 4.1 percent and 9.9 percent net sales growth in the U.S. in 2022 and 2021, respectively, when compared to the prior year in each case was primarily driven by recovery in surgical procedures as COVID-19 cases subsided, especially in the Knees and Hips categories. Internationally, net sales declined by 1.5 percent in 2022 when compared to 2021 and increased 13.5 percent in 2021 when compared to 2020. The decline in 2022 was driven by the negative impacts on International sales of 11.2 percent due to changes in foreign currency exchange rates. Absent the effect of changes in foreign currency exchange rates, most of our markets internationally experienced demand (volume and mix) growth from recovery in surgical procedures. In 2021, our International markets experienced net sales growth from recovery in elective surgical procedures.

Product Categories

In 2022, our Knees and Hips net sales increased by 4.9 percent and 2.1 percent, respectively, when compared to 2021 due to the recovery in elective surgical procedures and new product introductions. The increase was despite the impact of changes in foreign currency exchange rates having a negative effect of 5.0 percent and 5.9 percent on

Knees and Hips net sales, respectively. S.E.T. net sales decreased by 1.8 percent in 2022 when compared to 2021 due to the negative effects of changes in foreign currency exchange rates, lower trauma product net sales partially due to VBP implementation and unfavorable changes in reimbursement for certain restorative therapy products. Other product category net sales decreased by 4.3 percent in 2022 when compared to 2021 due to the negative effects of changes in foreign currency exchange rates and lower unit sales of our ROSA robots as some customers shifted to operating lease arrangements for our robots instead of purchasing them. In 2021, all our product categories experienced net sales growth when compared to 2020 due to the recovery of elective surgical procedures.

Expenses as a Percent of Net Sales

Year Ended December 31,

Intangible asset amortization 7.6 7.8 8.4 (0.2) (0.6)

Goodwill and intangible asset impairment 4.2 0.2 8.2 4.0 (8.0)

Restructuring and other cost reduction initiatives 2.8 1.8 1.7 1.0 0.1

Acquisition, integration, divestiture and related 0.2 - 0.2 0.2 (0.2)

Cost of Products Sold and Intangible Asset Amortization

We calculate gross profit as net sales minus cost of products sold and intangible asset amortization. Our gross margin percentage is gross profit divided by net sales. The following table sets forth the factors that contributed to the gross margin changes in each of 2022 and 2021 compared to the prior year:

Year Ended December 31,

Prior year gross margin 63.5 % 61.9 %

Lower average selling prices (0.3 ) (0.6 )

Manufacturing costs (0.9 ) 0.5

Impact of volume, product mix and other 0.6 (0.5 )

Inventory charges (0.1 ) 2.1

Impact from changes in foreign currency exchange rates 0.3 (0.5 )

Intangible asset amortization 0.2 0.6

Current year gross margin 63.3 % 63.5 %

The decline in gross margin percentage in 2022 compared to 2021 was primarily due to inflationary cost pressures, lower average selling prices and inventory charges related to products we plan to discontinue. These unfavorable items were partially offset by hedge gains recognized in 2022 as part of our hedging program compared to hedge losses in 2021, operating leverage from volume increases, a mix shift to higher margin product sales, as well as the fact that the 2021 period experienced lower than normal production at certain facilities which resulted in fixed overhead costs being expensed immediately.

Intangible asset amortization expense was similar in both amount and as a percentage of net sales in 2022 when compared to 2021.

Operating Expenses

Research & development (“R&D”) expenses decreased in both amount and as a percentage of net sales in 2022 compared to 2021, primarily due to the fact that in 2021 we entered into certain agreements to gain access to or acquire third-party IPR&D projects that resulted in charges of $65.0 million. We did not enter into any significant, similar agreements in 2022. That favorability was partially offset by higher personnel-related costs and higher spending on our initial compliance with the EU MDR in 2022.

Selling, general & administrative (“SG&A”) expenses decreased in both amount and as a percentage of net sales in 2022 compared to 2021 primarily due to litigation-related expenses declining by $135.1 million and savings from our restructuring plans. These favorable items were partially offset by higher bad debt charges partially related to the Russia/Ukraine conflict and higher expenses for travel and other activities as we started to return to pre-pandemic levels in 2022.

As a result of the invasion of Ukraine by Russia, economic sanctions and export controls were imposed by much of the world on Russian financial institutions and businesses. Our operations in Russia consist primarily of local commercial activities, including sales and customer support. We do not have direct operations in Ukraine. Our net sales in Russia and Ukraine in 2022 were less than 1 percent of our consolidated net sales. Therefore, the ongoing conflict and economic sanctions are not expected to have a significant effect on our results of operations or financial position. The bad debt charges for expected credit losses in Russia resulted in a significant portion of our accounts receivable from customers in this country being impaired. In addition to accounts receivable, we also have inventory and instruments that could require impairment if our business in Russia deteriorates more than our current expectations; however, any such amounts are not expected to be material. See Part I, Item 1A “Risk Factors” for additional risks related to this conflict.

In 2022, we recognized a goodwill impairment charge of $289.8 million related to our EMEA reporting unit. In 2022 and 2021, we recognized intangible asset impairment charges of $3.0 million and $16.3 million, respectively, related to IPR&D projects that we discontinued. For more information regarding these charges, see Note 11 to our consolidated financial statements.

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 costs to allow us to invest in higher priority growth opportunities. We also have other cost reduction and optimization initiatives that have the goal of reducing costs across the organization. We recognized expenses of $191.6 million and $125.7 million in 2022 and 2021, respectively, primarily related to employee termination benefits, sales agent contract terminations, and consulting and project management expenses associated with these programs. The expenses were higher in 2022 primarily due to additional expenses related to the 2021 Restructuring Plan that had just been initiated at the end of 2021. For more information regarding these expenses, see Note 5 to our consolidated financial statements.

We incurred quality remediation expenses of $33.8 million and $52.8 million in 2022 and 2021, respectively. We incurred these quality remediation expenses to complete our remediation milestones that address inspectional observations on Form 483 and a warning letter issued by the FDA at our Warsaw North Campus facility, among other matters. The decline in expenses in 2022 when compared to 2021 was due to the natural regression as various remediation milestones were completed. We do not expect to incur any significant quality remediation expenses related to these inspectional observations in 2023.

Acquisition, integration, divestiture and related expenses related to acquisitions made in 2022 and 2020 as well as costs related to our separation with ZimVie.

Other (Expense) Income, net, Interest Expense, net, Loss on Early Extinguishment of Debt and Income Taxes

In 2022, we incurred a loss of $128.0 million in our other (expense) income, net compared to a gain of $12.2 million in 2021. The expense in 2022 was primarily due to a $116.6 million loss on our investment in ZimVie.

Interest expense, net, decreased in 2022 when compared to 2021 primarily from using debt that we issued in the fourth quarter of 2021, along with cash on hand, to repurchase portions of outstanding notes with higher interest rates. Additionally, interest expense, net was lower due to additional debt paydown.

In 2021, we recognized a $165.1 million loss on the early extinguishment of debt. See Note 13 to our consolidated financial statements for additional information on this loss.

Our effective tax rate (“ETR”) on earnings from continuing operations before income taxes was 27.9 percent and 10.7 percent for the years ended December 31, 2022 and 2021, respectively. In 2022, the ETR was primarily driven by the $289.8 million goodwill impairment charge and the $116.6 million loss on our investment in ZimVie, which have no corresponding tax benefits, partially offset by favorable tax audit settlements and finalization of Switzerland's Federal Act on Tax Reform and AHV Financing (“TRAF”) step-up. In 2021, the ETR was primarily driven by the foreign rate differential as our foreign locations have lower tax rates and favorable return-to-provision changes in estimate offset by unfavorable tax rate changes.

Absent discrete tax events, we expect our future ETR will be lower than the U.S. corporate income tax rate of 21.0 percent due to our mix of earnings between U.S. and foreign locations, which have lower corporate income tax rates. Our ETR in future periods could also potentially be impacted by: changes in our mix of pre-tax earnings; changes in tax rates, tax laws or their interpretation, including the European Union adoption of Pillar 2 proposals; 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.

See Note 17 to our consolidated financial statements for additional information on our income taxes.

Segment Operating Profit

Operating Profit as a

Net Sales Operating Profit Percentage of Net Sales

Year Ended December 31, Year Ended December 31, Year Ended December 31,

Americas

In the Americas, operating profit and operating profit as a percentage of net sales increased in 2022 when compared to 2021 due to higher net sales driven by continued recovery of elective surgical procedures, lower excess and obsolete inventory charges and savings from our restructuring programs. These favorable items were partially offset by higher R&D costs.

EMEA

In EMEA, operating profit and operating profit as a percentage of net sales increased in 2022 when compared to 2021. Our net sales declined in EMEA due to the negative effects of changes in foreign currency exchange rates. However, our operating profit increased slightly due to our hedging program as we recognized hedge gains, which minimized the negative effects from net sales, and we realized savings from our restructuring programs. These favorable items were partially offset by higher bad debt, travel and medical training and education expenses.

