ZIMMER BIOMET HOLDINGS, INC. (ZBH) FY 2021 MD&A

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

The following discussion and analysis should be read in conjunction with the consolidated financial statements and the corresponding notes included elsewhere in this Annual Report on Form 10-K.  Certain percentages presented in this discussion and analysis are calculated from the underlying whole-dollar amounts and therefore may not recalculate from the rounded numbers used for disclosure purposes.  The following discussion, analysis and comparisons generally focus on the operating results for the years ended December 31, 2021 and 2020.  Discussion, analysis and comparisons of the years ended December 31, 2020 and 2019 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

On February 5, 2021, we announced our intention to pursue a plan to spin off our Spine and Dental businesses into a new public company.  The expected completion date of the spinoff of ZimVie is March 1, 2022.  The following discussion and analysis includes these businesses in our discussion of financial condition and results of operations.

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.  As COVID-19 rapidly started to spread throughout the world in early 2020, our net sales decreased dramatically as countries took precautions to prevent the spread of the virus with lockdowns and stay-at-home measures and as hospitals deferred elective surgical procedures.  The timing, level and sustainability of the recovery of elective surgical procedures has been difficult to predict, as a number of factors are involved, including which geographies are affected and the different measures governments and healthcare systems take in response to the virus in those areas.  In the second half of 2021, the highly transmissible Delta and Omicron variants resulted in further deferrals of elective surgical procedures.  Additionally, we believe that staffing shortages at hospitals are also contributing to the deferral of elective surgical procedures.

2021 Financial Highlights

In 2021, our net sales increased by 11.6 percent compared to 2020 primarily due to the significant deferral of elective surgical procedures at the onset of the COVID-19 pandemic in 2020.  Our net earnings were $401.6 million in 2021 compared to a net loss of $138.9 million in 2020.  In 2021, we returned to profitability compared to a net loss in 2020, primarily due to higher net sales combined with fixed operating costs that did not increase proportionally to the increase in net sales, and a reduction in operating expenses including goodwill and intangible asset impairment charges and certain fixed overhead and hourly production worker labor expenses.  In 2020, we recognized $645.0 million of goodwill and intangible asset impairment charges primarily due to the forecasted impact of COVID-19 on our operating results.  In the second quarter of 2020, we also temporarily suspended or limited production at certain manufacturing facilities, resulting in additional expense recognized in cost of products sold that related to certain fixed overhead costs and hourly production worker labor expenses that are included in the cost of inventory when these facilities are operating at normal capacity.  The additional expense for suspended and limited production continued throughout 2020 and while we did recognize similar charges in 2021, they were lower than the 2020 charges.  These reduced expenses in 2021 were partially offset by a charge for the early extinguishment of debt, higher research and development expenses, including certain agreements we entered into to gain access to or acquire third-party in-process R&D projects, higher consulting and professional service expenses related to the planned spinoff of our Spine and Dental businesses, and higher litigation-related charges.

2022 Outlook

We believe the COVID-19 variant surges and continuing staffing shortages that occurred late in 2021 will continue to negatively impact our net sales in 2022.  As previously mentioned, we expect to spin off our Spine and Dental businesses on March 1, 2022.  We expect to apply discontinued operations accounting after the separation, which will require us to recast our prior period results to reflect both continuing and discontinued operations.  Accordingly, it is difficult to provide forward-looking information that is comparable to our historical results until the recasting of prior periods is complete.

RESULTS OF OPERATIONS

We analyze sales by three geographies, the Americas, EMEA and Asia Pacific, and by the following product categories: Knees; Hips; S.E.T.; Spine & Dental; and Other.  This sales analysis differs from our reportable operating segments, which are based upon our senior management organizational structure and how we allocate

32

resources towards achieving operating profit goals.  We analyze sales by geography because the underlying market trends in any particular geography tend to be similar across product categories and because we primarily sell the same products in all geographies.

Net Sales by Geography

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

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

Net Sales by Product Category

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

33

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):

Demand (Volume/Mix) Trends

Changes in volume and mix of product sales had a positive effect of 12.1 percent on year-over-year sales during the year ended December 31, 2021.  Volume trends were positive in 2021 as elective surgical procedures were not as significantly impacted by the COVID-19 pandemic as compared to 2020 when there were significant deferrals at the beginning of the pandemic.  However, 2021 did experience periods with higher deferrals of elective surgical procedures, most notably at the beginning of 2021 before vaccines were widely available and during surges of the Delta and Omicron virus variants.  Accordingly, net sales in 2021 did not return to the pre-pandemic levels of 2019.

