Zimmer Biomet
Annual Report 2010

Plain-text annual report

Zimmer Holdings, Inc.2010 Annual ReportOperating ProfitImproved, industry-leading operating profit margins reflect continued financial discipline in the management of bottom-line performance. Operating Cash FlowRigorous management of operations and support functions resulted in strong cash flow. Diluted Earnings per ShareEarnings per share were in line with expectations notwithstanding a challenging economy as the Company made progress on a number of key initiatives.Net SalesYear-over-year sales increased in 2010, driven by successful commercial execution of product introductions across Zimmer’s portfolio.(1) “Constant Currency” refers to sales growth resulting from translating current and prior-period sales at the same predetermined foreign currency exchange rate. The translated results are then used to determine year-over-year percentage increases or decreases that exclude the effect of changes in foreign currency exchange rates. See the reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure on page 75.(2) “Adjusted” refers to performance measures that exclude inventory step-up, special items, the provision for certain Durom® Acetabular Component product claims, goodwill impairment, net curtailment and settlement and a 2007 civil settlement with the U.S. government and related tax benefit. See the reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures on page 75. % Change 2009-2010 ConstantSales b y Geographic Segment 2006 2007 2008 2009 2010 Reported Currency(1) Americas $2,076 $2,277 $2,354 $2,372 $2,432 2% 2% Europe 931 1,081 1,179 1,119 1,099 -2% 1% Asia Pacific 488 540 588 604 689 14% 6%Consolidated $3,495 $3,898 $4,121 $4,095 $4,220 3% 2% % Change 2009-2010 ConstantSales b y Product Category 2006 2007 2008 2009 2010 Reported Currency(1)Reconstructive $2,662 $ 2,958 $3,162 $3,120 $3,202 3% 2% Knees 1,457 1,633 1,761 1,756 1,790 2% 1% Hips 1,127 1,221 1,280 1,228 1,262 3% 2% Extremities 78 104 121 136 150 11% 10% Dental 179 221 227 205 219 7% 8% Trauma 195 206 222 235 246 5% 3% Spine 177 197 230 253 234 -8% -7% Surgical & Other 282 316 280 282 319 13% 11%Consolidated $3,495 $ 3,898 $4,121 $4,095 $4,220 3% 2% Financial Highlights (Dollars in millions except per-share amounts) 26%16%58%8%6%6%5%42%30%3%090807064.054.053.443.263.723.943.323.40090807061,0841,0381,1181,041090807061,3231,2351,1711,1281,0901,1831,0191,165090807063,8984,1214,0953,495101,232917101,194104.332.97104,2203% Reported4% Adjusted(2)-10% Reported7% Reported10% Adjusted(2)-11% ReportedA Message from David C. Dvorak and John L. Mc GoldrickTo Our Stockholders:Every day, thousands of healthcare professionals rely on Zimmer technologies to enable them to help patients reclaim active and productive lives. At Zimmer, this great responsibility serves as a powerful motivator. Our global leadership in the musculoskeletal industry is founded on an unwavering commitment to patients, healthcare professionals and care-giving institutions. This commitment drives our decision making in everything we do, from product development to operations and sales and marketing. By putting customers and patients first, Zimmer provides the world’s most innovative products and services to address the burden of musculoskeletal disease across the continuum of care. In 2010, Zimmer maintained a global leadership position across our core large-joint reconstructive businesses, Knees and Hips, while making notable progress in our other emerging product categories. Throughout the year, we introduced a range of new offerings across our musculoskeletal portfolios. These offerings continue our strong tradition of innovation, enabling surgeons and clinicians to personalize treatments to match the unique needs of every patient. Moving into 2011, our positive momentum in the sales of these new products provides a strong platform for growth. Zimmer’s sales in 2010 totaled $4.22 billion, our highest ever, with fully diluted adjusted earnings per share of $4.33. These results were consistent with our expectations.A Year of Change and Challenges in Healthcare and the Musculoskeletal Industry2010 was a significant year for the healthcare industry in the United States. The passage of healthcare reform legislation introduced a series of new health insurance exchanges, taxes, mandates and subsidies to be enacted in the coming years, while regulatory changes to the FDA’s 510(k) process for medical device clearance continue to be debated. Many of these measures have the potential to impact the way the musculoskeletal industry conducts its business. At Zimmer, we will continue to work closely with industry allies to ensure these changes do not adversely impact our ability to serve surgeons, clinicians and their patients. Globally, economic conditions remained challenging throughout the year, characterized by high rates of unemployment in a number of key markets. These factors contributed to a significant number of patients delaying implant and dental surgeries in 2010. However, as the year drew to a close, surgery schedules began to stabilize and we expect procedure demand to continue to perform in line with the global economic recovery and growth. With a comprehensive portfolio of innovative solutions, we are well positioned to provide care to a growing patient base worldwide.A Strong Platform for SuccessAt Zimmer, we are committed to continuous improvement across our enterprise, from product and service innovation to operational excellence in manufacturing, distribution and sales. This dedication ensures we remain responsive to the needs of our customers across a wide range of global markets. Building on unmatched experience in the development of large-joint reconstructive implant technologies, we are innovating across the continuum of care to provide the world’s most comprehensive portfolio of musculoskeletal care products and services. Zimmer’s portfolio of products combines a foundation in the world’s best performing and most trusted implant systems with innovative new technologies to address the emerging demand for personalization from surgeons, clinicians and their patients.Designing Patient-Specific TreatmentsIn 2010, Zimmer launched key products and instrument systems in our Knee, Hip and Trauma businesses that enable healthcare professionals to personalize treatments to address the unique needs of their individual patients. Patient-specific solutions offer the promise of improved outcomes for patients and enhanced value for payors and providers, and they are a key focus of our innovation pipeline. In Knees, we saw increased adoption of Zimmer® Patient Specific Instruments which use MRI technology to develop personalized surgical guides for each patient. Zimmer Patient Specific Instruments streamline total knee replacement surgery by ensuring accurate guide fixation. In Hips, we successfully launched our Continuum® Acetabular Cup System globally, underscoring improved performance in our Hip business. The Continuum System is the most versatile cup offering in the market and provides surgeons with options to choose from a variety of bearing surface technologies to best match the demands of their patients’ lifestyles. In our Trauma division, we introduced a series of exciting new products, including our Zimmer Natural Nail® Family, which features anatomical designs and a variety of nail lengths and widths, and the NCB® Periprosthetic Plating System, the first of its kind to address complex fractures that can occur around knee and hip implants. The success of these new innovative products draws on our experience providing the world’s best performing reconstructive products. Data from independent, national joint replacement registries around the world in 2010 once again demonstrated that our NexGen® and Natural-Knee® Families of products represent the most clinically successful knee implant systems on the market. It is one of the reasons we remain the most trusted knee implant company in the world, with more than one in every four knee replacements performed using a Zimmer product.Diversified Product and Service Offerings Joint replacement remains the sole treatment available for addressing late-stage osteoarthritis. The demand for total joint replacement procedures is expected to expand dramatically in the coming years as aging populations in a number of markets become candidates for these procedures. While Zimmer’s reconstructive large-joint franchises will continue to form the core of our business, we are committed to providing solutions for patients throughout the continuum of care. To this effort, we have invested in the development of Zimmer’s orthobiologic solutions through strategic partnerships. For example, Zimmer continues to experience rapid adoption of our DeNovo® NT Natural Tissue Graft product supported by positive results from preliminary peer-reviewed clinical studies. Supplied through ISTO Technologies, Inc., DeNovo NT is an allograft tissue that surgeons place directly into cartilage lesions, facilitating healing. Across the musculoskeletal continuum of care, we continue to leverage proprietary technologies and materials to further the standard of care. We recently commenced limited release of a potentially game-changing dental implant system utilizing our proprietary Trabecular Metal™ Technology in Europe. As well as being an industry leader in the development of emerging technologies and procedures to address joint and back pain, we are diversifying our product offerings in support of these technologies and procedures. Through our Computer Assisted Solutions (CAS) business, we provide leading computer navigation systems to ensure optimal and reproducible surgeries. In late 2010, we also announced the acquisition of Sodem Diffusion S.A., the manufacturer of SoPlus Orthopaedic Surgical Power Equipment, providing Zimmer with an expanded portfolio of surgical power tools. Emerging Markets Are a Key Growth DriverThrough our global distribution network, Zimmer supports surgeons and clinicians in more than 100 countries with the industry’s most innovative products and services. While the more developed markets continue to generate the majority of Zimmer’s revenues, we are also expanding services in a number of key emerging markets around the world. In December 2010, Zimmer announced the acquisition of Beijing Montagne Medical Device Co., Ltd., a leading orthopaedic implant manufacturer in China. The acquisition makes Zimmer the largest provider of reconstructive orthopaedic solutions in the rapidly growing Chinese market, which is expected to double in size to over U.S. $3.0 billion by 2015. In addition to strengthening our market position, the acquisition broadens our product portfolio, and provides local manufacturing and R&D capabilities in China. Alongside our commercial interests in emerging markets, Zimmer is excited to foster the growth of musculoskeletal healthcare in these regions through our best-in-class Zimmer Institute medical education programs. The Zimmer Institute offers a comprehensive curriculum of training programs, including both didactic and hands-on, lab-based training, led by some of the industry’s leading faculty. We expanded our Zimmer Institute course offerings internationally in 2010, training more than 22,000 surgeons and clinicians at regional training centers around the world, including the new Zimmer Institute at our Trabecular Metal Technology manufacturing facility in Parsippany, New Jersey.Toward a Bright FutureThrough a difficult economic period in the United States and globally, Zimmer has continued to successfully introduce innovative technologies, diversify products and services and expand our global presence while demonstrating a disciplined financial approach. We plan to continue to return value to shareholders through share repurchase programs. And we will continue to apply rigor in the evaluation of alternative uses of capital, benchmarking long-term accretion in earnings and returns against share repurchases. By continuing to execute our strategic plan in each of these areas, we expect to create value for shareholders in 2011 and beyond. This industry is one of enormous potential – every day more and more people around the world suffer from musculoskeletal conditions and seek solutions to help alleviate their pain and restore their mobility. Our Board, management team and employees take great pride in knowing that no company does more than Zimmer to support healthcare professionals with the world’s best products, technologies and training to enable them to revitalize patients’ lives. John L. Mc Goldrick ChairmanDavid C. Dvorak President and Chief Executive OfficerForm 10-KZimmer Holdings, Inc. 2010 Annual ReportUNITEDSTATESSECURITIESANDEXCHANGECOMMISSIONWashington,D.C.20549FORM10-KANNUALREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934ForyearendedDecember31,2010Commissionfilenumber001-16407ZIMMERHOLDINGS,INC.(Exactnameofregistrantasspecifiedinitscharter)Delaware13-4151777(StateofIncorporation)(IRSEmployerIdentificationNo.)345EastMainStreetWarsaw,Indiana46580(Addressofprincipalexecutiveoffices)(ZipCode)Registrant’stelephonenumber,includingareacode:(574)267-6131SecuritiesregisteredpursuanttoSection12(b)oftheAct:TitleofeachclassNameofeachexchangeonwhichregisteredCommonStock,$.01parvalueNewYorkStockExchangeSecuritiesregisteredpursuanttoSection12(g)oftheAct:NoneIndicatebycheckmarkiftheregistrantisawell-knownseasonedissuer,asdefinedinRule405oftheSecuritiesAct.Yes¥NonIndicatebycheckmarkiftheregistrantisnotrequiredtofilereportspursuanttoSection13orSection15(d)oftheAct.YesnNo¥Indicatebycheckmarkwhethertheregistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.Yes¥NonIndicatebycheckmarkwhethertheregistranthassubmittedelectronicallyandpostedonitscorporateWebsite,ifany,everyInteractiveDataFilerequiredtobesubmittedandpostedpursuanttoRule405ofRegulationS-T(§232.405ofthischapter)duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtosubmitandpostsuchfiles).Yes¥NonIndicatebycheckmarkifdisclosureofdelinquentfilerspursuanttoItem405ofRegulationS-Kisnotcontainedherein,andwillnotbecontained,tothebestoftheregistrant’sknowledge,indefinitiveproxyorinformationstatementsincorporatedbyreferenceinPartIIIofthisForm10-KoranyamendmenttothisForm10-K.¥Indicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,anon-acceleratedfiler,orasmallerreportingcompany.Seethedefinitionsof“largeacceleratedfiler”,“acceleratedfiler”and“smallerreportingcompany”inRule12b-2oftheExchangeAct.(CheckOne):Largeacceleratedfiler¥AcceleratedfilernNon-acceleratedfilernSmallerreportingcompanyn(Donotcheckifasmallerreportingcompany)Indicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedExchangeActRule12b-2).YesnNo¥Theaggregatemarketvalueofsharesheldbynon-affiliateswas$10,878,248,016(basedontheclosingpriceofthesesharesontheNewYorkStockExchangeonJune30,2010andassumingsolelyforthepurposeofthiscalculationthatalldirectorsandexecutiveofficersoftheregistrantare“affiliates”).AsofFebruary10,2011,192,125,427sharesoftheregistrant’s$.01parvaluecommonstockwereoutstanding.DocumentsIncorporatedbyReferenceDocumentForm10-KPortionsoftheProxyStatementwithrespecttothe2011AnnualMeetingofStockholdersPartIIICautionaryNoteAboutForward-LookingStatementsThisAnnualReportonForm10-Kincludes“forward-looking”statementswithinthemeaningoffederalsecuritieslaws.Forward-lookingstatementscanbeidentifiedbythefactthattheydonotrelatestrictlytohistoricalorcurrentfacts.Theyoftenincludewordssuchas“may,”“will,”“should,”“would,”“could,”“anticipate,”“expect,”“plan,”“seek,”“believe,”“predict,”“estimate,”“potential,”“project,”“target,”“forecast,”“intend,”“strategy,”“future,”“opportunity,”andsimilarexpressions.Forward-lookingstatementsarebasedoncurrentexpectationsandassumptionsthataresubjecttorisksanduncertaintieswhichmaycauseactualresultstodiffermateriallyfromtheforward-lookingstatements.Adetaileddiscussionofrisksanduncertaintiesthatcouldcauseactualresultsandeventstodiffermateriallyfromsuchforward-lookingstatementsisincludedinthesectiontitled“RiskFactors”(refertoPartI,Item1Aofthisreport).Readersofthisreportarecautionednottoplaceunduerelianceontheseforward-lookingstatements.Whilewebelievetheassumptionsonwhichtheforward-lookingstatementsarebasedarereasonable,therecanbenoassurancethattheseforward-lookingstatementswillprovetobeaccurate.Weexpresslydisclaimanyobligationtoupdateorreviseanyforward-lookingstatements,whetherasaresultofnewinformation,futureeventsorotherwise.Youareadvised,however,toconsultanyfurtherdisclosureswemakeonrelatedsubjectsinourQuarterlyReportsonForm10-QandCurrentReportsonForm8-K.TableofContentsPagePARTI3Item1.Business3Item1A.RiskFactors13Item1B.UnresolvedStaffComments18Item2.Properties19Item3.LegalProceedings19Item4.[RemovedandReserved]19PARTII20Item5.MarketfortheRegistrant’sCommonEquity,RelatedStockholderMattersandIssuerPurchasesofEquitySecurities20Item6.SelectedFinancialData21Item7.Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations22Item7A.QuantitativeandQualitativeDisclosuresAboutMarketRisk32Item8.FinancialStatementsandSupplementaryData35Item9.ChangesinandDisagreementsWithAccountantsonAccountingandFinancialDisclosure67Item9A.ControlsandProcedures67Item9B.OtherInformation67PARTIII68Item10.Directors,ExecutiveOfficersandCorporateGovernance68Item11.ExecutiveCompensation68Item12.SecurityOwnershipofCertainBeneficialOwnersandManagementandRelatedStockholderMatters68Item13.CertainRelationshipsandRelatedTransactionsandDirectorIndependence68Item14.PrincipalAccountingFeesandServices68PARTIV69Item15.Exhibits,FinancialStatementSchedules69ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT2PARTIITEM1.BusinessOVERVIEWWeareagloballeaderinthedesign,development,manufactureandmarketingoforthopaedicreconstructive,spinalandtraumadevices,dentalimplantsandrelatedsurgicalproducts.Wealsoprovideotherhealthcarerelatedservices.Inthisreport,“Zimmer,”“we,”“us,”“our”andsimilarwordsrefercollectivelytoZimmerHoldings,Inc.anditssubsidiaries.ZimmerHoldingsreferstotheparentcompanyonly.ZimmerHoldingswasincorporatedinDelawarein2001.Ourhistorydatesto1927,whenZimmerManufacturingCompany,apredecessor,wasfoundedinWarsaw,Indiana.OnAugust6,2001,ZimmerHoldingswasspunofffromitsformerparentandbecameanindependentpubliccompany.CUSTOMERS,SALESANDMARKETINGOurprimarycustomersincludeorthopaedicsurgeons,neurosurgeons,oralsurgeons,dentists,hospitals,stockingdistributors,healthcaredealersand,intheircapacityasagents,healthcarepurchasingorganizationsorbuyinggroups.Thesecustomersrangefromlargemultinationalenterprisestoindependentsurgeons.Wehaveoperationsinmorethan25countriesandmarketproductsinmorethan100countries,withcorporateheadquartersinWarsaw,Indiana,andmorethan100manufacturing,distributionandwarehousingand/orofficefacilitiesworldwide.Wemanageouroperationsthroughthreemajorgeographicsegments—theAmericas,whichiscomprisedprincipallyoftheU.S.andincludesotherNorth,CentralandSouthAmericanmarkets;Europe,whichiscomprisedprincipallyofEuropeandincludestheMiddleEastandAfricamarkets;andAsiaPacific,whichiscomprisedprimarilyofJapanandAustraliaandincludesotherAsianandPacificmarkets.Wemarketandsellproductsthroughthreeprincipalchannels:1)directtohealthcareinstitutions,suchashospitalsordirectchannelaccounts;2)throughstockingdistributorsandhealthcaredealers;and3)directlytodentalpracticesanddentallaboratories.Withdirectchannelaccounts,inventoryisgenerallyconsignedtosalesagentsorcustomers.Withsalestostockingdistributors,healthcaredealers,dentalpracticesanddentallaboratories,titletoproductpassesuponshipmentoruponimplantationoftheproduct.Directchannelaccountsrepresentedapproximately80percentofournetsalesin2010.Noindividualdirectchannelaccount,stockingdistributor,healthcaredealer,dentalpracticeordentallaboratoryaccountedformorethan1percentofournetsalesfor2010.Westockinventoryinourwarehousefacilitiesandretaintitletoconsignedinventoryinsufficientquantitiessothatproductsareavailablewhenneededforsurgicalprocedures.Safetystocklevelsaredeterminedbasedonanumberoffactors,includingdemand,manufacturingleadtimesandquantitiesrequiredtomaintainservicelevels.Wealsocarrytradeaccountsreceivablebalancesbasedoncredittermsthataregenerallyconsistentwithlocalmarketpractices.Weutilizeanetworkofsalesassociates,salesmanagersandsupportpersonnel,mostofwhomareemployedorcontractedbyindependentdistributorsandsalesagencies.Weinvestasignificantamountoftimeandexpenseintrainingsalesassociatesinhowtousespecificproductsandhowtobestinformsurgeonsofproductfeaturesanduses.Salesforcerepresentativesmusthavestrongtechnicalsellingskillsandmedicaleducationtoprovidetechnicalsupportforsurgeons.Inresponsetothedifferenthealthcaresystemsthroughouttheworld,oursalesandmarketingstrategiesandorganizationalstructuresdifferbyregion.Weutilizeaglobalapproachtosalesforcetraining,marketingandmedicaleducationtoprovideconsistent,highqualityservice.Additionally,wekeepcurrentwithkeysurgicaldevelopmentsandotherissuesrelatedtoorthopaedicsurgeons,neurosurgeons,dentistsandoralsurgeonsandthemedicalprocedurestheyperform.Americas.TheAmericasisourlargestgeographicsegment,accountingfor$2,431.6million,or58percent,of2010netsales,withtheU.S.accountingfor94percentofnetsalesinthisregion.TheU.S.salesforceprimarilyconsistsofindependentsalesagents,mostofwhomsellproductsexclusivelyforZimmer.SalesagentsintheU.S.receiveacommissiononproductsalesandareresponsibleformanyoperatingdecisionsandcosts.Salescommissionsareaccruedatthetimeofsale.Inthisregion,wecontractwithgrouppurchasingorganizationsandmanagedcareaccountsandhavepromotedunitgrowthbyofferingvolumediscountstocustomerhealthcareinstitutionswithinaspecifiedgroup.Generally,wearedesignatedasoneofseveralpreferredpurchasingsourcesforspecifiedproducts,althoughmembersarenotobligatedtopurchaseourproducts.Contractswithgrouppurchasingorganizationsgenerallyhaveatermofthreeyears,withextensionsaswarranted.IntheAmericas,wemonitorandrankindependentsalesagentsacrossarangeofperformancemetrics,includingtheachievementofcertainsalestargetsandmaintenanceofefficientlevelsofworkingcapital.Europe.TheEuropeangeographicsegmentaccountedfor$1,099.5million,or26percent,of2010netsales,withFrance,Germany,Italy,Spain,SwitzerlandandtheUnitedKingdomcollectivelyaccountingfor74percentofnetsalesintheregion.Thissegmentalsoincludesotherkeymarkets,includingBenelux,Nordic,CentralandEasternEurope,theMiddleEastandAfrica.Oursalesforceinthissegmentiscomprisedofdirectsalesassociates,commissionedagents,independentdistributorsandsalessupportpersonnel.InEurope,weemphasizetheadvantagesofourclinicallyZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT3proven,establisheddesignsandinnovativesolutions,suchasminimallyinvasivesurgicalproceduresandtechnologiesandnewandenhancedmaterialsandsurfaces.InmostEuropeancountries,healthcareissponsoredbythegovernmentandthereforegovernmentbudgetshavearoleinhealthcarespending,whichcanaffectoursalesinthissegment.AsiaPacific.TheAsiaPacificgeographicsegmentaccountedfor$689.1million,or16percent,of2010netsales,withJapanbeingthelargestmarketwithinthissegment,accountingforapproximately55percentoftheregion’ssales.ThissegmentalsoincludeskeymarketssuchasAustralia,NewZealand,Korea,China,Taiwan,India,Thailand,Singapore,HongKongandMalaysia.InJapanandmostcountriesintheAsiaPacificregion,wemaintainanetworkofdealers,whoactasorderagentsonbehalfofhospitalsintheregion,andsalesassociates,whobuildandmaintainrelationshipswithorthopaedicsurgeons,neurosurgeonsanddentalsurgeonsintheirmarkets.Thesesalesassociatescoverover7,000hospitalsintheregion.Theknowledgeandskillsofthesesalesassociatesplayacriticalroleinprovidingservice,productinformationandsupporttosurgeons.SEASONALITYOurbusinessissomewhatseasonalinnature,asmanyofourproductsareusedinelectiveprocedures,whichtypicallydeclineduringthesummermonthsandcanincreaseattheendoftheyearonceannualdeductibleshavebeenattainedonhealthinsuranceplans.DISTRIBUTIONWeoperatedistributionfacilitiesdomesticallyinWarsaw,Indiana;Dover,Ohio;Statesville,NorthCarolina;Memphis,Tennessee;Carlsbad,California;andAustin,TexasandinternationallyinAustralia,Austria,Belgium,Canada,theCzechRepublic,China,Finland,France,Germany,HongKong,India,Italy,Japan,Korea,Malaysia,theNetherlands,NewZealand,Portugal,Russia,Singapore,SouthAfrica,Spain,Sweden,Switzerland,Taiwan,ThailandandtheUnitedKingdom.Wegenerallyshipourordersviaexpeditedcourier.Wedonotconsiderourbacklogoffirmorderstobematerialtoanunderstandingofourbusiness.PRODUCTSOurproductsincludeorthopaedicreconstructive,spinalandtraumadevices,dentalimplantsandrelatedsurgicalproducts.WeutilizeourexclusiveTrabecularMetalTMTechnologyacrossvariousproductcategories.TrabecularMetalMaterialisastructuralbiomaterialwithacellulararchitecturethatresemblesboneandapproximatesitsphysicalandmechanicalpropertiesmorecloselythanotherprostheticmaterials.Thehighlyporoustrabecularconfigurationisconducivetomorenormalboneformationandbonein-growth.TrabecularMetalImplantsarefabricatedusingelementaltantalummetalandapatentedvapordepositiontechniquethatcreatesametallicstrutconfigurationresemblingcancellousbonewithnano-texturedsurfacefeatures.OrthopaedicReconstructiveImplantsKneeImplantsTotalkneereplacementsurgeriestypicallyincludeafemoralcomponent,apatella(kneecap),atibialtrayandanarticularsurface(placedonthetibialtray).Kneereplacementsurgeriesincludefirst-time,orprimary,jointreplacementproceduresandrevisionproceduresforthereplacement,repairorenhancementofanimplantorcomponentfromapreviousprocedure.Kneeimplantsaredesignedtoaccommodatedifferentlevelsofligamentstabilizationofthejoint.Whilesomekneeimplantdesigns,calledcruciateretaining(CR)designs,requiretheretentionoftheposteriorcruciateligament,otherdesigns,calledposteriorstabilized(PS)andultracongruent(UC)designs,providejointstabilitywithouttheposteriorcruciateligament.Therearealsoproceduresforpartialreconstructionoftheknee,whichtreatlimitedkneedegenerationandinvolvethereplacementofonlyoneside,orcompartment,ofthekneewithaunicompartmentalkneeprosthesis.OurportfolioofMinimallyInvasiveSolutionsTMProcedures(MIS)includestheMISMini-IncisionTotalKneeProcedure.TheMISMini-IncisionProcedureutilizesspecializedMISInstrumentswhichfeaturesmaller,ergonomicandhighlypreciseinstrumentswhichaccommodateandfacilitateasmallerincisionandlessdisruptionofthesurroundingsofttissues.Weofferawiderangeofproductsforspecializedkneeprocedures,includingthefollowing:NexGen»CompleteKneeSolution.Thenumberonesellingkneebrandintheworld,theNexGenKneeproductlineisacomprehensivesystemforkneereplacementsurgerywhichhassignificantapplicationacrossthecontinuumofcareinallthingsrelatedtoprimaryandrevisionkneearthroplasty,includingCR,PSandrevisionprocedures.TheNexGenKneeSystemoffersjointstability,sizingandperformanceoptionsinaunifiedsystemofinterchangeablecomponentsthatcanbetailoredtoanindividualpatient.TheNexGenKneeSystemprovidessurgeonswithcompleteandversatilekneeinstrumentoptionsspanningmultiplesurgeonandtreatmentphilosophies,includingsofttissuebalancingandmeasuredresectionMISMini-IncisionInstruments,andmultipletraditionalinstrumentsystems.ThebreadthandversatilityoftheNexGenKneeSystemallowssurgeonstotransitionfromonetypeofimplanttoanotherduringsurgery,accordingtotherespectiveneedsofthepatient,andtosupportcurrentsurgicalphilosophies.TheNexGenCRproductlineisdesignedtobeusedinconjunctionwithafunctioningposteriorcruciateligament.Similartotheposteriorstabilizeddesign,theNexGenCR-FlexFixedBearingKneeisdesignedtoprovideagreaterrangeofmotionforpatientswhorequiredeepbendingintheiractivitiesofdailyliving.TheNexGenCR-FlexFemoralComponentsofferatissuebalancing(flexionbalancing)ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT4solutionwhichallowsthesurgeontoadjustcomponentsizingandbalanceandstabilizetheimplantwithoutremovingadditionalboneorwastingcriticalproceduretime.TheNexGenCompleteKneeSolutionLegacy»Knee-PosteriorStabilizedproductlineprovidesstabilityintheabsenceoftheposteriorcruciateligament.ThePScapabilitiescanbeaugmentedviatheuseofaNexGenLegacyPosteriorStabilizedFlexKnee(LPS-FlexKnee),ahigh-flexionimplantthathasthepotentialtoaccommodatekneeflexionupto155-degreesrangeofmotionforpatientswhoselifestyleandbodytypedemandandcanaccommodatethisperformancestandard.WithourNexGenLPS-FlexMobileKnee,weareoneofonlytwocompaniesthatcanofferamobile-bearingtotalkneetreatmentoptionintheU.S.market.GenderSolutions»NexGenFemoralsrepresentthefirstkneeimplantsspecificallyshapedtoofferfitandfunctionoptimizedfortheuniqueanatomicalconsiderationsmorecommonlyseeninfemalepatients.GenderTMImplantsareanimportantstrategicfocus,asmorethanhalfoftotalkneearthroplastypatientsarefemale.GenderSolutionsFemoralsareavailableinbothNexGenCR-FlexandLPS-Flexconfigurations.Theconceptofadvancingimplantdesignthroughcustomizationbasedonanatomyorotherpatientcharacteristicshasmanifestedinrapidlyexpandinggendertechnologiesacrossthecontinuumofourproductsandintootherimportantbrandsinourgrowingportfolio.TheNexGenRevisionKneeproductlineconsistsofseveraldifferentproductsthataredesignedtoprovideclinicalsolutionstosurgeonsforvariousrevisionsituations,includingmultipleconstraintlevelsforligamentandsofttissueinefficienciesandaboneaugmentationimplantsystemmadefromourTrabecularMetalTechnologymaterial.Theseaugmentsaredesignedtoaddresssignificantbonelossinrevisionsurgerywhileallowingnaturalbonetoreconstructwithintheimplantconstruct.WeofferimprovedpolyethyleneperformanceintheNexGenKneeSystemwithourconventionalpolyethyleneandProlong»HighlyCrosslinkedPolyethylene,whichoffersreducedwearandresistancetooxidation,pittingandcracking.ProlongHighlyCrosslinkedPolyethyleneisavailableindesignscompatiblewithbothNexGenCR-FlexandLPS-Flexfemoralcomponents.Natural-Knee»IISystem.TheNatural-KneeIISystemconsistsofarangeofinterchangeable,anatomicallydesignedimplantswhichincludeaproprietaryCSTiTMCancellous-StructuredTitaniumPorousCoatingoptionforstablefixationinactivepatients.GenderSolutionsNatural-KneeFlexSystem.TheGenderSolutionsNatural-KneeFlexSystemaddsourHighFlexandGenderSolutionsdesignconceptstotheNatural-KneeSystem.TheGenderSolutionsNatural-KneeFlexSystemrecognizesthattwodistinctpopulationsexistintotalkneearthroplasty(femaleandmale)andofferstwodistinctimplantshapesforenhancedfit.ThesystemiscompatiblewithmusclesparingMISproceduresandaccommodateshighflexioncapacityupto155degrees.Thesystemfeaturestheprovenclinicalsuccessofourasymmetrictibialplate,CSTiPorousCoating,ProlongHighlyCrosslinkedPolyethyleneandultracongruentarticularsurface.Innex»TotalKneeSystem.TheInnexKneeSystemoffersfixedbearingandmobilebearingkneecomponentsalldesignedwithinthesamesystemphilosophy.WhiletheInnexKneeSystemisbestknownforitsmobilebearingkneeofferingandtheavailabilityofdifferinglevelsofarticularconstraint,theInnexRevisionKneeandInnexGenderSolutionsKneecomponentsmakethisofferingacomprehensivemobileandfixedbearingkneesystem.TheInnexKneeSystemisdistributedinEuropeandAsiaPacificandisnotcurrentlyavailableforcommercialdistributionintheU.S.Zimmer»UnicompartmentalKneeSystems.TheZimmerUnicompartmentalKneeSystemoffersahighflexiondesignforunicompartmentalkneesurgery.ThishighflexproductwasdesignedspecificallyforMISProceduresandTechnologies.Thesystemoffersthesurgeontheabilitytoconservebonebyreplacingonlythecompartmentofthekneethathashaddegenerativechanges.AGenderSolutionsPatello-FemoralJointSystemisalsoavailable,asystemwhichincorporateskeygenderspecificdesignfeaturesandaproprietaryguidedmillingsurgicaltechniqueforuseinpatello-femoraljointreplacement.Zimmer»PatientSpecificInstruments.Inlate2009,a510(k)ApplicationfortheZimmerPatientSpecificInstrumentswasapprovedbytheU.S.FoodandDrugAdministration(FDA).TheZimmerPatientSpecificInstrumentssimplifyatotalkneeprocedureandhelpenhanceappropriateplacementofthefinalimplantbasedonasurgeon’spreoperativesurgicalplan.Basedonapatient’sMRIscan,acomputergenerated,customguideisproducedtoconformtoapatient’suniquekneeanatomy.Thisguideisthenutilizedintraoperativelytoaidinthesurgicalcorrectionofthepatient’sknee.Zimmer»SegmentalSystem.Addingtoourbroadportfolioofrevisionoptions,theZimmerSegmentalSystemisacomprehensivesystemdesignedtoaddresspatientswithseverebonelossassociatedwithdisease,traumaorrevision.Thisimportantadditionrealizesourstrategicgoalofexpandingourproductsolutionsacrossthecontinuumofcareand,withtheincorporationofTrabecularMetalTechnology,expandsthepossibilitiesfortreatment,shortandlong-termfixationandstability.HipImplantsTotalhipreplacementsurgeriesreplaceboththeheadofthefemurandthesocketportionofthepelvis(acetabulum)ofthenaturalhip.Hipproceduresincludefirsttime,orprimary,jointreplacementaswellasrevisionprocedures.Approximately30percentofhipimplantproceduresinvolvetheuseofbonecementtoattachoraffixtheprostheticcomponentstothesurroundingbone.TheremainingareZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT5press-fitintobone,whichmeansthattheyhaveasurfacethatboneaffixestothrougheitherongrowthoringrowthtechnologies.OurportfolioofMISTechniquesincludestheZimmerMISAnteriorSupineTechnique,theMISPosteriorProcedure,theZimmerMISAnterolateralTechniqueandMIS2-IncisionTMHipReplacementProcedure.TheMISTechniquesaredesignedtobelessinvasivetosofttissuesandtoshortenrecoverytime.Ourkeyhipreplacementproductsinclude:Zimmer»M/LTaperHipProsthesis.TheZimmerM/LTaperHipProsthesisoffersaproximallyporous-coatedwedge-shapeddesignbasedonlong-termclinicallyprovenconcepts.TheM/LTaperhasbecomewidelyusedinMISProceduresduetoseveralkeydesignfeatures.ZimmerM/LTaperHipProsthesiswithKinectiv»Technology.TheZimmerM/LTaperwithKinectivTechnologyisasystemofmodularstemandneckcomponentsdesignedtohelpthesurgeonrestorethenaturalhipjointcenterintraoperativelybyaddressingthekeyvariablesofleglength,offsetandversionindependently.Alloclassic»(Zweymu¨ller»)HipSystem.TheAlloclassic(Zweymu¨ller)HipSystemhasbecomeoneofthemostused,primary,cementlesshipsystemsintheworld.Thisisoneofthefewstemsavailabletodaythatispracticallyunchangedsinceitsintroductionin1979.Anewoffsetdesignwasaddedin2004andoffersthesurgeonincreasedcapabilitytorestorethepatient’sanatomicaljointmovement.CLS»Spotorno»HipSystem.TheCLSSpotornoStemisoneofourlargestsellinghipprostheses,especiallyintheEuropeanmarkets.Additionstotheproductlineprovidethecapabilityforrestorationofthephysiologicalcenterofrotation.Fitmore»HipStem.TheFitmoreHipStemoffersthesurgeonashort,bonepreservingstem.Maintainingbonestockisparticularlyimportantforpatientswhomayundergoalaterrevisionprocedure.ItsshapefacilitatesMISprocedures,especiallytheMISAnteriorSupineapproachwhichisgaininginpopularity.VerSys»HipSystem.TheVerSysHipSystemissupportedbyacommoninstrumentationsetandisanintegratedfamilyofhipproductswithdesign-specificoptionstomeetvaryingsurgicalphilosophiesandpatientneeds.AnofferingwithintheVerSysHipSystem,theVerSysEpoch»FullcoatHipSystem,isthefirstreduced-stiffnessstemspecificallydesignedtoaddressvaryingpatientfemoralanatomiesandminimizeimplant-relatedcomplicationssuchasthighpain,boneresorptionandleglengthening.Continuum»AcetabularSystem,Trilogy»ITAcetabularSystemandAllofit»ITAlloclassicAcetabularSystem.Thesesystemswerereleasedin2009andeachacetabularsystemoffersthesurgeonachoiceofadvancedbearingoptionstomeettheclinicalandlifestyleneedsofeachpatient.BearingoptionsincludeLongevity»HighlyCrosslinkedPolyethylene,Metasul»Metal-on-MetalTechnologyandaBIOLOX»1deltaCeramic-on-CeramicTechnology(whereZimmerhasregulatoryclearances).Theacetabularsystemsalsoprovidesurgeonsachoiceoffixationmethodthataccommodatestheirsurgicalphilosophy.TrilogyAcetabularSystem.TheTrilogyAcetabularSystem,withitstitaniumalloyshell,fibermetalmeshingrowthsurfaceandLongevityHighlyCrosslinkedPolyethyleneLiners,isourmostwidelysoldacetabularcupsystem.TrabecularMetalModularAcetabularSystem.WeoffertheTrabecularMetalModularAcetabularSystem,whichincorporatesdesignfeaturesfromtheTrilogyfamilyofacetabularshellsaugmentedwiththeadvancedfixationsurfaceofTrabecularMetalMaterial.Inaddition,weofferaTrabecularMetalAcetabularRevisionSystemthatprovidesthesurgeonwithavarietyofoff-the-shelfoptionstoaddressawiderangeofbonedeficienciesencounteredduringacetabularrevisionsandtoachieveastableconstruct.ExtremityImplantsOurextremityportfolio,primarilyshoulderandelbowproducts,isdesignedtotreatarthriticconditions,softtissueinjuriesandfractures.Ourkeyproductsinclude:Bigliani/Flatow»CompleteShoulderSolutionFamily.TheBigliani/FlatowShoulderproductlinecombinedwiththeTrabecularMetalHumeralStemgiveusasignificantpresenceintheglobalshoulderimplantmarket.TrabecularMetalGlenoid.TheTrabecularMetalGlenoidofferssurgeonsaglenoidcomponentdesignedtoimprovefixation.TrabecularMetalMaterial’spropertiesallowformorenormalboneformationandmaintenance.TrabecularMetalReverseShoulderSystem.TheTrabecularMetalReverseShoulderSystemincorporatesadvancedmaterialsanddesigntoofferimprovedbiologicalingrowthpotentialthroughtheutilizationofTrabecularMetalTechnology,whileaddressingsignificantlossofrotatorcufffunction.Thereverseshouldersystemisdesignedtorestorefunctiontopatientswho,becauseofdebilitatingrotatorcufftears,arenotcandidatesfortraditionalshouldersurgeryandhaveexhaustedothermeansofrepair.Zimmer»AnatomicalShoulderTMSystem.TheAnatomicalShoulderSystemcanbeadjustedtoeachpatient’sindividualanatomy.ThisportfolioofproductsincludestheAnatomicalShoulderInverse/ReverseSystem,designedtoaddresssignificantlossofrotatorcufffunction,andtheAnatomicalShoulderFractureSystem.Boththeprimaryandfractureshoulderimplantscanbeconvertedtoareverseshoulderwithoutremovaloftheinitialimplant.