Asia Pacific

In Asia Pacific, operating profit and operating profit as a percentage of net sales increased in 2022 when compared to 2021. Our net sales declined in Asia Pacific due to the negative effects of changes in foreign currency exchange rates and by the China government implementing a nationwide volume-based procurement process that became effective in 2022. However, our operating profit increased slightly due to our hedging program as we recognized hedge gains, which minimized these negative effects from net sales, and we realized savings from our restructuring programs.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2022, we had $375.7 million in cash and cash equivalents. In addition, we had $1.0 billion available to borrow under a 364-day revolving credit agreement that matures on August 18, 2023, and $1.1 billion available under a five-year revolving facility that matures on August 19, 2027. The terms of the 364-day revolving credit agreement and the five-year revolving facility are described further in Note 13 to our consolidated financial statements.

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, due to the continued uncertainties related to the COVID-19 pandemic, it is possible our needs may change. Further, there can be no assurance that, if needed, we will be able to secure additional financing on terms favorable to us, if at all.

Sources of Liquidity

Cash flows provided by operating activities from continuing operations were $1,356.2 million in 2022 compared to $1,404.3 million in 2021. The decrease in cash flows from operating activities in 2022 when compared to 2021 was primarily the result of higher tax payments and increased payments under our restructuring programs. These unfavorable items were partially offset by lower interest payments and lower investments in inventory, as well as the fact that the 2021 period included payments related to certain IPR&D agreements.

Cash flows used in investing activities from continuing operations were $522.0 million in 2022 compared to $443.3 million in 2021. Instrument and property, plant and equipment additions reflected ongoing investments in our product portfolio, optimization of our manufacturing and logistics network and investments in enterprise resource planning software. The 2022 period also reflects investments for an acquisition as well as other investments for acquiring intellectual property related to products that have been commercialized. These cash outflows were partially offset by favorable settlements of our net investment hedges as they matured.

Cash flows used in financing activities from continuing operations were $775.7 million in 2022 compared to $1,306.0 million in 2021. 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 senior notes that were due April 1, 2022. We also repaid $242.9 million outstanding on our Japanese term loans and $525.8 million outstanding on our 1.414% Euro senior notes at their maturity date of December 13, 2022. In order to help fund the payment on these Euro senior notes, we borrowed $375.0 million under our five-year revolving facility and $83.0 million under a short-term term loan in connection with our plans to dispose of our ZimVie shares. In addition, in 2022 we expended $126.4 million to repurchase shares of our common stock.

In 2021, we issued senior notes and received $1,599.8 million in proceeds, which, along with cash on hand, were used to extinguish $1,993.2 million aggregate outstanding principal amount of our senior notes pursuant to cash tender offers for certain outstanding series of our senior notes, at a total reacquisition price of $2,154.8 million. Additionally, we used cash on hand to redeem $500.0 million of other senior notes that matured in 2021. We also had deferred business combination payments of $145.0 million that were paid in 2021 under the terms of the purchase agreements.

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

As of December 31, 2022, $328.2 million of our cash and cash equivalents were held in jurisdictions outside of the U.S. Of this amount, $43.2 million is denominated in U.S. Dollars and, therefore, bears no foreign currency translation risk. The balance of these assets is denominated in currencies of the various countries where we operate. We 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.

Material Cash Requirements from Known Contractual and Other Obligations

At December 31, 2022, we had outstanding debt of $5,696.5 million, of which $544.3 million was classified as current debt. Of our current debt, we settled the full amount of our $83.0 million of our short-term term loan in February 2023 using $33.9 million in cash and the transfer of all the ZimVie shares that we owned, $86.3 million of senior notes mature on March 19, 2023 and the remaining $375.0 million is outstanding under our five-year revolving facility which we expect to repay during 2023. 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 13 to our consolidated financial statements.

In February, May, August and December 2022, our Board of Directors declared cash dividends of $0.24 per share. We expect to continue paying cash dividends on a quarterly basis; however, future dividends are subject to approval of the Board of Directors and may be adjusted as business needs or market conditions change.

In February 2016, our Board of Directors authorized a $1.0 billion share repurchase program effective March 1, 2016, with no expiration date. We had not repurchased any shares under this program until the fourth quarter of 2022, when we entered into transactions to repurchase $150.0 million in shares of our common stock. Our third-party broker executed the full $150.0 million of repurchases as of December 31, 2022 for which paid them $126.4 million by December 31, 2022, with the remaining balance we owed settled at the beginning of January 2023. As of December 31, 2022, $850.0 million remained authorized under this program.

As discussed in Note 5 to our consolidated financial statements, 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 $220 million, of which approximately $130 million was incurred through December 31, 2022. 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 $350 million to $400 million, of which approximately $280 million was incurred through December 31, 2022. 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 17 to our consolidated financial statements, the IRS has issued proposed adjustments for years 2010 through 2012, and for years 2013 through 2015, reallocating profits between certain of 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.

Under the Tax Cuts and Jobs Act of 2017, we have a $187.8 million liability remaining from a one-time tax on the mandatory deemed repatriation of post-1986 untaxed foreign earnings and profits (“toll charge”) for the deemed repatriation of unremitted foreign earnings. This amount was recorded in non-current income tax liabilities on our consolidated balance sheet as of December 31, 2022.

As discussed in Note 21 to our consolidated financial statements, we are involved in various litigation matters. We estimate the total liabilities for all litigation matters was $349.2 million as of December 31, 2022. We expect to pay these liabilities over the next few years.

In the normal course of business, we enter into purchase commitments, primarily related to raw materials. However, we do not believe these purchase commitments are material to the overall standing of our business or our liquidity.

We have entered into various agreements that may result in future payments dependent upon various events such as the achievement of certain product R&D milestones, sales milestones, or, at our discretion, maintenance of exclusive rights to distribute a product. These estimated payments related to these agreements could range from $0 to $415 million.

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. We believe that the accounting estimates and assumptions described below involve significant subjectivity and judgment, and changes to such estimates or assumptions could have a material impact on our financial condition or operating results.

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

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

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

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

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

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

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

In our annual impairment test in the fourth quarter of 2022, we determined our EMEA reporting unit's carrying value was in excess of its estimated fair value. Fair value was determined using income and market approaches. Fair value under the income approach was determined by discounting to present value the estimated future cash flows of the reporting unit. Fair value under the market approach utilized the guideline public company methodology, which uses valuation indicators determined from other businesses that are similar to our EMEA reporting unit. As a result of its carrying value being in excess of its estimated fair value, we recorded a goodwill impairment charge of $289.8 million. No goodwill balance remains for the EMEA reporting unit.

See Note 11 to our consolidated financial statements for further discussion and the factors that contributed to this impairment charge.

We have three other reporting units with goodwill assigned to them. For two of these reporting units, their estimated fair values exceeded their carrying values by more than 35 percent. We estimated the fair value of these reporting units using the income and market approaches. We performed a qualitative test on the other reporting unit and concluded it was more likely than not the fair value of this reporting unit exceeded its carrying value.

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

MARKET RISK

We are exposed to certain market risks as part of our ongoing business operations, including risks from changes in foreign currency exchange rates, interest rates and commodity prices that could affect our financial condition, results of operations and cash flows. We manage our exposure to these and other market risks through regular operating and financing activities and through the use of derivative financial instruments. We use derivative financial instruments solely as risk management tools and not for speculative investment purposes.

FOREIGN CURRENCY EXCHANGE 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. See Note 15 to our consolidated financial statements for further details on our foreign currency exchange risk exposure and management.

We maintain written policies and procedures governing our risk management activities. Our policy requires that critical terms of hedging instruments be the same as hedged forecasted transactions. On this basis, with respect to cash flow hedges, changes in cash flows attributable to hedged transactions are generally expected to be offset by changes in the fair value of hedge instruments. As part of our risk management program, we also perform sensitivity analyses to assess potential changes in revenue, operating results, cash flows and financial position relating to hypothetical movements in currency exchange rates. A sensitivity analysis of changes in the fair value of foreign currency exchange forward contracts outstanding at December 31, 2022 indicated that, if the U.S. Dollar uniformly strengthened or weakened in value by 10 percent relative to all currencies, with no change in the interest differentials, the fair value of those contracts would affect earnings in a range of a decrease of approximately $93 million to an increase of approximately $88 million before income taxes in periods through June 2025.

Any change in the fair value of foreign currency exchange forward contracts as a result of a fluctuation in a currency exchange rate is expected to be largely offset by a change in the value of the hedged transaction. Consequently, foreign currency exchange contracts would not subject us to material risk due to exchange rate movements because gains and losses on these contracts offset gains and losses on the assets, liabilities and transactions being hedged.

We had net assets, excluding goodwill and intangible assets, in legal entities with non-U.S. Dollar functional currencies of $1,771.5 million at December 31, 2022.

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, 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.

For details about these and other financial instruments, including fair value methodologies, see Note 15 to our consolidated financial statements.