Based upon country dynamics, volume changes varied by region in 2021.  The volume increases in 2021 were largely a product of how much the COVID-19 pandemic negatively affected the various regions in 2020.  In EMEA, stay-at-home measures were far more prevalent than other geographies in 2020 and therefore volume increases were greater in this region in 2021 as elective surgical procedures resumed.  In the Americas, elective surgical procedures in the U.S. varied from state-to-state depending on local infection rates and preventative measures in 2020.  In Asia Pacific, containment of the COVID-19 virus varied from country-to-country in 2020, but overall some of our larger markets in this region were not as affected in 2020 as other locations.  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 is effective.

Pricing Trends

Global selling prices had a negative effect of 1.8 percent on year-over-year sales during 2021.  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.  Pricing in 2021 was also negatively affected by the anticipated China VBP implementation due to ongoing pricing negotiations with distributor partners.

Foreign Currency Exchange Rates

In 2021, changes in foreign currency exchange rates had a positive effect of 1.3 percent on year-over-year sales.  If foreign currency exchange rates remain at levels consistent with recent rates, we estimate they will have a negative impact of approximately 2.0 percent on sales in 2022 for the full year.

34

Estimated Market Trends

The following table presents estimated* 2021 global market information (dollars in billions):

Expenses as a Percent of Net Sales

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 2021 and 2020 compared to the prior year:

35

The increase in gross margin percentage in 2021 compared to 2020 was primarily due to lower excess and obsolete inventory charges and lower impact from intangible asset amortization as well as the fact that 2020 had higher charges from certain fixed overhead costs and hourly production worker labor expenses when we temporarily suspended or limited production at certain manufacturing facilities.  Intangible asset amortization and excess and obsolete inventory charges did not increase ratably with the increase our net sales in 2021 and therefore were a positive impact to our gross margin percentage.  These favorable items were partially offset by hedge losses recognized in the current year as part of our hedging program compared to hedge gains in the prior year, and lower average selling prices.

Operating Expenses

Research & development (“R&D”) expenses increased in both amount and as a percentage of net sales in 2021 compared to 2020 primarily due to reengaging in R&D projects in 2021, including the implementation of the European Union Medical Device Regulation (“EU MDR”), compared to 2020 when COVID-19 caused delays in project spending.  In addition to reengaging in projects, in 2021 we also entered into certain agreements to gain access to or acquire third-party in-process R&D projects that resulted in charges of $65.0 million.

Selling, general & administrative (“SG&A”) expenses increased in 2021 compared to 2020, but decreased as a percentage of net sales.  SG&A expenses increased primarily due to higher variable selling and distribution costs related to increased net sales, higher performance-based compensation in the current year as similar costs were reduced in the prior year due to the effect COVID-19 had on our operating results, higher litigation-related charges, and increased travel and medical training and education costs as we have partially resumed these activities. Despite the increase in SG&A expenses, SG&A as a percentage of net sales declined in 2021 when compared to 2020 as our SG&A expenses included many fixed costs that did not increase ratably with the increase in net sales in the 2021 period.

In 2021, we recognized an intangible asset impairment charge of $16.3 million.  In 2020, we recognized goodwill and intangible asset impairment charges of $645.0 million, including charges of $470.0 million and $142.0 million related to our EMEA and Dental reporting units, respectively, in the first quarter of 2020.  For more information regarding these charges, see Note 11 to our consolidated financial statements.

In December 2021, our management approved a restructuring program to reorganize our operations in preparation for the planned spinoff of ZimVie with an objective of reducing costs.  In December 2019, our Board of Directors approved, and we initiated, a restructuring program with an objective of reducing costs to allow us to invest in higher priority growth opportunities.  We recognized expenses of $129.1 million and $116.9 million in the years ended December 31, 2021 and 2020, respectively, attributable to restructuring and other cost reduction initiatives, primarily related to employee termination benefits, sales agent contract terminations, and consulting and project management expenses associated with these programs.  For more information regarding these expenses, see Note 4 to our consolidated financial statements.

Our quality remediation expenses increased slightly to $53.1 million in 2021 compared to $50.9 million in 2020.    We continue to incur 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.

Acquisition, integration, divestiture and related expenses increased to $79.8 million in 2021 compared to $23.8 million in 2020 due primarily to consulting and other professional service expenses related to the planned spinoff of our Spine and Dental businesses and integration expenses related to the acquisitions made in 2020.

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

In 2021, our other income, net was lower than in 2020 primarily due to losses recognized from changes to the fair value of our equity investments in 2021 compared to gains recognized in the prior year and lower pension-related gains recognized in 2021 compared to 2020.

Interest expense, net, decreased in 2021 when compared to 2020 primarily due to debt paydown and fixed-to-variable interest rate swaps we entered into in 2021.