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT61RegisteredtrademarkofCeramTecAGCoonrad/MorreyTotalElbow.TheCoonrad/MorreyTotalElbowproductlineisafamilyofelbowreplacementimplantproductstoaddresspatientswithconditionsofseverearthritisortrauma.DentalImplantsOurdentalproductsdivisionmanufacturesand/ordistributes:(1)dentalreconstructiveimplants—forindividualswhoaretotallywithoutteethoraremissingoneormoreteeth;(2)dentalrestorativeproducts—aimedatprovidingamorenaturalrestorationtomimictheoriginalteeth;and(3)dentalregenerativeproducts—forsofttissueandbonerehabilitation.DentalReconstructiveImplantsOurdentalreconstructiveimplantproductsandsurgicalandrestorativetechniquesinclude:TaperedScrew-Vent»ImplantSystem.Ourhighestsellingdentalproductlineprovidestheclinicianataperedgeometrywhichmimicsthenaturalshapeofatoothroot.TheTaperedScrew-VentImplantSystem,withitstwo-stagedesign,wasdevelopedtominimizevaluablechairtimeforrestorations.TheTaperedScrew-VentImplantSystemisatechnologicallyadvanceddentalimplantfeaturingaproprietaryinternalhexconnection,multipleleadthreadsforreducedinsertiontimeandselectivesurfacecoatings.TheZimmerOne-PieceImplantSystem,designedtocomplementthesuccessoftheTaperedScrew-VentImplantSystem,enhancesthisproductlinebyofferingcliniciansafast,convenientrestorativeoption.In2010,theTaperedScrew-VentImplantSystemcelebratedits10-yearanniversarywithmorethantwomillionimplantssoldworldwidesinceitsintroduction.AdVent»ImplantSystem.UtilizingmanyfeaturesoftheTaperedScrew-VentImplantSystem,theAdVentImplantSystemisatransgingival,onestagedesignthatutilizesthesamesurgicalsystemastheTaperedScrew-VentImplantSystem,allowingthecliniciantousebothdesignconceptswithoutincurringtheaddedcostofasecondsurgicalsystem.TaperedSwissPlus»ImplantSystem.Designedtomeettheneedsofclinicianswhopreferatransgingival,onestage,dentalimplant,theTaperedSwissPlusImplantSystemincorporatesmultipleleadthreadsforfasterinsertiontimeandataperedbodytoallowittobeplacedintightinterdentalspaces.TheTaperedSwissPlusImplantSystemalsoincorporatesaninternalconnection.DentalRestorativeProductsWecommercializeproductsfortheaestheticmarketaimedatprovidingamorenaturalrestoration.Weofferafulllineofprostheticdevicesforeachoftheabovedentalimplantsystemsaswellasacustomsolution,asfollows:ZimmerHex-Lock»ContourAbutmentandRestorativeProducts.DesignedtobeusedwithourTaperedScrew-VentandZimmerOne-PieceImplantSystems,ourcontourlinesareasolutionforaddressingthediversityofpatients’needs.Featuringpreparedmargins,titaniumandceramicoptionsandsnap-onimpressioncaps,ourabutmentsaredesignedtosimplifytherestorationprocess,savetimeforcliniciansandtechniciansandofferversatility.OurHex-LockShortAbutmentandRestorativeSystemisanall-inclusivesolutionthatpromotesposteriorrestorations.WealsooffertheZimmer»ContourZirconiaAbutment.BothareengineeredforusewiththeTaperedScrew-VentImplantSystem.In2010wereleasedtheZimmer»PlasticTemporaryAbutmentsfortheTaperedScrew-VentandScrew-Vent»ImplantSystems.Thesenewprovisionalabutments,offeredinangledandstraightdesigns,allowforexpedientandsimplifiedmodification.DentalRegenerativeProductsWemarketthefollowingproductlinesforuseinregenerativetechniquesinoralsurgery:Puros»AllograftProducts.ThePurosbiologicofferingisanallograftmaterial,whichinthecaseofmineralizedboneanddermaltissues,utilizestheTutoplast»2TissueProcessingTechniquetoprovideexceptionalboneandsofttissuegraftingmaterialforuseinoralsurgery.ZimmerDentaloffersanumberofdistinctPurosAllograftproductstousetogetherorseparatelyforvariousboneandsofttissuegraftingneeds:PurosCancellousParticulate,PurosCorticalParticulate,PurosBlockAllografts,PurosPericardiumMembranes,PurosDermisMembranes,PurosDemineralizedBoneMatrix(DBM)andPurosDBMPuttywithChips.WedistributethePurosAllograftProductsthroughanexclusive,worldwideagreementwithRTIBiologics,Inc.,whichwasamendedandrenewedin2010.ThroughthissameagreementwithRTIBiologics,Inc.,weprovideCopiOs»PericardiumMembraneintheU.S.Sourcedfrombovinepericardialtissue,theCopiOsPericardiumMembraneprovidesthecharacteristicsofnaturaltissueandcanbeusedasadirectsubstituteforPurosPericardiumMembranes.Inaddition,wehaveexpandedourregenerativeportfoliobyaddingnew,keyproductofferingstoprovidewoundmanagementandsinusliftsolutions.TheHemCon»3DentalDressingisanadvancedwounddressingmaterialthatutilizesaproprietarychitosan-basedtechnologytoeffectivelysealthewoundandminimizepaininvarioussurgicalprocedures.TheHemConDentalDressingisexclusivelyZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT72RegisteredtrademarkofRTIBiologics,Inc.3RegisteredtrademarkofHemConMedicalTechnologies,Inc.distributedbyZimmerDental.WehavealsointroducedourZimmer»SinusLiftBalloon,createdtosimplifythedelicatesinusliftprocedure,aswellastheZimmer»CollagenCapsules,whichrepresenttheindustry’sfirst-everbone-shapingmembranes—allunderanagreementwithOsseousTechnologiesofAmerica(OTA).Finally,inlinewithourgoaltooffercutting-edgesinusliftsolutionsandinstrumentation,webegandistributingtheminimally-invasiveNeobiotechSinusLateralApproachandSinusCrestalApproachKitsintheU.S.Thesesurgicalkitsstreamlineandsimplifytheprocessforaccessingthedelicatesinusarea.SpineImplantsOurSpineproductsdivisiondesigns,manufacturesanddistributesmedicaldevicesandsurgicalinstrumentstodelivercomprehensivesolutionsforthosewithbackorneckpaincausedbydegenerativeconditions,deformitiesortraumaticinjuryofthespine.Weprovidesurgeonsabroadrangeoftechnologiesforposteriorandanteriorproceduresinthecervical,thoracicandlumbarregionsofthespine.ZimmerSpine’sportfolioofspinalsolutionsincludes:PathFinderNXTTMMinimallyInvasivePedicleScrewSystem.Releasedin2010,thePathFinderNXTSystembuildsonthelegacyofthePathFinder»Device,apioneeringtechnologyinMISspinalfusionprocedures.ThePathFinderNXTSystemisdesignedtoallowforamini-openortruepercutaneousapproach,dependingonthepreferredsurgeontechniqueandpatientneed.Inaddition,thePathFinderNXTSystemincorporatesenhancedfeaturesthatprovideimprovedefficiencyinperformingMISfusionprocedures.UniversalClampTMSpinalFixationSystem.ThedesignoftheUniversalClampImplantallowsittobeusedalongsidetraditionalhooks,screwsandwirestotreatscolioticdeformitiesandcorrectcomplexspinalpathologies.Sequoia»PedicleScrewSystem.TheSequoiaSystemwasdevelopedtosimplifysurgicalflow,reduceimplantationtimeandimproveergonomictooldesign.Thispediclescrewsystemcombinesergonomicinstrumentationwithaneffectivedesignthatreducesimplantmetalvolume.Ardis»InterbodySystem.TheArdisImplantfeaturesaself-distractingnose,convexgeometryandwiderangeofsizes.ThisversatilePEEK-OPTIMA»4Deviceincorporatesalargespaceforgraftplacement,plusanadvancedtoothdesigntoeffectivelyresistmigrationandexpulsionduringprocedures.Ardisinstrumentationwasalsodesignedtostreamlinethesurgicalprocedureandimprovesurgeoncomfort.Trinica»SelectAnteriorCervicalPlatingSystem.TheTrinicaSelectSystemisdesignedtosimplifythesurgicalprocedurewiththeSecure-Twist»Anti-MigrationSystem,whichprovidesvisualconfirmationofscrewcapture,aswellasawidevarietyofscrewoptionstocustomizetheconstructdependingonpatientneed.BiologicalProducts.ZimmerSpineoffersafulllineofbonevoidfillerproductstoaccommodatemostsurgicalprocedures.Puros»DemineralizedBoneMatrixisavailableinPuttyandPuttywithChipsformulations,andtheCopiOs»BoneVoidFillerfamilyofproductsincludessyntheticbonegraftmaterialintheformofspongesorpastesthatareusedtofillbonevoidsduringspinesurgery.Dynesys»DynamicStabilizationSystem.TheDynesysImplantfamilywasdesignedtofacilitateamorephysiologicapproachtolowbackspinalstabilization.Thesystemthreadsflexiblecomponents,insteadoftraditionalrigidtitaniumrods,throughpediclescrewsinordertostabilizeaffectedspinalsegmentsinamorenaturalanatomicpositionandtoalleviatepain.TheDynesysDynamicStabilizationSystemiscurrentlyonlyindicatedforuseasanadjuncttofusionintheU.S.Wallis»PosteriorDynamicStabilizationSystem(availableoutsidetheU.S.only).TheWallisSystemisaspinalimplantthatwasdesignedtostabilizethelumbarspinewhilepreservingtheanatomyandminimizingtheneedforbonyresection.TheWallisSystemcombinesaPEEK-OPTIMASpacerlinkedtothevertebraeviaapolyesterbandthatpermitsanevendistributionofstressesonbone.TraumaTraumaproductsincludedevicesusedtostabilizedamagedorbrokenbonesandtheirsurroundingtissuestosupportthebody’snaturalhealingprocesses.Fracturesaremostoftenstabilizedusinginternalfixationdevicessuchasplates,screws,nails,wiresandpins,butmayalsobestabilizedusingexternalfixationdevices.Orthobiologicsareusedinconjunctionwithtraditionaltraumadevicestoencouragehealingandreplacebonelostduringaninjury.Wearefocusedonprovidingexceptionaloptionstotreatabroadrangeoftraumaticinjuries,addressingunmetclinicalneedsandimplementingnext-generationtechnologiesintoourportfoliooftraumasolutions.ZimmerTraumaoffersacomprehensivelineofproducts,including:ZimmerNaturalNail»System.TheZimmerNaturalNailSystemincludesaseriesofintramedullarynailsdesignedtoaddressabroadrangeoflongbonefractures.Thenailsareanatomicallyshapedandincorporateafeaturethatallowsthescrewstobelinkedtothenails,creatingaconstructeveninpoorqualitybone.Instrumentationfornailplacementisdesignedtomakeiteasyforsurgeonstoutilizetheimplantsaswellastoaddressgrowingconcernswithobesityandosteoporosis.NCB»PolyaxialLockingPlateSystem.NCBPolyaxialLockingPlatesprovidesurgeonswiththeabilitytoplacescrewswithpolyaxialfreedomandutilizebothconventionalandlockingtechnologyinthetreatmentofcomplexfracturesofthedistalfemur,proximalhumerusandZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT84RegisteredtrademarkofIvibio,Ltd.proximaltibia.Wecontinuetoinvestinadditionalapplicationsofthistechnology.Zimmer»PeriarticularLockingPlateSystem.TheZimmerPeriarticularLockingPlateSystemcombinesanatomicdesignswithlockingscrewtechnologytocreateconstructsforuseincomminutedfracturesorwheredeficientbonestockorpoorbonequalityisencountered.Bycombininglockingscrewholeswithcompressionslots,theplatescanbeusedasbothlockingdevicesandfracturecompressiondevices.Zimmer»UniversalLockingSystem.TheZimmerUniversalLockingSystemisacomprehensivesystemofminiandsmallfragmentplates,screwsandinstrumentsforfracturefixation.TheUniversalLockingSystemplatesresemblestandardplates,buthavefigure-8shapedholeswhichallowtheplatestobeusedascompressionplates,lockedinternalfixatorsorasaninternalfixationsystemcombiningbothtechniques.Zimmer»Cable-Ready»System.TheZimmerCable-ReadySystemincludesaseriesofinstruments,cablesandotherimplantsthathelpasurgeontreatseveraldifferentfracturetypes,includingthosethatoccuraroundapreviouslyimplanteddevice(periprosthetic).Thecablesarewrappedaroundtheboneandthensecured,eithertothemselvesortoplates,toprovidefixationforfracturedlimbs.SurgicalWedevelop,manufactureandmarketproductsthatsupportreconstructive,trauma,spineanddentalimplantprocedures,withafocusonBoneCements,SurgicalWoundSiteManagementandBloodManagement.TheSurgicalproductportfolioincludes:PALACOS»5BoneCement.WehaveexclusiveU.S.andCanadadistributionrightsforthePALACOSlineofbonecementproductsmanufacturedbyHeraeusKulzerGmbH.IncludedinthesebrandsarePALACOSRandPALACOSR+GBoneCements,aswellasPALACOSLVandPALACOSLV+GBoneCements.ThePALACOSR+GandPALACOSLV+Gproductsarebonecementswiththeantibioticgentamicinpre-mixedintheformulation.Bothareusedbyorthopaedicsurgeonstoreducetheriskofpostoperativeinfectioninsecondstagerevisions.ThePALACOSfamily’shistoryofclinicalsuccess,fatiguestrength,highvisualizationandhandlingcharacteristicsmakeitwell-suitedfororthopaedics.Hi-FatigueTM6BoneCement.WehaveexclusiveEuropeanandAsiandistributionrightsfortheHi-FatiguelineofbonecementproductsmanufacturedbyaapBiomaterialsGmbH&Co.KG.IncludedinthesebrandsareHi-FatigueandHi-FatigueGBoneCements.TheHi-FatigueGBoneCementutilizestheantibioticgentamicinpre-mixedintheformulationandisusedbyorthopaedicsurgeonstoreducetheriskofpostoperativeinfection.A.T.S.»AutomaticTourniquetSystems.TheA.T.S.TourniquetSystemsProductLineisourfamilyoftourniquetmachinesandcuffsthataredesignedtosafelycreateabloodlesssurgicalfield.TheportfolioincludestheA.T.S.3000TourniquetSystem,whichutilizesproprietarytechnologytodeterminethepatient’sappropriate“LimbOcclusionPressure”(LOP)basedonthepatient’sspecificphysiology.Throughreductionofapatient’sLOP,theclinicianmayreducetheriskoftissueand/ornervedamage.ComplementingA.T.S.TourniquetSystemsmachinesisawiderangeofcuffsthatprovidetheflexibilitytooccludebloodflowsafelywithconvenienceandaccuracyforlimbsofvirtuallyeverysizeandshape.Pulsavac»Plus,PulsavacPlusACandPulsavacPlusLPWoundDebridementSystem.ThePulsavacSystemsareusedforcleaninganddebridementofcontaminantsandforeignmatterfromwoundsusingsimultaneousirrigationandsuction.AllthreePulsavacSystemsaredisposabletoreducetheriskofcrosscontamination.WhilePulsavacPlusandPulsavacPlusLPWoundDebridementSystemsarebothbattery-powered,thePulsavacPlusACWoundDebridementSystemisadisposablesystemthatispoweredbyareusableACpowersourcetohelpalleviateenvironmentalconcernsassociatedwithbatterydisposal.Zimmer»BloodReinfusionSystem(ZBRS)andHemovac»BloodManagementSystems.Thesetwobloodmanagementproductsarepartofalargerfamilythatsupportstheclinicianinmanagingpatientbloodlossafterasurgicalprocedure.TheZBRSproductisaclosed-looppostoperativesystemthateffectivelysalvagesandfiltersthepatient’sownbloodtohelpreducedependencyonbankedbloodand/orpreoperativeautologousdonation.HEALTHCARECONSULTINGOurhealthcareconsultingservicessubsidiary,AcceleroHealthPartners,LLC(Accelero),isbasedinCanonsburg,Pennsylvania.Acceleroconsultantsworktodesignacustomizedprogramforeachclientthatpromotestheactiveparticipationandcollaborationofthephysiciansandthehospital-baseddepartmentswiththegoalofconsistentlyproducingasuperioroutcomeintheformofagrowing,efficientandeffectivecaredeliverynetwork.Currently,revenuerelatedtoAcceleroservicesrepresentslessthan1percentofourtotalnetsales.ORTHOBIOLOGICSOurresearchanddevelopmenteffortsincludeanOrthobiologicsgroupbasedinAustin,Texas,withitsownfull-timestaffanddedicatedprojectsfocusingonthedevelopmentofavarietyofbiologictechnologiesformusculoskeletalZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT95RegisteredtrademarkofHeraeusKulzerGmbH6RegisteredtrademarkofaapBiomaterialsGmbH&Co.KGapplications.Thisgroupworksonbiologicalsolutionstorepairandregeneratedamagedordegeneratedmusculoskeletaltissuesusingbiomaterials/celltherapieswhichofferthepossibilityoftreatingdamagedjointsbybiologicalrepairratherthanreplacingthem.AsamplingofsomeofourkeyprojectsintheOrthobiologicsareaissetforthbelow.WearecollaboratingwithISTOTechnologies,Inc.(ISTO)todevelopchondralgraftsforcartilagerepair.ISTOcreatescell-basedtherapiesforcartilageregenerationusingcellsfromjuveniledonorcartilage.DeNovo»NTNaturalTissueGraftwascommercializedin2009andrepresentsourfirstproductentryintothecartilagerepairmarket.Thistissueproductprovidesparticulatedjuvenilecartilagetissueforrepairofarticularcartilagedefectsoftheknee,ankle,shoulder,hip,elbowandtoejoints.Morethan1,700patientshaveundergonethisinnovativecartilagerepairprocedure.DeNovoETEngineeredTissueGraftisalivingtissue-engineeredcartilagegraftunderclinicalinvestigationfortherestorationofcartilagedefects,reestablishmentofjointfunctionandreliefofpainintheknee.ThePhaseI/IIclinicaltrialforDeNovoEThasbeencompletedandthedatahasbeensuppliedtotheFDAwitharequesttoallowZimmer/ISTOtoproceedwithenrollmentofthepivotalPhaseIIIclinicaltrial.Manymusculoskeletalsurgicalproceduresusebonegraftstohelpregeneratelostordamagedbone.OurSpine,DentalandTraumadivisionshaveintroducedatechnologicallyadvancedall-humandemineralizedbonematrix,PurosDBMPuttyandPuttywithbonechips.Thisbone-derivedallograftmaterialisusedtofillbonevoidsordefects.Itisplacedintothebonevoidwhereitisthencompletelyreplacedbynaturalboneduringthehealingprocess.RESEARCHANDDEVELOPMENTWehaveextensiveresearchanddevelopmentactivitiestodevelopnewsurgicaltechniques,materials,orthobiologicsandproductdesigns.Theresearchanddevelopmentfunctionsworkcloselywithourstrategicbrandmarketingfunction.Therapidcommercializationofinnovativenewmaterials,orthobiologicsproducts,implantandinstrumentdesignsandsurgicaltechniquesremainsoneofourcorestrategiesandcontinuestobeanimportantdriverofsalesgrowth.Wearebroadeningourproductofferingsineachofourproductcategoriesandexploringnewtechnologieswithpossibleapplicationsinmultipleareas.FortheyearsendedDecember31,2010,2009and2008,wespent$220.0million,$205.7millionand$192.3million,respectively,onresearchanddevelopment.OurprimaryresearchanddevelopmentfacilityislocatedinWarsaw,Indiana.Wehaveotherresearchanddevelopmentpersonnelbasedin,amongotherplaces,Winterthur,Switzerland;Austin,Texas;Minneapolis,Minnesota;Carlsbad,California;Dover,Ohio;andParsippany,NewJersey.AsofDecember31,2010,weemployedmorethan1,000researchanddevelopmentemployeesworldwide.Weexpecttocontinuetoidentifyinnovativetechnologiesandconsideracquiringcomplementaryproductsorbusinesses,orestablishingtechnologylicensingarrangementsorstrategicalliances.GOVERNMENTREGULATIONANDCOMPLIANCEWearesubjecttogovernmentregulationinthecountriesinwhichweconductbusiness.IntheU.S.,numerouslawsandregulationsgovernalltheprocessesbywhichmedicaldevicesarebroughttomarket.Theseinclude,amongothers,theFederalFood,DrugandCosmeticActandregulationsissuedorpromulgatedthereunder.TheFDAhasenactedregulationsthatcontrolallaspectsofthedevelopment,manufacture,advertising,promotionandpostmarketsurveillanceofmedicalproducts,includingmedicaldevices.Inaddition,theFDAcontrolstheaccessofproductstomarketthroughprocessesdesignedtoensurethatonlyproductsthataresafeandeffectivearemadeavailabletothepublic.MostofournewproductsfallintoanFDAclassificationthatrequiresthesubmissionofaPremarketNotification(510(k))totheFDA.Thisprocessrequiresustodemonstratethatthedevicetobemarketedisatleastassafeandeffectiveas,thatis,substantiallyequivalentto,alegallymarketeddevice.Wemustsubmitinformationthatsupportsoursubstantialequivalencyclaims.Beforewecanmarketthenewdevice,wemustreceiveanorderfromtheFDAfindingsubstantialequivalenceandclearingthenewdeviceforcommercialdistributionintheU.S.Otherdeviceswedevelopandmarketareinacategory(class)forwhichtheFDAhasimplementedstringentclinicalinvestigationandPremarketApproval(PMA)requirements.ThePMAprocessrequiresustoprovideclinicalandlaboratorydatathatestablishesthatthenewmedicaldeviceissafeandeffective.TheFDAwillapprovethenewdeviceforcommercialdistributionifitdeterminesthatthedataandinformationinthePMAconstitutevalidscientificevidenceandthatthereisreasonableassurancethatthedeviceissafeandeffectiveforitsintendeduse(s).AllofourdevicesmarketedintheU.S.havebeenclearedorapprovedbytheFDA,withtheexceptionofcertainpre-amendmentdeviceswhichwereincommercialdistributionpriortoMay28,1976.TheFDAhasgrandfatheredthesedevices,sonewFDAsubmissionsarenotrequired.TheFDAhastheauthorityto:haltthedistributionofcertainmedicaldevices;detainorseizeadulteratedormisbrandedmedicaldevices;orordertherepair,replacementorrefundofthecostsofsuchdevicesandtoseekcriminalprosecutionofexecutivesforviolationofFDAregulations.Therearealsocertainrequirementsofstate,localandforeigngovernmentsthatwemustcomplywithinthemanufactureandmarketingofourproducts.Inmanyoftheforeigncountriesinwhichwemarketourproducts,wearesubjecttolocalregulationsaffecting,amongotherthings,designandproductstandards,packagingrequirementsandlabelingrequirements.ManyoftheregulationsapplicabletoourdevicesandproductsinthesecountriesaresimilartothoseoftheFDA.ThemembercountriesoftheEuropeanUnionhaveadoptedtheEuropeanMedicalDeviceDirective,whichcreatesasinglesetofmedicaldeviceregulationsforproductsmarketedinallmembercountries.CompliancewiththeMedicalDeviceDirectiveandcertificationtoaqualitysystemenablethemanufacturertoplaceaCEmarkonitsproducts.ToobtainZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT10authorizationtoaffixtheCEmarktoaproduct,arecognizedEuropeanNotifiedBodymustassessamanufacturer’squalitysystemsandtheproduct’sconformitytotherequirementsoftheMedicalDeviceDirective.WearesubjecttoinspectionbytheNotifiedBodiesforcompliancewiththeserequirements.Further,wearesubjecttovariousfederalandstatelawsconcerninghealthcarefraudandabuse,includingfalseclaimslawsandanti-kickbacklaws.Theselawsareadministeredby,amongothers,theU.S.DepartmentofJustice,theOfficeofInspectorGeneraloftheDepartmentofHealthandHumanServicesandstateattorneysgeneral.Manyoftheseagencieshaveincreasedtheirenforcementactivitieswithrespecttomedicaldevicemanufacturersinrecentyears.Violationsoftheselawsarepunishablebycriminaland/orcivilsanctions,including,insomeinstances,fines,imprisonmentand,withintheU.S.,exclusionfromparticipationingovernmenthealthcareprograms,includingMedicare,MedicaidandVeteransAdministration(VA)healthprograms.OuroperationsinforeigncountriesaresubjecttotheextraterritorialapplicationoftheU.S.ForeignCorruptPracticesAct(FCPA).Aspartofourglobalcomplianceprogram,weseektoaddressFCPArisksproactively.Ourfacilitiesandoperationsarealsosubjecttocomplexfederal,state,localandforeignenvironmentalandoccupationalsafetylawsandregulations,includingthoserelatingtodischargesofsubstancesintheair,waterandland,thehandling,storageanddisposalofwastesandtheclean-upofpropertiesbypollutants.Wedonotexpectthattheongoingcostsofcompliancewiththeseenvironmentalrequirementswillhaveamaterialimpactonourconsolidatedearnings,capitalexpendituresorcompetitiveposition.Wecontinuetoassesstheimpactthatthehealthcarereformlegislationpassedin2010bytheU.S.federalgovernmentwillhaveonourbusiness.Thenewlawincludesa2.3percentexcisetaxonamajorityofourU.S.salesthatisscheduledtobeimplementedin2013.COMPETITIONTheorthopaedicsindustryishighlycompetitive.Intheglobalmarketsforreconstructiveimplants,traumaandrelatedsurgicalproducts,ourmajorcompetitorsinclude:DePuyOrthopaedics,Inc.(asubsidiaryofJohnson&Johnson),StrykerCorporation,Biomet,Inc.,Smith&Nephewplc,WrightMedicalGroup,Inc.,Synthes,Inc.andTornier,Inc.IntheAmericasgeographicsegment,weandDePuyOrthopaedics,Inc.,StrykerCorporation,Biomet,Inc.,Smith&Nephew,Inc.(asubsidiaryofSmith&Nephewplc),WrightMedicalGroup,Inc.andSynthes,Inc.accountforalargemajorityofthetotalreconstructiveandtraumaimplantsales.IntheAsiaPacificmarketforreconstructiveimplantandtraumaproducts,wecompeteprimarilywithDePuyOrthopaedics,Inc.,StrykerCorporation,Synthes,Inc.,Smith&NephewplcandBiomet,Inc.,aswellasregionalcompanies,includingJapanMedicalMaterialsCorporationandJapanMedicalDynamicMarketing,Inc.Factors,suchasthedealersystemandcomplexregulatoryenvironments,makeitdifficultforsmallercompanies,particularlythosethatarenon-regional,tocompeteeffectivelywiththemarketleadersintheAsiaPacificregion.TheEuropeanreconstructiveimplantandtraumaproductmarketsaremorefragmentedthantheAmericasortheAsiaPacificsegments.ThevarietyofphilosophiesheldbyEuropeansurgeonsregardinghipreconstruction,forexample,hasfosteredtheexistenceofmanyregionalEuropeancompanies,includingAesculapAG(asubsidiaryofB.Braun),WaldemarLINKGmbH&Co.,KGandMathysAGwhich,inadditiontotheglobalcompetitors,competewithus.TodaymosthipimplantssoldinEuropeareproductsdevelopedspecificallyfortheEuropeanmarket,althoughglobalproductsaregainingacceptance.WewillcontinuetodevelopandproducespeciallytailoredproductstomeetspecificEuropeanneeds.Inthespinalimplantcategory,wecompetegloballyprimarilywiththespinalandbiologicbusinessofMedtronic,Inc.,DePuySpine(asubsidiaryofJohnson&Johnson),Synthes,Inc.,StrykerCorporation,BiometSpine(asubsidiaryofBiomet,Inc.)andNuVasive,Inc.Inthedentalimplantcategory,wecompeteprimarilywithNobelBiocareHoldingAG,StraumannHoldingAG,AstraTechDental,DentsplyInternationalandBiomet3i(asubsidiaryofBiomet,Inc.).Competitionwithintheindustryisprimarilybasedontechnology,innovation,quality,reputationandcustomerservice.Akeyfactorinourcontinuingsuccessinthefuturewillbeourabilitytodevelopnewproductsandimproveexistingproductsandtechnologies.MANUFACTURINGANDRAWMATERIALSWemanufacturesubstantiallyallofourproductsatninesites,includingWarsaw,Indiana;Winterthur,Switzerland;Ponce,PuertoRico;Dover,Ohio;Statesville,NorthCarolina;Carlsbad,California;Parsippany,NewJersey;Shannon,Ireland;andEtupes,France.Additionally,inDecember2010weacquiredtwobusinesses,BeijingMontagneMedicalDeviceCo.,Ltd.(Montagne)andSodemDiffusionS.A.(Sodem).MontagnehasmanufacturingfacilitiesinBeijingandXianning,ChinaandSodemhasmanufacturingfacilitiesinGeneva,Switzerland.Weexpectthesefacilitieswillbecomeanimportantpartofourmanufacturingnetwork.Webelievethatourmanufacturingfacilitiesareamongthebestinourindustryintermsofautomationandproductivityandhavetheflexibilitytoaccommodatefuturegrowth.Themanufacturingoperationsatthesefacilitiesaredesignedtoincorporatethecellularconceptforproductionandtoimplementtenetsofamanufacturingphilosophyfocusedoncontinuousoperationalimprovementandoptimization.OurcontinuousimprovementeffortsaredrivenbyLeanandSixSigmamethodologies.Inaddition,atcertainofourmanufacturingfacilities,manyoftheemployeesarecross-trainedtoperformabroadarrayofoperations.Wegenerallytargetoperatingourmanufacturingfacilitiesatlevelsupto90percentoftotalcapacity.WecontinuallyZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT11evaluatethepotentialtoin-sourceproductscurrentlypurchasedfromoutsidevendorstoon-siteproduction.Wehaveimprovedourmanufacturingprocessestoprotectourprofitabilityandoffsettheimpactofinflationarycosts.Wehave,forexample,employedcomputer-assistedrobotsandmulti-axisgrinderstoprecisionpolishmedicaldevices;automatedcertainmanufacturingandinspectionprocesses,includingon-machineinspectionandprocesscontrols;purchasedstate-of-the-artequipment;in-sourcedcoreproducts,suchascastingsandforgings;andnegotiatedreductionsinthirdpartysuppliercosts.Weuseadiverseandbroadrangeofrawmaterialsinthemanufacturingofourproducts.Wepurchaseallofourrawmaterialsandselectcomponentsusedinmanufacturingourproductsfromexternalsuppliers.Inaddition,wepurchasesomesuppliesfromsinglesourcesforreasonsofqualityassurance,solesourceavailability,costeffectivenessorconstraintsresultingfromregulatoryrequirements.Weworkcloselywithoursupplierstoassurecontinuityofsupplywhilemaintaininghighqualityandreliability.Todate,wehavenotexperiencedanysignificantdifficultyinlocatingandobtainingthematerialsnecessarytofulfillourproductionschedules.INTELLECTUALPROPERTYPatentsandotherproprietaryrightsareimportanttothecontinuedsuccessofourbusiness.Wealsorelyupontradesecrets,know-how,continuingtechnologicalinnovationandlicensingopportunitiestodevelopandmaintainourcompetitiveposition.Weprotectourproprietaryrightsthroughavarietyofmethods,includingconfidentialityagreementsandproprietaryinformationagreementswithvendors,employees,consultantsandotherswhomayhaveaccesstoproprietaryinformation.Weownorcontrolthroughlicensingarrangementsmorethan5,000issuedpatentsandpatentapplicationsthroughouttheworldthatrelatetoaspectsofthetechnologyincorporatedinmanyofourproducts.EMPLOYEESAsofDecember31,2010,weemployedmorethan8,800employeesworldwide,includingmorethan1,000employeesdedicatedtoresearchanddevelopment.Approximately4,900employeesarelocatedwithintheU.S.andapproximately3,900employeesarelocatedoutsideoftheU.S.,primarilythroughoutEuropeandinJapan.Wehaveover3,700employeesdedicatedtomanufacturingourproductsworldwide.TheWarsaw,Indianaproductionfacilityemploysmorethan1,500employees.Approximately150U.S.employeesaremembersofatradeunioncoveredbyacollectivebargainingagreement.WehaveacollectivebargainingagreementwiththeUnitedSteel,PaperandForestry,RubberManufacturing,Energy,AlliedIndustrialandServiceWorkersInternationalUnionforandonbehalfofLocal2737-15coveringemployeesattheDover,Ohiofacility,whichcontinuesineffectuntilMay15,2012.EXECUTIVEOFFICERSThefollowingtablesetsforthcertaininformationwithrespecttoourexecutiveofficersasofFebruary15,2011.NameAgePositionDavidC.Dvorak47PresidentandChiefExecutiveOfficerCherylR.Blanchard,Ph.D.46SeniorVicePresidentandChiefScientificOfficerJamesT.Crines51ExecutiveVicePresident,FinanceandChiefFinancialOfficerDerekM.Davis41VicePresident,FinanceandCorporateControllerandChiefAccountingOfficerJefferyA.McCaulley45President,ZimmerReconstructiveBrunoA.Melzi63Chairman,Europe,MiddleEastandAfricaStephenH.L.Ooi57President,AsiaPacificJeffreyB.Paulsen49GroupPresident,GlobalBusinessesChadF.Phipps39SeniorVicePresident,GeneralCounselandSecretaryMr.DvorakwasappointedPresident,ChiefExecutiveOfficerandamemberoftheBoardofDirectorsinMay2007.FromDecember2005toApril2007,heservedasGroupPresident,GlobalBusinessesandChiefLegalOfficer.Priortothat,hehadservedasExecutiveVicePresident,CorporateServices,ChiefCounselandSecretary,aswellasChiefComplianceOfficer,sinceOctober2003.Mr.DvorakjoinedZimmerin2001.Dr.BlanchardwasappointedSeniorVicePresidentandChiefScientificOfficerinDecember2005.SheisresponsibleforCorporateResearch,GlobalQualityandRegulatoryAffairs,GlobalMedicalAffairs,BiologicsResearchandDevelopmentandBiologicsMarketing.Previously,shehadservedasVicePresident,CorporateResearchandClinicalAffairssinceOctober2003.Dr.BlanchardjoinedZimmerin2000.Mr.CrineswasappointedExecutiveVicePresident,FinanceandChiefFinancialOfficerinMay2007.FromDecember2005toApril2007,heservedasSeniorVicePresident,Finance,OperationsandCorporateControllerandChiefAccountingOfficer.Priortothat,hehadservedasSeniorVicePresident,Finance/ControllerandInformationTechnologysinceOctober2003.Mr.CrinesjoinedZimmerin1995.