COMMODITY PRICE RISK

We purchase raw material commodities such as cobalt chrome, titanium, tantalum, polymer and sterile packaging. We enter into supply contracts generally with terms of 12 to 24 months, where available, on these commodities to alleviate the effect of market fluctuation in prices. As part of our risk management program, we perform sensitivity analyses related to potential commodity price changes.

INTEREST RATE RISK

In the normal course of business, we are exposed to market risk from changes in interest rates that could affect our results of operations and financial condition. We manage our exposure to interest rate risks through our regular operations and financing activities.

We invest our cash and cash equivalents primarily in highly-rated corporate commercial paper and bank deposits. The primary investment objective is to ensure capital preservation. Currently, we do not use derivative financial instruments in our investment portfolio.

The majority of our debt is fixed-rate debt and therefore is not exposed to changes in interest rates. Based upon our overall interest rate exposure as of December 31, 2022, a change of 10 percent in interest rates, assuming the principal amount outstanding remains constant, would not have a material effect on interest expense, net. This analysis does not consider the effect of the change in the level of overall economic activity that could exist in such an environment.

CREDIT RISK

Financial instruments, which potentially subject us to concentrations of credit risk, are primarily cash and cash equivalents, derivative instruments and accounts receivable.

We place our cash and cash equivalents and enter into derivative transactions with highly-rated financial institutions and limit the amount of credit exposure to any one entity. We believe we do not have any significant credit risk on our cash and cash equivalents or derivative instruments.

Our concentrations of credit risks with respect to trade accounts receivable is 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. Our ability to collect accounts receivable in some countries depends in part upon the financial stability of these hospital and healthcare sectors and the respective countries’ national economic and healthcare systems. Most notably, in Europe healthcare is typically sponsored by the government. Since we sell products to public hospitals in those countries, we are indirectly exposed to government budget constraints and price reduction initiatives. To the extent the respective governments’ ability to fund their public hospital programs deteriorates, we may have to record significant bad debt expenses in the future.

While we are exposed to risks from the broader healthcare industry in Europe and around the world, there is no significant net exposure due to any individual customer. Exposure to credit risk is controlled through credit approvals, credit limits and monitoring procedures, and we believe that reserves for losses are adequate.

Item 8. Financial Statements and Supplementary Data

Zimmer Biomet Holdings, Inc.

Index to Consolidated Financial Statements

Financial Statements: Page

Report of Independent Registered Public Accounting Firm (PCAOB ID: 238) 41

Consolidated Balance Sheets as of December 31, 2022 and 2021 46

Notes to Consolidated Financial Statements 49

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Zimmer Biomet Holdings, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Zimmer Biomet Holdings, Inc. and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of earnings, of comprehensive income (loss), of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2022 appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable

assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Goodwill Impairment Assessment - EMEA and Americas CMFT Reporting Units

As described in Notes 2 and 11 to the consolidated financial statements, the Company’s consolidated goodwill balance was $8,580.2 million as of December 31, 2022, and the goodwill associated with the EMEA and Americas CMFT reporting units represents a portion of the consolidated goodwill balance. Management performs an impairment test in the fourth quarter of each year or whenever events or changes in circumstances indicate that the fair value of the reporting unit is more likely than not below its carrying amount. Potential impairment of a reporting unit is identified by comparing the reporting unit’s estimated fair value to its carrying amount. The annual goodwill impairment test resulted in an impairment charge of $289.8 million related to the EMEA reporting unit, which represented all of the remaining goodwill. Management estimated the fair value of the EMEA and Americas CMFT reporting units based on income and market approaches. Fair value under the income approach was determined by discounting to present value the estimated future cash flows of the reporting unit. Fair value under the market approach utilized the guideline public company methodology, which uses valuation indicators from publicly-traded companies that are similar to the EMEA and Americas CMFT reporting units. Significant assumptions are incorporated into the discounted cash flow analysis such as forecasted net sales, revenue growth rates, forecasted operating expenses and risk-adjusted discount rates.

The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the EMEA and Americas CMFT reporting units is a critical audit matter are (i) the significant judgment by management when estimating the fair value of the reporting units; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to forecasted net sales, forecasted operating expenses and risk-adjusted discount rate for the EMEA reporting unit and revenue growth rates, forecasted operating expenses and risk-adjusted discount rate for the Americas CMFT reporting unit; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Company’s reporting units. These procedures also included, among others (i) testing management’s process for developing the estimated fair value of the EMEA and Americas CMFT reporting units; (ii) evaluating the appropriateness of the discounted cash flow analysis; (iii) testing the completeness and accuracy of the underlying data used in the discounted cash flow analysis; and (iv) evaluating the reasonableness of the significant assumptions used by management in the discounted cash flow analysis related to forecasted net sales, forecasted operating expenses and risk-adjusted discount rate for the EMEA reporting unit and revenue growth rates, forecasted operating expenses and risk-adjusted discount rate for the Americas CMFT reporting unit. Evaluating management’s assumptions related to forecasted net sales, revenue growth rates and forecasted operating expenses involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the EMEA and Americas CMFT reporting units, where applicable; (ii) the consistency with external data from market and industry sources; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating the

appropriateness of the Company’s discounted cash flow analysis and the reasonableness of the risk-adjusted discount rate assumptions.

Tax Liabilities for Certain Unrecognized Tax Benefits

As described in Notes 2 and 17 to the consolidated financial statements, the Company has recorded tax liabilities for unrecognized tax benefits with a consolidated balance of $521.0 million as of December 31, 2022. The calculation of certain of the Company’s estimated tax liabilities, representing a majority of the consolidated balance, involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across the Company’s global operations. The Company’s income tax filings are regularly under audit in multiple federal, state and foreign jurisdictions. 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.

The principal considerations for our determination that performing procedures relating to tax liabilities for certain unrecognized tax benefits is a critical audit matter are (i) the significant judgment by management when determining the tax liabilities for certain unrecognized tax benefits due to a high degree of estimation uncertainty related to management’s application of complex tax laws and regulations, the result of income tax audits, and potential for significant adjustments as a result of such audits; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate the timely identification and accurate measurement of tax liabilities for certain unrecognized tax benefits and evaluating audit evidence available to support the estimates; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the identification and accurate measurement of tax liabilities for unrecognized tax benefits, including controls addressing the completeness of the tax liabilities. These procedures also included, among others (i) evaluating the accuracy of the measurement of tax liabilities for certain unrecognized tax benefits by testing certain information used in the calculation of tax liabilities for certain unrecognized tax benefits by jurisdiction, on a sample basis; (ii) assessing the completeness of the Company’s identification of tax liabilities for unrecognized tax benefits and possible outcomes for certain unrecognized tax benefits; and (iii) evaluating the status and results of income tax audits related to certain unrecognized tax benefits with the relevant tax authorities. Professionals with specialized skill and knowledge were used to assist in evaluating management’s application of complex tax laws and regulations in various jurisdictions and assessing the reasonableness of certain of the Company’s tax positions.

/s/ PricewaterhouseCoopers LLP

Chicago, Illinois

February 24, 2023

We have served as the Company’s auditor since 2000.

ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(in millions, except per share amounts)

For the Years Ended December 31,

Goodwill and intangible asset impairment 292.8 16.3 503.0

Restructuring and other cost reduction initiatives 191.6 125.7 107.2

Acquisition, integration, divestiture and related 11.4 3.1 11.4

Loss on early extinguishment of debt - (165.1 ) -

Net Earnings (Loss) from Continuing Operations 291.2 445.5 (9.2 )

Less: Net earnings attributable to noncontrolling interest 1.0 0.5 1.5

Loss from Discontinued Operations, Net of Tax (58.8 ) (43.4 ) (128.2 )

Net Earnings (Loss) of Zimmer Biomet Holdings, Inc. $ 231.4 $ 401.6 $ (138.9 )

Basic Earnings (Loss) Per Common Share

Earnings (Loss) from Continuing Operations $ 1.38 $ 2.14 $ (0.05 )

Loss from Discontinued Operations (0.28 ) (0.21 ) (0.62 )

Basic Earnings (Loss) Per Common Share $ 1.10 $ 1.93 $ (0.67 )

Diluted Earnings (Loss) Per Common Share

Earnings (Loss) from Continuing Operations $ 1.38 $ 2.12 $ (0.05 )

Loss from Discontinued Operations (0.28 ) (0.21 ) (0.62 )

Diluted Earnings (Loss) Per Common Share $ 1.10 $ 1.91 $ (0.67 )

Weighted Average Common Shares Outstanding

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

ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in millions)

For the Years Ended December 31,

Net Earnings (Loss) of Zimmer Biomet Holdings, Inc. $ 231.4 $ 401.6 $ (138.9 )

Other Comprehensive Income (Loss):

Unrealized cash flow hedge gains/(losses), net of tax 83.5 86.4 (33.5 )

Reclassification adjustments on hedges, net of tax (46.0 ) 1.3 (38.5 )

Total Other Comprehensive (Loss) Income (8.8 ) 66.2 (55.9 )