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.

36

Our effective tax rate (“ETR”) on earnings before income taxes was 3.9 percent and 49.9 percent for the years ended December 31, 2021 and 2020, respectively.  In 2021, this 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.

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

Absent discrete tax events, we expect our future ETR will be lower than the U.S. corporate income tax rate of 21.0 percent due to our mix of earnings between U.S. and foreign locations, which have lower corporate income tax rates.  Our ETR in future periods could also potentially be impacted by: changes in our mix of pre-tax earnings; changes in tax rates, tax laws or their interpretation, including the European Union rules on state aid; the outcome of various federal, state and foreign audits; and the expiration of certain statutes of limitations.  Currently, we cannot reasonably estimate the impact of these items on our financial results.

Segment Operating Profit

In 2021, the Americas Orthopedics, EMEA and Americas Spine and Global Dental operating segments’ operating profit and operating profit as a percentage of net sales increased when compared to 2020 due the recovery of elective surgical procedures when compared to the deferrals that occurred during the onset of the COVID-19 pandemic in 2020.  These operating segments have various fixed costs that do not fluctuate proportionally to net sales changes, which results in improved operating profit as a percentage of net sales as net sales increase.  In the Asia Pacific operating segment, while operating profit increased due to higher net sales in 2021 when compared to 2020, operating profit as a percentage of net sales decreased.  The decrease in operating profit as a percentage of net sales was primarily due the effect of the China VBP which had a significant negative effect on pricing in 2021 without a corresponding reduction in cost of products sold.  In addition, the amount of our foreign currency exchange rate hedge gains recognized in this operating segment in 2021 was lower than the amount recognized in 2020.

Non-GAAP Operating Performance Measures

We use financial measures that differ from financial measures determined in accordance with GAAP to evaluate our operating performance.  These non-GAAP financial measures exclude, as applicable, certain inventory and manufacturing-related charges including charges to discontinue certain product lines; intangible asset amortization; goodwill and intangible asset impairment; restructuring and other cost reduction initiative expenses; quality remediation expenses; acquisition, integration, divestiture and related expenses; certain litigation gains and charges; expenses to establish initial compliance with the EU MDR; expenses related to certain R&D agreements; loss on early extinguishment of debt; other charges; any related effects on our income tax provision associated with these items; the effect of Switzerland tax reform; other certain tax adjustments; and, with respect to earnings per share information, provide for the effect of dilutive shares assuming net earnings in a period of a reported net loss.  We use these non-GAAP financial measures internally to evaluate the performance of the business.  Additionally, we believe these non-GAAP measures provide meaningful incremental information to investors to consider when evaluating our performance.  We believe these measures offer the ability to make period-to-period comparisons that are not impacted by certain items that can cause dramatic changes in reported income but that do not impact the fundamentals of our operations.  The non-GAAP measures enable the evaluation of operating results and trend analysis by allowing a reader to better identify operating trends that may otherwise be masked or distorted by these

37

types of items that are excluded from the non-GAAP measures.  In addition, adjusted diluted earnings per share is used as a performance metric in our incentive compensation programs.

The following are reconciliations from our GAAP net earnings and diluted earnings per share to our non-GAAP adjusted net earnings and non-GAAP adjusted diluted earnings per share used for internal management purposes (in millions, except per share amounts):

38

39

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2021, we had $478.5 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 19, 2022, and $1.5 billion available under a five-year revolving facility that matures on August 20, 2026.  The terms of the 364-day revolving credit agreement and the 2021 five-year revolving facility are described further in Note 13 to our consolidated financial statements.

At the ZimVie spinoff date, we expect to receive approximately $500 million from ZimVie as partial consideration for the contribution of assets in connection with the separation.  Additionally, we will retain 19.7 percent of the outstanding shares of ZimVie common stock after the separation.  We intend to dispose of all of the ZimVie common stock after the distribution by exchanging such ZimVie common stock for Zimmer Biomet debt obligations over time.

We believe that cash flows from operations, our cash and cash equivalents on hand, cash received from the spinoff of ZimVie 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 were $1,499.2 million in 2021 compared to $1,204.5 million and $1,585.8 million in 2020 and 2019, respectively.  The increase in cash flows from operating activities in 2021 when compared to 2020 was primarily the result of higher net earnings in the 2021 period.  Additionally, in 2020 we terminated our accounts receivable purchase arrangements in the U.S. and Japan which we estimate negatively impacted operating cash flows by approximately $300 million.