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT12Mr.DaviswasappointedVicePresident,FinanceandCorporateControllerandChiefAccountingOfficerinMay2007.Hehasresponsibilityforinternalandexternalreporting,planningandanalysis,andcorporateandbusinessunitaccounting.FromMarch2006toMay2007,heservedasDirector,FinancialPlanningandAccounting.Priortothat,hehadservedasDirector,Finance,OperationsandLogisticssinceDecember2003.Mr.DavisjoinedZimmerin2003.Mr.McCaulleywasappointedPresident,ZimmerReconstructiveinNovember2008.HehasoverallresponsibilityfortheGlobalReconstructiveDivision,includingdirectresponsibilityforGlobalBrandManagement,ProductResearchandDevelopment,QualityandRegulatoryAffairs,andMedicalTrainingandEducation,aswellasAmericasMarketingandSales.PriortojoiningZimmer,heservedasPresidentandChiefExecutiveOfficeroftheHealthDivisionofWoltersKluwerfrom2005,VicePresidentandGeneralManageroftheDiabetesDivisionofMedtronic,Inc.from2002,andspent14yearswithGEHealthcareinnumerouspositionsofincreasingresponsibility,includingPresidentandChiefExecutiveOfficerofGEClinicalServicesfrom2000.Mr.MelziwasappointedChairman,Europe,MiddleEastandAfricainOctober2003.Heisresponsibleforthesales,marketinganddistributionofproductsintheEuropean,MiddleEasternandAfricanregions.Mr.MelzijoinedZimmerin1990.Mr.OoiwasappointedPresident,AsiaPacificinDecember2005.Heisresponsibleforthesales,marketinganddistributionofproductsintheAsiaPacificregion.Priortothat,hehadservedasPresident,AustralasiasinceSeptember2003.Mr.OoijoinedZimmerin1986.Mr.PaulsenwasappointedGroupPresident,GlobalBusinessesinDecember2009.HehasresponsibilityforZimmerSpine,ZimmerDental,ZimmerTraumaandZimmerSurgical.PriortojoiningZimmer,Mr.PaulsenservedasChiefOperatingOfficerofMPSGroup,Inc.,aprivatelyheldenvironmentalservicesandfacilitymanagementfirm,fromSeptember2008toDecember2009.Priortothat,heservedasGroupPresidentofTriMasCorporation,aspecialtymanufacturingcompany,fromJanuary2007toJune2008.Previously,Mr.PaulsenhadheldanumberofincreasinglyresponsibleexecutiverolesatStrykerCorporationfrom1996toDecember2006,includingPresident,OrthopaedicReconstructiveDivision.Mr.PhippswasappointedSeniorVicePresident,GeneralCounselandSecretaryinMay2007.HehasglobalresponsibilityforourlegalaffairsandheservesasSecretarytotheBoardofDirectors.Mr.PhippsalsooverseesourGovernmentAffairs,CorporateMarketingandCommunicationsandPublicRelationsactivities.FromDecember2005toMay2007,heservedasAssociateGeneralCounselandCorporateSecretary.Priortothat,hehadservedasAssociateCounselandAssistantSecretarysinceSeptember2003.Mr.PhippsjoinedZimmerin2003.AVAILABLEINFORMATIONOurInternetaddressiswww.zimmer.com.Weroutinelypostimportantinformationforinvestorsonourwebsiteinthe“InvestorRelations”section,whichmaybeaccessedfromourhomepageatwww.zimmer.comordirectlyathttp://investor.zimmer.com.Weintendtousethiswebsiteasameansofdisclosingmaterial,non-publicinformationandforcomplyingwithourdisclosureobligationsunderRegulationFD.Accordingly,investorsshouldmonitortheInvestorRelationssectionofourwebsite,inadditiontofollowingourpressreleases,SECfilings,publicconferencecalls,presentationsandwebcasts.OurgoalistomaintaintheInvestorRelationswebsiteasaportalthroughwhichinvestorscaneasilyfindornavigatetopertinentinformationaboutus,freeofcharge,including:(cid:129)ourAnnualReportsonForm10-K,QuarterlyReportsonForm10-Q,CurrentReportsonForm8-KandamendmentstothosereportsfiledorfurnishedpursuanttoSection13(a)or15(d)oftheExchangeAct,assoonasreasonablypracticableafterweelectronicallyfilethatmaterialwithorfurnishittotheSecuritiesandExchangeCommission(SEC);(cid:129)announcementsofinvestorconferencesandeventsatwhichourexecutivestalkaboutourproductsandcompetitivestrategies.Podcastsandarchivesoftheseeventsarealsoavailable;(cid:129)pressreleasesonquarterlyearnings,productannouncements,legaldevelopmentsandothermaterialnewsthatwemaypostfromtimetotime;(cid:129)corporategovernanceinformationincludingourCorporateGovernanceGuidelines,CodeofBusinessConduct,CodeofEthicsforChiefExecutiveOfficerandSeniorFinancialOfficers,informationconcerningourBoardofDirectorsanditscommittees,includingthechartersoftheAuditCommittee,CompensationandManagementDevelopmentCommittee,CorporateGovernanceCommitteeandScienceandTechnologyCommittee,andothergovernance-relatedpolicies;(cid:129)shareholderservicesinformation,includingwaystocontactourtransferagent;and(cid:129)opportunitiestosignupforemailalertsandRSSfeedstohaveinformationprovidedinrealtime.Theinformationavailableonourwebsiteisnotincorporatedbyreferencein,orapartofthisoranyotherreportwefilewithorfurnishtotheSEC.ITEM1A.RiskFactorsRiskfactorswhichcouldcauseactualresultstodifferfromourexpectationsandwhichcouldnegativelyimpactourfinancialconditionandresultsofoperationsarediscussedbelowandelsewhereinthisreport.Therisksanduncertaintiesdescribedbelowarenottheonlyonesweface.Additionalrisksanduncertaintiesnotpresentlyknowntousorthatarecurrentlynotbelievedtobesignificanttoourbusinessmayalsoaffectouractualresultsandcouldharmourbusiness,financialconditionandresultsofoperations.IfanyoftherisksorZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT13uncertaintiesdescribedbeloworanyadditionalrisksanduncertaintiesactuallyoccur,ourbusiness,resultsofoperationsandfinancialconditioncouldbemateriallyandadverselyaffected.IfwefailtocomplywiththetermsoftheCorporateIntegrityAgreementweenteredintoinSeptember2007,wemaybesubjecttoexclusionfromfederalhealthcareprograms.Aspreviouslyreported,inSeptember2007wesettledaninvestigationconductedbytheU.S.Attorney’sOfficefortheDistrictofNewJersey(U.S.Attorney)intofinancialrelationshipsbetweenmajororthopaedicmanufacturersandconsultingorthopaedicsurgeons.Aspartofthatsettlement,weenteredintoaCorporateIntegrityAgreement(CIA)withtheOfficeofInspectorGeneraloftheDepartmentofHealthandHumanServices(OIG-HHS).AcopyoftheCIAisfiledasanexhibittothisreport.IfwedonotcomplywiththetermsoftheCIA,wecouldbesubjecttoexclusionbyOIG-HHSfromparticipationinfederalhealthcareprograms,includingMedicaidandMedicare.TheongoinginvestigationbytheU.S.SecuritiesandExchangeCommissionandtheU.S.DepartmentofJusticeregardingpotentialviolationsoftheForeignCorruptPracticesActinthesaleofmedicaldevicesinanumberofforeigncountriesbycompaniesinthemedicaldeviceindustrycouldhaveamaterialadverseeffectonourbusiness,financialconditionandcashflows.WearecooperatingfullywiththeU.S.SecuritiesandExchangeCommissionandtheU.S.DepartmentofJusticewithregardtoanongoinginvestigationofpotentialviolationsoftheForeignCorruptPracticesActinthesaleofmedicaldevicesinanumberofforeigncountriesbycompaniesinthemedicaldeviceindustry.Althoughwehaveadoptedpoliciesandproceduresdesignedtopreventimproperpaymentsandwetrainouremployees,distributorsandothersconcerningtheseissues,wecannotassurethatviolationsoftheserequirementswillnotoccur.IfwearefoundtohaveviolatedtheForeignCorruptPracticesAct,wemayfacesanctionsincludingfines,criminalpenalties,disgorgementofprofitsandsuspensionordebarmentofourabilitytocontractwithgovernmentalagenciesorreceiveexportlicenses.Ifwefailtoretaintheindependentagentsanddistributorsuponwhomwerelyheavilytomarketourproducts,customersmaynotbuyourproductsandourrevenueandprofitabilitymaydecline.OurmarketingsuccessintheU.S.andabroaddependssignificantlyuponouragents’anddistributors’salesandserviceexpertiseinthemarketplace.Manyoftheseagentshavedevelopedprofessionalrelationshipswithexistingandpotentialcustomersbecauseoftheagents’detailedknowledgeofproductsandinstruments.Alossofasignificantnumberoftheseagentscouldhaveamaterialadverseeffectonourbusinessandresultsofoperations.Ifwedonotintroducenewproductsinatimelymanner,ourproductsmaybecomeobsoleteovertime,customersmaynotbuyourproductsandourrevenueandprofitabilitymaydecline.Demandforourproductsmaychange,incertaincases,inwayswemaynotanticipatebecauseof:(cid:129)evolvingcustomerneeds;(cid:129)changingdemographics;(cid:129)slowingindustrygrowthrates;(cid:129)declinesinthereconstructiveimplantmarket;(cid:129)theintroductionofnewproductsandtechnologies;(cid:129)evolvingsurgicalphilosophies;and(cid:129)evolvingindustrystandards.Withoutthetimelyintroductionofnewproductsandenhancements,ourproductsmaybecomeobsoleteovertime.Ifthathappens,ourrevenueandoperatingresultswouldsuffer.Thesuccessofournewproductofferingswilldependonseveralfactors,includingourabilityto:(cid:129)properlyidentifyandanticipatecustomerneeds;(cid:129)commercializenewproductsinatimelymanner;(cid:129)manufactureanddeliverinstrumentsandproductsinsufficientvolumesontime;(cid:129)differentiateourofferingsfromcompetitors’offerings;(cid:129)achievepositiveclinicaloutcomesfornewproducts;(cid:129)satisfytheincreaseddemandsbyhealthcarepayors,providersandpatientsforshorterhospitalstays,fasterpost-operativerecoveryandlower-costprocedures;(cid:129)innovateanddevelopnewmaterials,productdesignsandsurgicaltechniques;and(cid:129)provideadequatemedicaleducationrelatingtonewproducts.Inaddition,newmaterials,productdesignsandsurgicaltechniquesthatwedevelopmaynotbeacceptedquickly,insomeorallmarkets,becauseof,amongotherfactors:(cid:129)entrenchedpatternsofclinicalpractice;(cid:129)theneedforregulatoryclearance;and(cid:129)uncertaintywithrespecttothird-partyreimbursement.Moreover,innovationsgenerallyrequireasubstantialinvestmentinresearchanddevelopmentbeforewecandeterminetheircommercialviabilityandwemaynothavethefinancialresourcesnecessarytofundtheproduction.Inaddition,evenifweareabletosuccessfullydevelopenhancementsornewgenerationsofourproducts,theseenhancementsornewgenerationsofproductsmaynotproducerevenueinexcessofthecostsofdevelopmentandtheymaybequicklyrenderedobsoletebychangingcustomerpreferencesortheintroductionbyourcompetitorsofproductsembodyingnewtechnologiesorfeatures.WeconductasignificantamountofoursalesactivityoutsideoftheU.S.,whichsubjectsustoadditionalbusinessrisksandmaycauseourprofitabilitytodeclineduetoincreasedcosts.Wesellourproductsinmorethan100countriesandderivemorethan40percentofournetsalesfromoutsidetheU.S.Weintendtocontinuetopursuegrowthopportunitiesinsalesinternationally,includinginemergingmarkets,whichcouldexposeustoadditionalrisksassociatedwithinternationalsalesandoperations.OurinternationaloperationsZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT14are,andwillcontinuetobe,subjecttoanumberofrisksandpotentialcosts,including:(cid:129)changesinforeignmedicalreimbursementpoliciesandprograms;(cid:129)unexpectedchangesinforeignregulatoryrequirements;(cid:129)differinglocalproductpreferencesandproductrequirements;(cid:129)fluctuationsinforeigncurrencyexchangerates;(cid:129)diminishedprotectionofintellectualpropertyinsomecountriesoutsideoftheU.S.;(cid:129)tradeprotectionmeasuresandimportorexportrequirementsthatmaypreventusfromshippingproductstoaparticularmarketandmayincreaseouroperatingcosts;(cid:129)foreignexchangecontrolsthatmightpreventusfromrepatriatingcashearnedincountriesoutsidetheU.S.;(cid:129)complexdataprivacyrequirementsandlaborrelationslaws;(cid:129)extraterritorialeffectsofU.S.lawssuchastheForeignCorruptPracticesAct;(cid:129)difficultyinstaffingandmanagingforeignoperations;(cid:129)laborforceinstability;(cid:129)potentiallynegativeconsequencesfromchangesintaxlaws;and(cid:129)politicalandeconomicinstability.Violationsofforeignlawsorregulationscouldresultinfines,criminalsanctionsagainstus,ourofficersorouremployees,prohibitionsontheconductofourbusinessanddamagetoourreputation.Wearesubjecttorisksarisingfromcurrencyexchangeratefluctuations,whichcanincreaseourcosts,causeourprofitabilitytodeclineandexposeustocounterpartyrisks.AsubstantialportionofourforeignrevenuesisgeneratedinEuropeandJapan.TheU.S.dollarvalueofourforeign-generatedrevenuesvarieswithcurrencyexchangeratefluctuations.SignificantincreasesinthevalueoftheU.S.dollarrelativetotheEuroortheJapaneseYen,aswellasothercurrencies,couldhaveamaterialadverseeffectonourresultsofoperations.Althoughweaddresscurrencyriskmanagementthroughregularoperatingandfinancingactivities,and,onalimitedbasis,throughtheuseofderivativefinancialinstruments,thoseactionsmaynotprovetobefullyeffective.Wemayfailtoadequatelyprotectourproprietarytechnologyandotherintellectualproperty,whichwouldallowcompetitorsorotherstotakeadvantageofourresearchanddevelopmentefforts.Ourlong-termsuccesslargelydependsonourabilitytomarkettechnologicallycompetitiveproducts.Ifwefailtoobtainormaintainadequateintellectualpropertyprotection,wemaynotbeabletopreventthirdpartiesfromusingourproprietarytechnologies.Also,ourcurrentlypendingorfuturepatentapplicationsmaynotresultinissuedpatents,andissuedpatentsaresubjecttoclaimsconcerningpriority,scopeandotherissues.TheU.S.PatentandTrademarkOfficeandthecourtshavenotconsistentlytreatedthebreadthofclaimsallowedorinterpretedinorthopaedicreconstructiveimplantandbiotechnologypatents.Futurechangesin,orunexpectedinterpretationsof,thepatentlawsmayadverselyaffectourabilitytoenforceourpatentposition.Inaddition,intellectualpropertyrightsmaybeunavailableoroflimitedeffectinsomeforeigncountries.Ifwedonotobtainsufficientinternationalprotectionforourintellectualproperty,ourcompetitivenessininternationalmarketscouldbeimpaired,whichcouldlimitourgrowthandrevenue.Wealsoattempttoprotectourtradesecrets,proprietaryknow-howandcontinuingtechnologicalinnovationwithsecuritymeasures,includingtheuseofconfidentialityagreementswithouremployees,consultantsandcollaborators.Thesemeasuresmayprovetobeineffectiveandanyremediesavailabletousmaybeinsufficienttocompensateourdamages.Wemaybesubjecttointellectualpropertylitigationandinfringementclaims,whichcouldcauseustoincursignificantexpensesorpreventusfromsellingourproducts.Asuccessfulclaimofpatentorotherintellectualpropertyinfringementagainstuscouldadverselyaffectourgrowthandprofitability,insomecasesmaterially.Fromtimetotime,wereceivenoticesfromthirdpartiesofpotentialinfringementandreceiveclaimsofpotentialinfringement.Wemaybeunawareofintellectualpropertyrightsofothersthatmaycoversomeofourtechnology.Ifsomeoneclaimsthatourproductsinfringedtheirintellectualpropertyrights,anyresultinglitigationcouldbecostlyandtimeconsumingandwoulddiverttheattentionofmanagementandkeypersonnelfromotherbusinessissues.Ifweweretolosesuchlitigationinvolvingmaterialintellectualpropertyrights,wemaybeunabletomanufacture,sellorusesomeofourproducts.Wemayincurproductliabilitylosses,andinsurancecoveragemaybeinadequateorunavailabletocovertheselosses.Intheordinarycourseofbusiness,wearethesubjectofproductliabilitylawsuitsallegingthatcomponentfailures,manufacturingflaws,designdefectsorinadequatedisclosureofproduct-relatedrisksorproduct-relatedinformationresultedinanunsafeconditionorinjurytopatients.Aspreviouslyreported,wetemporarilysuspendedthemarketinganddistributionofourDurom»AcetabularComponent(DuromCup)intheU.S.inJuly2008.Followingouraction,productliabilitylawsuitsandotherclaimswereassertedagainstusandadditionalsimilarclaimsmaybeasserted.Productliabilitylawsuitsandclaims,safetyalertsorproductrecalls,regardlessoftheirultimateoutcome,couldhaveamaterialadverseeffectonourbusinessandreputationandonourabilitytoattractandretaincustomers.Althoughwemaintainthird-partyproductliabilityinsurancecoverage,itispossiblethatclaimsagainstusmayexceedthecoveragelimitsofourinsurancepoliciesorcauseustorecordaself-insuredloss.Evenifanyproductliabilitylossiscoveredbyaninsurancepolicy,thesepoliciestypicallyhavesubstantialretentionsordeductiblesforwhichweareresponsible.Productliabilityclaimsinexcessofapplicableinsurancecouldhaveamaterialadverseeffectonourbusiness,financialconditionandresultsofoperations.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT15Weareinvolvedinlegalproceedingsthatmayresultinadverseoutcomes.Inadditiontointellectualpropertyandproductliabilityclaimsandlawsuits,weareinvolvedinvariouscommercialandsecuritieslitigationandclaims,governmentinvestigationsandotherlegalproceedingsthatarisefromtimetotimeintheordinarycourseofourbusiness.Althoughwebelievewehavesubstantialdefensesinthesematters,litigationandotherclaimsaresubjecttoinherentuncertaintiesandmanagement’sviewofthesemattersmaychangeinthefuture.Wecouldinthefutureincurjudgmentsorenterintosettlementsofclaimsthatcouldhaveamaterialadverseeffectonourresultsofoperationsinanyparticularperiod.Wemaymakeadditionalacquisitionsorenterintostrategicalliancesthatcouldincreaseourcostsorliabilitiesorbedisruptive.Weintendtocontinuetolookforadditionalstrategicacquisitionsofotherbusinessesthatarecomplementarytoourbusinessesandothercompanieswithwhomwecouldformstrategicalliancesorenterintootherarrangementstodeveloporexploitintellectualpropertyrights.Theseactivitiesinvolverisks,includingthefollowing:(cid:129)wemayneedtodivertmoremanagementresourcestointegrationthanweplanned,whichmayadverselyaffectourabilitytopursueothermoreprofitableactivities;(cid:129)thedifficultiesofintegratingacquiredbusinessesmaybeincreasedifweneedtointegrategeographicallyseparatedorganizations,personnelwithdisparatebusinessbackgroundsandcompanieswithdifferentcorporatecultures;(cid:129)wemaynotrecognizeexpectedcostsavingsortheanticipatedbenefitsofacquisitionsorstrategicalliances;(cid:129)ouracquisitioncandidatesorstrategicpartnersmayhaveunexpectedliabilitiesorproveunabletomeettheirobligationstousorthejointventure;and(cid:129)theprioritiesofourstrategicpartnersmayproveincompatiblewithours.Wedependonalimitednumberofsuppliersforsomekeyrawmaterialsandoutsourcedactivities.Weuseanumberofsuppliersforrawmaterialsthatweneedtomanufactureourproductsandtooutsourcesomekeymanufacturingactivities.Thesesuppliersmustprovidethematerialsandperformtheactivitiestoourstandardsforustomeetourqualityandregulatoryrequirements.Somekeyrawmaterialsandoutsourcedactivitiescanonlybeobtainedfromasinglesourceoralimitednumberofsources.Aprolongeddisruptionorotherinabilitytoobtainthesematerialsoroutsourcekeymanufacturingactivitiescouldmateriallyandadverselyaffectourabilitytosatisfydemandforourproducts.Futurematerialimpairmentsinthecarryingvalueofourintangibleassets,includinggoodwill,wouldnegativelyaffectouroperatingresults.Ourassetsincludeintangibleassets,primarilygoodwill.Thegoodwillresultsfromouracquisitionactivityandrepresentstheexcessoftheconsiderationtransferredoverthefairvalueofthenetassetsacquired.Weassessatleastannuallywhethereventsorchangesincircumstancesindicatethatthecarryingvalueofourintangibleassetsmaynotberecoverable.Iftheoperatingperformanceatoneormoreofourbusinessunitsfallssignificantlybelowcurrentlevels,ifcompetingoralternativetechnologiesemerge,orifmarketconditionsorfuturecashflowestimatesforoneormoreofourbusinessesdecline,wecouldberequired,undercurrentU.S.accountingrules,torecordanon-cashchargetooperatingearningsfortheamountoftheimpairment.Anywrite-offofamaterialportionofourunamortizedintangibleassetswouldnegativelyaffectourresultsofoperations.Wemayhaveadditionaltaxliabilities.WearesubjecttoincometaxesintheU.S.andmanyforeignjurisdictions.Significantjudgmentisrequiredindeterminingourworldwideprovisionforincometaxes.Intheordinarycourseofourbusiness,therearemanytransactionsandcalculationswheretheultimatetaxdeterminationisuncertain.Weregularlyareunderauditbytaxauthorities.Althoughwebelieveourtaxestimatesarereasonable,thefinaldeterminationoftaxauditsandanyrelatedlitigationcouldbemateriallydifferentfromourhistoricalincometaxprovisionsandaccruals.Theresultsofanauditorlitigationcouldhaveamaterialeffectonourfinancialstatementsintheperiodorperiodsforwhichthatdeterminationismade.WeearnasignificantamountofouroperatingincomefromoutsidetheU.S.,andanyrepatriationoffundscurrentlyheldinforeignjurisdictionsmayresultinhighereffectivetaxrates.Inaddition,therehavebeenproposalstochangeU.S.taxlawsthatwouldsignificantlyimpacthowU.S.multinationalcorporationsaretaxedonforeignearnings.Althoughwecannotpredictwhetherorinwhatformthisproposedlegislationwillpass,ifenacteditcouldhaveamaterialadverseimpactonourtaxexpenseandcashflow.InJanuary2011,theIRSissuedaNoticeofProposedAdjustment(NOPA)fortaxyears2006and2007.TheNOPArelatestointercompanypricingbetweencertainofourU.S.andforeignsubsidiaries.WebelievethatwehavefollowedapplicableU.S.taxlawsandwillvigorouslydefendourincometaxpositions.However,theultimatesettlementwiththeIRSrelatedtotheseproposedadjustmentscouldhaveamaterialimpactonourincometaxexpenseandnetearnings.TheimpactofU.S.healthcarereformlegislationonusremainsuncertain.InMarch2010,federallegislationtoreformtheU.S.healthcaresystemwasenactedintolaw.Thelegislationisfar-reachingandisintendedtoexpandaccesstohealthinsurancecoverage,improvequalityandreducecostsovertime.Weexpectthenewlawwillhaveasignificantimpactuponvariousaspectsofourbusinessoperations.Forexample,totheextentthatthenumberofuninsuredorunderinsuredpatientsisreduced,demandforourproductsintheU.S.couldmarginallyincrease.However,itisunclearhowthenewlawwillimpactpatientaccesstonewtechnologiesorreimbursementratesundertheMedicareprogram.Inaddition,thenewlawimposesa2.3percentexcisetaxonmedicaldevicesscheduledtobeimplementedin2013thatwillapplytoU.S.salesofamajorityofourmedicaldeviceproducts.Manyofthedetailsofthenewlawwillbeincludedinnewandrevisedregulations,whichhavenotyetbeenpromulgated,andrequireadditionalguidanceandspecificitytobeprovidedZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT16bytheDepartmentofHealthandHumanServices,DepartmentofLaborandDepartmentoftheTreasury.Accordingly,whileitistooearlytounderstandandpredicttheultimateimpactofthenewlawonourbusiness,thelegislationcouldhaveamaterialadverseeffectonourbusiness,cashflows,financialconditionandresultsofoperations.Wearesubjecttohealthcarefraudandabuseregulationsonanongoingbasisthatcouldrequireustochangeourbusinesspracticesandrestrictouroperationsinthefuture.Ourindustryissubjecttovariousfederalandstatelawspertainingtohealthcarefraudandabuse,includingfalseclaimslaws,thefederalAnti-KickbackStatute,similarstatelawsandphysicianself-referrallaws.Violationsoftheselawsarepunishablebycriminaland/orcivilsanctions,including,insomeinstances,fines,imprisonmentand,withintheU.S.,exclusionfromparticipationingovernmenthealthcareprograms,includingMedicare,MedicaidandVeteransAdministration(VA)healthprograms.Theinterpretationandenforcementoftheselawsandregulationsareuncertainandsubjecttorapidchange.Ifthird-partypayorsdeclinetoreimburseourcustomersforourproductsorreducereimbursementlevels,thedemandforourproductsmaydeclineandourabilitytosellourproductsprofitablymaybeharmed.Wesellourproductsandservicestohospitals,doctors,dentistsandotherhealthcareproviders,allofwhichreceivereimbursementforthehealthcareservicesprovidedtotheirpatientsfromthird-partypayors,suchasdomesticandinternationalgovernmentprograms,privateinsuranceplansandmanagedcareprograms.Thesethird-partypayorsmaydenyreimbursementiftheydeterminethatadeviceusedinaprocedurewasnotinaccordancewithcost-effectivetreatmentmethods,asdeterminedbythethird-partypayor,orwasusedforanunapprovedindication.Third-partypayorsmayalsodeclinetoreimburseforexperimentalproceduresanddevices.Ifourproductsarenotconsideredcost-effectivebythird-partypayors,ourcustomersmaynotbereimbursedforourproducts.Inaddition,third-partypayorsareincreasinglyattemptingtocontainhealthcarecostsbylimitingbothcoverageandthelevelofreimbursementformedicalproductsandservices.Ifthird-partypayorsreducereimbursementlevelstohospitalsandotherhealthcareprovidersforourproducts,demandforourproductsmaydecline,orwemayexperiencepressuretoreducethepricesofourproducts,whichcouldhaveamaterialadverseeffectonoursalesandresultsofoperations.Wehavealsoexperienceddownwardpressureonproductpricingandothereffectsofhealthcarereforminourinternationalmarkets.Ifkeyparticipantsingovernmenthealthcaresystemsreducethereimbursementlevelsforourproducts,oursalesandresultsofoperationsmaybeadverselyaffected.Theongoingcost-containmenteffortsofhealthcarepurchasingorganizationsmayhaveamaterialadverseeffectonourresultsofoperations.Manycustomersforourproductshaveformedgrouppurchasingorganizationsinanefforttocontaincosts.Grouppurchasingorganizationsnegotiatepricingarrangementswithmedicalsupplymanufacturersanddistributors,andthesenegotiatedpricesaremadeavailabletoagrouppurchasingorganization’saffiliatedhospitalsandothermembers.Ifwearenotoneoftheprovidersselectedbyagrouppurchasingorganization,affiliatedhospitalsandothermembersmaybelesslikelytopurchaseourproducts,and,ifthegrouppurchasingorganizationhasnegotiatedastrictcompliancecontractforanothermanufacturer’sproducts,wemaybeprecludedfrommakingsalestomembersofthegrouppurchasingorganizationforthedurationofthecontractualarrangement.Ourfailuretorespondtothecost-containmenteffortsofgrouppurchasingorganizationsmaycauseustolosemarketsharetoourcompetitorsandcouldhaveamaterialadverseeffectonoursalesandresultsofoperations.Oursuccessdependsonourabilitytoeffectivelydevelopandmarketourproductsagainstthoseofourcompetitors.Weoperateinahighlycompetitiveenvironment.Ourpresentorfutureproductscouldberenderedobsoleteoruneconomicalbytechnologicaladvancesbyoneormoreofourpresentorfuturecompetitorsorbyothertherapies,includingbiologicaltherapies.Toremaincompetitive,wemustcontinuetodevelopandacquirenewproductsandtechnologies.Competitionisprimarilyonthebasisof:(cid:129)technology;(cid:129)innovation;(cid:129)quality;(cid:129)reputation;and(cid:129)customerservice.InmarketsoutsideoftheU.S.,otherfactorsinfluencecompetitionaswell,including:(cid:129)localdistributionsystems;(cid:129)complexregulatoryenvironments;and(cid:129)differingmedicalphilosophiesandproductpreferences.Ourcompetitorsmay:(cid:129)havegreaterfinancial,marketingandotherresourcesthanus;(cid:129)respondmorequicklytoneworemergingtechnologies;(cid:129)undertakemoreextensivemarketingcampaigns;(cid:129)adoptmoreaggressivepricingpolicies;or(cid:129)bemoresuccessfulinattractingpotentialcustomers,employeesandstrategicpartners.Anyofthesefactors,aloneorincombination,couldcauseustohavedifficultymaintainingorincreasingsalesofourproducts.Weandourcustomersaresubjecttovariousgovernmentalregulationsrelatingtothemanufacturing,labelingandmarketingofourproducts,andwemayincursignificantexpensestocomplywiththeseregulationsanddevelopproductscompatiblewiththeseregulations.Themedicaldeviceswedesign,develop,manufactureandmarketaresubjecttorigorousregulationbytheFDAandnumerousotherfederal,stateandforeigngovernmentalauthorities.TheprocessofobtainingregulatoryapprovalstomarketamedicaldevicecanbecostlyandtimeconsumingandapprovalsmightnotbegrantedforfutureproductsonatimelyZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT17basis,ifatall.Delaysinreceiptof,orfailuretoobtain,approvalsforfutureproductscouldresultindelayedrealizationofproductrevenuesorinsubstantialadditionalcosts.Inaddition,ifwefailtocomplywithapplicablematerialregulatoryrequirements,including,forexample,theQualitySystemRegulation,recordkeepingregulations,labelingandpromotionalrequirementsandadverseeventreportingregulations,wemaybesubjecttoarangeofsanctionsincluding:(cid:129)warningletters;(cid:129)finesorcivilpenalties;(cid:129)injunctions;(cid:129)repairs,replacementsorrefunds;(cid:129)recallsorseizuresofproducts;(cid:129)totalorpartialsuspensionofproduction;(cid:129)theFDA’srefusaltograntfuturepremarketclearancesorapprovals;(cid:129)withdrawalsorsuspensionsofcurrentproductapplications;and(cid:129)criminalprosecution.Moreover,theFDArecentlyannouncedwide-rangingproposalstoreformthe510(k)process.Whileitisnotknownwhichreformsmayultimatelybeimplemented,theymayresultinmoreextensivedatarequirementsandalongerprocessforobtainingclearance.Weexpect510(k)reformcoulddelaynewproductsfromreachingthemarketintheU.S.andincreasethecostsofintroducingnewproductsandfeatures,whichcouldadverselyaffectourbusiness.Ourproductsandoperationsarealsooftensubjecttotherulesofindustrialstandardsbodies,suchastheInternationalStandardsOrganization.Ifwefailtoadequatelyaddressanyoftheseregulations,ourbusinesscouldbeharmed.ITEM1B.UnresolvedStaffCommentsNotApplicable.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT18ITEM2.PropertiesWehavethefollowingproperties:LocationUseOwned/LeasedSquareFeetWarsaw,IndianaResearch&Development,Manufacturing,Warehousing,Marketing&Administration....................................................Owned1,400,000Warsaw,IndianaCorporateHeadquartersandTheZimmerInstitute.....................Owned117,000Warsaw,IndianaOffices,Manufacturing&Warehousing................................Leased90,000Carlsbad,CaliforniaOffices,Research&Development&Manufacturing.....................Leased118,000Minneapolis,MinnesotaOffices&Research&Development..................................Owned51,000Statesville,NorthCarolinaManufacturing&Warehousing.......................................Owned156,000Dover,OhioResearch&Development,Manufacturing&............................Owned140,000Warehousing......................................................Leased61,000Parsippany,NewJerseyOffice,Research&Development,Manufacturing,Warehousing&BioSkillsInstitute..........................................................Leased115,000Memphis,TennesseeOffices&Warehousing.............................................Leased30,000Austin,TexasOffices,Administration,Research&Development......................Leased97,000Sydney,AustraliaOffices&Warehousing.............................................Leased36,000Mo¨dling,AustriaOffices&Warehousing.............................................Owned14,000Wemmel,BelgiumOffices&Warehousing.............................................Leased15,000Mississauga,CanadaOffices&Warehousing.............................................Leased52,000Beijing,ChinaOffices&Manufacturing............................................Leased80,000Xianning,ChinaOffices,Research&Development&Manufacturing.....................Leased53,000Shanghai,ChinaOffices&Warehousing.............................................Leased18,000Etupes,FranceOffices,Manufacturing&Warehousing................................Owned90,000Eschbach,GermanyDistributionCenter................................................Owned94,000Freiburg,GermanyOffices&Warehousing.............................................Leased51,000Shannon,IrelandOffices&Manufacturing............................................Owned125,000Milan,ItalyOffices&Warehousing.............................................Leased47,000Gotemba,JapanOffices,ServiceCenter&Warehousing...............................Owned87,000Tokyo,JapanOffices&Warehousing.............................................Leased24,000Seoul,KoreaOffices&Warehousing.............................................Leased22,000Utrecht,NetherlandsOffices&Warehousing.............................................Leased16,000Ponce,PuertoRicoOffices,Manufacturing&Warehousing................................Owned213,000SingaporeOffices&Warehousing.............................................Leased19,000Barcelona,SpainOffices&Warehousing.............................................Leased16,000Winterthur,SwitzerlandOffices,Research&Development&Manufacturing.....................Leased374,000Mu¨nsingen,SwitzerlandOffices&Warehousing.............................................Owned76,000Geneva,SwitzerlandOffices,Research&Development&Manufacturing.....................Leased15,000Swindon,UnitedKingdomOffices&Warehousing.............................................Leased70,000Webelievethecurrentfacilities,includingmanufacturing,warehousing,researchanddevelopmentandofficespaceprovidesufficientcapacitytomeetongoingdemands.Onceafacilityreaches85percentutilization,weexaminealternativesforeitherexpandingthatfacilityoracquiringnewfacilitiestomeetourongoingdemands.Inadditiontotheabove,wemaintainmorethan100otherofficesandwarehousefacilitiesinmorethan25countriesaroundtheworld,includingtheU.S.,Japan,Australia,France,Russia,India,Germany,Italy,SwitzerlandandChina.Webelievethatallofthefacilitiesandequipmentareingoodcondition,wellmaintainedandabletooperateatpresentlevels.ITEM3.LegalProceedingsInformationpertainingtolegalproceedingsinwhichweareinvolvedcanbefoundinNote19toourconsolidatedfinancialstatements(seePartII,Item8ofthisreport).ITEM4.[RemovedandReserved]NotApplicable.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT19PartIIITEM5.MarketfortheRegistrant’sCommonEquity,RelatedStockholderMattersandIssuerPurchasesofEquitySecuritiesOurcommonstockistradedontheNewYorkStockExchangeandtheSIXSwissExchangeunderthesymbol“ZMH.”ThehighandlowsalespricesforourcommonstockontheNewYorkStockExchangeforthecalendarquartersoffiscalyears2010and2009aresetforthasfollows:QuarterlyHigh-LowSharePricesHighLowYearEndedDecember31,2010:FirstQuarter$64.77$54.72SecondQuarter$62.50$52.26ThirdQuarter$58.08$46.27FourthQuarter$54.99$47.09YearEndedDecember31,2009:FirstQuarter$44.36$30.67SecondQuarter$47.41$35.36ThirdQuarter$55.25$38.55FourthQuarter$60.64$49.14Wehavenotdeclaredorpaiddividendsonourcommonstocksincebecomingapubliccompanyin2001.Currently,wedonotanticipatepayinganycashdividendsonthecommonstockintheforeseeablefuture.Ourcreditfacilityalsorestrictsthepaymentofdividendsundercertaincircumstances.ThenumberofholdersofourcommonstockonFebruary10,2011wasapproximately315,700.OnFebruary10,2011,theclosingpriceofthecommonstock,asreportedontheNewYorkStockExchange,was$60.05pershare.TheinformationrequiredbythisItemconcerningequitycompensationplansisincorporatedbyreferencetoItem12ofthisreport.ThefollowingtablesummarizesrepurchasesofcommonstocksettledduringthethreemonthsendedDecember31,2010:TotalNumberofSharesPurchasedAveragePricePaidperShareTotalNumberofSharesPurchasedasPartofPubliclyAnnouncedPlansorPrograms(1)ApproximateDollarValueofSharesthatMayYetBePurchasedUnderPlansorProgramsOctober2010–$–57,039,739$1,306,584,171November20102,000,82450.4559,040,5631,205,641,008December2010––59,040,5631,205,641,008Total2,000,824$50.4559,040,563$1,205,641,008(1)IncludesrepurchasesmadeundertheprogramannouncedinJuly2010authorizing$1.5billionofrepurchasesthroughDecember31,2013.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT20ITEM6.SelectedFinancialDataThefinancialinformationforeachofthepastfiveyearsendedDecember31issetforthbelow(inmillions,exceptpershareamounts):SummaryofOperations20102009200820072006Netsales$4,220.2$4,095.4$4,121.1$3,897.5$3,495.4NetearningsofZimmerHoldings,Inc.596.9717.4848.6773.2834.5EarningspercommonshareBasic$2.98$3.34$3.73$3.28$3.43Diluted2.973.323.723.263.40AveragecommonsharesoutstandingBasic200.0215.0227.3235.5243.0Diluted201.1215.8228.3237.5245.4BalanceSheetDataTotalassets$7,999.9$7,785.5$7,239.0$6,633.7$5,974.4Long-termdebt1,142.11,127.6460.1104.399.6Otherlong-termobligations384.0328.5353.9328.4323.4Stockholders’equity5,771.35,638.75,653.95,452.44,923.2ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT21ITEM7.Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperationsThefollowingdiscussionandanalysisshouldbereadinconjunctionwiththeconsolidatedfinancialstatementsandthecorrespondingnotesincludedelsewhereinthisForm10-K.Certainpercentagespresentedinthisdiscussionandanalysisarecalculatedfromtheunderlyingwhole-dollaramountsandthereforemaynotrecalculatefromtheroundednumbersusedfordisclosurepurposes.Certainamountsinthe2009and2008consolidatedfinancialstatementshavebeenreclassifiedtoconformtothe2010presentation.OVERVIEWWebelievethefollowingdevelopmentsortrendsareimportantinunderstandingourfinancialcondition,resultsofoperationsandcashflowsfortheyearendedDecember31,2010.Demand(VolumeandMix)TrendsIncreasedvolumeandchangesinthemixofproductsalescontributed3percentagepointsof2010salesgrowth,whichis1percentagepointabovetherateofgrowthfrom2009comparedto2008.Webelievelong-termindicatorspointtowardsustainedgrowthdrivenbyanagingglobalpopulation,growthinemergingmarkets,obesity,provenclinicalbenefits,newmaterialtechnologies,advancesinsurgicaltechniquesandmoreactivelifestyles,amongotherfactors.Inaddition,theongoingshiftindemandtopremiumproducts,suchasLongevityandProlongHighlyCrosslinkedPolyethylenes,TrabecularMetalTechnologyproducts,hipstemswithKinectivTechnology,high-flexknees,kneerevisionproducts,poroushipstemsandtheintroductionofpatientspecificdevices,isexpectedtocontinuetopositivelyaffectsalesgrowth.PricingTrendsGlobalsellingpricesdecreased1percentduring2010.SellingpricesintheAmericas,EuropeandAsiaPacificdecreased1percent,wereflat,anddecreased2percent,respectively,during2010.Wecontinuetoseepricingpressurefromgovernmentalhealthcarecostcontainmenteffortsandfromlocalhospitalsandhealthsystems.IntheAmericas,wehaveexperiencedcompressionofhistoricpricingdifferentialsamongstourcustomers.AsiaPacificwasespeciallyinfluencedbyabi-annualpricingadjustmentinJapanthatwentintoeffectonApril1,2010.Duetothesepressures,weexpectsellingpriceswillcontinuetohaveanegative1to2percenteffectonsalesonaglobalbasisin2011.ForeignCurrencyExchangeRatesFor2010,foreigncurrencyexchangeratesresultedina1percentincreaseinsales.Ifforeigncurrencyexchangeratesremainconsistentwith2010yearendrates,weestimatethataweakerdollarversusforeigncurrencyexchangerateswillhaveapositiveeffectin2011ofapproximately1percentonsales.Weaddresscurrencyriskthroughregularoperatingandfinancingactivitiesand,underappropriatecircumstancesandsubjecttoproperauthorization,throughtheuseofforwardcontractsandoptionssolelytomanageforeigncurrencyvolatilityandrisk.Changestoforeigncurrencyexchangeratesaffectsalesgrowth,butduetooffsettinggains/lossesonhedgecontractsandoptions,whicharerecordedincostofproductssold,theeffectonnetearningsintheneartermisexpectedtobeminimal.GlobalEconomicConditionsWebelieveadverseconditionsinthebroadereconomyhavenegativelyaffectedelectivehospitalprocedures.Inthefourthquarterof2010,wesawsomestabilizationinprocedurevolumesandwebelievethenumberofprocedureswillincreaseastheglobaleconomystrengthens.Despitethecurrentconditionsoftheglobaleconomy,itiswellknownthatdemographictrendswillexpandthepatientbasethatneedsourproducts.Webelievethesefactorswillultimatelyfosterlong-termsustainedgrowthevenifintheshort-termthetimingoftheseelectiveprocedurescontinuestobeadverselyaffected.2011OutlookWeestimateoursaleswillgrowbetween3and5percentin2011.Suchsalesgrowthassumeskneeandhipprocedureswillgrowinlowsingledigitswithmodestglobaleconomicgrowthandrelativelystableemployment.Asdiscussedpreviously,weexpectpricingtohaveanegativeeffectonsalesgrowthby1to2percent,andforeigncurrencyexchangeratestohaveapositiveeffectonsalesgrowthbyapproximately1percentbaseduponDecember31,2010rates.AssumingcurrencyratesremainatDecember31,2010rates,weexpectourgrossmargintobeapproximately75percentofsalesin2011.ThistakesintoaccountanticipatedlossesfromforeigncurrencyhedgelossesresultingfromrelativeweaknessintheU.S.Dollar.Weexpecttocontinuemakinginvestmentsinresearchanddevelopment(R&D)intherangeof5to6percentofsales.Selling,generalandadministrativeexpenses(SG&A)asapercentofsalesisexpectedtobebetween40and41percentaswerealizeoperationalefficienciesfromglobalrestructuringandtransformationinitiativesandleveragerevenuegrowth.Weexpecttoincur$75to$80millionofexpensesin2011relatedtocertainglobalrestructuringandtransformationinitiatives.Wealsoexpecttoincuranadditional$15to$20millionforcertainacquisitionandintegrationcostsconnectedwithrecentacquisitions.Weanticipaterecognizingsomeofthe$90to$100millionincostofproductssoldandthemajorityin“Specialitems”onourstatementofnetearnings.ThegrossmarginandSG&Apercentagesdiscussedabovedonotincludetheseexpenses.Weexpectinterestandotherexpensetobeapproximately$50millionin2011,whichisslightlylowerthan2010aswehaveenteredintoaninterestrateswaptoeffectivelyconvertaportionofour$1billionseniornotesfromfixed-ratedebttovariable-ratedebt.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT22RESULTSOFOPERATIONSNetSalesbyReportableSegmentThefollowingtablespresentnetsalesbyreportablesegmentandthecomponentsofthepercentagechanges(dollarsinmillions):20102009%Inc/(Dec)Volume/MixPriceForeignExchangeYearEndedDecember31,Americas$2,431.6$2,372.42%3%(1)%–%Europe1,099.51,119.2(2)1–(3)AsiaPacific689.1603.8148(2)8Total$4,220.2$4,095.433(1)120092008%Inc/(Dec)Volume/MixPriceForeignExchangeYearEndedDecember31,Americas$2,372.4$2,353.91%2%(1)%–%Europe1,119.21,179.1(5)1–(6)AsiaPacific603.8588.131(1)3Total$4,095.4$4,121.1(1)2(1)(2)“ForeignExchange”asusedinthetablesinthisreportrepresentstheeffectofchangesinforeigncurrencyexchangeratesonsalesgrowth.NetSalesbyProductCategoryThefollowingtablespresentnetsalesbyproductcategoryandthecomponentsofthepercentagechanges(dollarsinmillions):20102009%Inc(Dec)Volume/MixPriceForeignExchangeYearEndedDecember31,ReconstructiveKnees$1,789.9$1,756.32%3%(2)%1%Hips1,262.31,228.534(2)1Extremities150.1135.61110–1Total3,202.33,120.434(2)1Dental219.0204.7744(1)Trauma245.5234.85122Spine234.4253.6(8)(6)(1)(1)Surgicalandother319.0281.91311–2Total$4,220.2$4,095.433(1)120092008%Inc(Dec)Volume/MixPriceForeignExchangeYearEndedDecember31,ReconstructiveKnees$1,756.3$1,761.1–%3%(1)%(2)%Hips1,228.51,279.4(4)(1)(1)(2)Extremities135.6121.01214–(2)Total3,120.43,161.5(1)1(1)(1)Dental204.7227.5(10)(9)1(2)Trauma234.8222.3651–Spine253.6229.71012–(2)Surgicalandother281.9280.11–1–Total$4,095.4$4,121.1(1)2(1)(2)ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT23Thefollowingtablepresentsnetsalesbyproductcategorybyregion(dollarsinmillions):2010200920082010vs.2009%Inc(Dec)2009vs.2008%Inc(Dec)YearEndedDecember31,ReconstructiveKneesAmericas$1,110.5$1,098.7$1,089.21%1%Europe418.7428.1451.2(2)(5)AsiaPacific260.7229.5220.7144HipsAmericas589.7565.9576.14(2)Europe433.2448.6493.9(3)(9)AsiaPacific239.4214.0209.4122ExtremitiesAmericas115.9103.788.11218Europe24.423.925.82(7)AsiaPacific9.88.07.12215Total3,202.33,120.43,161.53(1)DentalAmericas113.9102.8114.911(11)Europe80.078.282.22(5)AsiaPacific25.123.730.46(22)TraumaAmericas130.1125.9126.73(1)Europe50.252.747.4(5)11AsiaPacific65.256.248.21617SpineAmericas166.5192.6180.4(14)7Europe51.546.940.11017AsiaPacific16.414.19.21754SurgicalandotherAmericas205.0182.8178.5122Europe41.540.838.526AsiaPacific72.558.363.124(8)Total$4,220.2$4,095.4$4,121.13(1)KneesKneesaleshaveexperiencedflattomoderategrowthoverthepasttwoyears.Ourkneesaleshavebeenaffectedbybroadereconomicconditionsimpactingvolume/mixandcompetitivepressuresfromnewerkneesystemsthathavemoremodernsurgicalinstrumentsforimplantation.Weintendtocounterthesecompetitivepressuresin2011andthereafteraswecontinuetolaunchournewpatientspecificandposteriorreferencinginstrumentationsystems,aswellasthroughnewproductdevelopment.TheNexGenCompleteKneeSolutionproductline,includingGenderSolutionsKneeFemoralImplants,theNexGenLPS-FlexKneeandtheNexGenCR-FlexKnee,togetherwiththeGenderSolutionsNatural-KneeFlexSystemledkneesales.Inaddition,salesofpartialkneedevices,includingtheZimmerUnicompartmentalKneeandtherecentlyreleasedGenderSolutionsPatello-FemoralJoint,exhibitedgrowth.InEurope,changesinforeigncurrencyexchangeratesnegativelyaffectedkneesalesintheyearsendedDecember31,2010and2009by2percentand6percent,respectively.InAsiaPacific,changesinforeigncurrencyexchangeratespositivelyaffectedkneesalesintheyearsendedDecember31,2010and2009by10percentandzeropercent,respectively.HipsHipsalesreboundedfromnegativegrowthin2009topositivegrowthin2010drivenbynewproductintroductions,suchasourContinuumAcetabularSystemandourZimmerM/LTaperStemwithKinectivTechnology.TheZimmerM/LTaperStem,theZimmerM/LTaperStemwithKinectivTechnology,theCLSSpotornoStemfromtheCLSHipSystemandtheAlloclassicZweymu¨llerHipStemledhipstemsales.Inaddition,salesofrevisionhipproducts,suchastheZMRHipSystemandtheTrabecularMetalRevisionShellandAugmentCups,werestrongwhencomparedtotheprioryearperiods,asweresalesofFitmoreHipStems.InEurope,changesinforeigncurrencyexchangeratesnegativelyaffectedhipsalesintheyearsendedDecember31,2010and2009by2percentand6percent,respectively.InAsiaPacific,changesinforeigncurrencyexchangeratespositivelyaffectedhipsalesintheyearsendedDecember31,2010and2009by8percentand4percent,respectively.ExtremitiesExtremitiessaleshavegrownbylowdoubledigitsthepasttwoyearsledbytheBigliani/FlatowCompleteShoulderSolutionandtheZimmerTrabecularMetalReverseShoulderSystem.TrabecularMetalTechnologyisplayingacriticalroleZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT24inaddressingpreviouslyunmetclinicalneedsintheexpandingextremitiesmarket.DentalDentalsaleshaveexperiencedasignificantturnaroundfromanegative10percentdeclinein2009topositive7percentgrowthin2010.In2009,ourdentalsaleswereaffectedmorebytheglobaleconomicenvironmentthanourotherproductcategories,asmanydentalproceduresarenotreimbursedbythird-partypayors.SaleswereledbytheTaperedScrew-VentImplantSystem.Additionally,regenerativeproductshaveexhibitedstrongsalesgrowthin2010.TraumaTraumasalesincreasedinthemidsingledigitsthepasttwoyears.ZimmerPeriarticularLockingPlatesandtheITST»Intertrochanteric/SubtrochantericFixationSystemledtraumasales,whilesalesofcableproductsalsomadeastrongcontribution.In2009,weinitiatedthelaunchoftheZimmerNaturalNailSystem,whichmadeastrongcontributionto2010sales.Weanticipatethatabroaderlaunchofthatsystemwillcontinuetopositivelyaffectsalesgrowth.SpineInthefourthquarterof2008weacquiredAbbottSpine.Asaresultoftheacquisition,spinesalesincreasedin2009,butunderlyingthatperformanceweresaleslossesassociatedwithintegrationofthebusiness.In2010,onceweanniversariedoutoftheadditionalsalesfromtheacquisition,weexperiencedsalesdeclines,mostnotablyinourAmericassegment.InadditiontotheoperationalchallengesassociatedwiththeintegrationoftheAbbottSpinebusinessintheAmericas,adifficultreimbursementlandscapeandasignificantdeclineinourDynesysDynamicStabilizationSystemhaveaffectedsales.IncontrasttotheAmericas,ourspinesalesgrewinEuropeandAsiaPacificin2010drivenbythestabilizationofourdistributionchannels,whichfollowedtheAbbottSpineintegrationactivityof2009.Overall,solidsalesofthePathFinderandSequoiaPedicleScrewSystems,ourUniversalClampSystemandourTrinicaAnteriorCervicalPlateSystempartlyoffsetadeclineinsalesoftheDynesysSystem.SurgicalandotherSurgicalandothersaleswentfrom1percentsalesgrowthin2009to13percentsalesgrowthin2010.In2008,wevoluntarilyrecalledandsuspendedproductionofcertainpatientcareproducts,andwereabletoreintroducethoseproductsduringtheyearin2009.Accordingly,2009salesweresuppressed,especiallyinthefirsthalfoftheyear,butwestartedtoregainmarketshareinthesecondhalfof2009andthroughout2010.SurgicalsaleswereledbyPALACOSBoneCement,wounddebridementproducts,tourniquetproductsandpoweredinstruments.Thefollowingtablepresentsestimated*2010globalmarketsizeandmarketshareinformation(dollarsinbillions):GlobalMarketSizeGlobalMarket%Growth**ZimmerMarketShareZimmerMarketPositionReconstructiveKnees$6.74%27%1Hips5.93212Extremities1.212133Total$13.84231Dental$3.2275Trauma$5.0655Spine***$8.9337*Estimatesarenotpreciseandarebasedoncompetitorannualfilings,WallStreetequityresearchandCompanyestimates**Excludestheeffectofchangesinforeigncurrencyexchangeratesonsalesgrowth***SpineincludesrelatedorthobiologicsExpensesasaPercentofNetSales2010200920082010vs.2009Inc(Dec)2009vs.2008Inc(Dec)YearEndedDecember31,Costofproductssold24.0%24.2%24.2%(0.2)–Researchanddevelopment5.25.04.70.20.3Selling,generalandadministrative41.642.241.3(0.6)0.9Certainclaims1.80.91.70.9(0.8)Goodwillimpairment4.81.8–3.01.8Netcurtailmentandsettlement–(0.8)–0.8(0.8)Specialitems0.81.81.6(1.0)0.2Operatingprofit21.724.926.5(3.2)(1.6)Interestandotherincome(expense),net(1.3)(0.5)0.80.81.3CostofProductsSoldGrossmarginintotalhasnotchangedsignificantlyoverthepastthreeyearsforvariousoffsettingreasons.Inthelasthalfof2009andearly2010,lowerproductionlevelscausedourmanufacturingcostsperunittobehigher,resultinginincreasedcostsinboth2010and2009.In2010,thehigherunitcostswereoffsetbylowerexcessandobsolescencechargesresultingfromimprovedinventorymanagementandcertainproduct-specificmattersthatwereexperiencedin2009whichdidnotrecurin2010.Foreigncurrencyhedgingalsoaffectsourgrossmargin.Underourhedgingprogram,forderivativeswhichqualifyashedgesoffuturecashflows,theeffectiveportionofchangesinfairvalueistemporarilyrecordedinothercomprehensiveincomeandthenrecognizedincostofproductssoldwhenthehedgeditemaffectsearnings.In2010and2009,werecognizedhedgegainsincostofproductssoldwith2010gainsbeinglessthan2009gains.In2008,werecognizedforeigncurrencyhedgelosses.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT25Thefollowingtablereconcilesthegrossmarginchangesfor2010and2009:20102009YearEndedDecember31,Prioryeargrossmargin75.8%75.8%Increasedunitmanufacturingcosts(0.8)(1.7)Excessandobsoleteinventory0.9(0.4)Foreigncurrencyexchangeimpact,net(0.4)2.0Inventorystep-up0.3(0.1)Other0.20.2Currentyeargrossmargin76.0%75.8%OperatingExpensesR&DexpenseandR&Dasapercentofsaleshasincreasedineachofthelasttwoyears.Theseincreasesareinlinewithourstrategytoinvestinnewproductdevelopmentactivitiesacrossnearlyallofourproductcategories,aswellastoincreasespendingonexternalresearch,clinical,regulatoryandqualityinitiatives.Additionally,in2008weexperiencedsomedelayinR&Dactivitiesasweimplementedenhancementstoourcomplianceprogram.WecontinuetoexpectR&Dspendingtobebetween5to6percentofsalesin2011.SG&Ahasincreasedindollarstermsoverthelastthreeyears,butasapercentofsaleswaslowerin2010and2008comparedto2009.In2010,SG&Aincreasedindollartermsfrom2009primarilyforvariablesellinganddistributionexpensesas2010saleswerehigherthan2009sales,andfromincreasedspendingtofundmedicaleducationprograms.SG&Aasapercentofsalesin2010decreasedby60basispointsfrom2009,reflectingdisciplinedspendingcombinedwithahigherbaseofsales,andnoexpensein2010relatedtocorporatemonitoringthatendedafterthefirstquarterof2009.In2009,SG&Aasapercentofsalesincreasedapproximately90basispointscomparedto2008.SG&Aexpenseinthe2008periodincludedapproximately$60millionofincrementalcosts,suchasmonitorfeesandconsultingandlegalfeesassociatedwiththeglobalroll-outofenhancementstoourcomplianceprogram.Thesavingsfromthesecostsin2009wereoffsetbyincreasedspendingtofundenhancedmedicaleducationprograms,AbbottSpinecostsandincreasedproductliabilityclaims.TheacquisitionofAbbottSpineincreasedSG&Acostsforitemssuchassellingexpenses,increasedinstrumentdepreciationandamortizationoftheacquiredintangibleassets.Additionally,SG&Aasapercentageofnetsaleswasnegativelyimpactedbythedecreaseinrevenuescausedbychangesinforeigncurrencyrates.AmajorityofourSG&AspendisincurredintheU.S.,primarilyfromourcorporateheadquartersandsimilarfunctionsatourvariousbusinessessuchasDental,Trauma,SpineandSurgical.Therefore,SG&Aexpensedoesnotrespondtochangesinforeigncurrencyratesproportionallytoourrevenue,whichcausedSG&Aasapercentageofnetsalestoincreasein2009comparedto2008.“Certainclaims”expenseisaprovisionforestimatedliabilitiestoDuromCuppatientsundergoingrevisionsurgeries.Provisionsof$35.0millionand$69.0millionwereoriginallyrecordedduring2009and2008,respectively,withanadditional$75.0millionrecordedduring2010,bringingthetotalprovisionto$179.0millionfortheseclaims.Formoreinformationregardingtheseclaims,seeNote19totheconsolidatedfinancialstatements.Inconnectionwithourannualgoodwillimpairmenttestsperformedinthefourthquartersof2010and2009,wenotedthatthecarryingvaluesoftheassetsofourU.S.Spinereportingunitwereinexcessofthereportingunit’sestimatedfairvalue.Asaresult,werecordedgoodwillimpairmentchargesof$204.0millionand$73.0millionduringtheyearsendedDecember31,2010and2009,respectively.Formoreinformationregardinggoodwillimpairmentandthefactorsthatledtotheimpairment,seeNote9totheconsolidatedfinancialstatements.Wehavefiveotherreportingunitswithgoodwillassignedtothem.Weestimatethefairvaluesofthosereportingunitsusingtheincomeapproachbydiscountingtopresentvaluetheestimatedfuturecashflowsofthereportingunit.Foreachofthosefiveotherreportingunits,theestimatedfairvaluessubstantiallyexceedtheircarryingvalue.Werecognizedanetcurtailmentandsettlementgainof$32.1millionduring2009relatedtoamendingourU.S.andPuertoRicopostretirementbenefitplans.Formoreinformationregardingthenetcurtailmentandsettlementgain,seeNote14totheconsolidatedfinancialstatements.“Specialitems”expensefortheyearsendedDecember31,2010,2009and2008were$34.7million,$75.3millionand$68.5million,respectively.2010includesexpensesrelatedtorestructuringofourinformationtechnologyinfrastructureaswellasourmanagementstructure.Thisresultedin$7.7millionofassetimpairmentchargesand$6.7millionofemployeeseveranceandtermination-relatedexpenses.Wehavealsoincurredconsultingandprofessionalfees,facilityandemployeerelocationcosts,contractterminationexpensesandothervariousexpensesresultingfromouracquisitionsofAbbottSpine,BeijingMontagneMedicalDeviceCo.,Ltd,andthirdpartydistributors.“Specialitems”alsoincludestheimpairmentofanavailable-for-salesecuritythatwasacquiredaspartofabusinessacquisitionandcertainlitigationrelatedmatters.“Specialitems”in2009includedaworkforcerealignment,whichresultedintheeliminationofpositionsinsomeareasandincreasesinotherstosupportlong-termgrowth.Asaresultofthisrealignmentandheadcountreductionsfromacquisitions,weincurredapproximately$19.0millionofseveranceandtermination-relatedexpenses.Other“Specialitems”in2009includedapproximately$9.4millionofexpensesrelatedtocontractterminationcosts,$23.4millionofcertainlitigationmattersthatwererecognizedduringtheperiodandvariouscostsincurredtointegratetheAbbottSpinebusinessacquiredinthefourthquarterof2008.Includedin“Specialitems”in2008was$38.5millionofin-processresearchanddevelopmentrelatedtotheAbbottSpineacquisitionandothercostsrelatedtotheintegrationofAbbottSpine.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT26SeeNote2totheconsolidatedfinancialstatementsformoreinformationregarding“Specialitems”charges.InterestandOther,IncomeTaxesandNetEarningsInterestandotherexpensehasincreasedoverthepastthreeyears.Interestandotherexpenseincreasedin2010over2009duetothe$1.0billionseniorunsecurednotesthatweissuedinNovember2009.Asaresult,in2010wehadafullyearofinterestonthesenotes.Interestandotherexpensein2009increasedover2008astheresultoflong-termdebtincurredtopartiallyfundtheAbbottSpineacquisitioninthefourthquarterof2008andtheissuanceoftheseniorunsecurednotesinNovember2009.Interestandotherincomein2008includedarealizedgainof$38.8millionrelatedtothesaleofcertainmarketablesecurities.TheeffectivetaxrateonearningsbeforeincometaxesfortheyearsendedDecember31,2010,2009and2008hasbeen30.6percent,28.1percentand24.3percent,respectively.Theeffectivetaxratesfor2010and2009arenegativelyimpactedbythegoodwillimpairmentchargesof$204.0millionand$73.0million,respectively,forwhichnotaxbenefitwasrecorded.ThegoodwillimpairmentchargeshaveincreasedtheeffectivetaxratefortheyearsendedDecember31,2010and2009byapproximately6percentand2percent,respectively.Additionally,in2010theeffectivetaxratewasfavorablyimpactedbytheresolutionofcertaintaxcontingencies.Theeffectivetaxratefor2008includestheimpactofacurrenttaxbenefitof$31.7millionrelatedtoa2007U.S.governmentcivilsettlementexpense,resultinginadecreaseofapproximately3percentinthe2008effectivetaxrate.Thisimpactonthe2008effectivetaxratewaspartiallyoffsetbyAbbottSpineacquisition-relatedin-processresearchanddevelopmentchargesrecordedduring2008forwhichnotaxbenefitwasrecorded.Thesediscreteitemsaccountforthemajorityofthechangeinoureffectivetaxratesinthepastthreeyears.Asaresultoftherevenuesandexpensesdiscussedpreviously,netearningsin2010decreased17percentcomparedto2009.In2009,netearningsdecreased15percentcomparedto2008.Basicanddilutedearningspersharedecreased11percentin2010comparedto2009,while2009basicanddilutedearningspersharedecreased10percentand11percent,respectively,from2008.Thedisproportionatechangeinearningspershareascomparedtonetearningsisattributedtotheeffectofsharerepurchasesmadeinthelastthreeyears.Non-GAAPoperatingperformancemeasuresWeusenon-GAAPfinancialmeasurestoevaluateouroperatingperformancethatdifferfromfinancialmeasuresdeterminedinaccordancewithU.S.generallyacceptedaccountingprinciples(GAAP).Ournon-GAAPfinancialmeasuresexcludetheimpactofinventorystep-upcharges,“Specialitems,”“Certainclaims,”NetcurtailmentandsettlementandGoodwillimpairment,andthetaxesonthoseitemsandthetaxbenefitrelatedtoa2007civilsettlement.Weusethisinformationinternallyandbelieveitishelpfultoinvestorsbecauseitallowsmoremeaningfulperiod-to-periodcomparisonsofouron-goingoperatingresults,ithelpstobetteridentifyoperatingtrendsandperformtrendanalysisthatmayotherwisebemaskedordistortedbythesetypesofitems,andprovidesahigherdegreeoftransparencyofcertainitems.Certainofthesenon-GAAPfinancialmeasuresareusedasmetricsforourincentivecompensationprograms.Ournon-GAAPadjustednetearningsusedforinternalmanagementpurposesfortheyearsendedDecember31,2010,2009and2008were$871.6million,$849.9million,and$924.3million,respectively,andournon-GAAPadjusteddilutedearningspersharewere$4.33,$3.94,and$4.05,respectively.Ournon-GAAPadjustednetearningsincreasedin2010comparedto2009duetoincreasedsales,disciplinedspendinginSG&A,andtheabsenceofmonitor-relatedexpensesin2010.Suchincreasestonon-GAAPadjustednetearningswereslightlyoffsetbyincreasedR&Dandmedicaleducationexpensesandincreasedinterestexpensefromtheseniorunsecurednotesissuedin2009.Ournon-GAAPadjustednetearningsdecreasedin2009comparedto2008aslowersalesandhigherR&Dandmedicaleducationexpensesreducednon-GAAPadjustednetearnings.Additionally,2008non-GAAPadjustednetearningsfeatureda$38.8millionpre-taxgainrelatedtosalesofcertainmarketablesecurities.The2009perioddidcontainsomeexpensesavingssuchasthe$60millionofincrementalsavingsrelatedtomonitorfeesandconsultingandlegalfeesassociatedwiththeglobalroll-outofenhancementstoourcomplianceprogram,butsuchsavingswerenotenoughtooffsettheotheritemsthatreducednon-GAAPadjustednetearnings.ThefollowingarereconciliationsfromourGAAPnetearningsanddilutedearningspersharetoournon-GAAPadjustednetearningsandnon-GAAPadjusteddilutedearningspershareusedforinternalmanagementpurposes.201020092008YearEndedDecember31,NetEarningsofZimmerHoldings,Inc.$596.9$717.4$848.6Inventorystep-up1.412.57.0Specialitems34.775.368.5Certainclaims75.035.069.0Netcurtailmentandsettlement–(32.1)–Goodwillimpairment204.073.0–Taxesoninventorystep-up,specialitems,certainclaimsandnetcurtailmentandsettlement*(40.4)(31.2)(37.1)Taxbenefitfromcivilsettlement––(31.7)AdjustedNetEarnings$871.6$849.9$924.3*Thetaxeffectiscalculatedbaseduponthestatutoryratesforthejurisdictionswheretheitemswereincurred.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT27201020092008YearEndedDecember31,DilutedEPS$2.97$3.32$3.72Inventorystep-up0.010.060.03Specialitems0.170.350.30Certainclaims0.370.160.30Netcurtailmentandsettlement–(0.15)–Goodwillimpairment1.010.34–Taxesoninventorystep-up,specialitems,certainclaimsandnetcurtailmentandsettlement*(0.20)(0.14)(0.16)Taxbenefitfromcivilsettlement––(0.14)AdjustedDilutedEPS$4.33$3.94$4.05*Thetaxeffectiscalculatedbaseduponthestatutoryratesforthejurisdictionswheretheitemswereincurred.HealthcareReformintheU.S.Wecontinuetoassesstheimpactthatthehealthcarereformlegislationpassedin2010bytheU.S.federalgovernmentwillhaveonourbusiness.Thenewlawincludesa2.3percentexcisetaxonamajorityofourU.S.salesthatisscheduledtobeimplementedin2013.LIQUIDITYANDCAPITALRESOURCESCashflowsprovidedbyoperatingactivitieswere$1,193.5millionin2010comparedto$1,117.5millionin2009.Theprincipalsourceofcashfromoperatingactivitiesin2010wasnetearnings.Non-cashchargesincludedinnetearningsaccountedforanother$535.1millionofoperatingcash.Allotheritemsofoperatingcashflowsin2010provided$61.5millionofcash.Theresolutionofoutstandingpaymentstohealthcareprofessionalsandinstitutionsresultedinincreasedcashoutflowsduringthe2009periodcomparedtothedelayinsimilarpaymentsduringthe2008periodasweimplementedenhancementstoourcomplianceprogram.Theresolutionoftheseoutstandingpayments,alongwithachangeinthetimingofemployeebonuspaymentscomparedtothe2008periodandproductliabilitypayments,contributedtoincreasedoutflowsfromaccruedexpensesin2009.Accruedexpensesdidnothaveanysuchsignificantvariationsin2010,thusreflectingloweroutflowsin2010inourindirectstatementofcashflowswhencomparedto2009.Wehavepaidapproximately$45millionand$25millionin2010and2009,respectively,relatedtoDuromCupproductliabilityclaims.WeestimatetheremainingliabilityforDuromCupclaimsasofDecember31,2010,is$132.8million.Weexpecttopaythemajorityofthisamountoverthenextthreeyears.AtDecember31,2010,wehad58daysofsalesoutstandingintradeaccountsreceivable,anincreaseof2dayswhencomparedtoDecember31,2009,reflectingsomechangesincollectionpracticesthatmayhaveslightlyincreaseddayssalesoutstanding,buthavedecreasedourcoststocollectatanacceptablerisklevel.AtDecember31,2010,wehad307daysofinventoryonhand,aslightincreaseof5dayscomparedtoDecember31,2009.Cashflowsusedininvestingactivitieswere$726.9millionin2010,comparedto$381.2millionin2009.Additionstoinstrumentsincreasedin2010comparedtothe2009periodtosupportnewproductlaunches,suchasourContinuumAcetabularSystem,andasweintroducednewinstrumentationinourkneeproductcategorysuchasposteriorreferencinginstrumentation.In2011,weexpecttospendapproximately$140to$150milliononinstrumentstosupportnewproductsandsalesgrowth.Spendingonotherproperty,plantandequipmentdecreasedin2010comparedtothe2009periodastherewerenosignificantinfrastructureinitiativesin2010.During2011,weexpecttopurchaseapproximately$110to$120millioninotherproperty,plantandequipment,reflectingthecashoutlaysnecessarytocompletenewproduct-relatedinvestmentsandreplacementofoldermachineryandequipment.Beginningin2009andwithmoresignificancein2010,webeganinvestingsomeofourcashandcashequivalentsinhighlyrateddebtsecurities.Thepurchasesandanysalesormaturitiesoftheseinvestmentsarereflectedascashflowsfrominvestingactivities.Acquiredintellectualpropertyrightsdecreasedto$8.5millionin2010comparedto$35.8millionin2009and$109.4millionin2008.Theseitemsrelatetolump-sumpaymentsmadetocertainhealthcareprofessionalsandinstitutionsinplaceoffutureroyaltypaymentsthatotherwisewouldhavebeendueunderthetermsofexistingcontractualarrangements.Theselump-sumpaymentswerebaseduponathirdpartyfairmarketvaluationofthecurrentnetpresentvalueofthecontractualarrangements.Includedininvestingcashflowsin2008were$363.0millionpaidtoacquireAbbottSpineand$54.9millionofproceedswereceivedfromthesaleofcertainequitysecurities.Inthepastthreeyears,wehavemadeothersmallerbusinessacquisitionsincludingBeijingMontagneMedicalDeviceCo.,Ltd.,SodemDiffusionS.A.andforeign-baseddistributors.Cashflowsusedinfinancingactivitieswere$489.6millionfor2010,comparedto$262.1millionin2009.In2010,theonlysignificantcashweusedinfinancingactivitiesrelatedtotherepurchaseof$505.6millionofourcommonstock.InNovember2009,wesold$1.0billionaggregateprincipalamountofseniorunsecurednotes(SeniorNotes)inapublicoffering.Wereceivednetproceedsofapproximately$998.8million,netofanofferingdiscountof$1.2million.Wealsopaidanadditional$8.5millionofdebtissuancecostsrelatedtothesaleoftheSeniorNotes.WeusedcashfromoperatingcashflowsandsomeoftheproceedsfromtheSeniorNotestorepurchase$923.7millionofourcommonstockin2009.TheSeniorNotesincludetwotranches:$500millionaggregateprincipalamountof4.625percentSeniorNotesdueNovember30,2019,and$500millionaggregateprincipalamountof5.75percentSeniorNotesdueNovember30,2039.InterestontheSeniorNotesispayableonMay30andNovember30ofeachyearuntilmaturity.WemayredeemtheSeniorNotesatourelectioninwholeorinpartatanytimepriortomaturityataredemptionpriceequaltothegreaterof1)100percentoftheprincipalamountofthenotesbeingredeemed;or2)thesumofthepresentvaluesoftheremainingscheduledpaymentsofprincipalandinterest(notincludinganyportionofsuchpaymentsofZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT28interestaccruedasofthedateofredemption),discountedtothedateofredemptiononasemi-annualbasisattheTreasuryRate(asdefinedinthedebtagreement),plus20basispoints,inthecaseofthe2019notes,and25basispoints,inthecaseofthe2039notes.WewillalsopaytheaccruedandunpaidinterestontheSeniorNotestotheredemptiondate.Wehaveafiveyear$1,350millionrevolving,multi-currency,seniorunsecuredcreditfacilitymaturingNovember30,2012(SeniorCreditFacility).Wehad$141.8millionoutstandingundertheSeniorCreditFacilityatDecember31,2010,andanavailabilityof$1,208.2million.Wealsohaveavailableuncommittedcreditfacilitiestotaling$77.8million.Weplaceourcashandcashequivalentsinhighlyratedfinancialinstitutionsandlimittheamountofcreditexposuretoanyoneentity.Weinvestonlyinhigh-qualityfinancialinstrumentsinaccordancewithourinternalinvestmentpolicy.AsofDecember31,2010wehadshort-termandlong-terminvestmentsindebtsecuritieswithafairvalueof$410.6million.Theseinvestmentsareindebtsecuritiesofmanydifferentcounterpartiesandthereforewehavenosignificantconcentrationofriskwithasinglecounterparty.Allthesedebtsecuritiesarehighly-ratedandthereforewebelievetheriskofdefaultbythecounterpartiesislow.AsofDecember31,2010,$725.3millionofourcashandcashequivalentsandshort-termandlong-terminvestmentsareheldinjurisdictionsoutsideoftheU.Sandexpectedtobeindefinitelyreinvestedforcontinueduseinforeignoperations.RepatriationoftheseassetstotheU.S.wouldhavenegativetaxconsequences.Approximately$550millionofthisamountisdenominatedinU.S.Dollarsandthereforebearsnoforeigncurrencytranslationrisk.Theremainingisdenominatedinthevariouscurrencieswhereweoperate.Wemayuseexcesscashtorepurchaseadditionalcommonstockunderoursharerepurchaseprogram.AsofDecember31,2010,approximately$1.2billionremainedauthorizedundera$1.5billionrepurchaseprogram,whichwillexpireonDecember31,2013.ManagementbelievesthatcashflowsfromoperationsandavailableborrowingsundertheSeniorCreditFacilityaresufficienttomeetourexpectedworkingcapital,capitalexpenditureanddebtserviceneeds.Shouldinvestmentopportunitiesarise,webelievethatourearnings,balancesheetandcashflowswillallowustoobtainadditionalcapital,ifnecessary.CONTRACTUALOBLIGATIONSWehaveenteredintocontractswithvariousthirdpartiesinthenormalcourseofbusinessthatwillrequirefuturepayments.Thefollowingtableillustratesourcontractualobligations(inmillions):ContractualObligationsTotal20112012and20132014and20152016andThereafterLong-termdebt$1,141.8$–$141.8$–$1,000.0Interestpayments1,044.553.6104.6103.8782.5Operatingleases142.744.650.023.125.0Purchaseobligations27.126.11.0––Otherlong-termliabilities232.9–149.331.951.7Totalcontractualobligations$2,589.0$124.3$446.7$158.8$1,859.2Approximately8percentoftheotherlong-termliabilitiesonourbalancesheetareliabilitiesrelatedtodefinedbenefitpensionplans.Definedbenefitplanliabilitiesarebasedupontheunderfundedstatusoftherespectiveplans;theyarenotbaseduponfuturecontributions.Duetouncertaintiesregardingfutureplanassetperformance,changesininterestratesandourintentionsonvoluntarycontributions,weareunabletoreasonablyestimatefuturecontributionsbeyond2011.Therefore,thistabledoesnotincludeanyamountsrelatedtofuturecontributionstoourplans.SeeNote14toourconsolidatedfinancialstatementsforfurtherinformationonourdefinedbenefitplans.Alsoincludedinotherlong-termliabilitiesonourbalancesheetareliabilitiesrelatedtouncertaintaxbenefitsandcorrespondinginterestandpenaltiesthereon.Duetotheuncertaintiesinherentintheseliabilities,suchastheultimatetimingandresolutionoftaxaudits,weareunabletoreasonablyestimatetheamountorperiodinwhichpotentialtaxpaymentsrelatedtothesepositionswillbemade.Therefore,thistabledoesnotincludeanyobligationsrelatedtouncertaintaxbenefits.SeeNote15toourconsolidatedfinancialstatementsforfurtherinformationontheseuncertaintaxbenefits.WehaveenteredintovariouscontractualagreementsthatmayresultinfuturepaymentsdependentuponvariouseventssuchastheachievementofcertainproductR&Dmilestones,salesmilestones,oratourdiscretiontomaintainexclusiverightstodistributeaproduct.Sincethereisuncertaintyonthetimingorwhethersuchpaymentswillhavetobemade,wehavenotincludedtheminthistable.Thesepaymentscouldrangefrom$0to$60million.CRITICALACCOUNTINGESTIMATESOurfinancialresultsareaffectedbytheselectionandapplicationofaccountingpoliciesandmethods.Significantaccountingpolicieswhichrequiremanagement’sjudgmentarediscussedbelow.ExcessInventoryandInstruments–Wemustdetermineasofeachbalancesheetdatehowmuch,ifany,ofZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT29ourinventorymayultimatelyprovetobeunsaleableorunsaleableatourcarryingcost.Similarly,wemustalsodetermineifinstrumentsonhandwillbeputtoproductiveuseorremainundeployedasaresultofexcesssupply.Reservesareestablishedtoeffectivelyadjustinventoryandinstrumentstonetrealizablevalue.Todeterminetheappropriatelevelofreserves,weevaluatecurrentstocklevelsinrelationtohistoricalandexpectedpatternsofdemandforallofourproductsandinstrumentsystemsandcomponents.Thebasisforthedeterminationisgenerallythesameforallinventoryandinstrumentitemsandcategoriesexceptforwork-in-processinventory,whichisrecordedatcost.Obsoleteordiscontinueditemsaregenerallydestroyedandcompletelywrittenoff.Managementevaluatestheneedforchangestovaluationreservesbasedonmarketconditions,competitiveofferingsandotherfactorsonaregularbasis.IncomeTaxes–Ourincometaxexpense,deferredtaxassetsandliabilitiesandreservesforunrecognizedtaxbenefitsreflectmanagement’sbestassessmentofestimatedfuturetaxestobepaid.WearesubjecttoincometaxesintheU.S.andnumerousforeignjurisdictions.Significantjudgmentsandestimatesarerequiredindeterminingtheconsolidatedincometaxexpense.Weestimateincometaxexpenseandincometaxliabilitiesandassetsbytaxablejurisdiction.Realizationofdeferredtaxassetsineachtaxablejurisdictionisdependentonourabilitytogeneratefuturetaxableincomesufficienttorealizethebenefits.Weevaluatedeferredtaxassetsonanongoingbasisandprovidevaluationallowancesunlesswedetermineitis“morelikelythannot”thatthedeferredtaxbenefitwillberealized.FederalincometaxesareprovidedontheportionoftheincomeofforeignsubsidiariesthatisexpectedtoberemittedtotheU.S.Thecalculationofourtaxliabilitiesinvolvesdealingwithuncertaintiesintheapplicationofcomplextaxlawsandregulationsinamultitudeofjurisdictionsacrossourglobaloperations.Wearesubjecttoregulatoryrevieworauditinvirtuallyallofthosejurisdictionsandthosereviewsandauditsmayrequireextendedperiodsoftimetoresolve.Werecordourincometaxprovisionsbasedonourknowledgeofallrelevantfactsandcircumstances,includingexistingtaxlaws,ourexperiencewithprevioussettlementagreements,thestatusofcurrentexaminationsandourunderstandingofhowthetaxauthoritiesviewcertainrelevantindustryandcommercialmatters.WerecognizetaxliabilitiesinaccordancewiththeFinancialAccountingStandardsBoard’s(FASB)guidanceonincometaxesandweadjusttheseliabilitieswhenourjudgmentchangesasaresultoftheevaluationofnewinformationnotpreviouslyavailable.Duetothecomplexityofsomeoftheseuncertainties,theultimateresolutionmayresultinapaymentthatismateriallydifferentfromourcurrentestimateofthetaxliabilities.Thesedifferenceswillbereflectedasincreasesordecreasestoincometaxexpenseintheperiodinwhichtheyaredetermined.CommitmentsandContingencies–Accrualsforproductliabilityandotherclaimsareestablishedwiththeassistanceofinternalandexternallegalcounselbasedoncurrentinformationandhistoricalsettlementinformationforclaims,relatedlegalfeesandforclaimsincurredbutnotreported.Weuseanactuarialmodeltoassistmanagementindetermininganappropriatelevelofaccrualsforproductliabilityclaims.Historicalpatternsofclaimlossdevelopmentovertimearestatisticallyanalyzedtoarriveatfactorswhicharethenappliedtolossestimatesintheactuarialmodel.Inadditiontoourgeneralproductliability,wehaverecorded“Certainclaims”provisionstotaling$179.0millionrelatedtotheDuromCup,including$75.0millionin2010.Theadditionalprovisionwasneededin2010inpartbecausewerevisedthedefinitionof“Certainclaims”recordedinourstatementofearningstoincludeworldwideclaimsrelatingtoallrevisionsofDuromCupcaseswheretheoriginalsurgerywasperformedbeforeourJuly22,2008suspensionofmarketinganddistribution,regardlessofthetimeperiodelapsedbetweentheoriginalsurgeryandtherevisionsurgery.Thisadditionalprovisionrepresentsmanagement’supdatedestimateofliabilitytoDuromCuppatientsundergoingrevisionsassociatedwithoriginalsurgeriesoccurringbeforeJuly22,2008.TheremainingliabilityasofDecember31,2010is$132.8million.GoodwillandIntangibleAssets–Weevaluatethecarryingvalueofgoodwillandindefinitelifeintangibleassetsannually,orwhenevereventsorcircumstancesindicatethecarryingvaluemaynotberecoverable.Weevaluatethecarryingvalueoffinitelifeintangibleassetswhenevereventsorcircumstancesindicatethecarryingvaluemaynotberecoverable.Significantassumptionsarerequiredtoestimatethefairvalueofgoodwillandintangibleassets,mostnotablyestimatedfuturecashflowsgeneratedbytheseassets.Assuch,thesefairvaluationmeasurementsusesignificantunobservableinputs.Changestotheseassumptionscouldrequireustorecordimpairmentchargesontheseassets.AsofDecember31,2010,wehadintangibleassetsof$210.7millionrelatedtotrademarksandtradenames,ofwhich$197.3millionareclassifiedashavinganindefinitelife.Wecurrentlyhaveandanticipatefutureproductdevelopmenteffortsthatmayreplacethecurrentproductsthatusethosetrademarksandtradenames.Whileitispossible,itisnotknownifthesenewproductswillutilizethesetrademarksandtradenames.Ifthesenewproductsdonotusethesetrademarksandtradenames,theseassetsmaybeimpaired.Inthefourthquarterof2010,wedeterminedourU.S.Spinereportingunit’scarryingvaluewasinexcessofitsestimatedfairvalue.Fairvaluewasdeterminedusinganequalweightingofincomeandmarketapproaches.Fairvalueundertheincomeapproachwasdeterminedbydiscountingtopresentvaluetheestimatedfuturecashflowsofthereportingunit.Fairvalueunderthemarketapproachutilizedthecomparabletransactionmethodology,whichusesvaluationindicatorsdeterminedfromsalesofotherbusinessesthataresimilartoourU.S.Spinereportingunit.Asaresult,werecordedagoodwillimpairmentchargefortheU.S.Spinereportingunitof$204.0millionduringtheyearendedDecember31,2010.IntheyearendedDecember31,ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT302009,wealsorecordedanimpairmentchargerelatedtothisreportingunitof$73.0million.SeeNote9toourconsolidatedfinancialstatementsforfurtherdiscussionandthefactorsthatcontributedtotheseimpairmentcharges.Wehavefiveotherreportingunitswithgoodwillassignedtothem.Weestimatethefairvalueofthosereportingunitsusingtheincomeapproachbydiscountingtopresentvaluetheestimatedfuturecashflowsofthereportingunit.Foreachofthosefivereportingunits,theestimatedfairvaluessubstantiallyexceedtheircarryingvalue.Share-basedPayment–Wemeasureshare-basedpaymentexpenseatthegrantdatebasedonthefairvalueoftheawardandrecognizeexpenseovertherequisiteserviceperiod.Determiningthefairvalueofshare-basedawardsatthegrantdaterequiresjudgment,includingestimatingtheexpectedlifeofstockoptionsandtheexpectedvolatilityofourstock.Additionally,wemustestimatetheamountofshare-basedawardsthatareexpectedtobeforfeited.Weestimateexpectedvolatilitybasedupontheimpliedvolatilityofactivelytradedoptionsonourstock.Theexpectedlifeofstockoptionsandestimatedforfeituresarebaseduponouremployees’historicalexerciseandforfeiturebehaviors.Theassumptionsusedindeterminingthegrantdatefairvalueandtheexpectedforfeituresrepresentmanagement’sbestestimates.RECENTACCOUNTINGPRONOUNCEMENTSTherearenorecentlyissuedaccountingpronouncementsthatwehavenotyetadoptedthatareexpectedtohaveamaterialeffectonourfinancialposition,resultsofoperationsorcashflows.