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

ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in millions, except share amounts)

As of December 31,

ASSETS

Current Assets:

Cash and cash equivalents $ 375.7 $ 378.1

Accounts receivable, less allowance for credit losses 1,381.5 1,259.6

Prepaid expenses and other current assets 324.5 271.0

Current assets of discontinued operations - 501.6

Noncurrent assets of discontinued operations - 1,276.8

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

Current portion of long-term debt 544.3 1,605.1

Current liabilities of discontinued operations - 177.2

Noncurrent liabilities of discontinued operations - 168.4

Commitments and Contingencies (Note 21)

Stockholders' Equity:

Accumulated other comprehensive loss (179.3 ) (231.6 )

Total Zimmer Biomet Holdings, Inc. stockholders' equity 12,020.3 12,660.7

Noncontrolling interest 6.7 5.7

Total Liabilities and Stockholders' Equity $ 21,066.0 $ 23,456.4

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

ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in millions)

Zimmer Biomet Holdings, Inc. Stockholders

Accumulated

Other Total

Number Amount Capital Earnings (Loss) Income Number Amount Interest Equity

Other comprehensive loss - - - - (55.9 ) - - - (55.9 )

Cash dividends declared ($0.96 per share) - - - (198.9 ) - - - - (198.9 )

Adoption of new accounting standard - - - (3.1 ) - - - - (3.1 )

Acquisition of noncontrollinginterest - - - - - - - (1.0 ) (1.0 )

Other comprehensive income - - - - 66.2 - - - 66.2

Cash dividends declared ($0.96 per share) - - - (200.4 ) - - - - (200.4 )

Other comprehensive loss - - - - (8.8 ) - - - (8.8 )

Cash dividends declared ($0.96 per share) - - - (201.3 ) - - - - (201.3 )

Reclassifications of net investment hedges - - - - 25.9 - - - 25.9

Spinoff of ZimVie Inc. - - - (763.4 ) 35.2 - - - (728.2 )

Share repurchases - - - - - (1.0 ) (150.0 ) - (150.0 )

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

ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

For the Years Ended December 31,

Net earnings (loss) from continuing operations $ 291.2 $ 445.5 $ (9.2 )

Goodwill and intangible asset impairment 292.8 16.3 503.0

Loss on early extinguishment of debt - 165.1 -

Loss on investment in ZimVie 116.6 - -

Deferred income tax (benefit) provision (64.4 ) (102.1 ) 39.4

Accounts payable and accrued liabilities 103.0 86.5 (96.3 )

Other assets and liabilities (1.2 ) (47.6 ) 61.1

Additions to other property, plant and equipment (187.9 ) (143.6 ) (111.9 )

Net investment hedge settlements 89.4 1.9 53.5

Business combination investments, net of acquired cash (99.8 ) - (227.1 )

Investments in other assets (65.4 ) (28.0 ) (19.8 )

Proceeds from multicurrency revolving facility 595.0 - -

Payments on multicurrency revolving facility (220.0 ) - -

Proceeds from term loan 83.0 - -

Payments on term loans (242.9 ) - -

Proceeds from employee stock compensation plans 78.1 122.5 129.8

Distribution from ZimVie, Inc. 540.6 - -

Net cash flows from unremitted collections from factoring programs - - (53.0 )

Business combination contingent consideration payments - (8.9 ) (15.0 )

Debt issuance costs (1.6 ) (13.2 ) (22.3 )

Deferred business combination payments - (145.0 ) -

Repurchase of common stock (126.4 ) - -

Other financing activities (4.5 ) (6.3 ) (8.3 )

Cash flows provided by (used in) discontinued operations:

Net cash (used in) provided by operating activities (71.5 ) 94.9 128.9

Net cash used in investing activities (7.2 ) (60.3 ) (49.5 )

Net cash used in financing activities (68.1 ) - (1.6 )

Net cash (used in) provided by discontinued operations (146.8 ) 34.6 77.8

Effect of exchange rates on cash and cash equivalents (14.5 ) (13.2 ) 15.3

(Decrease) increase in cash and cash equivalents (102.8 ) (323.6 ) 184.2

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

ZIMMER BIOMET HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Business

We design, manufacture and market orthopedic reconstructive products; sports medicine, biologics, extremities and trauma products; craniomaxillofacial and thoracic products; surgical products; and a suite of integrated digital and robotic technologies that leverage data, data analytics and artificial intelligence. We collaborate with healthcare professionals around the globe to advance the pace of innovation. Our products and solutions help treat patients suffering from disorders of, or injuries to, bones, joints or supporting soft tissues. Together with healthcare professionals, we help millions of people live better lives.

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

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 continue to be deferred to some extent due to precautions in certain markets and staffing shortages. The consequences of COVID-19 and its related effects continue to be extremely fluid and there are many market dynamics that are difficult to predict. 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 Holdings of 80.3% of the outstanding shares of common stock of ZimVie Inc. (“ZimVie”) to Zimmer Biomet Holding’s stockholders. 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 consolidated financial statements as the spinoff represents a strategic shift in our business that has a major effect on operations and financial results. As of December 31, 2021, the assets and liabilities associated with these businesses are classified as assets and liabilities of discontinued operations in the consolidated balance sheet. The disclosures presented in our notes to the consolidated financial statements are presented on a continuing operations basis.

Significant Accounting Policies

Basis of Presentation - The consolidated financial statements include the accounts of Zimmer Biomet Holdings and its subsidiaries in which it holds a controlling financial interest. All significant intercompany accounts and transactions are eliminated.

Use of Estimates - The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“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. These estimates have considered the impact the COVID-19 pandemic may have on our financial position, results of operations and cash flows. Such estimates included, but were not limited to, variable consideration to our customers, our allowance for doubtful accounts for expected credit losses, the net realizable value of our inventory, the fair value of our goodwill and the recoverability of other long-lived assets. Actual results could differ materially from these estimates.

Foreign Currency Translation - The financial statements of our foreign subsidiaries are translated into U.S. Dollars using period-end exchange rates for assets and liabilities and average exchange rates for operating results. Unrealized translation gains and losses are included in accumulated other comprehensive loss in stockholders’ equity. When a transaction is denominated in a currency other than the subsidiary’s functional currency, we remeasure the transaction into the functional currency and recognize any transactional gains or losses in earnings.

Shipping and Handling - Amounts billed to customers for shipping and handling of products are reflected in net sales and are not significant. Expenses incurred related to shipping and handling of products are reflected in selling,

general and administrative (“SG&A”) expenses and were $254.4 million, $255.4 million and $235.5 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Research and Development - We expense all research and development (“R&D”) costs as incurred except when there is an alternative future use for the R&D. R&D costs include salaries, prototypes, depreciation of equipment used in R&D, consultant fees, service fees paid to collaborative partners, and arrangements to gain access to or acquire third-party in-process R&D projects with no alternative future use. Where contingent milestone payments are due to third parties under R&D arrangements, we expense the milestone payment obligations when it is probable that the milestone results will be achieved.

Litigation - We record an undiscounted liability for contingent losses, including future legal costs, settlements and judgments, when we consider it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

Quality remediation - We use the financial statement line item “Quality remediation” to recognize expenses related to addressing inspectional observations on Form 483 and a warning letter issued by the FDA following its inspections of our Warsaw North Campus facility, among other matters. See Note 21 for additional information about the Form 483 and warning letter. The majority of these expenses were related to consultants who helped us to update previous documents and redesign certain processes.

Restructuring and other cost reduction initiatives - A restructuring is defined as a program that is planned and controlled by management, and materially changes either the scope of a business undertaken by an entity, or the manner in which that business is conducted. Restructuring charges include (i) employee termination benefits, (ii) contract termination costs and (iii) other related costs associated with exit or disposal activities.

In December 2021, our management approved a new global restructuring program intended to further reduce costs and to reorganize our global operations in preparation for the spinoff of ZimVie. In December 2019, our Board of Directors approved, and we initiated, a new global restructuring program with an objective of reducing costs to allow us to further invest in higher priority growth opportunities. Restructuring charges for the years ended December 31, 2022, 2021 and 2020 were primarily attributable to these programs.

Acquisition, integration, divestiture and related – We use the financial statement line item, “Acquisition, integration, divestiture and related” to recognize expenses resulting from the consummation of business mergers and acquisitions and the related integration of those businesses, and expenses related to the divestiture of our businesses. Acquisition, integration, divestiture and related gains and expenses are primarily composed of:

•

Consulting and professional fees related to third-party integration performed in a variety of areas, such as finance, tax, compliance, logistics and human resources, and legal fees related to the consummation of mergers and acquisitions.

•

Employee termination benefits related to terminating employees with overlapping responsibilities in various areas of our business.

•

Dedicated project personnel expenses which include the salary, benefits, travel expenses and other costs directly associated with employees who are 100 percent dedicated to our integration of acquired businesses and employees who have been notified of termination, but are continuing to work on transferring their responsibilities.