Cash flows used in investing activities were $503.6 million in 2021 compared to $613.8 million and $729.3 million in 2020 and 2019, respectively.  Instrument and property, plant and equipment additions reflected ongoing investments in our product portfolio and optimization of our manufacturing and logistics network.  In order to preserve cash, we prioritized investments in 2020 which resulted in lower investments in property, plant and equipment.  As further discussed in Note 10 to our consolidated financial statements, we made various acquisitions in 2020 requiring initial cash outlays of $235.5 million, net of acquired cash.

Cash flows used in financing activities were $1,306.0 million in 2021. 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.

Cash flows used in financing activities were $421.8 million in 2020. In 2020, we issued senior notes and received $1,497.1 million in proceeds, which were used to pay our $1,500.0 million senior notes at maturity on April 1, 2020.  Additionally, with cash flows generated from operations, in 2020 we redeemed $250.0 million of our floating rate senior notes that matured on March 19, 2021.  Further, the termination of certain accounts receivable purchase arrangements in 2020 resulted in $54.6 million of financing cash outflows to the purchasing financial institutions.  These outflows represent the amount of unremitted cash that we had collected on sold accounts receivable as of December 31, 2019 that was repaid in 2020.

40

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, 2021, $450.2 million of our cash and cash equivalents were held in jurisdictions outside of the U.S.  Of this amount, $58.0 million is denominated in U.S. Dollars and, therefore, bears no foreign currency translation risk.  The balance of these assets is denominated in currencies of the various countries where we operate.  We intend to repatriate $5.0 to $6.0 billion of unremitted earnings in future years.

Material Cash Requirements from Known Contractual and Other Obligations

At December 31, 2021, we had outstanding debt of $7,068.8 million, of which $1,605.1 million was classified as current debt.  Of our current debt, $750.0 million of senior notes mature on April 1, 2022, $286.5 million of Japanese Yen denominated term loans mature on September 27, 2022, and $568.6 million of Euro denominated senior notes mature on December 13, 2022.  We believe we can satisfy these debt obligations with cash generated from our operations, cash received from the spinoff of ZimVie, by issuing new debt, and/or by borrowing on our revolving credit facilities.  We also estimate our interest payments will be $163.0 million in 2022 and continue to decline annually thereafter assuming we continue to pay down our debt as it matures and incur no additional borrowings.

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 2021, our Board of Directors declared cash dividends of $0.24 per share.  We expect to continue paying cash dividends on a quarterly basis; however, future dividends are subject to approval of the Board of Directors and may be adjusted as business needs or market conditions change.

In February 2016, our Board of Directors authorized a $1.0 billion share repurchase program effective March 1, 2016, with no expiration date.  As of December 31, 2021, all $1.0 billion remained authorized.

As discussed in Note 4 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 $240 million, of which approximately $30 million was incurred through December 31, 2021.  We expect to reduce gross annual pre-tax operating expenses by approximately $210 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 $225 million was incurred through December 31, 2021.  We expect to reduce gross annual pre-tax operating expenses by approximately $200 million to $300 million relative to the 2019 baseline expenses by the end of 2023 as program benefits under the 2019 Restructuring Plan are realized.

As discussed in Note 17 to our consolidated financial statements, the IRS has issued proposed adjustments for years 2010 through 2012, as well as proposed adjustments for years 2013 through 2015, reallocating profits between certain of our U.S. and foreign subsidiaries.  We have disputed these proposed adjustments and intend to continue to vigorously defend our positions.  Although the ultimate timing for resolution of the disputed tax issues is uncertain, future payments may be significant to our operating cash flows.

Under the Tax Cuts and Jobs Act of 2017, we have a $215.3 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, 2021.

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 $420.5 million as of December 31, 2021.  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.

41

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 $365 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

42

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 2021, all our reporting units exceeded their carrying values by more than 20 percent.  Fair value was determined using income and market approaches.  Fair value under the income approach was determined by discounting to present value the estimated future cash flows of the reporting units.  Significant assumptions are incorporated into the income approach, such as estimated growth rates, forecasted operating expenses and risk-adjusted discount rates.  Fair value under the market approach utilized the guideline public company methodology, which uses valuation indicators determined from other businesses that are similar to our reporting units.

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

As previously discussed, we expect to spin off our Spine and Dental businesses effective March 1, 2022.  At the separation date, we will be required to compare the carrying value of the assets disposed of in the spinoff to their fair value, and recognize impairment if the assets’ carrying value exceeds their fair value.  This impairment test is different than the test performed while these assets are being held and used.  The impairment test while the assets are being held and used is an undiscounted cash flows recoverability test while the separation date test is done at fair value, which may be estimated using discounted cash flows.  Therefore, the difference in impairment testing between assets being held and used and assets being disposed of could result in us recording an impairment charge at the separation date.

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.