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT31Item7A.QuantitativeandQualitativeDisclosuresAboutMarketRiskMARKETRISKWeareexposedtocertainmarketrisksaspartofourongoingbusinessoperations,includingrisksfromchangesinforeigncurrencyexchangerates,interestratesandcommoditypricesthatcouldaffectourfinancialcondition,resultsofoperationsandcashflows.Wemanageourexposuretotheseandothermarketrisksthroughregularoperatingandfinancingactivitiesandthroughtheuseofderivativefinancialinstruments.Weusederivativefinancialinstrumentssolelyasriskmanagementtoolsandnotforspeculativeinvestmentpurposes.FOREIGNCURRENCYEXCHANGERISKWeoperateonaglobalbasisandareexposedtotheriskthatourfinancialcondition,resultsofoperationsandcashflowscouldbeadverselyaffectedbychangesinforeigncurrencyexchangerates.WeareprimarilyexposedtoforeigncurrencyexchangerateriskwithrespecttotransactionsandnetassetsdenominatedinEuros,SwissFrancs,JapaneseYen,BritishPounds,CanadianDollars,AustralianDollars,KoreanWon,SwedishKrona,CzechKoruna,ThaiBaht,TaiwanDollars,SouthAfricanRand,RussianRublesandIndianRupees.Wemanagetheforeigncurrencyexposurecentrally,onacombinedbasis,whichallowsustonetexposuresandtotakeadvantageofanynaturaloffsets.Toreducetheuncertaintyofforeigncurrencyexchangeratemovementsontransactionsdenominatedinforeigncurrencies,weenterintoderivativefinancialinstrumentsintheformofforeigncurrencyexchangeforwardcontractsandoptionswithmajorfinancialinstitutions.Theseforwardcontractsandoptionsaredesignedtohedgeanticipatedforeigncurrencytransactions,primarilyintercompanysaleandpurchasetransactions,forperiodsconsistentwithcommitments.Realizedandunrealizedgainsandlossesonthesecontractsandoptionsthatqualifyascashflowhedgesaretemporarilyrecordedinothercomprehensiveincome,thenrecognizedincostofproductssoldwhenthehedgeditemaffectsnetearnings.ForcontractsoutstandingatDecember31,2010,wehadobligationstopurchaseU.S.DollarsandsellEuros,JapaneseYen,BritishPounds,CanadianDollars,AustralianDollars,KoreanWon,SwedishKrona,CzechKoruna,ThaiBaht,TaiwanDollars,SouthAfricanRand,RussianRublesandIndianRupeesandpurchaseSwissFrancsandsellU.S.DollarsatsetmaturitydatesrangingfromJanuary2011throughJune2013.ThenotionalamountsofoutstandingforwardcontractsenteredintowiththirdpartiestopurchaseU.S.DollarsatDecember31,2010were$1.4billion.ThenotionalamountsofoutstandingforwardcontractsenteredintowiththirdpartiestopurchaseSwissFrancsatDecember31,2010were$212.1million.TheweightedaveragecontractratesoutstandingatDecember31,2010wereEuro:USD1.35,USD:SwissFranc1.04,USD:JapaneseYen87.20,BritishPound:USD1.57,USD:CanadianDollar1.07,AustralianDollar:USD0.82,USD:KoreanWon1,231,USD:SwedishKrona7.32,USD:CzechKoruna19.57,USD:ThaiBaht31.27,USD:TaiwanDollar30.62,USD:SouthAfricanRand7.85,USD:RussianRuble32.24andUSD:IndianRuppee48.08.Wemaintainwrittenpoliciesandproceduresgoverningourriskmanagementactivities.Ourpolicyrequiresthatcriticaltermsofhedginginstrumentsarethesameashedgedforecastedtransactions.Onthisbasis,withrespecttocashflowhedges,changesincashflowsattributabletohedgedtransactionsaregenerallyexpectedtobecompletelyoffsetbychangesinthefairvalueofhedgeinstruments.Aspartofourriskmanagementprogram,wealsoperformsensitivityanalysestoassesspotentialchangesinrevenue,operatingresults,cashflowsandfinancialpositionrelatingtohypotheticalmovementsincurrencyexchangerates.AsensitivityanalysisofchangesinthefairvalueofforeigncurrencyexchangeforwardcontractsoutstandingatDecember31,2010indicatedthat,iftheU.S.Dollaruniformlychangedinvalueby10percentrelativetotheEuro,SwissFranc,JapaneseYen,BritishPound,CanadianDollar,AustralianDollar,KoreanWon,SwedishKrona,CzechKoruna,ThaiBaht,TaiwanDollars,SouthAfricanRand,RussianRublesandIndianRupees,withnochangeintheinterestdifferentials,thefairvalueofthosecontractswouldincreaseordecreaseearningsbeforeincometaxesinperiodsthrough2012,dependingonthedirectionofthechange,byanaverageapproximateamountof$59.8million,$19.8million,$36.1million,$11.3million,$7.2million,$12.6million,$1.7million,$2.3million,$0.6million,$0.6million,$1.7million,$0.5million,$1.2millionand$1.1million,respectively.Anychangeinthefairvalueofforeigncurrencyexchangeforwardcontractsasaresultofafluctuationinacurrencyexchangerateisexpectedtobelargelyoffsetbyachangeinthevalueofthehedgedtransaction.Consequently,foreigncurrencyexchangecontractswouldnotsubjectustomaterialriskduetoexchangeratemovementsbecausegainsandlossesonthesecontractsoffsetgainsandlossesontheassets,liabilitiesandtransactionsbeinghedged.Wehadnetinvestmentexposurestonetforeigncurrencydenominatedassetsandliabilitiesofapproximately$2,250millionatDecember31,2010,primarilyinEurosandJapaneseYen.Approximately$1,295millionofthenetassetexposureatDecember31,2010relatestogoodwillrecordedintheEuropeandAsiaPacificgeographicsegments.Weenterintoforeigncurrencyforwardexchangecontractswithtermsofonemonthtomanagecurrencyexposuresformonetaryassetsandliabilitiesdenominatedinacurrencyotherthananentity’sfunctionalcurrency.Asaresult,foreigncurrencyremeasurementgains/lossesrecognizedinearningsaregenerallyoffsetwithgains/lossesontheforeigncurrencyforwardexchangecontractsinthesamereportingperiod.COMMODITYPRICERISKWepurchaserawmaterialcommoditiessuchascobaltchrome,titanium,tantalum,polymerandsterilepackaging.Weenterintosupplycontractsgenerallywithtermsof12to24months,whereavailable,onthesecommoditiestoalleviateZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT32theeffectofmarketfluctuationinprices.Aspartofourriskmanagementprogram,weperformsensitivityanalysesrelatedtopotentialcommoditypricechanges.A10percentpricechangeacrossallthesecommoditieswouldnothaveamaterialeffectonourconsolidatedfinancialposition,resultsofoperationsorcashflows.INTERESTRATERISKInthenormalcourseofbusiness,weareexposedtomarketriskfromchangesininterestratesthatcouldaffectourresultsofoperationsandfinancialcondition.Wemanageourexposuretointerestraterisksthroughourregularoperationsandfinancingactivities.Weinvestourcashandcashequivalentsprimarilyinhighly-ratedcorporatecommercialpaperandbankdeposits.Wealsohaveshort-termandlong-terminvestmentsinhighly-ratedcorporatedebtsecurities,U.S.governmentandagencydebtsecurities,U.S.governmenttreasuryfunds,municipalbonds,foreigngovernmentdebtsecurities,commercialpaperandcertificatesofdeposit.Theprimaryinvestmentobjectiveistoensurecapitalpreservationofourinvestedprincipalfunds.Currently,wedonotusederivativefinancialinstrumentsinourinvestmentportfolio.Weareexposedtointerestrateriskonourdebtobligationsandourcashandcashequivalents.Presently,allofourdebtoutstandingundertheSeniorCreditFacilitybearsinterestatshort-termrates.InDecember2010,weenteredintointerestrateswapagreementswithaconsolidatednotionalamountof$250millionthathedgeaportionofour$500million4.625percentSeniorNotesdueNovember30,2019.OntheinterestrateswapagreementsoutstandingasofDecember31,2010,wereceiveafixedinterestrateof4.625percentandwepayvariableinterestequaltothethree-monthLIBORplusanaverageof133basispoints.Theinterestrateswapagreementsaretomanageourexposuretointerestratemovementsbyconvertingfixed-ratedebtintovariable-ratedebt.Theobjectiveoftheinstrumentsistomorecloselyaligninterestexpensewithinterestincomereceivedoncashandcashequivalents.ThesederivativeinstrumentsaredesignatedasfairvaluehedgesunderU.S.GAAP.Changesinthefairvalueofthederivativeinstrumentarerecordedinearningsandareoffsetbygainsorlossesontheunderlyingdebtinstrument.BaseduponouroverallinterestrateexposureasofDecember31,2010,achangeof10percentininterestrates,assumingtheamountoutstandingremainsconstant,wouldnothaveamaterialeffectonnetinterestexpense.Thisanalysisdoesnotconsidertheeffectofthechangeinthelevelofoveralleconomicactivitythatcouldexistinsuchanenvironment.CREDITRISKFinancialinstruments,whichpotentiallysubjectustoconcentrationsofcreditrisk,areprimarilycashandcashequivalents,short-termandlong-terminvestments,derivativeinstruments,counterpartytransactionsandaccountsreceivable.Weplaceourinvestmentsinhighly-ratedfinancialinstitutionsandlimittheamountofcreditexposuretoanyoneentity.Webelievewedonothaveanysignificantcreditriskonourcashandcashequivalentsandinvestments.Weareexposedtocreditlossifthefinancialinstitutionswithwhichweconductbusinessfailtoperform.However,thislossislimitedtotheamounts,ifany,bywhichtheobligationsofthecounterpartytothefinancialinstrumentcontractexceedourobligation.Wealsominimizeexposuretocreditriskbydealingwithadiversifiedgroupofmajorfinancialinstitutions.Wemanagecreditriskbymonitoringthefinancialconditionofourcounterpartiesusingstandardcreditguidelines.Wedonotanticipateanynonperformancebyanyofthecounterparties.Concentrationofcreditriskwithrespecttotradeaccountsreceivableislimitedduetothelargenumberofcustomersandtheirdispersionacrossanumberofgeographicareasandbyfrequentmonitoringofthecreditworthinessofthecustomerstowhomcreditisgrantedinthenormalcourseofbusiness.However,essentiallyallofourtradereceivablesareconcentratedinthepublicandprivatehospitalandhealthcareindustryintheU.S.andinternationallyorwithdistributorsordealerswhooperateininternationalmarketsand,accordingly,areexposedtotheirrespectivebusiness,economicandcountryspecificvariables.Repaymentisdependentuponthefinancialstabilityoftheseindustrysectorsandtherespectivecountries’nationaleconomicandhealthcaresystems.Exposuretocreditriskiscontrolledthroughcreditapprovals,creditlimitsandmonitoringprocedures,andwebelievethatreservesforlossesareadequate.Whileweareexposedtorisksfromthebroaderhealthcareindustrywherewedobusiness,thereisnosignificantnetexposureduetoanyindividualcustomer.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT33Management’sReportonInternalControlOverFinancialReportingThemanagementofZimmerHoldings,Inc.isresponsibleforestablishingandmaintainingadequateinternalcontroloverfinancialreporting.InternalcontroloverfinancialreportingisdefinedinRules13a-15(f)or15d-15(f)promulgatedundertheSecuritiesExchangeActof1934asaprocessdesignedby,orunderthesupervisionof,thecompany’sprincipalexecutiveandprincipalfinancialofficersandeffectedbythecompany’sBoardofDirectors,managementandotherpersonnel,toprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithU.S.generallyacceptedaccountingprinciplesandincludesthosepoliciesandproceduresthat:(cid:129)Pertaintothemaintenanceofrecordsthatinreasonabledetailaccuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsofthecompany;(cid:129)ProvidereasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsinaccordancewithU.S.generallyacceptedaccountingprinciples,andthatreceiptsandexpendituresofthecompanyarebeingmadeonlyinaccordancewithauthorizationsofmanagementanddirectorsofthecompany;and(cid:129)Providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,useordispositionofthecompany’sassetsthatcouldhaveamaterialeffectonthefinancialstatements.Becauseofitsinherentlimitations,thecompany’sinternalcontroloverfinancialreportingmaynotpreventordetectmisstatements.Also,projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttotheriskthatcontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate.Thecompany’smanagementassessedtheeffectivenessofthecompany’sinternalcontroloverfinancialreportingasofDecember31,2010.Inmakingthisassessment,thecompany’smanagementusedthecriteriasetforthbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO)inInternalControl-IntegratedFramework.Basedonthatassessment,managementhasconcludedthat,asofDecember31,2010,thecompany’sinternalcontroloverfinancialreportingiseffectivebasedonthosecriteria.Thecompany’sindependentregisteredpublicaccountingfirmhasauditedtheeffectivenessofthecompany’sinternalcontroloverfinancialreportingasofDecember31,2010,asstatedinitsreportwhichappearsinItem8ofthisAnnualReportonForm10-K.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT34ITEM8.FinancialStatementsandSupplementaryDataZimmerHoldings,Inc.IndextoConsolidatedFinancialStatementsPageFinancialStatements:ReportofIndependentRegisteredPublicAccountingFirm36ConsolidatedStatementsofEarningsfortheYearsEndedDecember31,2010,2009and200837ConsolidatedBalanceSheetsasofDecember31,2010and200938ConsolidatedStatementsofStockholders’EquityfortheYearsEndedDecember31,2010,2009and200839ConsolidatedStatementsofCashFlowsfortheYearsEndedDecember31,2010,2009and200840ConsolidatedStatementsofComprehensiveIncomefortheYearsEndedDecember31,2010,2009and200841NotestoConsolidatedFinancialStatements42ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT35ReportofIndependentRegisteredPublicAccountingFirmToTheStockholdersandBoardofDirectorsofZimmerHoldings,Inc.:Inouropinion,theconsolidatedfinancialstatementslistedintheindexappearingunderItem15(a)(1)presentfairly,inallmaterialrespects,thefinancialpositionofZimmerHoldings,Inc.anditssubsidiariesatDecember31,2010and2009,andtheresultsoftheiroperationsandtheircashflowsforeachofthethreeyearsintheperiodendedDecember31,2010inconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.Inaddition,inouropinion,thefinancialstatementschedulelistedintheaccompanyingindexappearingunderItem15(a)(2)presentsfairly,inallmaterialrespects,theinformationsetforththereinwhenreadinconjunctionwiththerelatedconsolidatedfinancialstatements.Alsoinouropinion,theCompanymaintained,inallmaterialrespects,effectiveinternalcontroloverfinancialreportingasofDecember31,2010,basedoncriteriaestablishedinInternalControl–IntegratedFrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO).TheCompany’smanagementisresponsibleforthesefinancialstatements,formaintainingeffectiveinternalcontroloverfinancialreportingandforitsassessmentoftheeffectivenessofinternalcontroloverfinancialreporting,includedintheaccompanyingReportofManagementonInternalControloverFinancialReporting.OurresponsibilityistoexpressopinionsonthesefinancialstatementsandontheCompany’sinternalcontroloverfinancialreportingbasedonourintegratedaudits.WeconductedourauditsinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheauditstoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatementandwhethereffectiveinternalcontroloverfinancialreportingwasmaintainedinallmaterialrespects.Ourauditsofthefinancialstatementsincludedexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements,assessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,andevaluatingtheoverallfinancialstatementpresentation.Ourauditofinternalcontroloverfinancialreportingincludedobtaininganunderstandingofinternalcontroloverfinancialreporting,assessingtheriskthatamaterialweaknessexists,andtestingandevaluatingthedesignandoperatingeffectivenessofinternalcontrolbasedontheassessedrisk.Ourauditsalsoincludedperformingsuchotherproceduresasweconsiderednecessaryinthecircumstances.Webelievethatourauditsprovideareasonablebasisforouropinions.Acompany’sinternalcontroloverfinancialreportingisaprocessdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples.Acompany’sinternalcontroloverfinancialreportingincludesthosepoliciesandproceduresthat(i)pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsofthecompany;(ii)providereasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsinaccordancewithgenerallyacceptedaccountingprinciples,andthatreceiptsandexpendituresofthecompanyarebeingmadeonlyinaccordancewithauthorizationsofmanagementanddirectorsofthecompany;and(iii)providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionofthecompany’sassetsthatcouldhaveamaterialeffectonthefinancialstatements.Becauseofitsinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetectmisstatements.Also,projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttotheriskthatcontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate.PricewaterhouseCoopersLLPChicago,IllinoisFebruary24,2011ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT36ConsolidatedStatementsofEarningsFortheYearsEndedDecember31,201020092008(inmillions,exceptpershareamounts)NetSales$4,220.2$4,095.4$4,121.1Costofproductssold1,012.4990.7997.3GrossProfit3,207.83,104.73,123.8Researchanddevelopment220.0205.7192.3Selling,generalandadministrative1,757.41,729.01,704.0Certainclaims(Note19)75.035.069.0Goodwillimpairment(Note9)204.073.0–Netcurtailmentandsettlement(Note14)–(32.1)–Specialitems(Note2)34.775.368.5Operatingexpenses2,291.12,085.92,033.8OperatingProfit916.71,018.81,090.0Interestandotherincome(expense),net(56.5)(20.6)31.8Earningsbeforeincometaxes860.2998.21,121.8Provisionforincometaxes263.3280.8272.3Netearnings596.9717.4849.5Less:Netearningsattributabletononcontrollinginterest––(0.9)NetEarningsofZimmerHoldings,Inc.$596.9$717.4$848.6EarningsPerCommonShare–Basic$2.98$3.34$3.73EarningsPerCommonShare–Diluted$2.97$3.32$3.72WeightedAverageCommonSharesOutstandingBasic200.0215.0227.3Diluted201.1215.8228.3Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT37ConsolidatedBalanceSheetsDecember31,20102009(inmillions)ASSETSCurrentAssets:Cashandcashequivalents$668.9$691.7Short-terminvestments265.166.4Accountsreceivable,lessallowancefordoubtfulaccounts775.9751.4Inventories,net936.4913.2Prepaidexpensesandothercurrentassets127.7105.4Deferredincometaxes235.7209.9TotalCurrentAssets3,009.72,738.0Property,plantandequipment,net1,213.81,221.7Goodwill2,580.82,783.5Intangibleassets,net827.1858.0Otherassets368.5184.3TotalAssets$7,999.9$7,785.5LIABILITIESANDSTOCKHOLDERS’EQUITYCurrentLiabilities:Accountspayable$129.6$134.6Incometaxes48.957.5Othercurrentliabilities524.0498.6TotalCurrentLiabilities702.5690.7Otherlong-termliabilities384.0328.5Long-termdebt1,142.11,127.6TotalLiabilities2,228.62,146.8CommitmentsandContingencies(Note19)Stockholders’Equity:Commonstock,$0.01parvalue,onebillionsharesauthorized,254.6million(254.1millionin2009)issued2.52.5Paid-incapital3,293.53,214.6Retainedearnings5,699.45,102.5Accumulatedothercomprehensiveincome321.0358.6Treasurystock,59.0millionshares(49.9millionsharesin2009)(3,545.1)(3,039.5)TotalStockholders’Equity5,771.35,638.7TotalLiabilitiesandStockholders’Equity$7,999.9$7,785.5Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT38ConsolidatedStatementsofStockholders’EquityNumberAmountPaid-inCapitalRetainedEarningsAccumulatedOtherComprehensiveIncomeNumberAmountNoncontrollingInterestTotalStockholders’EquityCommonSharesTreasurySharesZimmerHoldings,Inc.Stockholders(inmillions)BalanceJanuary1,2008252.2$2.5$2,999.1$3,536.9$290.3(19.3)$(1,379.2)$2.8$5,452.4Netearnings–––848.6–––0.9849.5Othercomprehensiveincome––––(50.3)–––(50.3)Stockcompensationplans,includingtaxbenefits1.5–139.4–––––139.4Sharerepurchases–––––(10.8)(737.0)–(737.0)Currencytranslation–––––––(0.1)(0.1)BalanceDecember31,2008253.72.53,138.54,385.5240.0(30.1)(2,116.2)3.65,653.9Netearnings–––717.4––––717.4Othercomprehensiveloss––––118.6–––118.6Purchaseofnoncontrollinginterest––(5.0)––––(3.6)(8.6)Stockcompensationplans,includingtaxbenefits0.4–81.1(0.4)––0.4–81.1Sharerepurchases–––––(19.8)(923.7)–(923.7)BalanceDecember31,2009254.12.53,214.65,102.5358.6(49.9)(3,039.5)–5,638.7Netearnings–––596.9––––596.9Othercomprehensiveincome––––(37.6)–––(37.6)Stockcompensationplans,includingtaxbenefits0.5–78.9–––––78.9Sharerepurchases–––––(9.1)(505.6)–(505.6)BalanceDecember31,2010254.6$2.5$3,293.5$5,699.4$321.0(59.0)$(3,545.1)$—$5,771.3Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT39ConsolidatedStatementsofCashFlowsFortheYearsEndedDecember31,201020092008(inmillions)Cashflowsprovidedby(usedin)operatingactivities:NetearningsofZimmerHoldings,Inc.$596.9$717.4$848.6Adjustmentstoreconcilenetearningstonetcashprovidedbyoperatingactivities:Depreciationandamortization340.2337.4275.1Goodwillimpairment204.073.0–Gainonsaleofinvestments––(38.8)In-processresearchanddevelopment––38.5Netcurtailmentandsettlement–(32.1)–Share-basedcompensation62.075.369.9Incometaxbenefitfromstockoptionexercises4.23.512.5Excessincometaxbenefitfromstockoptionexercises(1.3)(0.4)(6.5)Inventorystep-up1.412.57.0Deferredincometaxprovision(72.5)(19.7)2.0Changesinoperatingassetsandliabilities,netofacquiredassetsandliabilitiesIncometaxespayable7.77.0(77.3)Receivables(33.0)(4.6)(44.4)Inventories25.836.2(148.1)Accountspayableandaccruedliabilities(0.8)(132.6)119.3Otherassetsandliabilities58.944.6(19.7)Netcashprovidedbyoperatingactivities1,193.51,117.51,038.1Cashflowsprovidedby(usedin)investingactivities:Additionstoinstruments(192.5)(123.7)(237.9)Additionstootherproperty,plantandequipment(79.2)(105.1)(250.0)Acquisitionofintellectualpropertyrights(8.5)(35.8)(109.4)Purchasesofinvestments(413.3)(66.4)–Salesofinvestments67.5–54.9AbbottSpineacquisition,netofacquiredcash––(363.0)Otherbusinesscombinationinvestments(82.6)(39.5)(18.8)Investmentsinotherassets(18.3)(10.7)–Netcashusedininvestingactivities(726.9)(381.2)(924.2)Cashflowsprovidedby(usedin)financingactivities:Netproceeds(payments)underrevolvingcreditfacilities(2.2)(330.0)330.0Debtissuancecosts–(8.5)–Proceedsfromemployeestockcompensationplans16.99.557.0Excessincometaxbenefitfromstockoptionexercises1.30.46.5Proceedsfromissuanceofnotes–998.8–Acquisitionofnoncontrollinginterest–(8.6)–Repurchaseofcommonstock(505.6)(923.7)(737.0)Netcashusedinfinancingactivities(489.6)(262.1)(343.5)Effectofexchangeratesoncashandcashequivalents0.24.9(21.7)Increase(decrease)incashandcashequivalents(22.8)479.1(251.3)Cashandcashequivalents,beginningofyear691.7212.6463.9Cashandcashequivalents,endofyear$668.9$691.7$212.6Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT40ConsolidatedStatementsofComprehensiveIncomeFortheYearsEndedDecember31,201020092008(inmillions)NetEarnings$596.9$717.4$849.5OtherComprehensiveIncome(Loss):Foreigncurrencycumulativetranslationadjustments(38.6)114.0(49.4)Unrealizedforeigncurrencyhedgegains/(losses),netoftaxeffectsof$10.1in2010,$8.9in2009and$0.7in200821.6(28.9)35.0Reclassificationadjustmentsonforeigncurrencyhedges,netoftaxeffectsof$(4.3)in2010,$(0.1)in2009and$(9.2)in2008(11.6)(18.1)43.4Unrealizedgains/(losses)onsecurities,netoftaxeffectsof$0.3in2010,$0.1in2009and$(15.2)in2008(0.8)(0.3)24.4Reclassificationadjustmentsonsecurities,netoftaxeffectsof$(1.2)in2010and$15.0in20082.2–(23.8)Adjustmentstopriorservicecostandunrecognizedactuarialassumptions,netoftaxeffectsof$4.4in2010,$(1.4)in2009and$14.1in2008(10.4)51.9(79.9)TotalOtherComprehensiveIncome(Loss)(37.6)118.6(50.3)Comprehensive(Loss)AttributabletoNoncontrollingInterest––(0.9)ComprehensiveIncomeAttributabletoZimmerHoldings,Inc.$559.3$836.0$798.3Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT41NotestoConsolidatedFinancialStatements1.BUSINESSWedesign,develop,manufactureandmarketorthopaedicreconstructive,spinalandtraumadevices,dentalimplantsandrelatedsurgicalproducts.Wealsoprovideotherhealthcarerelatedservices.Orthopaedicreconstructivedevicesrestorefunctionlostduetodiseaseortraumainjointssuchasknees,hips,shouldersandelbows.Dentalreconstructiveimplantsrestorefunctionandaestheticsinpatientswhohavelostteethduetotraumaordisease.Spinaldevicesareutilizedbyorthopaedicsurgeonsandneurosurgeonsinthetreatmentofdegenerativediseases,deformitiesandtraumainallregionsofthespine.Traumaproductsaredevicesusedprimarilytoreattachorstabilizedamagedboneandtissuetosupportthebody’snaturalhealingprocess.Ourrelatedsurgicalproductsincludesurgicalsuppliesandinstrumentsdesignedtoaidinorthopaedicsurgicalproceduresandpost-operationrehabilitation.Wehaveoperationsinmorethan25countriesandmarketourproductsinmorethan100countries.Weoperateinasingleindustrybuthavethreereportablegeographicsegments,theAmericas,EuropeandAsiaPacific.Thewords“we,”“us,”“our”andsimilarwordsrefertoZimmerHoldings,Inc.anditssubsidiaries.ZimmerHoldingsreferstotheparentcompanyonly.2.SignificantAccountingPoliciesBasisofPresentation–TheconsolidatedfinancialstatementsincludetheaccountsofZimmerHoldingsanditssubsidiariesinwhichitholdsacontrollingequityposition.Investmentsincompaniesinwhichweexercisesignificantinfluenceovertheoperatingandfinancialaffairs,butdonotcontrol,areaccountedforundertheequitymethod.Undertheequitymethod,werecordtheinvestmentatcostandadjustthecarryingamountoftheinvestmentbyourproportionateshareoftheinvestee’snetearningsorlosses.Allsignificantintercompanyaccountsandtransactionsareeliminated.Certainamountsinthe2009and2008consolidatedfinancialstatementshavebeenreclassifiedtoconformtothe2010presentation.UseofEstimates–TheconsolidatedfinancialstatementsarepreparedinconformitywithaccountingprinciplesgenerallyacceptedintheU.S.whichrequireustomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatementsandthereportedamountsofrevenuesandexpensesduringthereportingperiod.Actualresultscoulddifferfromthoseestimates.ForeignCurrencyTranslation–ThefinancialstatementsofourforeignsubsidiariesaretranslatedintoU.S.dollarsusingperiod-endexchangeratesforassetsandliabilitiesandaverageexchangeratesforoperatingresults.Unrealizedtranslationgainsandlossesareincludedinaccumulatedothercomprehensiveincomeinstockholders’equity.Whenatransactionisdenominatedinacurrencyotherthanthesubsidiary’sfunctionalcurrency,werecognizeatransactiongainorlosswhenthetransactionissettled.ForeigncurrencytransactiongainsandlossesincludedinnetearningsfortheyearsendedDecember31,2010,2009and2008werenotsignificant.RevenueRecognition–Wesellproductthroughthreeprincipalchannels:1)directtohealthcareinstitutions,referredtoasdirectchannelaccounts;2)throughstockingdistributorsandhealthcaredealers;and3)directlytodentalpracticesanddentallaboratories.Thedirectchannelaccountsrepresentapproximately80percentofournetsales.Throughthischannel,inventoryisgenerallyconsignedtosalesagentsorcustomerssothatproductsareavailablewhenneededforsurgicalprocedures.Norevenueisrecognizedupontheplacementofinventoryintoconsignmentasweretaintitleandmaintaintheinventoryonourbalancesheet.Uponimplantation,weissueaninvoiceandrevenueisrecognized.Pricingforproductsisgenerallypredeterminedbycontractswithcustomers,agentsactingonbehalfofcustomergroupsorbygovernmentregulatorybodies,dependingonthemarket.Pricediscountsundergrouppurchasingcontractsaregenerallylinkedtovolumeofimplantpurchasesbycustomerhealthcareinstitutionswithinaspecifiedgroup.Atnegotiatedthresholdswithinacontractbuyingperiod,pricediscountsmayincrease.Salestostockingdistributors,healthcaredealers,dentalpracticesanddentallaboratoriesaccountforapproximately20percentofournetsales.Withthesetypesofsales,revenueisrecognizedwhentitletoproductpasses,eitheruponshipmentoftheproductorinsomecasesuponimplantationoftheproduct.Productisgenerallysoldatcontractuallyfixedpricesforspecifiedperiods.Paymenttermsvarybycustomer,butaretypicallylessthan90days.Insomecasessalesincentivesmaybeearnedbyacustomerforpurchasingaspecifiedamountofourproduct.Weestimatewhethersuchincentiveswillbeachievedand,ifso,recognizetheseincentivesasareductioninrevenueinthesameperiodtheunderlyingrevenuetransactionisrecognized.Occasionallyproductsarereturned,and,accordingly,wemaintainanestimatedsalesreturnreservethatisrecordedasareductioninrevenue.ProductreturnswerenotsignificantfortheyearsendedDecember31,2010,2009and2008.TaxesCollectedfromCustomers–Taxescollectedfromcustomersandremittedtogovernmentalauthoritiesarepresentedonanetbasisandexcludedfromrevenues.ShippingandHandling–Amountsbilledtocustomersforshippingandhandlingofproductsarereflectedinnetsalesandarenotsignificant.Expensesincurredrelatedtoshippingandhandlingofproductsarereflectedinselling,generalandadministrativeandwere$129.1million,$121.8millionand$117.3millionfortheyearsendedDecember31,2010,2009and2008,respectively.ResearchandDevelopment–Weexpenseallresearchanddevelopmentcostsasincurred.Researchanddevelopmentcostsincludesalaries,prototypes,depreciationofequipmentusedinresearchanddevelopment,consultantZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT42feesandservicefeespaidtocollaborativepartners.Wherecontingentmilestonepaymentsareduetothirdpartiesunderresearchanddevelopmentarrangements,themilestonepaymentobligationsareexpensedwhenthemilestoneresultsareachieved.SpecialItems–Werecognizeexpensesresultingdirectlyfromourbusinesscombinationsandotheritemsas“Specialitems”inourconsolidatedstatementofearnings.Expensesinthe“Specialitems”linefortheyearsendedDecember31,2010,2009and2008,included(inmillions):201020092008Adjustmentorimpairmentofassetsandobligations,net$11.4$(1.5)$(10.4)Consultingandprofessionalfees4.911.713.2Employeeseveranceandretention,includingshare-basedcompensationacceleration6.719.00.2Informationtechnologyintegration0.11.10.7In-processresearch&development––38.5Vacatedfacilities0.21.4–Facilityandemployeerelocation2.05.47.5Distributoracquisitions1.91.16.9Certainlitigationmatters(0.3)23.4–Contractterminations3.99.45.7Other3.94.36.2Specialitems$34.7$75.3$68.5Adjustmentorimpairmentofassetsandobligationsrelatestoimpairmentonassetsthatwereacquiredinbusinesscombinations,impairmentofassetsrelatedtoatransformationofourglobalinformationtechnologyinfrastructureoradjustmentstocertainliabilitiesofacquiredcompaniesduetochangesincircumstancessurroundingthoseliabilitiessubsequenttotherelatedmeasurementperiod.Consultingandprofessionalfeesrelatetothird-partyintegrationconsultingperformedinavarietyofareassuchastax,compliance,logisticsandhumanresourcesforourbusinesscombinationsandincludethird-partyfeesrelatedtoseveranceandterminationbenefitsmatters.Thesefeesalsoincludelegalfeesrelatedtolitigationmattersinvolvingacquiredbusinessesthatexistedpriortoouracquisitionorresultedfromouracquisition.In2010and2009,weterminatedsomeemployeesaswereducedmanagementlayers,restructuredcertainareas,andcommencedinitiativestofocusonbusinessopportunitiesthatbestsupportourstrategicpriorities.In2010and2009,approximately60and300employees,respectively,fromacrosstheglobewereaffectedbytheseactions.Asaresultofthesechangesinourworkforceandheadcountreductionsfromacquisitions,weincurredexpensesrelatedtoseverancebenefits,redundantsalariesasweworkedthroughtransitionperiods,share-basedcompensationaccelerationandotheremployeetermination-relatedcosts.Theseterminationbenefitswereprovidedinaccordancewithourexistingorlocalgovernmentpoliciesandareconsideredongoingbenefits.Thesecostswereaccruedwhentheybecameprobableandestimableandwererecordedaspartofothercurrentliabilities.Themajorityofthesecostswerepaidduringtheyeartheywereincurred.Informationtechnologyintegrationrelatestothenon-capitalizablecostsassociatedwithintegratingtheinformationsystemsofacquiredbusinesses.In-processresearchanddevelopmentchargesfor2008relatetotheacquisitionofAbbottSpine.Weceasedusingcertainleasedfacilitiesin2010and2009and,accordingly,recordedexpensefortheremainingleasepayments,lessestimatedsubleaserecoveries,andwrote-offanyassetsbeingusedinthosefacilities.Facilityandemployeerelocationrelatestocostsassociatedwithrelocatingcertainfacilitiesaswellasemployeerelocationresultingfromourbusinesscombinations.Mostnotably,weconsolidatedourlegacyEuropeandistributioncentersintoanewdistributioncenterinEschbach,Germany.OverthepastfewyearswehaveacquiredanumberofU.S.andforeign-baseddistributors.Wehaveincurredvariouscostsrelatedtotheacquisitionandintegrationofthosebusinesses.Certainlitigationmattersrelatetocostsandadjustmentsrecognizedduringtheyearfortheestimatedoractualsettlementofvariouslegalmatters,includingpatentlitigationmatters,commerciallitigationmattersandmattersarisingfromouracquisitionsofcertaincompetitivedistributorshipsinprioryears.Werecognizeexpenseforthepotentialsettlementofalegalmatterwhenwebelieveitisprobablethatalosshasbeenincurredandwecanreasonablyestimatetheloss.In2009,wemadeaconcertedefforttosettlesomeofthesematterstoavoidfurtherlitigationcosts.Contractterminationcostsrelatetoterminatedagreementsinconnectionwiththeintegrationofacquiredcompaniesandchangestoourdistributionmodelaspartofbusinessrestructuringandtransformation.Theterminatedcontractsprimarilyrelatetosalesagentsanddistributionagreements.CashandCashEquivalents–Weconsiderallhighlyliquidinvestmentswithanoriginalmaturityofthreemonthsorlesstobecashequivalents.Thecarryingamountsreportedinthebalancesheetforcashandcashequivalentsarevaluedatcost,whichapproximatestheirfairvalue.Investments–Weinvestindebtsecuritiestopromotebusinessandstrategicobjectives.Ourinvestmentsincludecorporatedebtsecurities,foreigngovernmentdebtsecurities,U.S.agencydebtsecuritiesandcertificatesofdepositandareclassifiedandaccountedforasavailable-for-sale.Available-for-saledebtsecuritiesarerecordedatfairvalueonourconsolidatedbalancesheet.Investmentswithacontractualmaturityoflessthanoneyearareclassifiedasshort-terminvestmentsonourconsolidatedbalancesheet,orinothernon-currentassetsifthecontractualmaturityisgreaterthanoneyear.ChangesinfairvalueforZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT43NotestoConsolidatedFinancialStatements(Continued)available-for-salesecuritiesarerecorded,netoftaxes,asacomponentofaccumulatedothercomprehensivelossonourconsolidatedbalancesheet.Wereviewourinvestmentsforother-than-temporaryimpairmentateachreportingperiod.Ifanunrealizedlossforanyinvestmentisconsideredtobeother-than-temporary,thelosswillberecognizedintheconsolidatedstatementofearningsintheperiodthedeterminationismade.SeeNote7formoreinformationregardingourinvestments.AccountsReceivable–Accountsreceivableconsistsoftradeandothermiscellaneousreceivables.Wegrantcredittocustomersinthenormalcourseofbusinessandmaintainanallowancefordoubtfulaccountsforpotentialcreditlosses.Wedeterminetheallowancefordoubtfulaccountsbygeographicmarketandtakeintoconsiderationhistoricalcreditexperience,creditworthinessofthecustomerandotherpertinentinformation.Wemakeconcertedeffortstocollectallaccountsreceivable,butsometimeswehavetowrite-offtheaccountagainsttheallowancewhenwedeterminetheaccountisuncollectible.Theallowancefordoubtfulaccountswas$14.4millionand$18.8millionasofDecember31,2010and2009,respectively.Inventories–Inventories,netofallowancesforobsoleteandslow-movinggoods,arestatedatthelowerofcostormarket,withcostdeterminedonafirst-infirst-outbasis.Property,PlantandEquipment–Property,plantandequipmentiscarriedatcostlessaccumulateddepreciation.Depreciationiscomputedusingthestraight-linemethodbasedonestimatedusefullivesoftentofortyyearsforbuildingsandimprovementsandthreetoeightyearsformachineryandequipment.Maintenanceandrepairsareexpensedasincurred.Wereviewproperty,plantandequipmentforimpairmentwhenevereventsorchangesincircumstancesindicatethatthecarryingvalueofanassetmaynotberecoverable.Animpairmentlosswouldberecognizedwhenestimatedfutureundiscountedcashflowsrelatingtotheassetarelessthanitscarryingamount.Animpairmentlossismeasuredastheamountbywhichthecarryingamountofanassetexceedsitsfairvalue.SoftwareCosts–Wecapitalizecertaincomputersoftwareandsoftwaredevelopmentcostsincurredinconnectionwithdevelopingorobtainingcomputersoftwareforinternalusewhenboththepreliminaryprojectstageiscompletedanditisprobablethatthesoftwarewillbeusedasintended.Capitalizedsoftwarecostsgenerallyincludeexternaldirectcostsofmaterialsandservicesutilizedindevelopingorobtainingcomputersoftwareandcompensationandrelatedbenefitsforemployeeswhoaredirectlyassociatedwiththesoftwareproject.Capitalizedsoftwarecostsareincludedinproperty,plantandequipmentonourbalancesheetandamortizedonastraight-linebasiswhenthesoftwareisreadyforitsintendeduseovertheestimatedusefullivesofthesoftware,whichapproximatethreetotenyears.Instruments–Instrumentsarehand-helddevicesusedbysurgeonsduringtotaljointreplacementandothersurgicalprocedures.Instrumentsarerecognizedaslong-livedassetsandareincludedinproperty,plantandequipment.Undeployedinstrumentsarecarriedatcost,netofallowancesforexcessandobsoleteinstruments.Instrumentsinthefieldarecarriedatcostlessaccumulateddepreciation.Depreciationiscomputedusingthestraight-linemethodbasedonaverageestimatedusefullives,determinedprincipallyinreferencetoassociatedproductlifecycles,primarilyfiveyears.Wereviewinstrumentsforimpairmentwhenevereventsorchangesincircumstancesindicatethatthecarryingvalueofaninstrumentmaynotberecoverable.Depreciationofinstrumentsisrecognizedasselling,generalandadministrativeexpense.Goodwill–Goodwillisnotamortizedbutissubjecttoannualimpairmenttests.Goodwillhasbeenassignedtoreportingunits.Weperformannualimpairmenttestsbycomparingeachreportingunit’sfairvaluetoitscarryingamounttodetermineifthereispotentialimpairment.Thefairvalueofthereportingunitandtheimpliedfairvalueofgoodwillaredeterminedbaseduponadiscountedcashflowanalysis.Significantassumptionsareincorporatedintothesediscountedcashflowanalysessuchasestimatedgrowthratesandrisk-adjusteddiscountrates.Weperformthistestinthefourthquarteroftheyearorwhenevereventsorchangesincircumstancesindicatethatthecarryingvalueofthereportingunit’sassetsmaynotberecoverable.Ifthefairvalueofthereportingunitislessthanitscarryingvalue,animpairmentlossisrecordedtotheextentthattheimpliedfairvalueofthereportingunitgoodwillislessthanthecarryingvalueofthereportingunitgoodwill.DuringtheyearsendedDecember31,2010and2009werecordedgoodwillimpairmentchargesof$204.0millionand$73.0million,respectively,relatedtoourU.S.Spinereportingunit.SeeNote9formoreinformationregardinggoodwillandgoodwillimpairment.IntangibleAssets–Intangibleassetsareinitiallymeasuredattheirfairvalue.Wehavedeterminedthefairvalueofourintangibleassetseitherbythefairvalueoftheconsiderationexchangedfortheintangibleassetortheestimatedafter-taxdiscountedcashflowsexpectedtobegeneratedfromtheintangibleasset.Intangibleassetswithanindefinitelife,includingcertaintrademarksandtradenames,arenotamortized.Indefinitelifeintangibleassetsareassessedannuallytodeterminewhethereventsandcircumstancescontinuetosupportanindefinitelife.Intangibleassetswithafinitelife,includingcoreanddevelopedtechnology,certaintrademarksandtradenames,customer-relatedintangibles,intellectualpropertyrightsandpatentsandlicensesareamortizedonastraight-linebasisovertheirestimatedusefullife,rangingfromlessthanoneyearto40years.Intangibleassetswithafinitelifearetestedforimpairmentwhenevereventsorcircumstancesindicatethatthecarryingamountmaynotberecoverable.Intangibleassetswithanindefinitelifearetestedforimpairmentannuallyorwhenevereventsorcircumstancesindicatethatthecarryingamountmaynotberecoverable.AnimpairmentlossisrecognizedifthecarryingZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT44NotestoConsolidatedFinancialStatements(Continued)amountexceedstheestimatedfairvalueoftheasset.Theamountoftheimpairmentlosstoberecordedwouldbedeterminedbasedupontheexcessoftheasset’scarryingvalueoveritsfairvalue.Thefairvaluesofindefinitelivedintangibleassetsaredeterminedbaseduponadiscountedcashflowanalysisusingtherelieffromroyaltymethod.Therelieffromroyaltymethodestimatesthecostsavingsassociatedwithowning,ratherthanlicensing,assets.Significantassumptionsareincorporatedintothesediscountedcashflowanalysessuchasestimatedgrowthrates,royaltyratesandrisk-adjusteddiscountrates.Indeterminingtheusefullivesofintangibleassets,weconsidertheexpecteduseoftheassetsandtheeffectsofobsolescence,demand,competition,anticipatedtechnologicaladvances,changesinsurgicaltechniques,marketinfluencesandothereconomicfactors.Fortechnology-basedintangibleassets,weconsidertheexpectedlifecyclesofproducts,absentunforeseentechnologicaladvances,whichincorporatethecorrespondingtechnology.Trademarksandtradenamesthatdonothaveawastingcharacteristic(i.e.,therearenolegal,regulatory,contractual,competitive,economicorotherfactorswhichlimittheusefullife)areassignedanindefinitelife.Trademarksandtradenamesthatarerelatedtoproductsexpectedtobephasedoutareassignedlivesconsistentwiththeperiodinwhichtheproductsbearingeachbrandareexpectedtobesold.Forcustomerrelationshipintangibleassets,weassignusefullivesbaseduponhistoricallevelsofcustomerattrition.Intellectualpropertyrightsareassignedusefullivesthatapproximatethecontractuallifeofanyrelatedpatentortheperiodforwhichwemaintainexclusivityovertheintellectualproperty.IncomeTaxes–Weaccountforincometaxesundertheassetandliabilitymethod,whichrequirestherecognitionofdeferredtaxassetsandliabilitiesfortheexpectedfuturetaxconsequencesofeventsthathavebeenincludedinthefinancialstatements.Underthismethod,deferredtaxassetsandliabilitiesaredeterminedbasedonthedifferencesbetweenthefinancialstatementsandtaxbasisofassetsandliabilitiesusingenactedtaxratesineffectfortheyearinwhichthedifferencesareexpectedtoreverse.Theeffectofachangeintaxratesondeferredtaxassetsandliabilitiesisrecognizedinincomeintheperiodthatincludestheenactmentdate.Werecordnetdeferredtaxassetstotheextentwebelievetheseassetswillmorelikelythannotberealized.Inmakingsuchdetermination,weconsiderallavailablepositiveandnegativeevidence,includingfuturereversalsofexistingtaxabletemporarydifferences,projectedfuturetaxableincome,taxplanningstrategiesandrecentfinancialoperations.Intheeventweweretodeterminethatwewouldbeabletorealizeourdeferredincometaxassetsinthefutureinexcessoftheirnetrecordedamount,wewouldmakeanadjustmenttothevaluationallowancewhichwouldreducetheprovisionforincometaxes.FederalincometaxesareprovidedontheportionoftheincomeofforeignsubsidiariesthatisexpectedtoberemittedtotheU.S.DerivativeFinancialInstruments–Wemeasureallderivativeinstrumentsatfairvalueandreportthemonourconsolidatedbalancesheetasassetsorliabilities.Wemaintainwrittenpoliciesandproceduresthatpermit,underappropriatecircumstancesandsubjecttoproperauthorization,theuseofderivativefinancialinstrumentssolelyforhedgingpurposes.Theuseofderivativefinancialinstrumentsfortradingorspeculativepurposesisprohibitedbyourpolicy.SeeNote13formoreinformationregardingourderivativeandhedgingactivities.OtherComprehensiveIncome–Othercomprehensiveincomereferstorevenues,expenses,gainsandlossesthatundergenerallyacceptedaccountingprinciplesareincludedincomprehensiveincomebutareexcludedfromnetearningsastheseamountsarerecordeddirectlyasanadjustmenttostockholders’equity.Othercomprehensiveincomeiscomprisedofforeigncurrencytranslationadjustments,unrealizedforeigncurrencyhedgegainsandlosses,unrealizedgainsandlossesonavailable-for-salesecuritiesandamortizationofpriorservicecostsandunrecognizedgainsandlossesinactuarialassumptions.TreasuryStock–Weaccountforrepurchasesofcommonstockunderthecostmethodandpresenttreasurystockasareductionofstockholders’equity.Wereissuecommonstockheldintreasuryonlyforlimitedpurposes.NoncontrollingInterest–OnJanuary1,2009,weadoptedtheFASB’snewlyissuedguidancerelatedtononcontrollinginterests.Thisnewguidancechangestheaccountingandreportingforminorityinterests,whicharenowrecharacterizedasnoncontrollinginterestsandclassifiedasacomponentofequity.Thisnewguidancerequiresretroactiveadoptionofthepresentationanddisclosurerequirementsforexistingnoncontrollinginterests.Thisadoptiondidnothaveamaterialimpactonourconsolidatedfinancialstatementsorresultsofoperations.DuringtheyearendedDecember31,2009,weacquired100percentownershipofouronlyoutstandingnoncontrollinginterestforapproximately$8.6million.Thispurchasewasrecordedasanequitytransactionandisreflectedasafinancingactivityinourconsolidatedstatementofcashflows.Asaresult,thecarryingbalanceofthenoncontrollinginterestsof$3.6millionwaseliminated,andtheremaining$5.0million,representingthedifferencebetweenthepurchasepriceandcarryingbalance,wasrecordedasareductioninpaid-incapital.TransactionswithnoncontrollinginterestshadthefollowingZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT45NotestoConsolidatedFinancialStatements(Continued)effectonequityattributabletoZimmerHoldings,Inc.(inmillions):2009NetearningsofZimmerHoldings,Inc.$717.4Transferstononcontrollinginterests:Decreaseinequityrelatedtothepurchaseofnoncontrollinginterests(5.0)ChangefromnetearningsofZimmerHoldings,Inc.andtransferstononcontrollinginterests$712.4AccountingPronouncements–Therearenorecentlyissuedaccountingpronouncementsthatwehavenotyetadoptedthatareexpectedtohaveamaterialeffectonourfinancialposition,resultsofoperationsorcashflows.3.SHARE-BASEDCOMPENSATIONOurshare-basedpaymentsprimarilyconsistofstockoptions,restrictedstock,restrictedstockunits(RSUs),performancesharesandanemployeestockpurchaseplan.Share-basedcompensationexpensefortheyearsendedDecember31,2010,2009and2008isasfollows(inmillions):201020092008Stockoptions$47.6$61.9$65.4RSUandother14.413.44.5Totalexpense,pre-tax62.075.369.9Taxbenefitrelatedtoawards(16.2)(20.9)(20.4)Totalexpense,netoftax$45.8$54.4$49.5Share-basedcompensationcostcapitalizedaspartofinventoryfortheyearsendedDecember31,2010,2009and2008was$12.2million,$17.2million,and$19.6million,respectively.AsofDecember31,2010and2009,approximately$6.6millionand$9.4millionofcapitalizedcostsremainedinfinishedgoodsinventory.StockOptionsWehadtwoequitycompensationplansineffectatDecember31,2010:the2009StockIncentivePlan(2009Plan)andtheStockPlanforNon-EmployeeDirectors.The2009Plansucceedsthe2006StockIncentivePlan(2006Plan)andtheTeamShareStockOptionPlan(TeamSharePlan).Followingstockholderapprovalofthe2009PlaninMay2009,nofurtherawardsweregrantedunderthe2006PlanorundertheTeamSharePlan,andsharesremainingavailableforgrantunderthoseplansareexpectedtobemergedintothe2009Plan.VestedandunvestedstockoptionsandunvestedrestrictedstockandRSUspreviouslygrantedunderthe2006Plan,theTeamSharePlanandanotherpriorplan,the2001StockIncentivePlan,remainedoutstandingasofDecember31,2010.Wehavereservedthemaximumnumberofsharesofcommonstockavailableforawardunderthetermsofeachoftheseplans.Wehaveregistered57.9millionsharesofcommonstock.The2009Planprovidesforthegrantofnonqualifiedstockoptionsandincentivestockoptions,long-termperformanceawardsintheformofperformancesharesorunits,restrictedstock,RSUsandstockappreciationrights.TheCompensationandManagementDevelopmentCommitteeoftheBoardofDirectorsdeterminesthegrantdateforannualgrantsunderourequitycompensationplans.Thedateforannualgrantsunderthe2009Plantoourexecutiveofficersisexpectedtooccurinthefirstquarterofeachyearfollowingtheearningsannouncementsforthepreviousquarterandfullyear.TheStockPlanforNon-EmployeeDirectorsprovidesforawardsofstockoptions,restrictedstockandRSUstonon-employeedirectors.Ithasbeenourpracticetoissuesharesofcommonstockuponexerciseofstockoptionsfrompreviouslyunissuedshares.Thetotalnumberofawardswhichmaybegrantedinagivenyearand/oroverthelifeoftheplanundereachofourequitycompensationplansislimited.AtDecember31,2010,anaggregateof11.9millionshareswereavailableforfuturegrantsandawardsundertheseplans.Stockoptionsgrantedtodateunderourplansgenerallyvestoverfouryearsandgenerallyhaveamaximumcontractuallifeof10years.Asestablishedunderourequitycompensationplans,vestingmayaccelerateuponretirementafterthefirstanniversarydateoftheawardifcertaincriteriaaremet.Werecognizeexpenserelatedtostockoptionsonastraight-linebasisovertherequisiteserviceperiod,lessawardsexpectedtobeforfeitedusingestimatedforfeiturerates.Duetotheacceleratedretirementprovisions,therequisiteserviceperiodofourstockoptionsrangefromonetofouryears.Stockoptionsaregrantedwithanexercisepriceequaltothemarketpriceofourcommonstockonthedateofgrant,exceptinlimitedcircumstanceswherelocallawmaydictateotherwise.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT46NotestoConsolidatedFinancialStatements(Continued)AsummaryofstockoptionactivityfortheyearendedDecember31,2010isasfollows(optionsinthousands):StockOptionsWeightedAverageExercisePriceWeightedAverageRemainingContractualLifeIntrinsicValue(inmillions)OutstandingatDecember31,200916,912$67.17Optionsgranted2,02357.82Optionsexercised(404)34.47Optionscancelled(545)60.49Optionsexpired(548)76.22OutstandingatDecember31,201017,438$66.765.8$50.3VestedorexpectedtovestasofDecember31,201016,733$67.095.7$47.6ExercisableatDecember31,201012,108$69.264.9$31.7WeuseaBlack-Scholesoption-pricingmodeltodeterminethefairvalueofourstockoptions.Expectedvolatilitywasderivedfromtheimpliedvolatilityoftradedoptionsonourstockthatwereactivelytradedaroundthegrantdateofthestockoptionswithexercisepricessimilartothestockoptionsandmaturitiesofoveroneyear.Theexpectedtermofthestockoptionshasbeenderivedfromhistoricalemployeeexercisebehavior.Therisk-freeinterestrateisdeterminedusingtheimpliedyieldcurrentlyavailableforzero-couponU.S.governmentissueswitharemainingtermapproximatingtheexpectedlifeoftheoptions.Adividendyieldofzeropercenthasbeenusedaswehavenotpaidanydividendssincebecomingapubliccompanyin2001andwedonotexpecttopayanydividendsintheforeseeablefuture.TheweightedaveragefairvalueoftheoptionsgrantedintheyearsendedDecember31,2010,2009and2008weredeterminedusingthefollowingassumptions:201020092008DividendYield–%–%–%Volatility26.3%41.6%27.4%Risk-freeinterestrate2.8%1.7%2.9%Expectedlife(years)5.95.45.4Theweightedaveragefairvalueforstockoptionsgrantedduring2010,2009and2008was$18.17,$16.02and$23.32,respectively.ThetotalintrinsicvalueofstockoptionsexercisedduringtheyearsendedDecember31,2010,2009and2008was$8.5million,$3.3millionand$31.9million,respectively.AsofDecember31,2010,therewas$63.4millionofunrecognizedshare-basedpaymentexpenserelatedtononvestedstockoptionsgrantedunderourplans.Thatexpenseisexpectedtoberecognizedoveraweightedaverageperiodof2.2years.PerformanceSharesandRSUsWehaveawardedbothperformancesharesandRSUstoouremployees.Someoftheseawardshavehadserviceconditionswhileothershavehadperformanceconditions.Thetermsoftheserviceconditionawardshavebeeneithertwoorfiveyearswithvestingoccurringratablyontheanniversarydateoftheaward.However,baseduponmeetingcertaincriteria,asestablishedunderourequitycompensationplans,theseawardsmayaccelerateuponretirementafterthefirstanniversarydateoftheaward.Accordingly,therequisiteserviceperiodusedforshare-basedpaymentexpenserangesfromonetofiveyears.Thelastawardsissuedwithperformanceconditionsweretovestin2008.However,fortheseperformanceconditionawardsitwasdeterminedin2008thattheperformancetargetswouldnotbeachieved.Therefore,noperformanceconditionawardsareoutstanding.AsummaryofnonvestedRSUactivityfortheyearendedDecember31,2010isasfollows(inthousands):RSUsWeightedAverageGrantDateFairValueOutstandingatJanuary1,2010435$42.09Granted80757.92Vested(56)42.63Forfeited(238)55.08OutstandingatDecember31,201094852.30Thefairvalueoftheawardswasdeterminedbaseduponthefairmarketvalueofourcommonstockonthedateofgrant.WearerequiredtoestimatethenumberofRSUsthatwillvestandrecognizeshare-basedpaymentexpenseonastraight-linebasisovertherequisiteserviceperiod.AsofDecember31,2010,weestimatethatapproximately842,000outstandingRSUswillvest.Ifourestimateweretochangeinthefuture,thecumulativeeffectofthechangeinestimatewillberecordedinthatperiod.BaseduponthenumberofRSUsthatweexpecttovest,theunrecognizedshare-basedpaymentexpenseasofDecember31,2010was$30.2millionandisexpectedtoberecognizedoveraweighted-averageperiodof3.0years.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT47NotestoConsolidatedFinancialStatements(Continued)4.INVENTORIESInventoriesatDecember31,2010and2009consistofthefollowing(inmillions):20102009Finishedgoods$757.3$718.6Workinprogress47.048.0Rawmaterials132.1146.6Inventories,net$936.4$913.2Reservesforexcessandobsoleteinventorywere$268.4millionand$255.1millionatDecember31,2010and2009,respectively.5.PROPERTY,PLANTANDEQUIPMENTProperty,plantandequipmentatDecember31,2010and2009wasasfollows(inmillions):20102009Land$22.0$21.8Buildingandequipment1,162.01,147.7Capitalizedsoftwarecosts172.0158.8Instruments1,365.61,210.2Constructioninprogress66.562.02,788.12,600.5Accumulateddepreciation(1,574.3)(1,378.8)Property,plantandequipment,net$1,213.8$1,221.7Depreciationexpensewas$247.9million,$244.2millionand$215.8millionfortheyearsendedDecember31,2010,2009and2008,respectively.6.ACQUISITIONSWemadeanumberofbusinessacquisitionsduringtheyears2010,2009and2008.InDecember2010weacquiredBeijingMontagneMedicalDeviceCo.,Ltd.(Montagne)andSodemDiffusionS.A.(Sodem).TheMontagneacquisitionmakesusaleadingprovideroforthopaedicsolutionsinChinaandprovidesproductlinestailoredexclusivelytotherapidlygrowingChinesemarket.TheSodemacquisitionbroadensourportfolioofsurgicalpowertoolsandstrengthensourpositionintheapproximate$1billionsurgicalpowertoolmarket.In2008weacquiredAbbottSpine,whichprovidedusanumberofinnovativeproductsandhelpedbuildcriticalmassinthespinemarket.Additionally,wehaveacquiredanumberofforeign-baseddistributorsduringthethreeyearperiod.Theresultsofoperationsoftheacquiredcompanieshavebeenincludedinourconsolidatedresultsofoperationssubsequenttothetransactiondates,andtherespectiveassetsandliabilitiesoftheacquiredcompanieshavebeenrecordedattheirestimatedfairvaluesinourconsolidatedstatementoffinancialpositionasofthetransactiondates,withanyexcesspurchasepricebeingallocatedtogoodwill.TheestimatedfairvaluesoftheMontagneandSodemassetsarepreliminary.ProformafinancialinformationandotherinformationrequiredbytheFASB’sguidanceonbusinesscombinationshavenotbeenincludedastheacquisitionsdidnothaveamaterialimpactuponourfinancialpositionorresultsofoperations.7.INVESTMENTSWeinvestinshortandlong-terminvestmentsclassifiedasavailable-for-salesecurities.InformationregardingourinvestmentsasofDecember31,2010isasfollows(inmillions):AmortizedCostGainsLossesFairvalueGrossUnrealizedCorporatedebtsecurities$203.9$0.1$(0.2)$203.8U.S.governmentandagencydebtsecurities47.9––47.9Municipalbonds1.1––1.1Foreigngovernmentdebtsecurities10.3––10.3Commercialpaper16.1––16.1Certificatesofdeposit131.5–(0.1)131.4Totalshortandlong-terminvestments$410.8$0.1$(0.3)$410.6InformationregardingourinvestmentsasofDecember31,2009isasfollows(inmillions):AmortizedCostGainsLossesFairvalueGrossUnrealizedCertificatesofdeposit$66.4$–$–$66.4Totalshort-terminvestments$66.4$–$–$66.4Thefollowingtableshowsthefairvalueandgrossunrealizedlossesforallavailable-for-salesecuritiesinanunrealizedlosspositiondeemedtobetemporaryasofDecember31,2010(inmillions):FairValueUnrealizedLossesCorporatedebtsecurities$126.1$(0.2)Certificatesofdeposit50.6(0.1)Total$176.7$(0.3)Allsecuritiesinthetableabovehavebeeninanunrealizedlosspositionforlessthantwelvemonths.Atotalof72securitieswereinanunrealizedlosspositionasofDecember31,2010.Theunrealizedlossesonourinvestmentsincorporatedebtsecuritieswerecausedbyincreasesininterestyieldsresultingfromthecurrentadverseconditionsintheglobalcreditmarkets.Webelievetheunrealizedlossesassociatedwithouravailable-for-salesecuritiesasofDecember31,2010aretemporarybecausewedonotintendtoselltheseinvestments,norisitmorelikelythannotthatwewillberequiredtosellthem,beforerecoveryoftheiramortizedcostbasis.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT48NotestoConsolidatedFinancialStatements(Continued)Theamortizedcostandfairvalueofouravailable-for-salefixed-maturitysecuritiesbycontractualmaturityasofDecember31,2010areasfollows(inmillions):AmortizedCostFairValueDueinoneyearorless$265.2$265.1Dueafteroneyearthroughtwoyears145.6145.5Total$410.8$410.68.FAIRVALUEMEASUREMENTSOFASSETSANDLIABILITIESThefollowingfinancialassetsandliabilitiesarerecordedatfairvalueonarecurringbasisasofDecember31,2010(inmillions):DescriptionRecordedBalanceQuotedPricesinActiveMarketsforIdenticalAssets(Level1)SignificantOtherObservableInputs(Level2)SignificantUnobservableInputs(Level3)FairValueMeasurementsatReportingDateUsing:AssetsAvailable-for-salesecuritiesCorporatedebtsecurities$203.8$–$203.8$–U.S.governmentandagencydebtsecurities47.9–47.9–Municipalbonds1.1–1.1–Foreigngovernmentdebtsecurities10.3–10.3–Commercialpaper16.1–16.1–Certificatesofdeposit131.4–131.4–Totalavailable-for-salesecurities410.6–410.6–Derivatives,currentandlong-termForeigncurrencyforwardcontractsandoptions34.5–34.5–Interestrateswaps1.5–1.5–$446.6$–$446.6$–LiabilitiesDerivatives,currentandlong-termForeigncurrencyforwardcontractsandoptions$40.0$–$40.0$–$40.0$–$40.0$–ThefollowingfinancialassetsandliabilitiesarerecordedatfairvalueonarecurringbasisasofDecember31,2009(inmillions):DescriptionRecordedBalanceQuotedPricesinActiveMarketsforIdenticalAssets(Level1)SignificantOtherObservableInputs(Level2)SignificantUnobservableInputs(Level3)FairValueMeasurementsatReportingDateUsing:AssetsAvailable-for-salesecuritiesCertificatesofdeposit$66.4$–$66.4$–Totalavailable-for-salesecurities66.4–66.4–Derivatives,currentandnon-current12.4–12.4–$78.8$–$78.8$–LiabilitiesDerivatives,currentandnon-current$32.7$–$32.7$–$32.7$–$32.7$–Available-for-salesecuritiesarevaluedunderamarketapproachusingbrokerpricesforidenticalassetsinover-the-countermarkets.Wevalueourforeigncurrencyforwardcontractsandforeigncurrencyoptionsusingamarketapproachbasedonforeigncurrencyexchangeratesobtainedfromactivemarketsandperformanassessmentofcounterpartycreditrisk.Wevalueourinterestrateswapsusingamarketapproachbasedonpubliclyavailablemarketyieldcurvesandthetermsofourswaps.ThefollowingnonfinancialassetsweremeasuredatfairvalueonanonrecurringbasisduringtheyearendedDecember31,2010(inmillions):DescriptionYearEndedDecember31,2010QuotedPricesinActiveMarketsforIdenticalAssets(Level1)SignificantOtherObservableInputs(Level2)SignificantUnobservableInputs(Level3)TotalLossesFairValueMeasurementsUsing:Goodwill$137.0$–$–$137.0$204.0$137.0$–$–$137.0$204.0ThefollowingnonfinancialassetsweremeasuredatfairvalueonanonrecurringbasisduringtheyearendedDecember31,2009(inmillions):DescriptionYearEndedDecember31,2009QuotedPricesinActiveMarketsforIdenticalAssets(Level1)SignificantOtherObservableInputs(Level2)SignificantUnobservableInputs(Level3)TotalLossesFairValueMeasurementsUsing:Goodwill$342.9$–$–$342.9$73.0$342.9$–$–$342.9$73.0In2010,goodwillrelatingtoourU.S.Spinereportingunitwithacarryingamountof$341.0millionwaswrittendowntoitsimpliedfairvalueof$137.0million,resultinginanimpairmentchargeof$204.0million.TheimpliedfairvalueofgoodwillequalstheestimatedfairvalueofareportingunitZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT49NotestoConsolidatedFinancialStatements(Continued)minusthefairvalueofthereportingunit’snetassets.IndeterminingtheimpliedfairvalueoftheU.S.Spinereportingunit’sgoodwill,weusedunobservableinputstoestimatethefairvalueofthereportingunitanditsassetsandliabilities.Fairvaluewasdeterminedusinganequalweightingofincomeandmarketapproaches.Fairvalueundertheincomeapproachwasdeterminedbydiscountingtopresentvaluetheestimatedfuturecashflowsofthereportingunit.Fairvalueunderthemarketapproachutilizedthecomparabletransactionmethodology,whichusesvaluationindicatorsdeterminedfromsalesofotherbusinessesthataresimilartoourU.S.Spinereportingunit.Inestimatingthefuturecashflowsofthereportingunit,weutilizedacombinationofmarketandcompanyspecificinputsthatamarketparticipantwoulduseinassessingthefairvalueofthereportingunit.Theprimarymarketinputwasrevenuegrowthrates.Theserateswerebaseduponhistoricaltrendsandestimatedfuturegrowthdriverssuchasanagingglobalpopulation,obesityandmoreactivelifestyles.Significantcompanyspecificinputsincludedassumptionsregardinghowthereportingunitcouldleverageoperatingexpensesasrevenuegrowsandtheimpactanynewproductswillhaveonrevenues.Underthecomparabletransactionmethodology,wetookintoconsiderationwhenthecomparabletransactionoccurredandthedifferencesthatmayexistduetochangesintheeconomicenvironment.WealsotookintoconsiderationdifferencesbetweenthecomparablecompaniesandourU.S.Spinereportingunitthatcouldaffectfairvalue,suchascashanddebtlevels.Thefairvalueofthereportingunit’sassetsandliabilitieswasdeterminedbyusingthesamemethodsthatareusedinbusinesscombinationpurchaseaccounting.SeeNote9forfurtherinformationregardingthisgoodwillimpairment.In2009,theimpliedfairvalueofgoodwillwasdeterminedusingthesamemethodologiesutilizedinthe2010valuation.TherewerenoothersignificantnonfinancialassetsthatweremeasuredatfairvalueintheyearsendedDecember31,2010andDecember31,2009.9.GOODWILLANDOTHERINTANGIBLEASSETSThefollowingtablesummarizesthechangesinthecarryingamountofgoodwillfortheyearsendedDecember31,2010and2009(inmillions):AmericasEuropeAsiaPacificTotalBalanceatJanuary1,2009Goodwill$1,540.3$1,110.1$124.4$2,774.8Accumulatedimpairmentlosses––––1,540.31,110.1124.42,774.8ChangeinfairvalueestimatesofAbbottSpinerelatedto:Integrationliability1.04.20.35.5Inventory2.2––2.2Incometaxes(1.9)––(1.9)U.S.Spinereportingunitimpairment(73.0)––(73.0)Otheracquisitions–5.0–5.0Currencytranslation6.353.810.870.9BalanceatDecember31,2009Goodwill1,547.91,173.1135.52,856.5Accumulatedimpairmentlosses(73.0)––(73.0)1,474.91,173.1135.52,783.5U.S.Spinereportingunitimpairment(204.0)––(204.0)Otheracquisitions13.13.737.354.1Currencytranslation1.8(69.7)15.1(52.8)BalanceatDecember31,2010Goodwill1,562.81,107.1187.92,857.8Accumulatedimpairmentlosses(277.0)––(277.0)$1,285.8$1,107.1$187.9$2,580.8Weconductourannualimpairmenttestinthefourthquarterofeveryyearorwhenevereventsoccurorcircumstanceschangethatwouldmorelikelythannotreducethefairvalueofareportingunitbelowitscarryingamount.Duringour2009and2010annualimpairmenttests,itwasdeterminedthatourU.S.Spinereportingunit’scarryingvaluewasinexcessofitsestimatedfairvalue.Fairvaluewasdeterminedusinganequalweightingofincomeandmarketapproaches.Inthe2009period,factorsthatcontributedtotheestimatedfairvalueofthereportingunitbeingbelowitscarryingvalueincludedadecreaseinprojectedrevenuesrelatedtotheDynesysDynamicStabilizationSystem.Thisproductlineexperiencedincreasedcompetitionandinsurancereimbursementissuesin2009.WehadbeenseekingapprovalfromtheFDAtomarketthisproductdifferentlyintheU.S.,whichwouldhaveenhanceditspositioninthemarket.However,inNovember2009anFDAadvisorypanelissuedanon-approvablerecommendation,increasingtheuncertaintyoftheestimatedfuturecashflowsatthattime.InadditiontotheDynesysproduct,revenuesfromotherproductshadbeenaffectedasweworkedthroughtheintegrationofthesaleschannelfollowingtheAbbottSpineacquisition.Inthefirstquarterof2010,ourU.S.Spinereportingunitresultswerebelowourexpectationssoweperformedanimpairmenttestusingsimilarmethodologiestothoseusedin2009.WedeterminedatthattimethatgoodwillwasnotZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT50NotestoConsolidatedFinancialStatements(Continued)impaired.Inthesecondandthirdquartersof2010,wedidnotperformimpairmenttestsbecauseourrevenuesandunderlyingcashflowswereinlinewithourestimatesfromthefirstquarter.Aswecompletedourannualimpairmenttestinginthefourthquarterof2010,factorsinthebroaderU.S.spinemarketplaceaswellascompanyspecificfactorscontributedtoafurtherdecreaseintheestimatedfairvalueofthereportingunit.Atthetimeofour2009impairmenttest,weestimatedthattheU.S.spinemarketwasexperiencingyear-over-yearrevenuegrowthinthelowdoubledigitsthatwouldcontinueintotheforeseeablefuture.Sincethetimeofour2009test,year-over-yeargrowthcontinuedtodecelerateandaftermultiplequartersofdecelerationweestimatedthismaybealonger-termtrendinsteadofatemporaryphenomenon.Inourfourthquarter2010impairmenttest,weconcludedthatyear-over-yeargrowthhadfallentothelowtomidsingledigitswhichweestimatetobethetrendinthenear-term.Aportionofthisdecreasehascomefromlowerpricingashospitalstrytoreducetheircosts.Anotherfactorinthelowergrowthtrendincludesincreasedscrutinyfrominsurancecompaniesandcontinueddiscussioninthehealthcarecommunityonwhethercertainspineproceduresarenecessary.Asanexample,lateinthethirdquarterof2010inonestateaninsurerprovidednoticethatstartingJanuary1,2011,theinsurerwillrequirepriorreviewandcertificationthatthepatienthasmetspecificclinicalcriteriabeforetheprocedurewillbecovered.Whilerevenuesfromtheseproceduresinthisonestatearenotsignificanttoouroverallrevenues,ithascauseduncertaintyonwhethermoreinsurersmaytakesimilaractions.Asdiscussedabove,webelievesuchdecelerationanduncertaintyastorevenuegrowthhavedecreasedthevaluationsofotherspinecompaniesintheU.S.marketandthushasaffectedourestimatedfairvalueofourU.S.Spinereportingunit.Inaddition,followingtheFDAadvisorypaneldecisioninNovember2009wecontinuedtoevaluateourregulatoryoptionsformarketingtheDynesysproductdifferently.In2010,weconcludedthatobtainingregulatoryapprovalwouldtakemoretimeandcostmoremoneythanoriginallyexpected.Thisconclusionhasalsocontributedtothedecreaseinourestimatedfairvalueofthereportingunit.Asaresult,werecordedgoodwillimpairmentchargesof$204.0millionand$73.0millionduringtheyearsendedDecember31,2010and2009,respectively.Wehavefiveotherreportingunitswithgoodwillassignedtothem.Weestimatethefairvalueofthosereportingunitsusingtheincomeapproachbydiscountingtopresentvaluetheestimatedfuturecashflowsofthereportingunit.Foreachofthosefivereportingunits,theestimatedfairvaluesubstantiallyexceedsitscarryingvalue.WewillcontinuetomonitorthefairvalueofourU.S.Spinereportingunitaswellasourotherfivereportingunitsinourinterimandannualreportingperiods.Ifourestimatedcashflowsforthesereportingunitsdecrease,wemayhavetorecordfurtherimpairmentchargesinthefuture.Factorsthatcouldresultinourcashflowsbeinglowerthanourcurrentestimatesinclude:1)decreasedrevenuescausedbychangesinthehealthcaremarket,orourinabilitytogeneratenewproductrevenuefromourresearchanddevelopmentactivities,and2)ifwearenotabletoachievetheestimatedoperatingmarginsinourforecastsduetounforeseenfactors.Additionally,changesinthebroadereconomicenvironmentcouldcausechangestoourestimateddiscountrates,whichwillimpactourestimatedfairvalues.Thecomponentsofidentifiableintangibleassetsareasfollows(inmillions):CoreTechnologyDevelopedTechnologyIntellectualPropertyRightsTrademarksandTradeNamesCustomerRelationshipsOtherTotalAsofDecember31,2010:Intangibleassetssubjecttoamortization:Grosscarryingamount$144.1$511.5$153.7$36.8$147.7$70.0$1,063.8Accumulatedamortization(52.0)(219.3)(73.4)(23.4)(32.8)(33.1)(434.0)Intangibleassetsnotsubjecttoamortization:Grosscarryingamount–––197.3––197.3Totalidentifiableintangibleassets$92.1$292.2$80.3$210.7$114.9$36.9$827.1AsofDecember31,2009:Intangibleassetssubjecttoamortization:Grosscarryingamount$144.1$499.1$145.2$34.7$129.2$51.5$1,003.8Accumulatedamortization(44.0)(183.5)(40.3)(20.0)(23.4)(31.1)(342.3)Intangibleassetsnotsubjecttoamortization:Grosscarryingamount–––196.5––196.5Totalidentifiableintangibleassets$100.1$315.6$104.9$211.2$105.8$20.4$858.0The2010additionstodevelopedtechnology,trademarksandtradenames,andcustomerrelationshipsintangibleassetsrelatetoouracquisitionsofMontagne,Sodemandforeign-baseddistributors.Themajorityofthe2010additionstootherintangibleassetsrelatestoadistributionagreement.Wecurrentlyhaveandanticipatefutureproductdevelopmenteffortsthatmayreplacethecurrentproductsthatuseourtrademarksandtradenames.Whileitispossible,itisnotknownifthesenewproductswillutilizethesetrademarksandtradenames.IfthesenewproductsdonotZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT51NotestoConsolidatedFinancialStatements(Continued)usethesetrademarksandtradenames,theseassetsmaybeimpaired.Totalamortizationexpenseforfinite-livedintangibleassetswas$92.3million,$93.2millionand$59.3millionfortheyearsendedDecember31,2010,2009and2008,respectively.For2010,$33.1millionofamortizationexpensewasrecordedaspartofcostofgoodssold,withtheremaining$59.2millionrecordedaspartofselling,generalandadministrativeexpenses.For2009,$33.6millionofamortizationexpensewasrecordedaspartofcostofgoodssold,withtheremaining$59.6millionrecordedaspartofselling,generalandadministrativeexpenses.For2008,$6.7millionofamortizationexpensewasrecordedaspartofcostofgoodssold,withtheremaining$52.6millionrecordedaspartofselling,generalandadministrativeexpenses.EstimatedannualamortizationexpensefortheyearsendingDecember31,2011through2015is$89.4million,$82.6million,$75.7million,$71.3millionand$63.7million,respectively.10.OTHERCURRENTANDLONG-TERMLIABILITIESOthercurrentandlong-termliabilitiesatDecember31,2010and2009consistofthefollowing(inmillions):20102009Othercurrentliabilities:Licenseandserviceagreements$108.5$108.0Certainclaimsaccrual(Note19)42.542.5Salaries,wagesandbenefits118.195.7Accruedliabilities254.9252.4Totalothercurrentliabilities$524.0$498.6Otherlong-termliabilities:Long-termincometaxpayable$113.5$94.3Certainclaimsaccrual(Note19)90.329.4Otherlong-termliabilities180.2204.8Totalotherlong-termliabilities$384.0$328.511.DEBTWehadnoshort-termdebtasofDecember31,2010or2009.Long-termdebtasofDecember31,2010and2009onourconsolidatedbalancesheetconsistedofthefollowing(inmillions):20102009SeniorNotesdue2019$500.0$500.0SeniorNotesdue2039500.0500.0Debtdiscount(1.2)(1.2)Interestrateswaps1.5–SeniorCreditFacility141.8128.8Totallong-termdebt$1,142.1$1,127.6InNovember2009,wesold$500millionaggregateprincipalamountofour4.625percentSeniorNotesdueNovember30,2019and$500millionaggregateprincipalamountofour5.75percentSeniorNotesdueNovember30,2039(SeniorNotes)inapublicoffering.InterestispayableonMay30andNovember30ofeachyearuntilmaturity.Wereceivednetproceedsofapproximately$998.8million,netofanofferingdiscountof$1.2million.TheSeniorNotescarryaneffectiveinterestrateof4.634percentand5.762percent,respectively.TheestimatedfairvalueofourSeniorNotesasofDecember31,2010and2009was$1,022.0millionand$992.1million,respectively.WemayredeemtheSeniorNotesatourelectioninwholeorinpartatanytimepriortomaturityataredemptionpriceequaltothegreaterof1)100percentoftheprincipalamountofthenotesbeingredeemed;or2)thesumofthepresentvaluesoftheremainingscheduledpaymentsofprincipalandinterest(notincludinganyportionofsuchpaymentsofinterestaccruedasofthedateofredemption),discountedtothedateofredemptiononasemi-annualbasisattheTreasuryRate(asdefinedinthedebtagreement),plus20basispoints,inthecaseofthe2019notes,and25basispoints,inthecaseofthe2039notes.WewillalsopaytheaccruedandunpaidinterestontheSeniorNotestotheredemptiondate.InDecember2010,weenteredintointerestrateswapagreementswhichwedesignatedasfairvaluehedgesofunderlyingfixedrateobligationsonourSeniorNotesdue2019.WedidnothaveanyinterestrateswapagreementsoutstandingasofDecember31,2009.SeeNote13foradditionalinformationregardingtheinterestrateswapagreements.Wehaveafiveyear$1,350millionseniorcreditagreement(SeniorCreditFacility).TheSeniorCreditFacilityisarevolving,multi-currency,seniorunsecuredcreditfacilitymaturingNovember30,2012.AvailableborrowingsundertheSeniorCreditFacilityatDecember31,2010were$1,208.2million.ThecarryingvalueoftheSeniorCreditFacilityapproximatesfairvalue,astheunderlyinginstrumentshavevariableinterestratesatmarketvalue.WeandcertainofourwhollyownedforeignsubsidiariesaretheborrowersundertheSeniorCreditFacility.BorrowingsundertheSeniorCreditFacilitybearinterestataLIBOR-basedrateplusanapplicablemargindeterminedbyreferencetoourseniorunsecuredlong-termcreditratingandtheamountsdrawnundertheSeniorCreditFacility,atanalternatebaserate,oratafixedratedeterminedthroughacompetitivebidprocess.TheSeniorCreditFacilitycontainscustomaryaffirmativeandnegativecovenantsandeventsofdefaultforanunsecuredfinancingarrangement,including,amongotherthings,limitationsonconsolidations,mergersandsalesofassets.Financialcovenantsincludeamaximumleverageratioof3.0to1.0andaminimuminterestcoverageratioof3.5to1.0.Ifwefallbelowaninvestmentgradecreditrating,additionalrestrictionswouldresult,includingrestrictionsoninvestments,paymentofdividendsandstockrepurchases.WewereincompliancewithallcovenantsundertheSeniorCreditFacilityasofDecember31,2010.CommitmentsundertheSeniorCreditFacilityaresubjecttocertainfees,includingafacilityandautilizationfee.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT52NotestoConsolidatedFinancialStatements(Continued)BorrowingsundertheSeniorCreditFacilityatDecember31,2010and2009wereJapaneseYen-basedborrowings.Wealsohaveavailableuncommittedcreditfacilitiestotaling$77.8million.Theweightedaverageinterestrateforallborrowingswas3.9percentatDecember31,2010.Wepaid$59.8million,$17.0millionand$14.0millionininterestduring2010,2009and2008,respectively.12.OTHERCOMPREHENSIVEINCOMEOthercomprehensiveincomeitemsrepresentcertainamountsthatarereportedascomponentsofshareholders’equityinourconsolidatedbalancesheet,includingforeigncurrencytranslationadjustments,unrealizedgainsandlosses,netoftax,onavailable-for-saleinvestmentsandhedginginstrumentsandpensionliabilityadjustments.AccumulatedothercomprehensiveincomeatDecember31,2010and2009consistsofthefollowing:20102009Foreigncurrencytranslation$394.8$433.4Foreigncurrencycashflowhedges(4.0)(14.0)Unrealizedlossonsecurities(0.2)(1.6)Unrecognizedpriorservicecostandunrecognizedlossinactuarialassumptions(69.6)(59.2)Accumulatedothercomprehensiveincome$321.0$358.613.DERIVATIVEINSTRUMENTSANDHEDGINGACTIVITIESWeareexposedtocertainmarketrisksrelatingtoourongoingbusinessoperations,includingforeigncurrencyexchangeraterisk,commoditypricerisk,interestrateriskandcreditrisk.Wemanageourexposuretotheseandothermarketrisksthroughregularoperatingandfinancingactivities.Currently,theonlyrisksthatwemanagethroughtheuseofderivativeinstrumentsareinterestrateriskandforeigncurrencyexchangeraterisk.InterestRateRiskDerivativesDesignatedasFairValueHedgesWeuseinterestratederivativeinstrumentstomanageourexposuretointerestratemovementsbyconvertingfixed-ratedebtintovariable-ratedebt.Undertheseagreements,weagreetoexchange,atspecifiedintervals,thedifferencebetweenfixedandvariableinterestamountscalculatedbyreferencetoanagreed-uponnotionalprincipalamount.Theobjectiveoftheinstrumentsistomorecloselyaligninterestexpensewithinterestincomereceivedoncashandcashequivalents.ThesederivativeinstrumentsaredesignatedasfairvaluehedgesunderU.S.GAAP.Changesinthefairvalueofthederivativeinstrumentarerecordedincurrentearningsandareoffsetbygainsorlossesontheunderlyingdebtinstrument.InDecember2010,weenteredintofivenine-yearfixed-to-variableinterestrateswapagreementswithnotionalamountsof$50millioneachforatotalnotionalamountof$250million.Theseinterestrateswapagreementsweredesignatedasfairvaluehedgesofthefixedinterestrateobligationunderour$500million4.625percentSeniorNotesdueNovember30,2019.OntheinterestrateswapagreementsoutstandingasofDecember31,2010,wereceiveafixedinterestrateof4.625percentandpayvariableinterestequaltothethree-monthLIBORplusanaverageof133basispoints.WedidnothaveanyinterestrateswapagreementsoutstandingasofDecember31,2009.DerivativeinstrumentsdesignatedasfairvaluehedgeshadthefollowingeffectsonourconsolidatedstatementofearningsfortheyearendedDecember31,2010(inmillions):IncomeStatementClassificationGainonSwapsLossonBorrowings2010Interestandotherincome(expense),net$1.5$(1.5)$1.5$(1.5)WehadnoineffectivefairvaluehedginginstrumentsduringtheyearendedDecember31,2010.ForeignCurrencyExchangeRateRiskWeoperateonaglobalbasisandareexposedtotheriskthatourfinancialcondition,resultsofoperationsandcashflowscouldbeadverselyaffectedbychangesinforeigncurrencyexchangerates.Toreducethepotentialeffectsofforeigncurrencyexchangeratemovementsonnetearnings,weenterintoderivativefinancialinstrumentsintheformofforeigncurrencyexchangeforwardcontractsandoptionswithmajorfinancialinstitutions.WeareprimarilyexposedtoforeigncurrencyexchangerateriskwithrespecttotransactionsandnetassetsdenominatedinEuros,SwissFrancs,JapaneseYen,BritishPounds,CanadianDollars,AustralianDollars,KoreanWon,SwedishKrona,CzechKoruna,ThaiBaht,TaiwanDollars,SouthAfricanRand,RussianRublesandIndianRupees.Wedonotusederivativefinancialinstrumentsfortradingorspeculativepurposes.DerivativesDesignatedasCashFlowHedgesOurrevenuesaregeneratedinvariouscurrenciesthroughouttheworld.However,asignificantamountofourinventoryisproducedinU.S.Dollars.Therefore,movementsinforeigncurrencyexchangeratesmayhavedifferentproportionaleffectsonourrevenuescomparedtoourcostofproductssold.Tominimizetheeffectsofforeigncurrencyexchangeratemovementsoncashflows,wehedgeintercompanysalesofinventoryexpectedtooccurwithinthenext30monthswithforeigncurrencyexchangeforwardcontractsandoptions.Wedesignatethesederivativeinstrumentsascashflowhedges.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT53NotestoConsolidatedFinancialStatements(Continued)Weperformquarterlyassessmentsofhedgeeffectivenessbyverifyinganddocumentingthecriticaltermsofthehedgeinstrumentandthatforecastedtransactionshavenotchangedsignificantly.Wealsoassessonaquarterlybasiswhethertherehavebeenadversedevelopmentsregardingtheriskofacounterpartydefault.Forderivativeswhichqualifyashedgesoffuturecashflows,theeffectiveportionofchangesinfairvalueistemporarilyrecordedinothercomprehensiveincomeandthenrecognizedincostofproductssoldwhenthehedgeditemaffectsnetearnings.Theineffectiveportionofaderivative’schangeinfairvalue,ifany,isreportedincostofproductssoldimmediately.ThenetamountrecognizedinearningsduringtheyearsendedDecember31,2010,2009and2008duetoineffectivenessandamountsexcludedfromtheassessmentofhedgeeffectivenesswasnotsignificant.ForforwardcontractsandoptionsoutstandingatDecember31,2010,wehaveobligationstopurchaseU.S.DollarsandsellEuros,JapaneseYen,BritishPounds,CanadianDollars,AustralianDollars,KoreanWon,SwedishKrona,CzechKoruna,ThaiBaht,TaiwanDollars,SouthAfricanRand,RussianRublesandIndianRupeesandpurchaseSwissFrancsandsellU.S.DollarsatsetmaturitydatesrangingfromJanuary2011throughJune2013.AsofDecember31,2010,thenotionalamountsofoutstandingforwardcontractsandoptionsenteredintowiththirdpartiestopurchaseU.S.Dollarswere$1.4billion.AsofDecember31,2010,thenotionalamountsofoutstandingforwardcontractsenteredintowiththirdpartiestopurchaseSwissFrancswere$212.1million.Derivativeinstrumentsdesignatedascashflowhedgeshadthefollowingeffectsonothercomprehensiveincome(OCI)onourconsolidatedbalancesheetandourconsolidatedstatementofearningsonagrossbasisfortheyearsendedDecember31,2010and2009(inmillions):DerivativeInstrument201020092008201020092008AmountofGain/(Loss)RecognizedinOCIAmountofGain/(Loss)ReclassifiedFromOCItoCostofProductsSoldForeignexchangeforwardcontracts$11.2$(35.8)$33.1$7.3$16.8$(52.6)Foreignexchangeoptions0.3(2.0)1.2–1.2–Total$11.5$(37.8)$34.3$7.3$18.0$(52.6)ThefairvalueofoutstandingderivativeinstrumentsdesignatedascashflowhedgesandrecordedonthebalancesheetatDecember31,2010,togetherwithsettledderivativeswherethehedgeditemhasnotyetaffectedearnings,wasanetunrealizedlossof$20.6million,or$4.0millionaftertaxes,whichisdeferredinothercomprehensiveincome,ofwhichalossof$6.4million,oragainof$2.4millionaftertaxes,isexpectedtobereclassifiedtoearningsoverthenexttwelvemonths.DerivativesNotDesignatedasHedgingInstrumentsWeenterintoforeigncurrencyforwardexchangecontractswithtermsofonemonthtomanagecurrencyexposuresformonetaryassetsandliabilitiesdenominatedinacurrencyotherthananentity’sfunctionalcurrency.Asaresult,anyforeigncurrencyremeasurementgains/lossesrecognizedinearningsaregenerallyoffsetwithgains/lossesontheforeigncurrencyforwardexchangecontractsinthesamereportingperiod.Theseoffsettinggains/lossesarerecordedincostofproductssoldastheunderlyingassetsandliabilitiesexposedtoremeasurementincludeinventory-relatedtransactions.Thesecontractsaresettledonthelastdayofeachreportingperiod.Therefore,thereisnooutstandingbalancerelatedtothesecontractsrecordedonthebalancesheetasoftheendofthereportingperiod.Thenotionalamountsofthesecontractsaretypicallyinarangeof$1.0billionto$1.4billionperquarter.Thefollowinggains/(losses)fromthesederivativeinstrumentswererecognizedincostofproductssoldonourconsolidatedstatementofearnings(inmillions):DerivativeInstrument201020092008YearEndedDecember31,Foreignexchangeforwardcontracts$3.3$(10.3)$(2.2)Total$3.3$(10.3)$2.2Thisimpactdoesnotincludeanyoffsettinggains/lossesrecognizedinearningsasaresultofforeigncurrencyremeasurementofmonetaryassetsandliabilitiesdenominatedinacurrencyotherthananentity’sfunctionalcurrency.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT54NotestoConsolidatedFinancialStatements(Continued)BalanceSheetPresentationAsofDecember31,2010and2009,allderivativeinstrumentsdesignatedasfairvaluedhedgesandcashflowhedgesarerecordedatfairvalueonthebalancesheet.Onourconsolidatedbalancesheet,werecognizeindividualforwardcontractsandoptionswiththesamecounterpartyonanetasset/liabilitybasisifwehaveamasternettingagreementwiththecounterparty.ThefairvalueofderivativeinstrumentsonagrossbasisasofDecember31,2010and2009isasfollows(inmillions):BalanceSheetLocationFairValueBalanceSheetLocationFairValue20102009AssetDerivativesForeignexchangeforwardcontractsOthercurrentassets$32.2Othercurrentassets$23.3ForeignexchangeoptionsOthercurrentassets0.4Othercurrentassets–ForeignexchangeforwardcontractsOtherassets11.6Otherassets6.3ForeignexchangeoptionsOtherassets2.3Otherassets–InterestrateswapsOtherassets1.5Otherassets–Totalassetderivatives$48.0$29.6LiabilityDerivativesForeignexchangeforwardcontractsOthercurrentliabilities$37.6Othercurrentliabilities$35.4ForeignexchangeforwardcontractsOtherlong-termliabilities14.4Otherlong-termliabilities14.5Totalliabilityderivatives$52.0$49.914.RETIREMENTBENEFITPLANSWehavedefinedbenefitpensionplanscoveringcertainU.S.andPuertoRicoemployees.Theemployeeswhoarenotparticipatinginthedefinedbenefitplansreceiveadditionalbenefitsunderourdefinedcontributionplans.Planbenefitsareprimarilybasedonyearsofcreditedserviceandtheparticipant’saverageeligiblecompensation.InadditiontotheU.S.andPuertoRicodefinedbenefitpensionplans,wesponsorvariousnon-U.S.pensionarrangements,includingretirementandterminationbenefitplansrequiredbylocallaworcoordinatedwithgovernmentsponsoredplans.WeuseaDecember31measurementdateforourbenefitplans.DefinedBenefitPlansThecomponentsofnetpensionexpensefortheyearsendedDecember31,2010,2009and2008forourdefinedbenefitretirementplansareasfollows(inmillions):201020092008201020092008U.S.andPuertoRicoNon-U.S.Servicecost$10.9$12.3$11.7$14.6$13.7$12.1Interestcost11.510.69.76.76.87.3Expectedreturnonplanassets(18.1)(16.4)(13.5)(8.0)(8.2)(9.3)Curtailment–0.4––––Settlement––3.4––0.1Amortizationofpriorservicecost(0.1)0.10.1(0.7)(0.7)(0.1)Amortizationofunrecognizedactuarialloss2.44.12.21.21.90.1Netperiodicbenefitcost$6.6$11.1$13.6$13.8$13.5$10.2ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT55NotestoConsolidatedFinancialStatements(Continued)Theweightedaverageactuarialassumptionsusedtodeterminenetpensionexpenseforourdefinedbenefitretirementplanswereasfollows:201020092008201020092008U.S.andPuertoRicoNon-U.S.Discountrate6.26%5.79%6.16%3.19%3.40%3.60%Rateofcompensationincrease3.80%3.84%3.84%2.63%2.39%3.06%Expectedlong-termrateofreturnonplanassets7.50%7.75%8.00%4.12%4.16%4.64%Theexpectedlong-termrateofreturnonplanassetsisbasedonthehistoricalandestimatedfutureratesofreturnonthedifferentassetclassesheldintheplans.Theexpectedlong-termrateofreturnistheweightedaverageofthetargetassetallocationofeachindividualassetclass.Webelievethathistoricalassetresultsapproximateexpectedmarketreturnsapplicabletothefundingofalong-termbenefitobligation.Discountratesweredeterminedforeachofourdefinedbenefitretirementplansattheirmeasurementdatetoreflecttheyieldofaportfolioofhighqualitybondsmatchedagainstthetimingandamountsofprojectedfuturebenefitpayments.Changesinprojectedbenefitobligationsandplanassets,fortheyearsendedDecember31,2010and2009forourdefinedbenefitretirementplans,were(inmillions):2010200920102009U.S.andPuertoRicoNon-U.S.Projectedbenefitobligation–beginningofyear$187.6$188.4$197.3$192.1Servicecost10.912.314.613.7Interestcost11.510.66.76.8Employeecontributions––12.612.0Benefitspaid(3.6)(2.6)(18.1)(27.0)Actuarial(gain)loss20.7(21.0)0.2(3.0)Priorservicecost–––(5.0)Curtailment–(0.1)––Translationloss––13.27.7Projectedbenefitobligation–endofyear$227.1$187.6$226.5$197.3Planassetsatfairmarketvalue–beginningofyear$202.1$138.5$179.0$163.7Actualreturnonplanassets23.225.86.811.0Employercontributions23.240.414.012.2Employeecontributions––12.612.0Benefitspaid(3.6)(2.6)(18.1)(27.0)Translationgain––11.77.1Planassetsatfairmarketvalue–endofyear$244.9$202.1$206.0$179.0Fundedstatus$17.8$14.5$(20.5)$(18.3)Amountsrecognizedinconsolidatedbalancesheet:Prepaidpension$27.0$21.4$3.0$1.8Short-termaccruedbenefitliability(0.7)(0.3)––Long-termaccruedbenefitliability(8.5)(6.6)(23.5)(20.1)Netamountrecognized$17.8$14.5$(20.5)$(18.3)Amountsrecognizedinaccumulatedothercomprehensiveincome:Unrecognizedpriorservicecost$0.6$0.5$(5.7)$(5.8)Unrecognizedactuarialloss79.566.233.530.8Totalamountrecognized$80.1$66.7$27.8$25.0ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT56NotestoConsolidatedFinancialStatements(Continued)Weestimatethefollowingamountsrecordedaspartofaccumulatedothercomprehensiveincomewillberecognizedaspartofournetpensionexpenseduring2011(inmillions):U.S.andPuertoRicoNon-U.S.Unrecognizedpriorservicecost$–$(0.8)Unrecognizedactuarialloss6.11.2$6.1$0.4Theweightedaverageactuarialassumptionsusedtodeterminetheprojectedbenefitobligationforourdefinedbenefitretirementplanswereasfollows:201020092008201020092008U.S.andPuertoRicoNon-U.S.Discountrate5.82%6.26%5.79%2.82%3.25%3.34%Rateofcompensationincrease3.80%3.80%3.84%2.61%2.46%3.03%PlanswithprojectedbenefitobligationsinexcessofplanassetsasofDecember31,2010and2009wereasfollows(inmillions):2010200920102009U.S.andPuertoRicoNon-U.S.Projectedbenefitobligation$9.2$6.9$200.7$157.5Planassetsatfairmarketvalue––177.3137.7PlanswithaccumulatedbenefitobligationsinexcessofplanassetsasofDecember31,2010and2009wereasfollows(inmillions):2010200920102009U.S.andPuertoRicoNon-U.S.Accumulatedbenefitobligation$6.1$5.0$167.2$145.9Planassetsatfairmarketvalue––154.1133.8TheaccumulatedbenefitobligationforU.S.andPuertoRicodefinedbenefitretirementpensionplanswas$182.1millionand$148.3millionasofDecember31,2010and2009,respectively.Theaccumulatedbenefitobligationfornon-U.S.definedbenefitretirementplanswas$212.9millionand$186.6millionasofDecember31,2010and2009,respectively.Thebenefitsexpectedtobepaidoutineachofthenextfiveyearsandforthefiveyearscombinedthereafterareasfollows(inmillions):FortheYearsEndingDecember31,U.S.andPuertoRicoNon-U.S.2011$5.1$15.320126.616.020137.315.420148.715.120159.916.12016-202073.782.4TheU.S.andPuertoRicodefinedbenefitretirementplans’overallinvestmentstrategyistomaximizetotalreturnsbyemphasizinglong-termgrowthofcapitalwhileavoidingrisk.Wehaveestablishedtargetrangesofassetsheldbytheplansof45to50percentforequitysecurities,45to50percentfordebtsecuritiesand5to10percentinnon-traditionalinvestments.Theplansstrivetohavesufficientlydiversifiedassetssothatadverseorunexpectedresultsfromoneassetclasswillnothaveanundulydetrimentalimpactontheentireportfolio.Theinvestmentsintheplansmayberebalancedquarterlybaseduponthetargetassetallocationoftheplans.IntheU.S.andPuertoRico,wemaintainaninvestmentpolicystatementthatguidestheinvestmentallocationintheplans.Theinvestmentpolicystatementdescribesthetargetassetallocationpositionsdescribedabove.Wehaveabenefitscommitteetomonitorcompliancewiththeinvestmentpolicystatementandmanagethegeneralinvestmentstrategyandobjectivesoftheplans.Thebenefitscommitteemeetsquarterlytoreviewperformanceandtoensurethatthecurrentinvestmentallocationiswithintheguidelinessetforthintheinvestmentpolicystatement.Theinvestmentstrategiesofnon-U.S.basedplansvaryaccordingtotheplanprovisionsandlocallaws.Themajorityoftheassetsinnon-U.S.basedplansarelocatedinSwitzerlandbasedplans.TheseassetsareheldintrustsandarecommingledwiththeassetsofotherSwisscompanieswithrepresentativesofallthecompaniesmakingtheinvestmentdecisions.Theoverallstrategyistomaximizetotalreturnswhileavoidingrisk.Thetrusteesoftheassetshaveestablishedtargetrangesofassetsheldbytheplansof30to50percentindebtsecurities,20to37percentinequityZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT57NotestoConsolidatedFinancialStatements(Continued)securities,15to24percentinrealestate,3to15percentincashfundsand0to12percentinotherfunds.ThefairvalueofourU.S.andPuertoRicopensionplanassetsasofDecember31,2010,byassetcategoryareasfollows(inmillions):AssetCategoryTotalQuotedPricesinActiveMarketsforIdenticalAssets(Level1)SignificantOtherObservableInputs(Level2)SignificantUnobservableInputs(Level3)FairValueMeasurementsatReportingDateUsing:Cashandcashequivalents$0.8$0.8$–$–Equitysecurities:U.S.large-cap34.1–34.1–U.S.small-cap12.3–12.3–International43.8–43.8–Realestate14.8–14.8–Commodity-linkedmutualfunds25.7–25.7–Intermediatefixedincomesecurities113.4–113.4–Total$244.9$0.8$244.1$–ThefairvalueofourU.S.andPuertoRicopensionplanassetsasofDecember31,2009,byassetcategoryareasfollows(inmillions):AssetCategoryTotalQuotedPricesinActiveMarketsforIdenticalAssets(Level1)SignificantOtherObservableInputs(Level2)SignificantUnobservableInputs(Level3)FairValueMeasurementsatReportingDateUsing:Cashandcashequivalents$12.1$12.1$–$–Equitysecurities:U.S.large-cap67.6–67.6–U.S.small-cap20.8–20.8–International22.5–22.5–Intermediatefixedincomesecurities79.1–79.1–Total$202.1$12.1$190.0$–Thefairvalueofournon-U.S.pensionplanassetsasofDecember31,2010,byassetcategoryareasfollows(inmillions):AssetCategoryTotalQuotedPricesinActiveMarketsforIdenticalAssets(Level1)SignificantOtherObservableInputs(Level2)SignificantUnobservableInputs(Level3)FairValueMeasurementsatReportingDateUsing:Cashandcashequivalents$14.3$14.3$–$–Equitysecurities:Energy2.02.0––Materials1.61.6––Industrials3.43.4––Consumerdiscretionary2.52.5––Consumerstaples3.73.7––Healthcare6.76.7––Financials7.07.0––Informationtechnology2.82.8––Telecommunicationservices1.01.0––Utilities2.22.2––Other27.124.22.9–Fixedincomesecurities:Governmentbonds33.0–33.0–Corporatebonds41.0–41.0–Asset-backedsecurities7.4–7.4–Otherdebt1.1–1.1–Othertypesofinvestments:Mortgageloans5.6–5.6–Insurancecontracts5.0–5.0–Otherinvestments7.1–7.1–Realestate31.5––31.5Total$206.0$71.4$103.1$31.5Thefairvalueofournon-U.S.pensionplanassetsasofDecember31,2009,byassetcategoryareasfollows(inmillions):AssetCategoryTotalQuotedPricesinActiveMarketsforIdenticalAssets(Level1)SignificantOtherObservableInputs(Level2)SignificantUnobservableInputs(Level3)FairValueMeasurementsatReportingDateUsing:Cashandcashequivalents$7.4$7.4$–$–Equitysecurities:Energy1.61.6––Materials1.31.3––Industrials3.03.0––Consumerdiscretionary2.22.2––Consumerstaples3.53.5––Healthcare6.36.3––Financials5.75.7––Informationtechnology2.72.7––Telecommunicationservices1.01.0––Utilities1.41.4––Other23.220.52.7–Fixedincomesecurities:Governmentbonds29.5–29.5–Corporatebonds36.9–36.9–Asset-backedsecurities8.6–8.6–Otherdebt0.9–0.9–Othertypesofinvestments:Mortgageloans5.0–5.0–Insurancecontracts5.1–5.1–Otherinvestments5.8–5.8–Realestate27.9––27.9Total$179.0$56.6$94.5$27.9ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT58NotestoConsolidatedFinancialStatements(Continued)AsofDecember31,2010and2009,ourdefinedbenefitpensionplans’assetsdidnotholdanydirectinvestmentinZimmerHoldingscommonstock.Equitysecuritiesarevaluedusingamarketapproach,basedonquotedpricesforthespecificsecurityfromtransactionsinactiveexchangemarkets(Level1),orinsomecaseswhereweareinvestedinmutualorcollectivefunds,baseduponthenetassetvalueperunitofthefundwhichisdeterminedfromquotedmarketpricesoftheunderlyingsecuritiesinthefund’sportfolio(Level2).Fixedincomesecuritiesarevaluedusingamarketapproach,baseduponquotedpricesforthespecificsecurityorfrominstitutionalbidevaluations.Somefixedincomesecuritiesareinfundswithanetassetvalueperunitwhichisdeterminedusingsimilartechniquesfortheunderlyingsecuritiesinthefund’sportfolio.Realestateisvaluedbydiscountingtopresentvaluethecashflowsexpectedtobegeneratedbythespecificproperties.Thefollowingtableprovidesareconciliationofthebeginningandendingbalancesofournon-U.S.pensionplanassetsmeasuredatfairvaluethatusedsignificantunobservableinputs(Level3):December31,2010BeginningBalance27.9Gainsonassetssold0.2Changeinfairvalueofassets0.4Netpurchasesandsales0.6Translationgain2.4EndingBalance$31.5Weexpectthatwewillhavenolegallyrequiredminimumfundingrequirementsin2011forthequalifiedU.S.andPuertoRicodefinedbenefitretirementplans.Weexpecttovoluntarilycontributebetween$35millionand$50milliontotheseplansduring2011.Contributionstonon-U.S.definedbenefitplansareestimatedtobeapproximately$15millionin2011.Wedonotexpecttheplanassetsinanyofourplanstobereturnedtousinthenextyear.DefinedContributionPlansWealsosponsordefinedcontributionplansforsubstantiallyalloftheU.S.andPuertoRicoemployeesandcertainemployeesinothercountries.Thebenefitsofferedundertheseplansarereflectiveoflocalcustomsandpracticesinthecountriesconcerned.Weexpensed$24.4million,$21.6millionand$17.1millionrelatedtotheseplansfortheyearsendedDecember31,2010,2009and2008,respectively.PostretirementBenefitPlansDuring2009,weamendedthepostretirementhealthcarebenefitplansforcertainU.S.andPuertoRicoemployees.Participantsintheplansbetweentheagesof55and65whowerepreviouslyreceivingbenefitswillcontinuetoreceivebenefitsuntilreachingtheageof65.Forallotherparticipantsintheplans,nobenefitswillbepaidafterJanuary1,2010.Additionally,wecontributedapproximately$7milliontoaVoluntaryEmployees’BeneficiaryAssociation(VEBA)trusttosettleanyfutureobligations.Werecognizedacurtailmentgainandsettlementlossrelatedtotheseactions.ThecomponentsofnetperiodicexpensefortheyearsendedDecember31,2010,2009and2008forourunfundedpostretirementbenefitplansareasfollows(inmillions):201020092008Servicecost$–$0.8$1.5Interestcost–1.32.5Amortizationofpriorservicecost–(0.2)(0.5)Amortizationofunrecognizedactuarialloss–0.30.6Settlement–3.2–Curtailment–(35.3)–Netperiodicbenefitcost$–$(29.9)$4.1Wehavenotprovidedfurtherdisclosuresrelatedtothesepostretirementbenefitplansasotherthanthecurtailmentgainandsettlementlossin2009discussedabove,theseplanswerenotsignificanttoourresultsofoperationsorfinancialposition.15.INCOMETAXESThecomponentsofearningsbeforetaxesconsistofthefollowing(inmillions):FortheYearsEndedDecember31,201020092008UnitedStatesoperations$382.4$489.7$618.8Foreignoperations477.8508.5503.0Total$860.2$998.2$1,121.8Theprovisionforincometaxesconsistsof(inmillions):Current:Federal$235.3$204.9$136.0State19.523.327.3Foreign81.072.3107.0335.8300.5270.3Deferred:Federal(54.9)(17.4)31.6State(2.0)(3.1)(2.0)Foreign(15.6)0.8(27.6)(72.5)(19.7)2.0Provisionforincometaxes$263.3$280.8$272.3Incometaxespaidduring2010,2009and2008were$330.6million,$268.5millionand$332.9million,respectively.AreconciliationoftheU.S.statutoryincometaxratetooureffectivetaxrateisasfollows:ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT59NotestoConsolidatedFinancialStatements(Continued)FortheYearsEndedDecember31,201020092008U.S.statutoryincometaxrate35.0%35.0%35.0%Statetaxes,netoffederaldeduction1.71.41.6Taximpactofforeignoperations,includingforeigntaxcredits(10.6)(9.9)(9.8)TaxbenefitrelatingtoU.S.manufacturer’sdeductionandexportsales(2.6)(1.5)(1.3)R&Dcredit(0.8)(0.3)(0.1)2007settlement(taxbenefit)––(2.8)In-processresearchanddevelopmentcharges––1.2Goodwillimpairment8.32.6–Other(0.4)0.80.5Effectiveincometaxrate30.6%28.1%24.3%OuroperationsinPuertoRico,SwitzerlandandtheStateofIndianabenefitfromvarioustaxincentivegrants.Unlessthesegrantsareextended,theywillexpirebetweenfiscalyears2016and2019.Duringthethirdquarterof2008,wereachedanagreementwiththeU.S.InternalRevenueService(IRS)confirmingthedeductibilityofaportionofapaymentwemadetotheU.S.governmenttosettlecertainclaimsandrecordedataxbenefitof$31.7million.Deferredincometaxesreflectthenettaxeffectsoftemporarydifferencesbetweenthecarryingamountsofassetsandliabilitiesforfinancialreportingpurposesandtheamountsusedforincometaxpurposes.Wehaveestablishedvaluationallowancesfordeferredtaxassetswhentheamountofexpectedfuturetaxableincomeisnotlikelytosupporttheuseofthedeductionorcredit.Thecomponentsofdeferredtaxesconsistedofthefollowing(inmillions):December31,20102009Deferredtaxassets:Inventory$234.3$204.1Netoperatinglosscarryover22.037.5Taxcreditcarryover32.520.7Accruedliabilities91.378.3Share-basedcompensation85.471.1Unremittedearningsofforeignsubsidiaries104.2105.5Other59.249.9Totaldeferredtaxassets628.9567.1Less:Valuationallowances(39.9)(37.3)Totaldeferredtaxassetsaftervaluation589.0529.8Deferredtaxliabilities:Fixedassets$(101.7)$(105.0)Intangibleassets(151.9)(162.7)Accruedliabilities(0.7)(2.4)Other(1.0)(1.5)Totaldeferredtaxliabilities(255.3)(271.6)Totalnetdeferredtaxassets$333.7$258.2Thenetoperatinglosscarryoversareavailabletoreducefuturefederal,stateandforeigntaxableearnings.AtDecember31,2010,thesenetoperatinglosscarryoversgenerallyexpirewithinaperiodof1to20years.Valuationallowancesfornetoperatinglosscarryovershavebeenestablishedintheamountof$14.6millionand$13.2millionatDecember31,2010and2009,respectively.Thetaxcreditcarryoversareavailabletooffsetfuturefederal,stateandforeigntaxliabilities.AtDecember31,2010,thesetaxcreditcarryoversgenerallyexpirewithinaperiodof1to10years.Wehaveestablishedvaluationallowancesforcertaintaxcreditcarryoversintheamountof$17.5millionand$17.9millionatDecember31,2010and2009,respectively.Theremainingvaluationallowancesof$7.8millionand$6.2millionatDecember31,2010and2009,respectively,relateprimarilytopotentialcapitallosses.Wehaveestablishedvaluationallowancesrelatedtocertainbusinesscombinationtransactionsthroughgoodwill.Theseallowanceswereapproximately$13.3millionand$14.5millionatDecember31,2010and2009,respectively.AtDecember31,2010,wehadanaggregateofapproximately$2,191millionofunremittedearningsofforeignsubsidiariesthathavebeen,orareintendedtobe,indefinitelyreinvestedforcontinueduseinforeignoperations.Ifthetotalundistributedearningsofforeignsubsidiarieswereremitted,asignificantamountoftheadditionaltaxwouldbeoffsetbytheallowableforeigntaxcredits.Itisnotpracticalforustodeterminetheadditionaltaxofremittingtheseearnings.Thefollowingisatabularreconciliationofthetotalamountsofunrecognizedtaxbenefits(inmillions):201020092008BalanceatJanuary1$150.4$129.5$135.2Increasesrelatedtopriorperiods23.132.912.1Decreasesrelatedtopriorperiods(6.1)(26.7)(32.0)Increasesrelatedtocurrentperiod23.717.415.8Decreasesrelatedtosettlementswithtaxingauthorities(14.1)(1.1)(1.3)Decreasesrelatedtolapseofstatuteoflimitations(9.0)(1.6)(0.3)BalanceatDecember31$168.0$150.4$129.5IncludedinthebalanceofunrecognizedtaxbenefitsatDecember31,2010are$112.2millionoftaxbenefitsthat,ifrecognized,wouldaffecttheeffectivetaxrate.Werecognizeaccruedinterestandpenaltiesrelatedtounrecognizedtaxbenefitsasincometaxexpense.Wedecreasedinterestandpenaltiesby$5.8millionduring2010,andasofDecember31,2010,hadrecognizedaliabilityforinterestandpenaltiesof$22.8million.During2009,weaccruedinterestandpenaltiesof$5.7million,andasofDecember31,2009,hadrecognizedaliabilityforinterestandpenaltiesof$28.6million.During2008,weaccruedinterestandpenaltiesof$3.3million,andasofDecember31,2008,hadrecognizedaliabilityforinterestandpenaltiesof$22.9million.WeoperateinmultipleincometaxjurisdictionsbothinsideandoutsidetheU.S.andarecurrentlyunderauditinnumerousfederal,stateandforeignjurisdictions.Accordingly,weexpectthatthenetamountoftaxliabilityforunrecognizedtaxbenefitswillchangeinthenexttwelveZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT60NotestoConsolidatedFinancialStatements(Continued)monthsduetochangesinauditstatus,expirationofstatutesoflimitationsandothereventswhichcouldimpactourdeterminationofunrecognizedtaxbenefits.Currently,wecannotreasonablyestimatetheamountbywhichourunrecognizedtaxbenefitswillchange.Duringthethirdquarterof2009wesettledvarioustaxmatterswiththeIRSforallyearspriorto2005.OurU.S.federalreturnsforyears2005through2007arecurrentlyunderIRSexamination.InJanuary2011,theIRSissuedaNoticeofProposedAdjustment(NOPA)fortaxyears2006and2007.TheNOPArelatestointercompanypricingbetweencertainofourU.S.andforeignsubsidiaries.WebelievethatwehavefollowedapplicableU.S.taxlawsandwillvigorouslydefendourincometaxpositions.However,theultimatesettlementwiththeIRSrelatedtotheseproposedadjustmentscouldhaveamaterialimpactonourincometaxexpenseandnetearnings.Stateincometaxreturnsaregenerallysubjecttoexaminationforaperiodof3to5yearsafterfilingoftherespectivereturn.Thestateimpactofanyfederalchangesgenerallyremainssubjecttoexaminationbyvariousstatesforaperiodofuptooneyearafterformalnotificationtothestates.Wehavevariousstateincometaxreturnsintheprocessofexamination,administrativeappealsorlitigation.Ourtaxreturnsarecurrentlyunderexaminationinvariousforeignjurisdictions.Foreignjurisdictionshavestatutesoflimitationsgenerallyrangingfrom3to5years.Yearsstillopentoexaminationbyforeigntaxauthoritiesinmajorjurisdictionsinclude:Australia(2004onward),Canada(2004onward),France(2008onward),Germany(2005onward),Ireland(2008onward),Italy(2006onward),Japan(2004onward),Korea(2005onward),PuertoRico(2005onward),Singapore(2004onward),Switzerland(2009onward),andtheUnitedKingdom(2009onward).16.CAPITALSTOCKANDEARNINGSPERSHAREWeareauthorizedtoissue250millionsharesofpreferredstock,noneofwhichwereissuedoroutstandingasofDecember31,2010.Thenumeratorforbothbasicanddilutedearningspershareisnetearningsavailabletocommonstockholders.Thedenominatorforbasicearningspershareistheweightedaveragenumberofcommonsharesoutstandingduringtheperiod.Thedenominatorfordilutedearningspershareisweightedaveragesharesoutstandingadjustedfortheeffectofdilutivestockoptionsandotherequityawards.ThefollowingisareconciliationofweightedaveragesharesforthebasicanddilutedsharecomputationsfortheyearsendedDecember31(inmillions):201020092008Weightedaveragesharesoutstandingforbasicnetearningspershare200.0215.0227.3Effectofdilutivestockoptionsandotherequityawards1.10.81.0Weightedaveragesharesoutstandingfordilutednetearningspershare201.1215.8228.3FortheyearendedDecember31,2010,anaverageof13.7millionoptionstopurchasesharesofcommonstockwerenotincludedinthecomputationofdilutedearningspershareastheexercisepricesoftheseoptionsweregreaterthantheaveragemarketpriceofthecommonstock.FortheyearsendedDecember31,2009and2008,anaverageof14.3millionand11.2millionoptions,respectively,werenotincluded.During2010,werepurchased9.1millionsharesofourcommonstockatanaveragepriceof$55.26pershareforatotalcashoutlayof$505.6million,includingcommissions.AsofDecember31,2010,approximately$1.2billionremainedauthorizedundera$1.5billionrepurchaseprogram,whichwillexpireonDecember31,2013.