•

Contract termination expenses related to terminated contracts, primarily with sales agents and distribution agreements.

•

Changes to our contingent consideration liabilities related to our mergers and acquisitions.

•

Other various expenses to relocate facilities, integrate information technology, losses incurred on assets resulting from the applicable acquisition, and other various expenses.

•

Income and expenses related to providing ZimVie certain services after the separation date.

Cash and Cash Equivalents - We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. The carrying amounts reported in the balance sheet for cash and cash equivalents are valued at cost, which approximates their fair value.

Accounts Receivable - Accounts receivable consists of trade and other miscellaneous receivables. We grant credit to customers in the normal course of business and maintain an allowance for expected credit losses. We determine the

allowance for credit losses by geographic market and take into consideration historical credit experience, creditworthiness of the customer and other pertinent information. We make concerted efforts to collect all accounts receivable, but sometimes we have to write-off the account against the allowance when we determine the account is uncollectible. The allowance for credit losses was $78.4 million and $60.1 million as of December 31, 2022 and 2021, respectively.

We also have receivables purchase arrangements with unrelated third parties to transfer portions of our trade accounts receivable balance. We terminated our purchase arrangements in the U.S. and Japan during the year ended December 31, 2020. We continue to have arrangements in Europe where we sell to a third party and have no continuing involvement or significant risk with the factored accounts receivable. Funds received from the transfers are recorded as an increase to cash and a reduction to accounts receivable outstanding in our consolidated balance sheets. We report the cash flows attributable to the sale of receivables to third parties in cash flows from operating activities in our consolidated statements of cash flows. Net expenses resulting from the sales of receivables are recognized in SG&A expense and are immaterial. Net expenses include any resulting gains or losses from the sales of receivables, credit insurance and factoring fees. Under the previous arrangement in the U.S. and Japan, any initial collections of cash and remittances to the third parties were recognized in our consolidated statements of cash flows in financing activities which resulted in an outflow of $53.0 million for the year ended December 31, 2020.

Inventories - Inventories are stated at the lower of cost and net realizable value, with cost determined on a first-in first-out basis.

Property, Plant and Equipment - Property, plant and equipment is carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on estimated useful lives of ten to forty years for buildings and improvements and three to eight years for machinery and equipment. Maintenance and repairs are expensed as incurred. We review property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss would be recognized when estimated future undiscounted cash flows relating to the asset are less than its carrying amount. An impairment loss is measured as the amount by which the carrying amount of an asset exceeds its fair value.

Software Costs - We capitalize certain computer software and software development costs incurred in connection with developing or obtaining computer software for internal use when both the preliminary project stage is completed and it is probable that the software will be used as intended. Capitalized software costs generally include external direct costs of materials and services utilized in developing or obtaining computer software and compensation and related benefits for employees who are directly associated with the software project. Capitalized software costs are included in property, plant and equipment on our balance sheet and amortized on a straight-line or weighted average estimated user basis when the software is ready for its intended use over the estimated useful lives of the software, which approximate three to fifteen years.

For cloud computing arrangements that are considered a service contract, our capitalization of implementation costs is aligned with the internal use software requirements. However, on our consolidated balance sheet these implementation costs are recognized in other noncurrent assets. On our consolidated statement of cash flows, these implementations costs are recognized in operating cash flows. The implementation costs are recognized on a straight-line basis over the expected term of the related service contract.

Instruments - Instruments are hand-held devices used by surgeons during total joint replacement and other surgical procedures. Instruments are recognized as long-lived assets and are included in property, plant and equipment. Undeployed instruments are carried at cost or net realizable value. Instruments that have been deployed to be used in surgeries are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on average estimated useful lives, determined principally in reference to associated product life cycles, primarily five years. We review instruments for impairment whenever events or changes in circumstances indicate that the carrying value of an instrument may not be recoverable. Depreciation of instruments is recognized as SG&A expense.

Goodwill - Goodwill is not amortized but is subject to annual impairment tests. Goodwill has been assigned to reporting units. Potential impairment of a reporting unit is identified by either comparing a reporting unit’s estimated fair value to its carrying amount or doing a qualitative assessment of a reporting unit’s fair value from the last quantitative assessment to determine if there is potential impairment. We may do a qualitative assessment when the results of the previous quantitative test indicated the reporting unit’s estimated fair value was significantly in excess of the carrying value of its net assets and we do not believe there have been significant changes in the

reporting unit’s operations that would significantly decrease its estimated fair value. If a quantitative assessment is performed, the fair value of the reporting unit and the fair value of goodwill are determined based upon a discounted cash flow analysis and/or use of a market approach by looking at market values of comparable companies. Significant assumptions are incorporated into our discounted cash flow analyses such as forecasted net sales, revenue growth rates, forecasted operating expenses and risk-adjusted discount rates. We perform this test in the fourth quarter of the year or whenever events or changes in circumstances indicate that the fair value of the reporting unit is more likely than not below its carrying amount. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded in the amount that the carrying value of the reporting unit exceeds the fair value. See Note 11 for more information regarding goodwill.

Intangible Assets - Intangible assets are initially measured at their fair value. We have determined the fair value of our intangible assets either by the fair value of the consideration exchanged for the intangible asset or the estimated after-tax discounted cash flows expected to be generated from the intangible asset. Intangible assets with a finite life, including technology, certain trademarks and trade names, customer-related intangibles, intellectual property rights and patents and licenses are amortized on a straight-line basis over their estimated useful life or contractual life, which may range from less than one year to twenty years. Intangible assets with a finite life are tested for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable.

Intangible assets with an indefinite life, including certain trademarks and trade names and in-process research and development (“IPR&D”) projects, are not amortized. Indefinite life intangible assets are assessed annually to determine whether events and circumstances continue to support an indefinite life. Intangible assets with an indefinite life are tested for impairment annually or whenever events or circumstances indicate that the fair value of the reporting unit is more likely than not below its carrying amount. An impairment loss is recognized if the carrying amount exceeds the estimated fair value of the asset. The amount of the impairment loss to be recorded would be determined based upon the excess of the asset’s carrying value over its fair value. The fair values of indefinite lived intangible assets are determined based upon a discounted cash flow analysis using the relief from royalty method or a qualitative assessment may be performed for any changes to the asset’s fair value from the last quantitative assessment. The relief from royalty method estimates the cost savings associated with owning, rather than licensing, assets. Significant assumptions are incorporated into these discounted cash flow analyses such as estimated growth rates, royalty rates and risk-adjusted discount rates. We may do a qualitative assessment when the results of the previous quantitative test indicated that the asset’s fair value was significantly in excess of its carrying value.

In determining the useful lives of intangible assets, we consider the expected use of the assets and the effects of obsolescence, demand, competition, anticipated technological advances, changes in surgical techniques, market influences and other economic factors. For technology-based intangible assets, we consider the expected life cycles of products, absent unforeseen technological advances, which incorporate the corresponding technology. Trademarks and trade names that do not have a wasting characteristic (i.e., there are no legal, regulatory, contractual, competitive, economic or other factors which limit the useful life) are assigned an indefinite life. Trademarks and trade names that are related to products expected to be phased out are assigned lives consistent with the period in which the products bearing each brand are expected to be sold. For customer relationship intangible assets, we assign useful lives based upon historical levels of customer attrition. Intellectual property rights are assigned useful lives that approximate the contractual life of any related patent or the period for which we maintain exclusivity over the intellectual property.

Income Taxes - We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period the new tax rate is enacted.

We reduce our deferred tax assets by a valuation allowance if it is more likely than not that we will not realize some portion or all of the deferred tax assets. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce the provision for income taxes.

We operate on a global basis and are subject to numerous and complex tax laws and regulations. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. Our income tax filings are regularly under audit in multiple federal, state, and foreign jurisdictions. 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. Because income tax adjustments in certain jurisdictions can be significant, we record tax positions based upon our estimates. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements.

Derivative Financial Instruments - We measure all derivative instruments at fair value and report them on our consolidated balance sheet as assets or liabilities. We maintain written policies and procedures that permit, under appropriate circumstances and subject to proper authorization, the use of derivative financial instruments solely for risk management purposes. The use of derivative financial instruments for trading or speculative purposes is prohibited by our policy. See Note 15 for more information regarding our derivative and hedging activities.

Accumulated Other Comprehensive Income (Loss) – Accumulated other comprehensive income (loss) (“AOCI”) refers to gains and losses that under GAAP are included in comprehensive income but are excluded from net earnings as these amounts are recorded directly as an adjustment to stockholders’ equity. Our AOCI is comprised of foreign currency translation adjustments, including unrealized gains and losses on net investments hedges, unrealized gains and losses on cash flow hedges and amortization of prior service costs and unrecognized gains and losses in actuarial assumptions.

Other Expense (Income), Net - Other expense (income), net includes gains/(losses) on changes in fair value of our investments, gains/(losses) on remeasurement of monetary assets and liabilities denominated in a currency other than an entity's functional currency and the related gains/(losses) on derivative instruments that are not designated as hedging instruments that we use to manage the currency exposures of these assets and liabilities, certain components of pension expense, and other non-operating gains/(losses). In the year ended December 31, 2022, we recognized losses of $116.6 million related to our investment in ZimVie. The initial value of our investment was based upon our 19.7 percent share of the carrying value of net assets transferred to ZimVie on the separation date. At December 31, 2022, we valued our investment at fair value based upon ZimVie's share price on that date, less a discount to reflect that the shares are not registered.

Treasury Stock - We account for repurchases of common stock under the cost method and present treasury stock as a reduction of stockholders’ equity. We reissue common stock held in treasury only for limited purposes.

Noncontrolling Interest - We have investments in other companies in which we have a controlling financial interest, but not 100 percent of the equity. Further information related to the noncontrolling interests of those investments has not been provided as it is not significant to our consolidated financial statements.

Accounting Pronouncements Recently Adopted

In July 2021, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2021-05 Lessors - Certain Leases with Variable Lease Payments which is an amendment to Accounting Standards Codification Topic 842 - Leases (“ASC 842”). Under the prior ASC 842 guidance, variable payments were excluded from the measurement of the initial net investment in the lease if the payments do not depend on an index or rate. For sales-type or direct financing leases, this could result in the recognition of a day-one loss for leases with entire or partial variable payments. ASU 2021-05 requires lessors to classify leases with entire or partial variable payments as operating leases if otherwise a day-one loss would be recognized. The ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those years. Early adoption of this ASU was permitted. The ASU could either be applied retrospectively to leases that were commenced or modified on or after

the adoption of ASC 842 or applied prospectively to leases that commence or are modified after the adoption of ASU 2021-05. We adopted this standard as of January 1, 2022. The adoption of this standard did not have a material impact on our financial position, results of operations or cash flows.

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.

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 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.

Also, 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. The agreements set forth the principles and actions taken or to be taken in connection with the separation and the distribution and provide a framework for our relationship with ZimVie from and after the separation and the distribution. The agreements include a Separation and Distribution Agreement, a Tax Matters Agreement, an Employee Matters Agreement, a Transition Services Agreement (the “TSA”), an Intellectual Property Matters Agreement, a Stockholder and Registration Rights Agreement, a Transition Manufacturing and Supply Agreement (the “TMA”), a Reverse Transition Manufacturing and Supply Agreement (the “Reverse TMA”) and a Transitional Trademark License Agreement, 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 Acquisition, integration, divestiture and related expense in our consolidated statements of earnings. Amounts included in the consolidated statements of earnings related to these agreements for the years ended December 31, 2022, 2021 and 2020 were immaterial. Amounts due from ZimVie were also immaterial as of December 31, 2022.

We retained approximately 5.1 million common shares of ZimVie, 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 recognize this investment at fair value in prepaid expenses and other current assets on our consolidated balance sheet. We disposed of these shares in February 2023. Changes to the fair value of the investment are recognized in non-operating other (expense) income, net. In the year ended December 31, 2022, we recognized losses of $116.6 million 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. It is likely that the financial institution entered into hedging transactions, which may have included selling the ZimVie shares in the market, in anticipation of receiving the shares 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 Forward Exchange Agreement was accounted for at fair value, with changes in fair value recognized in non-operating other (expense) income, net. The most significant input into the valuation of the Forward Exchange Agreement is the price of ZimVie shares. The fair value of the Forward Exchange Agreement as of December 31, 2022 was $1.1 million and is included within prepaid expenses and other current assets on our consolidated balance sheet. For the year ended December 31, 2022, an unrealized gain of $1.1 million related to the change in fair value of the Forward Exchange Agreement was recorded in non-operating other (expense) income, net in our consolidated statements of earnings.

As discussed in Note 1, Business, the results of our spine and dental businesses have been reflected as discontinued operations in the consolidated statements of earnings for the years presented. Details of earnings (loss) from discontinued operations included in our consolidated statements of earnings are as follows (in millions):

For the Years Ended

December 31,

Cost of products sold, excluding intangible asset amortization 53.5 380.6 304.0

Goodwill and intangible asset impairment - - 142.0

Restructuring and other cost reduction initiatives 0.4 3.3 9.7

Quality remediation - 0.2 0.2

Acquisition, integration, divestiture and related 40.9 76.8 12.4

Other expense (income), net 0.3 0.5 (1.6 )

Loss from discontinued operations before income taxes (61.2 ) (80.6 ) (169.3 )

Benefit for income taxes from discontinued operations (2.4 ) (37.2 ) (41.1 )

Loss from discontinued operations, net of tax $ (58.8 ) $ (43.4 ) $ (128.2 )

Details of assets and liabilities of discontinued operations are as follows (in millions):

December 31,

Cash and cash equivalents $ 100.4

Accounts receivable, less allowance for credit losses 145.3

Prepaid expenses and other current assets 9.4

Total Current Assets of Discontinued Operations $ 501.6

Property, plant and equipment, net $ 179.9

Intangible assets, net 766.2

Other assets 57.9

Total Noncurrent Assets of Discontinued Operations $ 1,276.8

Accounts payable $ 44.7

Income taxes payable 3.1

Other current liabilities 129.4

Total Current Liabilities of Discontinued Operations $ 177.2

Deferred income taxes, net $ 107.1

Other long-term liabilities 61.3

Total Noncurrent Liabilities of Discontinued Operations $ 168.4

Revenue Recognition

We recognize revenue when our performance obligations under the terms of a contract with our customer are satisfied. This happens when we transfer control of our products to the customer, which generally occurs upon implantation or when title passes upon shipment. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring our product. Taxes collected from customers and remitted to governmental authorities are excluded from revenues.

We sell products through two principal channels: 1) direct to healthcare institutions, referred to as direct channel accounts; and 2) through stocking distributors and healthcare dealers. In direct channel accounts and with some healthcare dealers, inventory is generally consigned to sales agents or customers so that products are available when needed for surgical procedures. No revenue is recognized upon the placement of inventory into consignment, as we retain the ability to control the inventory. Upon implantation, we issue an invoice and revenue is recognized. Consignment sales represented approximately 85 percent of our net sales in 2022. Pricing for products is generally predetermined by contracts with customers, agents acting on behalf of customer groups or by government regulatory bodies, depending on the market. Price discounts under group purchasing contracts are generally linked to volume of implant purchases by customer healthcare institutions within a specified group. At negotiated thresholds within a contract buying period, price discounts may increase. Payment terms vary by customer, but are typically less than 90 days.

With sales to stocking distributors and some healthcare dealers and hospitals, revenue is generally recognized when control of our product passes to the customer, which can be upon shipment of the product or receipt by the customer. We estimate sales recognized in this manner represented approximately 15 percent of our net sales in 2022. These customers may purchase items in large quantities if incentives are offered or if there are new product offerings in a market, which could cause period-to-period differences in sales. It is our accounting policy to account for shipping and handling activities as a fulfillment cost rather than as an additional promised service. We have contracts with these customers or orders may be placed from available price lists. Payment terms vary by customer, but are typically less than 90 days.

We offer standard warranties to our customers that our products are not defective. These standard warranties are not considered separate performance obligations. In limited circumstances, we offer extended warranties that are separate performance obligations. We have very few contracts that have multiple performance obligations. Since we do not have significant multiple element arrangements and essentially all of our sales are recognized upon implantation of a product or when title passes, very little judgment is required to allocate the transaction price of a contract or determine when control has passed to a customer. Our costs to obtain contracts consist primarily of sales commissions to employees or third-party agents that are earned when control of our product passes to the customer. Therefore, sales commissions are expensed as part of SG&A expenses at the same time revenue is recognized. Accordingly, we do not have significant contract assets, liabilities or future performance obligations.

We offer volume-based discounts, rebates, prompt pay discounts, right of return and other various incentives which we account for under the variable consideration model. If sales incentives may be earned by a customer for purchasing a specified amount of our product, we estimate whether such incentives will be achieved and recognize these incentives as a reduction in revenue in the same period the underlying revenue transaction is recognized. We primarily use the expected value method to estimate incentives. Under the expected value method, we consider the historical experience of similar programs as well as review sales trends on a customer-by-customer basis to estimate what levels of incentives will be earned. Occasionally, products are returned and, accordingly, we maintain an estimated refund liability based upon the expected value method that is recorded as a reduction in revenue.

We analyze sales by two geographies, the United States and International; and by the following product categories: Knees; Hips; Sports Medicine, Extremities and Trauma (“S.E.T.”), which includes Craniomaxillofacial and Thoracic (“CMFT”); and Other. Other includes sales from our Technology, Surgical and Bone Cement products.

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 below and our reportable operating segments are the geographic groupings.

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

For the Years Ended December 31,

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

For the Years Ended December 31,

Restructuring

In December 2021, our management approved a new 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 $220 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. The following table summarizes the liabilities recognized related to the 2021 Restructuring Plan (in millions):

Employee

Termination Contract

Benefits Terminations Other Total

Balance, December 31, 2020 $ - $ - $ - $ -

Cash payments - - - -

Foreign currency exchange rate changes - - - -

Foreign currency exchange rate changes 0.8 1.0 0.1 1.9

In December 2019, our Board of Directors approved, and we initiated, a new global restructuring program (the “2019 Restructuring Plan”) with an objective of reducing costs to allow us to further invest in higher priority growth opportunities.The 2019 Restructuring Plan is expected to result in total pre-tax restructuring charges of approximately $350 million to $400 million. 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 and relocation costs. The restructuring charges incurred in the year ended December 31, 2022, primarily related to employee termination benefits, consulting fees and project management expenses. The following table summarizes the liabilities recognized related to the 2019 Restructuring Plan (in millions):

Employee

Termination Contract

Benefits Terminations Other Total

Foreign currency exchange rate changes 1.4 - - 1.4

Foreign currency exchange rate changes (1.6 ) - (0.1 ) (1.7 )

Foreign currency exchange rate changes (1.6 ) (0.9 ) (0.4 ) (2.9 )

For the expense estimated to be recognized for the 2019 Restructuring Plan, we have disclosed the midpoint in our estimated range of expenses.

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

In our 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 and optimization initiative expenses are not considered restructuring, they have been excluded from the amounts presented in this note.

Share-Based Compensation

Our share-based payments primarily consist of stock options and restricted stock units (“RSUs”). Share-based compensation expense was as follows (in millions):

For the Years Ended December 31,

Total expense, net of tax $ 88.1 $ 58.8 $ 58.2

We had two equity compensation plans in effect at December 31, 2022: the 2009 Stock Incentive Plan (“2009 Plan”) and the Stock Plan for Non-Employee Directors. We have reserved the maximum number of shares of common stock available for awards under the terms of each of these plans. We have registered 49.9 million shares of common stock under these plans. The 2009 Plan provides for the grant of nonqualified stock options and incentive stock options, long-term performance awards in the form of performance shares or units, restricted stock, RSUs and stock appreciation rights. The Compensation and Management Development Committee of the Board of Directors determines the grant date for annual grants under our equity compensation plans. The date for annual grants under the 2009 Plan to our executive officers is expected to occur in the first quarter of each year following the earnings announcements for the previous quarter and full year. The Stock Plan for Non-Employee Directors provides for awards of stock options, restricted stock and RSUs to non-employee directors. It has been our practice to issue shares of common stock upon exercise of stock options from previously unissued shares, except in limited circumstances where they are issued from treasury stock. The total number of awards which may be granted in a given year and/or over the life of the plan under each of our equity compensation plans is limited. At December 31, 2022, an aggregate of 8.5 million shares were available for future grants and awards under these plans.

Stock Options

Stock options granted to date under our plans generally vest over three or four years and have a maximum contractual life of 10 years. As established under our equity compensation plans, vesting may accelerate upon retirement after the first anniversary date of the award if certain criteria are met. We recognize expense related to stock options on a straight-line basis over the requisite service period, less awards expected to be forfeited using estimated forfeiture rates. Due to the accelerated retirement provisions, the requisite service period of our stock options range from one to four years. Stock options are granted with an exercise price equal to the market price of our common stock on the date of grant, except in limited circumstances where local law may dictate otherwise.

A summary of stock option activity for the year ended December 31, 2022 is as follows (options in thousands):

Awards transferred to ZimVie in the spinoff (431 ) 134.66

Adjustment to Zimmer Biomet awards related to the spinoff of ZimVie (2) 270

(1)

Activity prior to the ZimVie spinoff has not been adjusted for the spinoff

(2)

In connection with the spinoff of ZimVie, all outstanding Zimmer Biomet stock options (whether vested or unvested) were modified into adjusted Zimmer Biomet awards for continuing Zimmer Biomet employees or converted into ZimVie awards for those becoming ZimVie employees. The modified awards attempted to preserve the same intrinsic value and general terms and conditions (including vesting) as were in place immediately prior to the modification. The modification of these awards did not result in significant incremental expense.

We use a Black-Scholes option-pricing model to determine the fair value of our stock options. Expected volatility was derived from a combination of historical volatility and implied volatility because the options that were actively traded around the grant date of our stock options did not have maturities of over one year. The expected term of the stock options has been derived from historical employee exercise behavior. The risk-free interest rate was determined using the implied yield currently available for zero-coupon U.S. government issues with a remaining term approximating the expected life of the options. The dividend yield was determined by using an estimated annual dividend and dividing it by the market price of our stock on the grant date.

The following table presents information regarding the weighted average fair value of stock options granted, the assumptions used to determine fair value, the intrinsic value of options exercised and the tax benefit of options exercised in the indicated year:

For the Years Ended December 31,

Dividend yield 0.8 % 0.6 % 0.6 %

Risk-free interest rate 1.9 % 0.7 % 1.3 %

Expected life (years) 5.0 5.4 5.0

Weighted average fair value of options granted $ 32.07 $ 43.91 $ 31.65

Intrinsic value of options exercised (in millions) $ 20.5 $ 54.6 $ 50.1

Tax benefit of options exercised (in millions) $ 4.0 $ 10.8 $ 9.6

As of December 31, 2022, there was $49.9 million of unrecognized share-based payment expense related to nonvested stock options granted under our plans. That expense is expected to be recognized over a weighted average period of 1.9 years.

RSUs

We have awarded RSUs to certain of our employees. The terms of the awards are generally three or four years. Some of the awards have only service conditions while some have performance and market conditions in addition to service conditions. Future service conditions may be waived if an employee retires after the first anniversary date of the award, but performance and market conditions continue to apply. Accordingly, the requisite service period used for share-based payment expense on our RSUs range from one year to four years.

A summary of nonvested RSU activity for the year ended December 31, 2022 is as follows (RSUs in thousands):

WeightedAverage

Grant Date

RSUs Fair Value

Awards transferred to ZimVie in the spinoff (71 ) 132.61

Adjustment to Zimmer Biomet awards related to the spinoff of ZimVie (2) 35

(1)

Activity prior to the ZimVie spinoff has not been adjusted for the spinoff.

(2)

In connection with the spinoff of ZimVie, all unvested Zimmer Biomet RSUs were modified into adjusted Zimmer Biomet awards for continuing Zimmer Biomet employees or converted into ZimVie awards for those becoming ZimVie employees. For awards with service conditions only, the modified awards attempted to preserve the same intrinsic value and general terms and conditions (including vesting) as were in place immediately prior to the modification. For awards that had performance and market conditions, these conditions were removed and converted into service condition only awards to be earned at a fixed amount as determined by our Board of Directors' Compensation and Management Development Committee. The other general terms and conditions (including vesting) were preserved. The modification of these awards did not result in significant incremental expense.

For the RSUs with service conditions only, the fair value of the awards was determined based upon the fair market value of our common stock on the date of grant. For the RSUs with market conditions, a Monte Carlo valuation technique was used to simulate the market conditions of the awards. The outcome of the simulation was used to determine the fair value of the awards.

We are required to estimate the number of RSUs that will vest and recognize share-based payment expense on a straight-line basis over the requisite service period. As of December 31, 2022, we estimate that approximately 893,091 outstanding RSUs will vest. If our estimate were to change in the future, the cumulative effect of the change in estimate will be recorded in that period. Based upon the number of RSUs that we expect to vest, the unrecognized share-based payment expense as of December 31, 2022 was $59.5 million and is expected to be recognized over a weighted-average period of 1.8 years. The fair value of RSUs that vested during the years ended December 31, 2022, 2021 and 2020 based upon our stock price on the date of vesting was $20.3 million, $40.0 million, and $33.2 million, respectively.

Inventories

Inventories consisted of the following (in millions):

As of December 31,

Amounts charged to the consolidated statements of earnings for excess and obsolete inventory, including certain product lines we intend to discontinue, in the years ended December 31, 2022, 2021 and 2020 were $137.3 million, $117.3 million and $230.0 million, respectively.

Property, Plant and Equipment

Property, plant and equipment consisted of the following (in millions):

As of December 31,

Property, plant and equipment, net $ 1,872.5 $ 1,836.6

Depreciation expense was $399.6 million, $408.1 million and $386.3 million for the years ended December 31, 2022, 2021 and 2020, respectively.

We had $17.0 million and $10.3 million of property, plant and equipment included in accounts payable as of December 31, 2022 and 2021, respectively.

Fair Value Measurements of Assets and Liabilities

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

Fair Value Measurements at Reporting Date Using:

Assets

Derivatives designated as hedges, current and long-term

Foreign currency forward contracts $ 72.8 $ - $ 72.8 $ -

Cross-currency interest rate swaps 6.8 - 6.8 -

Derivatives not designated as hedges, current and long-term

Foreign currency forward contracts 1.8 - 1.8 -

Forward Exchange Agreement 1.1 - 1.1 -

Investment in ZimVie 45.5 45.5 - -

Liabilities

Derivatives designated as hedges, current and long-term

Foreign currency forward contracts $ 5.5 $ - $ 5.5 $ -

Cross-currency interest rate swaps 49.6 - 49.6 -

Derivatives not designated as hedges, current and long-term

Foreign currency forward contracts 3.3 - 3.3 -

Contingent payments related to acquisitions 17.4 - - 17.4

Fair Value Measurements at Reporting Date Using:

Assets

Derivatives designated as hedges, current and long-term

Foreign currency forward contracts $ 52.4 $ - $ 52.4 $ -

Cross-currency interest rate swaps 23.0 - 23.0 -

Derivatives not designated as hedges, current and long-term

Foreign currency forward contracts 1.1 - 1.1 -

Total Assets $ 76.5 $ - $ 76.5 $ -

Liabilities

Derivatives designated as hedges, current and long-term

Foreign currency forward contracts $ 0.3 $ - $ 0.3 $ -

Cross-currency interest rate swaps 3.4 - 3.4 -

Interest rate swaps 10.5 - 10.5 -

Derivatives not designated as hedges, current and long-term

Foreign currency forward contracts 1.5 - 1.5 -

Contingent payments related to acquisitions 35.6 - - 35.6

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 uncommon shares of ZimVie, representing 19.7 percent of ZimVie's common stock on the separation date. At each reporting date, we value these shares based upon the market share price of ZimVie less a discount to reflect that the shares are not registered.

The value of the Forward Exchange Agreement is 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 settlement date.

Contingent payments related to acquisitions consist of sales-based payments, and are valued using discounted cash flow techniques. The fair value of sales-based payments is based upon probability-weighted future revenue estimates, and changes as revenue estimates increase or decrease.

The following table provides a reconciliation of the beginning and ending balances of items related to continuing operations 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

Change in estimates (11.2 )

Settlements (7.0 )

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

10.

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 next two years.

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 the acquisition (in millions):

Current assets $ 3.8

Intangible assets subject to amortization:

Customer relationships 12.3

Other assets 4.9

Total assets acquired 112.1

Current liabilities 1.1

Total liabilities assumed 1.1

Net assets acquired $ 111.0

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

In the fourth quarter of 2020, we completed the acquisitions of A&E Medical Corporation, a sternal closure company, and Relign Corp., an arthroscopy equipment company (collectively referred to as the “2020 acquisitions”). The 2020 acquisitions were completed primarily to expand our product offerings in CMFT and sports medicine markets. The total aggregate cash consideration paid in 2020 related to the 2020 acquisitions was $235.7 million. An additional $145.0 million of guaranteed deferred payments were made in 2021. We assigned a fair value of $23.0 million for potential additional payments as of the acquisition dates related to these acquisitions that are contingent on the respective companies' future product sales. The estimated fair value of the aggregate contingent payment liabilities was calculated based on the probability of achieving the specified sales growth and discounting to present value the estimated payments.

The goodwill related to the 2020 acquisitions represents the excess of the consideration transferred over the fair value of the net assets acquired. The goodwill related to the 2020 acquisitions is generated from the operational synergies and cross-selling opportunities we expect to receive from the technologies acquired. None of the goodwill related to these acquisitions is expected to be deductible for tax purposes.

The following table summarizes the aggregate final estimates of fair value of the assets acquired and liabilities assumed related to the 2020 acquisitions (in millions):

Current assets $ 30.5

Intangible assets subject to amortization:

Trademarks and trade names 1.5

Customer relationships 92.7

Other assets 5.1

Total assets acquired 450.3

Current liabilities 4.6

Deferred income taxes 42.0

Total liabilities assumed 46.6

Net assets acquired $ 403.7

In the year ended December 31, 2021, we adjusted the preliminary fair values of the 2020 acquisitions. The adjustments primarily related to the customer relationships intangible assets and the related deferred income tax liability as we refined our estimates by analyzing historical purchasing patterns of existing customers. The adjustment did not result in a significant change to intangible asset amortization expense recognized in the year ended December 31, 2021 that would have been recognized in the previous period if the adjustment were recognized as of the acquisition date. In addition, we revised our estimates related to net operating loss carryforwards based on updated tax calculations which reduced our deferred income tax liability and goodwill correspondingly. There were no other significant adjustments during the year ended December 31, 2021.

The weighted average amortization period selected for technology, trademarks and trade names, and customer relationships related to the 2020 acquisitions were 13 years, 12 years, and 15 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.

11.

Goodwill and Other Intangible Assets

The following table summarizes the changes in the carrying amount of goodwill related to continuing operations (in millions):

Americas EMEA Asia Pacific Total

Balance at January 1, 2021

Other acquisitions 2.4 - - 2.4

Purchase accounting adjustments 0.9 - - 0.9

Other acquisitions 48.3 - - 48.3

As discussed further in Note 10, we purchased a privately held sternal closure company during the year ended December 31, 2022, resulting in additional goodwill in 2022.

We perform our annual test of goodwill impairment in the fourth quarter of every year. In connection with the annual goodwill impairment test in the fourth quarter of 2022, we estimated the fair value of our Americas Orthopedics, Americas CMFT, and EMEA reporting units using the income and market approaches. In the annual 2022 test, each of the Americas Orthopedics and Americas CMFT reporting units exceeded their carrying values by more than 35 percent. We determined the goodwill related to our EMEA reporting unit was fully impaired and recognized an impairment charge of $289.8 million for the year ended December 31, 2022. We performed a qualitative test on our Asia Pacific reporting unit and concluded it was more likely than not the fair value of this reporting unit exceeded its carrying value.

The impairment charge of $289.8 million in our EMEA reporting unit was primarily due to the impacts from macroeconomic factors. The weakening of major foreign currencies in our EMEA reporting unit against the U.S. Dollar significantly impacted forecasted cash flows used in our analysis. For the EMEA reporting unit, operating expenses do not decline proportionally to revenue as many inventory-related and certain expenses are based on the U.S. Dollar. In addition, inflationary pressures have also caused our forecasted expenses to increase. Furthermore, our discounted cash flows utilized a higher risk-adjusted discount rate for the 2022 impairment test when compared to the 2021 test, primarily due to central banks raising interest rates in 2022 and increased country-specific risk due to macroeconomic factors and risks the region faces. We had previously taken goodwill impairment charges related to this reporting unit in prior years so when these negative macroeconomic factors occurred in 2022, the remaining goodwill was determined to be fully impaired.

We estimated the fair value of the Americas Orthopedics, Americas CMFT, and EMEA reporting units based on income and market approaches. Fair value under the income approach was determined by discounting to present value the estimated future cash flows of the reporting unit. Fair value under the market approach utilized the guideline public company methodology, which uses valuation indicators from publicly-traded companies that are similar to our reporting units and considers differences between our reporting unit and the comparable companies.

In estimating the future cash flows of the reporting units, we utilized a combination of market and company-specific inputs that a market participant would use in assessing the fair value of the reporting units. The primary market input was revenue growth rates. These rates were based upon historical trends and estimated future growth drivers such as an aging global population, obesity and more active lifestyles. Significant company-specific inputs included assumptions regarding how the reporting units could leverage operating expenses as revenue grows and the impact any of our differentiated products or new products will have on revenues.

Under the guideline public company methodology, we took into consideration specific risk differences between our reporting unit and the comparable companies, such as recent financial performance, size risks and product portfolios, among other considerations.

We will continue to monitor the fair value of our reporting units in our interim and annual reporting periods. If our estimated cash flows decrease, we may have to record further impairment charges in the future. Factors that could result in our cash flows being lower than our current estimates include: 1) additional recurrence of the COVID-19 virus, including variants, causing hospitals to defer elective surgical procedures, 2) decreased revenues caused by unforeseen changes in the healthcare market, or our inability to generate new product revenue from our research and development activities, 3) our inability to achieve the estimated operating margins in our forecasts from our restructuring programs, cost saving initiatives, and other unforeseen factors, and 4) the weakening of foreign currencies against the U.S. Dollar. Additionally, changes in the broader economic environment could cause changes to our estimated discount rates and comparable company valuation indicators, which may impact our estimated fair values.

During the year ended December 31, 2020, we recorded a goodwill charge related to our EMEA reporting unit of $470.0 million. The impairment charge was primarily due to the COVID-19 pandemic and a reportable segment change. The COVID-19 pandemic had a significant adverse effect on both the operational and non-operational assumptions used to estimate the fair value of our EMEA reporting unit. The significant decline in our share price and that of most other publicly-traded companies resulted in us utilizing a higher risk-adjusted discount rate compared to the rate used in the previous annual goodwill impairment test to discount our future estimated cash flows to present value. On an operational basis, due to the deferral of elective surgical procedures, we estimated that our cash flows would be significantly lower than previously estimated in the prior annual goodwill impairment test. The change in reportable segments resulted in additional impairment due to additional assets being allocated to the EMEA reporting unit.

ZBH US Equity

ZBH · 10-K · period ended 2022-12-31

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

ZBH US Equity☆

ZBH · 10-K · period ended 2022-12-31

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

ZBH US Equity