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT61NotestoConsolidatedFinancialStatements(Continued)17.SEGMENTDATAWedesign,develop,manufactureandmarketorthopaedicreconstructiveimplants,dentalimplants,spinalimplants,traumaproductsandrelatedsurgicalproductswhichincludesurgicalsuppliesandinstrumentsdesignedtoaidinsurgicalproceduresandpost-operationrehabilitation.Wealsoprovideotherhealthcare-relatedservices.Revenuerelatedtotheseservicescurrentlyrepresentslessthan1percentofourtotalnetsales.Wemanageoperationsthroughthreemajorgeographicsegments–theAmericas,whichiscomprisedprincipallyoftheU.S.andincludesotherNorth,CentralandSouthAmericanmarkets;Europe,whichiscomprisedprincipallyofEuropeandincludestheMiddleEastandAfricanmarkets;andAsiaPacific,whichiscomprisedprimarilyofJapanandincludesotherAsianandPacificmarkets.Thisstructureisthebasisforourreportablesegmentinformationdiscussedbelow.Managementevaluatesreportablesegmentperformancebaseduponsegmentoperatingprofitexclusiveofoperatingexpensespertainingtoshare-basedpaymentexpense,inventorystep-up,“Certainclaims”,goodwillimpairment,“Specialitems”,netcurtailmentandsettlementandglobaloperationsandcorporatefunctions.Globaloperationsincluderesearch,developmentengineering,medicaleducation,brandmanagement,corporatelegal,finance,andhumanresourcefunctions,U.S.andPuertoRico-basedmanufacturingoperationsandlogisticsandintangibleamortizationresultingfrombusinesscombinationaccounting.Intercompanytransactionshavebeeneliminatedfromsegmentoperatingprofit.Managementreviewsaccountsreceivable,inventory,property,plantandequipment,goodwillandintangibleassetsbyreportablesegmentexclusiveofU.S.andPuertoRico-basedmanufacturingoperationsandlogisticsandcorporateassets.Netsales,segmentoperatingprofitandyear-endassetsareasfollows(inmillions):20102009200820102009200820102009NetSalesOperatingProfitYear-EndAssetsAmericas$2,431.6$2,372.4$2,353.9$1,214.6$1,168.7$1,209.4$2,578.0$3,022.4Europe1,099.51,119.21,179.1398.0436.8470.22,210.82,273.6AsiaPacific689.1603.8588.1259.9257.4257.1561.4443.6Netsales$4,220.2$4,095.4$4,121.1Share-basedpaymentexpense(62.0)(75.3)(69.9)Inventorystep-up(1.4)(12.5)(7.0)Certainclaims(75.0)(35.0)(69.0)Goodwillimpairment(204.0)(73.0)–Specialitems(34.7)(75.3)(68.5)Netcurtailmentandsettlement–32.1–Globaloperationsandcorporatefunctions(578.7)(605.1)(632.3)2,649.72,045.9Operatingprofit$916.7$1,018.8$1,090.0Totalassets$7,999.9$7,785.5U.S.saleswere$2,277.2million,$2,237.5millionand$2,212.3millionfortheyearsendedDecember31,2010,2009and2008,respectively.Saleswithinanyotherindividualcountrywerelessthan10percentofourconsolidatedsales.Salesareattributabletoacountrybaseduponthecustomer’scountryofdomicile.Netsalesbyproductcategoryareasfollows(inmillions):201020092008ReconstructiveKnees$1,789.9$1,756.3$1,763.1Hips1,262.31,228.51,279.4Extremities150.1135.6121.0Total3,202.33,120.43,163.5Dental219.0204.7227.5Trauma245.5234.8222.3Spine234.4253.6229.7Surgicalandother319.0281.9278.1Total$4,220.2$4,095.4$4,121.1ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT62NotestoConsolidatedFinancialStatements(Continued)Long-livedtangibleassetsasofDecember31,2010and2009areasfollows(inmillions):20102009Americas$841.5$851.0Europe281.7285.0AsiaPacific90.685.7Total$1,213.8$1,221.7TheAmericaslong-livedtangibleassetsarelocatedprimarilyintheU.S.Approximately$235.4millionofEuropelong-livedtangibleassetsasofDecember31,2010arelocatedinSwitzerland.CapitalexpendituresbyreportablesegmentfortheyearsendedDecember31,2010,2009and2008wereasfollows(inmillions):201020092008AmericasAdditionstootherproperty,plantandequipment$0.3$0.6$1.5EuropeAdditionstoinstruments22.917.025.3Additionstootherproperty,plantandequipment16.928.859.6AsiaPacificAdditionstoinstruments5.25.32.2Additionstootherproperty,plantandequipment7.65.19.4GlobaloperationsandcorporatefunctionsAdditionstoinstruments164.4101.4210.4Additionstootherproperty,plantandequipment54.470.6179.5Forsegmentreportingpurposes,deployedinstrumentsareincludedinthemeasurementofreportablesegmentassetswhileundeployedinstrumentsatU.S.andPuertoRico-basedmanufacturingoperationsandlogisticsareincludedinglobaloperationsandcorporatefunctions.ThemajorityofinstrumentsarepurchasedbyU.S.andPuertoRico-basedmanufacturingoperationsandlogisticsandaredeployedtothereportablesegmentsasneededforthebusiness.DepreciationandamortizationincludedinreportablesegmentprofitfortheyearsendedDecember31,2010,2009and2008wasasfollows(inmillions):201020092008Americas$78.1$86.4$78.5Europe70.564.857.0AsiaPacific30.026.725.6Globaloperationsandcorporatefunctions161.6159.5114.0$340.2$337.4$275.118.LEASESFutureminimumrentalcommitmentsundernon-cancelableoperatingleasesineffectasofDecember31,2010were$44.6millionfor2011,$30.6millionfor2012,$19.4millionfor2013,$12.6millionfor2014,$10.5millionfor2015and$25.0millionthereafter.TotalrentexpensefortheyearsendedDecember31,2010,2009and2008aggregated$46.2million,$43.5millionand$41.4million,respectively.19.COMMITMENTSANDCONTINGENCIESProductLiability-RelatedClaimsWearesubjecttoproductliabilityclaimsarisingintheordinarycourseofourbusiness.Weestablishstandardaccrualsforproductliabilityclaimsinconjunctionwithoutsidecounselbasedoncurrentinformationandhistoricalsettlementinformationforopenclaims,relatedlegalfeesandclaimsincurredbutnotreported.Thesestandardproductliabilityaccrualsarerecognizedinselling,generalandadministrativeexpense.Wemayalsoestablishprovisionsforcertainproductliabilityclaimsoutsideofthestandardaccrualsthatarerecordedseparatelyonourstatementofearnings,suchastheprovisionforclaimsrelatedtotheDurom»AcetabularComponent(DuromCup)discussedbelow.Wemaintaininsurance,subjecttoself-insuredretentionrequirements,forlossesfromtheseandotherclaims.OnJuly22,2008,wetemporarilysuspendedmarketinganddistributionoftheDuromCupintheU.S.Subsequently,anumberofproductliabilitylawsuitsandotherclaimshavebeenassertedagainstus.Wehavesettledsomeoftheseclaimsandtheothersarestillpending.Additionalclaimsmaybeassertedinthefuture.Werecordedaprovisionof$69.0millionin2008as“Certainclaims”onourstatementofearningsrepresentingourestimateoftheDuromCup-relatedclaimsweexpectedtobemadeforrevisionsurgeriesoccurringwithintwoyearsoftheoriginalsurgery.In2009,basedonclaimsinformationreceivedafterourinitialestimate,weincreasedourestimateofthenumberofclaimsforrevisionsurgeriesoccurringwithintwoyearsoftheoriginalsurgeryand,accordingly,increasedthe“Certainclaims”provisionby$35.0million.Inthesecondquarterof2010,basedonmorerecentclaimsinformationavailableandafterconsultationwithanindependentactuary,werevisedourestimatetoincludeallclaimsforrevisionsoforiginalsurgeriesperformedbeforeJuly22,2008onaworldwidebasis,regardlessoftheamountoftimebetweentherevisionsurgeryandtheoriginalsurgery.Asaresult,weincreasedthe“Certainclaims”provisionby$75.0million,foratotalof$179.0million.FortheyearsendedDecember31,2010,2009and2008werecorded$10.9million,$24.6millionand$7.2million,respectively,aspartofourstandardproductliabilityaccrualsforworldwideclaimsrelatingtorevisionsofDuromCupcaseswheretherevisionshadoccurred,orwereestimatedtooccur,morethantwoyearsaftertheoriginalsurgery.Beginningwiththesecondquarterof2010,anyadditionalprovisionsforsuchZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT63NotestoConsolidatedFinancialStatements(Continued)claimsarerecordedaspartofthe“Certainclaims”accrual,asdescribedabove.WewillcontinuetorecordanyprovisionsforclaimsrelatingtoDuromCupcaseswheretheoriginalsurgerywasperformedafterJuly22,2008aspartofourstandardproductliabilityaccruals.AsofDecember31,2010,wehaverecordedprovisionstotaling$6.0millionforsuchpost-suspensionclaims.OurestimateasofDecember31,2010oftheremainingliabilityforallDuromCup-relatedclaimsrelatingtooriginalsurgeriesperformedbeforeJuly22,2008is$132.8million,ofwhich$42.5millionisclassifiedasshort-termin“Othercurrentliabilities”and$90.3millionisclassifiedaslong-termin“Otherlong-termliabilities”onourconsolidatedbalancesheet.WeexpecttopaythemajorityoftheDuromCup-relatedclaimswithinthenextthreeyears.WerelyonsignificantestimatesindeterminingtheprovisionsforDuromCup-relatedclaims,includingthenumberofclaimsthatwewillreceiveandtheaverageamountwewillpayperclaim.Theactualnumberofclaimsthatwereceiveandtheaverageamountwepayperclaimmaydifferfromourestimates,whichcouldresultinfurtherchangestotheprovision.OnAugust20,2008,MargoandDanielPolettfiledanactionagainstusandanunrelatedthirdparty,PublicCommunications,Inc.(PCI),intheCourtofCommonPleas,Philadelphia,PennsylvaniaseekinganunspecifiedamountofdamagesforinjuriesandlossofconsortiumallegedlysufferedbyMrs.Polettandherspouse,respectively.ThecomplaintallegedthatdefendantswerenegligentinconnectionwithMrs.Polett’sparticipationinapromotionalvideofeaturingoneofourkneeproducts.ThecasewastriedinNovember2010andthejuryreturnedaverdictinfavorofplaintiffs.Thejuryawarded$27.6millionincompensatorydamagesandapportionedfault30percenttoplaintiffs,34percenttousand36percenttoPCI.Underapplicablelaw,wemaybeliableforanyportionofthedamagesapportionedtoPCIthatitdoesnotpay.Thetrialcourthasnotyetenteredajudgmentontheverdict.OnDecember2,2010,weandPCIfiledaMotionforPost-TrialReliefseekingajudgmentnotwithstandingtheverdict,anewtrialoraremittitur.Thatmotionispending.Ifourpost-trialmotionisunsuccessful,weintendtoappealtheverdictandwillberequiredtopostabondfortheverdictamountplusinterest.Wedonotbelievethefactsandevidencesupportthejury’sverdict.WehavenotrecordedanychargerelatingtothismatterinourconsolidatedstatementofearningsfortheyearendedDecember31,2010,becausewebelievewehavestrongargumentsforreversingthejuryverdict,eitherbeforethetrialcourtoronappeal.Asaresult,wedonotbelievethatitisprobablethatwehaveincurredaliabilityconsistentwiththeverdictandwecannotreasonablyestimateanylossthatmighteventuallybeincurred.Althoughwebelievewehavestronggroundstoreversethejury’sverdict,theultimateresolutionofthismatterisuncertain.Wecouldinthefutureberequiredtorecordachargetoourconsolidatedstatementofearningsthatcouldhaveamaterialadverseeffectonourresultsofoperationsinanyparticularperiod.IntellectualProperty-RelatedClaimsWearesubjecttoclaimsofpatentinfringementandotherintellectualproperty-relatedclaimsandlawsuitsintheordinarycourseofourbusiness.Wemaintaininsurance,subjecttoself-insuredretentionrequirements,forlossesfromtheseandotherclaims.OnFebruary15,2005,HowmedicaOsteonicsCorp.filedanactionagainstusandanunrelatedpartyintheU.S.DistrictCourtfortheDistrictofNewJerseyalleginginfringementofU.S.PatentNos.6,174,934;6,372,814;6,664,308;and6,818,020.OnJune13,2007,theCourtgrantedourmotionforsummaryjudgmentontheinvalidityoftheassertedclaimsofU.S.PatentNos.6,174,934;6,372,814;and6,664,308byrulingthatalloftheassertedclaimsareinvalidforindefiniteness.OnAugust19,2008,theCourtgrantedourmotionforsummaryjudgmentofnon-infringementofcertainclaimsofU.S.PatentNo.6,818,020,reducingthenumberofclaimsatissueinthesuittofive.OnApril9,2009,inresponsetoourearlierpetition,theU.S.PatentandTrademarkOffice(USPTO)institutedre-examinationproceedingsagainstU.S.PatentNo.6,818,020.TheUSPTOrejectedallpreviouslyissuedclaimsofU.S.PatentNo.6,818,020asbeingunpatentableinlightofoneormorepriorartreferences.OnSeptember30,2009,theCourtissuedanorderstayingproceedingsinthelitigationpendingtheoutcomeofthere-examinationprocess.Subsequenttothatstayorder,Howmedicafiledamotionseekingtocertifyanappealofthesummaryjudgmentrulingonthe’934,’814and’308patents.ThatmotionwasgrantedonJanuary13,2010.OnOctober13,2010,theU.S.CourtofAppealsfortheFederalCircuitaffirmedtheDistrictCourt’srulingontheinvalidityoftheassertedclaimsofthe’934,’814and’308patents.OnNovember12,Howmedicafiledapetitionforare-hearingenbanc,whichwasdeniedonDecember14,2010.ThecaseotherwiseremainsstayedpendingtheUSPTO’sre-examinationofthe’020patent.Wecontinuetobelievethatourdefensesagainstinfringementarevalidandmeritorious,andweintendtocontinuetodefendthislawsuitvigorously.Whileitisnotpossibletopredicttheoutcomeoftheselawsuitsandclaimswithanycertainty,webelievethattheliability,ifany,resultingfromtheseclaimswillnothaveamaterialadverseeffectonourconsolidatedfinancialposition,resultsofoperationsorcashflows.GovernmentInvestigationsInSeptember2007,weandotherorthopaediccompaniessettledaU.S.governmentinvestigationpertainingtoconsultingcontracts,professionalservicesagreementsandotheragreementsbywhichremunerationisprovidedtoorthopaedicsurgeons.Aspartofthesettlement,weenteredZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT64NotestoConsolidatedFinancialStatements(Continued)intoaCorporateIntegrityAgreement(CIA)withtheOfficeofInspectorGeneraloftheDepartmentofHealthandHumanServices(OIG-HHS).UndertheCIA,whichhasatermexpiringin2012,weagreed,amongotherprovisions,tocontinuetheoperationofourenhancedCorporateComplianceProgram,designedtopromotecompliancewithfederalhealthcareprogramrequirements.WealsoagreedtoretainanindependentrevieworganizationtoperformannualreviewstoassistusinassessingourcompliancewiththeobligationssetforthintheCIAtoensurethatarrangementsweenterintodonotviolatetheAnti-KickbackStatute(42U.S.C.§1320a-7b).AmaterialbreachoftheCIAmaysubjectustoexclusionbyOIG-HHSfromparticipationinallfederalhealthcareprograms,whichwouldhaveamaterialadverseeffectonourfinancialposition,resultsofoperationsandcashflows.InNovember2007,wereceivedacivilinvestigativedemandfromtheMassachusettsAttorneyGeneral’sofficeseekingadditionalinformationregardingourfinancialrelationshipswithanumberofMassachusettshealthcareproviders.WereceivedasimilarinquiryfromtheOregonAttorneyGeneral’sofficeinOctober2008.Wearecooperatingfullywiththeinvestigatorswithregardtothesematters.InSeptember2007,theStaffoftheU.S.SecuritiesandExchangeCommission(SEC)informedusthatitwasconductinganinvestigationregardingpotentialviolationsoftheForeignCorruptPracticesAct(FCPA)inthesaleofmedicaldevicesinanumberofforeigncountriesbycompaniesinthemedicaldeviceindustry.InNovember2007,wereceivedaletterfromtheU.S.DepartmentofJustice(DOJ)requestingthatanyinformationprovidedtotheSECalsobeprovidedtotheDOJonavoluntarybasis.WearecontinuingtoprovideinformationandcooperatefullywiththeSECandtheDOJ.Inthecourseofcontinuingdialogueswiththeagencies,wehavevoluntarilydisclosedinformationtotheSECandDOJrelatingtosalesofourproductsbyindependentdistributorsintwoSouthAmericancountries.Wecannotcurrentlypredicttheoutcomeoftheinvestigationortheimpactofourvoluntarydisclosurestotheauthorities.PutativeClassActionsOnAugust5,2008,acomplaintwasfiledintheU.S.DistrictCourtfortheSouthernDistrictofIndiana,PlumbersandPipefittersLocalUnion719PensionFundv.ZimmerHoldings,Inc.,etal.,namingusandtwoofourexecutiveofficersasdefendants.ThecomplaintrelatedtoaputativeclassactiononbehalfofpersonswhopurchasedourcommonstockbetweenJanuary29,2008andJuly22,2008.ThecomplaintallegedthatthedefendantsviolatedthefederalsecuritieslawbyallegedlyfailingtodisclosedevelopmentsrelatingtoourorthopaedicsurgicalproductsmanufacturingoperationsinDover,OhioandtheDuromCup.Theplaintiffsoughtunspecifieddamagesandinterest,attorneys’fees,costsandotherrelief.OnDecember24,2008,theleadplaintifffiledaconsolidatedcomplaintthatallegedthesameclaimsandrelatedtothesametimeperiod.ThedefendantsfiledamotiontodismisstheconsolidatedcomplaintonFebruary23,2009.OnDecember1,2009,theCourtgranteddefendants’motiontodismiss,withoutprejudice.OnJanuary15,2010,theplaintifffiledamotionforleavetoamendtheconsolidatedcomplaint.OnJanuary28,2011,theCourtdeniedtheplaintiff’smotionforleavetoamendtheconsolidatedcomplaintanddismissedthecase.Theplaintiffhas30daystofileanoticeofappealtotheU.S.CourtofAppealsfortheSeventhCircuit.Webelievethislawsuitiswithoutmerit,andweandtheindividualdefendantsintendtodefenditvigorously.OnNovember20,2008,acomplaintwasfiledintheU.S.DistrictCourtfortheNorthernDistrictofIndiana,Dewaldv.ZimmerHoldings,Inc.,etal.,namingusandcertainofourcurrentandformerdirectorsandemployeesasdefendants.ThecomplaintrelatestoaputativeclassactiononbehalfofallpersonswhowereparticipantsinorbeneficiariesofourU.S.orPuertoRicoSavingsandInvestmentPrograms(plans)betweenOctober5,2007andthedateoffilingandwhoseaccountsincludedinvestmentsinourcommonstock.Thecomplaintalleges,amongotherthings,thatthedefendantsbreachedtheirfiduciarydutiesinviolationoftheEmployeeRetirementIncomeSecurityActof1974,asamended,bycontinuingtoofferZimmerstockasaninvestmentoptionintheplanswhenthestockpurportedlywasnolongeraprudentinvestmentandthatdefendantsfailedtoprovideplanparticipantswithcompleteandaccurateinformationsufficienttoadvisethemoftherisksofinvestingtheirretirementsavingsinZimmerstock.Theplaintiffseeksanunspecifiedmonetarypaymenttotheplans,injunctiveandequitablerelief,attorneys’fees,costsandotherrelief.OnJanuary23,2009,theplaintifffiledanamendedcomplaintthatallegesthesameclaimsandclarifiesthattheclassperiodisOctober5,2007throughSeptember2,2008.ThedefendantsfiledamotiontodismisstheamendedcomplaintonMarch23,2009.Themotiontodismissispendingwiththecourt.OnJune12,2009,theU.S.JudicialPanelonMultidistrictLitigationenteredanordertransferringtheDewaldcasetotheU.S.DistrictCourtfortheSouthernDistrictofIndianaforcoordinatedorconsolidatedpretrialproceedingswiththePlumbers&PipefittersLocalUnion719PensionFundcasereferencedabove.Webelievethislawsuitiswithoutmerit,andweandtheindividualdefendantsintendtodefenditvigorously.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT65NotestoConsolidatedFinancialStatements(Continued)20.QUARTERLYFINANCIALINFORMATION(UNAUDITED)(inmillions,exceptpersharedata)MarJunSepDecMarJunSepDec2010QuarterEnded2009QuarterEndedNetsales$1,062.8$1,057.7$965.0$1,134.7$992.6$1,019.9$975.6$1,107.3Grossprofit794.4807.1745.8860.5762.3783.1726.3832.9NetearningsofZimmerHoldings,Inc.205.4165.5191.134.9202.2210.1149.9155.2EarningspercommonshareBasic1.010.820.960.180.910.980.700.74Diluted1.010.820.960.180.910.980.700.74Inthefourthquarterof2010,werecordedcertainadjustmentsrelatedtopriorperiodsthatreducednetearningsby$5.0million.Theadjustmentsincreasedoperatingexpensesby$2.9millionandincreasedtheprovisionforincometaxesby$2.1million.Weassessedtheeffectsoftheseadjustmentshadtheybeenmadeinpriorperiodstobeimmaterial.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT66NotestoConsolidatedFinancialStatements(Continued)ITEM9.ChangesinandDisagreementsWithAccountantsonAccountingandFinancialDisclosureNoneITEM9A.ControlsandProceduresWehaveestablisheddisclosurecontrolsandproceduresandinternalcontrolsoverfinancialreportingtoprovidereasonableassurancethatmaterialinformationrelatingtous,includingourconsolidatedsubsidiaries,ismadeknownonatimelybasistomanagementandtheBoardofDirectors.However,nocontrolsystem,nomatterhowwelldesignedandoperated,canprovideabsoluteassurancethattheobjectivesofthecontrolsystemaremet,andnoevaluationofcontrolscanprovideabsoluteassurancethatallcontrolissuesandinstancesoffraud,ifany,withinacompanyhavebeendetected.Ourmanagement,withtheparticipationofourChiefExecutiveOfficerandChiefFinancialOfficer,evaluatedtheeffectivenessofthedesignandoperationofourdisclosurecontrolsandprocedures(asdefinedinRule13a-15(e)oftheSecuritiesExchangeActof1934).Baseduponthatevaluation,ourChiefExecutiveOfficerandChiefFinancialOfficerconcludedthatourdisclosurecontrolsandproceduresasoftheendoftheperiodcoveredbythisreportareeffective.Therewasnochangeinourinternalcontroloverfinancialreporting(asdefinedinRule13a-15(f)oftheSecuritiesExchangeActof1934)thatoccurredduringthequarterendedDecember31,2010thathasmateriallyaffected,orisreasonablylikelytomateriallyaffect,ourinternalcontroloverfinancialreporting.Management’sreportoninternalcontroloverfinancialreportingappearsinthisreportattheconclusionofPartII,Item7A.ITEM9B.OtherInformationDuringthefourthquarterof2010,theAuditCommitteeoftheBoardofDirectorswasnotaskedtoanddidnotapprovetheengagementofPricewaterhouseCoopersLLP,ourindependentregisteredpublicaccountingfirm,toperformanynon-auditservices.ThisdisclosureismadepursuanttoSection10A(i)(2)oftheSecuritiesExchangeActof1934,asaddedbySection202oftheSarbanes-OxleyActof2002.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT67PARTIIIITEM10.Directors,ExecutiveOfficersandCorporateGovernanceInformationrequiredbythisitemregardingourdirectorsisincorporatedbyreferencefromthesectionentitled“ProposalNo.1:ElectionofDirectors”inourdefinitiveProxyStatementfortheannualmeetingofstockholderstobeheldonMay2,2011(the“2011ProxyStatement”).InformationaboutourAuditCommitteeisincorporatedbyreferencefromthesectionentitled“CommitteesoftheBoard”inour2011ProxyStatement.InformationregardingtheproceduresbywhichstockholdersmayrecommendnomineestotheBoardofDirectorsisincorporatedbyreferencefromthesectionentitled“CorporateGovernance—NominationsforDirectors”inour2011ProxyStatement.InformationregardingourexecutiveofficersissetforthinItem1ofPartIofthisreportunderthecaption“ExecutiveOfficers.”InformationaboutcompliancewithSection16(a)oftheSecuritiesExchangeActof1934isincorporatedbyreferencefromthesectionentitled“Section16(a)BeneficialOwnershipReportingCompliance”inour2011ProxyStatement.WehaveadoptedtheZimmerCodeofEthicsforChiefExecutiveOfficerandSeniorFinancialOfficers(the“financecodeofethics”),acodeofethicsthatappliestoourChiefExecutiveOfficer,ChiefFinancialOfficer,ChiefAccountingOfficerandCorporateController,andotherfinanceorganizationemployees.ThefinancecodeofethicsispubliclyavailableintheInvestorRelationssectionofourwebsite,whichmaybeaccessedfromourhomepageatwww.zimmer.comordirectlyathttp://investor.zimmer.com.Ifwemakeanysubstantiveamendmentstothefinancecodeofethicsorgrantanywaiver,includinganyimplicitwaiver,fromaprovisionofthecodetoourChiefExecutiveOfficer,ChiefFinancialOfficer,orChiefAccountingOfficerandCorporateController,wewilldisclosethenatureofthatamendmentintheInvestorRelationssectionofourwebsite.ITEM11.ExecutiveCompensationInformationrequiredbythisitemisincorporatedbyreferencefromthesectionsentitled“CommitteesoftheBoard”and“ExecutiveCompensation”inour2011ProxyStatement.ITEM12.SecurityOwnershipofCertainBeneficialOwnersandManagementandRelatedStockholderMattersInformationrequiredbythisitemisincorporatedbyreferencefromthesectionsentitled“SecurityOwnershipofCertainBeneficialOwners,”“SecurityOwnershipofDirectorsandExecutiveOfficers”and“EquityCompensationPlanInformation”inour2011ProxyStatement.ITEM13.CertainRelationshipsandRelatedTransactionsandDirectorIndependenceInformationrequiredbythisitemisincorporatedbyreferencefromthesectionsentitled“CorporateGovernance–CertainRelationshipsandRelatedPersonTransactions”and“CorporateGovernance–DirectorIndependence”inour2011ProxyStatement.ITEM14.PrincipalAccountingFeesandServicesInformationrequiredbythisitemisincorporatedbyreferencefromthesectionsentitled“AuditandNon-AuditFees”and“AuditCommitteePre-ApprovalofServicesofIndependentRegisteredPublicAccountingFirm”in“ProposalNo.4”ofour2011ProxyStatement.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT68PARTIVITEM15.Exhibits,FinancialStatementSchedules(a)1.FinancialStatementsThefollowingconsolidatedfinancialstatementsofZimmerHoldings,Inc.anditssubsidiariesaresetforthinPartII,Item8.ReportofIndependentRegisteredPublicAccountingFirmConsolidatedStatementsofEarningsfortheYearsEndedDecember31,2010,2009and2008ConsolidatedBalanceSheetsasofDecember31,2010and2009ConsolidatedStatementsofStockholders’EquityfortheYearsEndedDecember31,2010,2009and2008ConsolidatedStatementsofCashFlowsfortheYearsEndedDecember31,2010,2009and2008ConsolidatedStatementsofComprehensiveIncomefortheYearsEndedDecember31,2010,2009and2008NotestoConsolidatedFinancialStatements2.FinancialStatementSchedulesScheduleII.ValuationandQualifyingAccountsOtherfinancialstatementschedulesareomittedbecausetheyarenotapplicableortherequiredinformationisshowninthefinancialstatementsorthenotesthereto.3.ExhibitsAlistofexhibitsrequiredtobefiledaspartofthisreportissetforthintheIndextoExhibits,whichimmediatelyprecedessuchexhibitsandisincorporatedhereinbyreference.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT69SignaturesPursuanttotherequirementsofSection13or15(d)oftheSecuritiesExchangeActof1934,theregistranthasdulycausedthisreporttobesignedonitsbehalfbytheundersigned,thereuntodulyauthorized.ZIMMERHOLDINGS,INC.By:/s/DAVIDC.DVORAKDavidC.DvorakPresidentandChiefExecutiveOfficerDated:February24,2011PursuanttotherequirementsoftheSecuritiesExchangeActof1934,thisreporthasbeensignedbelowbythefollowingpersonsonbehalfoftheregistrantandinthecapacitiesandonthedatesindicated.SignatureTitleDate/s/DAVIDC.DVORAKDavidC.DvorakPresident,ChiefExecutiveOfficerandDirector(PrincipalExecutiveOfficer)February24,2011/s/JAMEST.CRINESJamesT.CrinesExecutiveVicePresident,FinanceandChiefFinancialOfficer(PrincipalFinancialOfficer)February24,2011/s/DEREKM.DAVISDerekM.DavisVicePresident,Finance,andCorporateControllerandChiefAccountingOfficer(PrincipalAccountingOfficer)February24,2011/s/BETSYJ.BERNARDBetsyJ.BernardDirectorFebruary24,2011/s/MARCN.CASPERMarcN.CasperDirectorFebruary24,2011/s/LARRYC.GLASSCOCKLarryC.GlasscockDirectorFebruary24,2011/s/ROBERTA.HAGEMANNRobertA.HagemannDirectorFebruary24,2011/s/ARTHURJ.HIGGINSArthurJ.HigginsDirectorFebruary24,2011/s/JOHNL.MCGOLDRICKJohnL.McGoldrickDirectorFebruary24,2011/s/CECILB.PICKETT,PH.D.CecilB.Pickett,Ph.D.DirectorFebruary24,2011ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT70IndextoExhibitsExhibitNoDescription3.1RestatedCertificateofIncorporationofZimmerHoldings,Inc.datedMay13,2008(incorporatedbyreferencetoExhibit3.1totheRegistrant’sQuarterlyReportonForm10-QfiledAugust5,2008)3.2RestatedBy-LawsofZimmerHoldings,Inc.effectiveMay6,2008(incorporatedbyreferencetoExhibit3.1totheRegistrant’sCurrentReportonForm8-KfiledMay9,2008)4.1SpecimenCommonStockcertificate(incorporatedbyreferencetoExhibit4.3totheRegistrant’sRegistrationStatementonFormS-8filedJanuary20,2006)4.2IndenturedatedasofNovember17,2009betweenZimmerHoldings,Inc.andWellsFargoBank,NationalAssociation,asTrustee(incorporatedbyreferencetotheformfiledasExhibit4.8totheRegistrant’sRegistrationStatementonFormS-3filedNovember12,2009)4.3FirstSupplementalIndenturetotheIndenturedatedasofNovember17,2009betweenZimmerHoldings,Inc.andWellsFargoBank,NationalAssociation,asTrustee(incorporatedbyreferencetoExhibit4.2totheRegistrant’sCurrentReportonForm8-KfiledNovember17,2009)4.4Formof4.625%Notedue2019(incorporatedbyreferencetoExhibit4.3above)4.5Formof5.750%Notedue2039(incorporatedbyreferencetoExhibit4.3above)10.1*ZimmerHoldings,Inc.2001StockIncentivePlan(incorporatedbyreferencetoAppendixBtotheRegistrant’sdefinitiveProxyStatementonSchedule14AfiledMarch24,2003)10.2*FirstAmendmenttotheZimmerHoldings,Inc.2001StockIncentivePlan(incorporatedbyreferencetoExhibit10.1totheRegistrant’sCurrentReportonForm8-KfiledDecember15,2005)10.3*ZimmerHoldings,Inc.2006StockIncentivePlan,asamended(incorporatedbyreferencetoExhibit10.1totheRegistrant’sCurrentReportonForm8-KfiledDecember13,2006)10.4*ZimmerHoldings,Inc.ExecutivePerformanceIncentivePlan,asamended(incorporatedbyreferencetoAppendixBtotheRegistrant’sdefinitiveProxyStatementonSchedule14AfiledMarch20,2008)10.5*RestatedZimmer,Inc.Long-TermDisabilityIncomePlanforHighlyCompensatedEmployees(incorporatedbyreferencetoExhibit10.9totheRegistrant’sAnnualReportonForm10-KfiledFebruary28,2007)10.6*ChangeinControlSeveranceAgreementwithDavidC.Dvorak(incorporatedbyreferencetoExhibit10.10totheRegistrant’sAnnualReportonForm10-KfiledFebruary27,2009)10.7*FormofChangeinControlSeveranceAgreementwithBrunoA.Melzi(incorporatedbyreferencetoExhibit10.3totheRegistrant’sQuarterlyReportonForm10-QfiledMay8,2002)10.8*FormofChangeinControlSeveranceAgreementwithJamesT.CrinesandCherylR.Blanchard(incorporatedbyreferencetoExhibit10.12totheRegistrant’sAnnualReportonForm10-KfiledFebruary27,2009)10.9*FormofChangeinControlSeveranceAgreementwithJefferyA.McCaulleyandChadF.Phipps(incorporatedbyreferencetoExhibit10.13totheRegistrant’sAnnualReportonForm10-KfiledFebruary27,2009)10.10*FormofChangeinControlSeveranceAgreementwithJeffreyB.Paulsen(incorporatedbyreferencetoExhibit10.1totheRegistrant’sQuarterlyReportonForm10-QfiledMay5,2010)10.11*ChangeinControlSeveranceAgreementwithStephenHongLiang,Ooi(incorporatedbyreferencetoExhibit10.21totheRegistrant’sAnnualReportonForm10-KfiledMarch12,2003)10.12ChangeinControlSeveranceAgreementwithDerekM.Davis(incorporatedbyreferencetoExhibit10.14totheRegistrant’sAnnualReportonForm10-KfiledFebruary27,2009)10.13*RestatedBenefitEqualizationPlanofZimmerHoldings,Inc.andItsSubsidiaryorAffiliatedCorporationsParticipatingintheZimmerHoldings,Inc.SavingsandInvestmentProgram(incorporatedbyreferencetoExhibit10.16totheRegistrant’sAnnualReportonForm10-KfiledFebruary27,2009)10.14*RestatedBenefitEqualizationPlanofZimmerHoldings,Inc.andItsSubsidiaryorAffiliatedCorporationsParticipatingintheZimmerHoldings,Inc.RetirementIncomePlanortheZimmerPuertoRicoRetirementIncomePlan(incorporatedbyreferencetoExhibit10.17totheRegistrant’sAnnualReportonForm10-KfiledFebruary27,2009)10.15*FormofConfidentiality,Non-CompetitionandNon-SolicitationEmploymentAgreementwithU.S.-BasedExecutiveOfficers(incorporatedbyreferencetoExhibit10.1totheRegistrant’sQuarterlyReportonForm10-QfiledAugust7,2009)10.16*Non-Disclosure,Non-CompetitionandNon-SolicitationEmploymentAgreementwithStephenHongLiang,Ooi(incorporatedbyreferencetoExhibit10.2totheRegistrant’sCurrentReportonForm8-KfiledMarch27,2006)ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT71ExhibitNoDescription10.17*Confidentiality,Non-CompetitionandNon-SolicitationAgreementwithBrunoA.Melzi(incorporatedbyreferencetoExhibit10.3totheRegistrant’sCurrentReportonForm8-KfiledMarch27,2006)10.18*FormofNonqualifiedStockOptionAwardLetterundertheZimmerHoldings,Inc.2001StockIncentivePlan(incorporatedbyreferencetoExhibit10.3totheRegistrant’sCurrentReportonForm8-KfiledJanuary11,2006)10.19*FormofNonqualifiedPerformance-ConditionedStockOptionGrantAwardLetterundertheZimmerHoldings,Inc.2001StockIncentivePlan(incorporatedbyreferencetoExhibit10.1totheRegistrant’sCurrentReportonForm8-KfiledJanuary21,2005)10.20*ZimmerHoldings,Inc.StockPlanforNon-EmployeeDirectors,asamended(incorporatedbyreferencetoAppendixCtotheRegistrant’sDefinitiveProxyStatementfiledMarch20,2009)10.21*FormofNonqualifiedStockOptionAwardLetterundertheZimmerHoldings,Inc.StockPlanforNon-EmployeeDirectors(incorporatedbyreferencetoExhibit10.2totheRegistrant’sCurrentReportonForm8-KfiledApril5,2005)10.22*FormofRestrictedStockUnitAwardLetterundertheZimmerHoldings,Inc.StockPlanforNon-EmployeeDirectors(incorporatedbyreferencetoExhibit10.1totheRegistrant’sCurrentReportonForm8-KfiledFebruary21,2006)10.23*FormofNonqualifiedStockOptionAwardLetterundertheZimmerHoldings,Inc.2006StockIncentivePlan(incorporatedbyreferencetoExhibit10.2totheRegistrant’sCurrentReportonForm8-KfiledDecember13,2006)10.24*FormofNonqualifiedStockOptionAwardLetterforNon-U.S.EmployeesundertheZimmerHoldings,Inc.2006StockIncentivePlan(incorporatedbyreferencetoExhibit10.3totheRegistrant’sCurrentReportonForm8-KfiledDecember13,2006)10.25*FormofRestrictedStockAwardLetterundertheZimmerHoldings,Inc.2006StockIncentivePlan(five-yearvesting)(incorporatedbyreferencetoExhibit10.4totheRegistrant’sCurrentReportonForm8-KfiledDecember13,2006)10.26*FormofPerformance-BasedRestrictedStockUnitAwardLetterundertheZimmerHoldings,Inc.2006StockIncentivePlan(incorporatedbyreferencetoExhibit10.1totheRegistrant’sCurrentReportonForm8-KfiledFebruary17,2009)10.27*RestatedZimmerHoldings,Inc.DeferredCompensationPlanforNon-EmployeeDirectors(incorporatedbyreferencetoAppendixDtotheRegistrant’sDefinitiveProxyStatementfiledMarch20,2009)10.28*ZimmerHoldings,Inc.2009StockIncentivePlan(incorporatedbyreferencetoAppendixBtotheRegistrant’sDefinitiveProxyStatementfiledMarch20,2009)10.29*FormofNonqualifiedStockOptionAwardLetterundertheZimmerHoldings,Inc.2009StockIncentivePlan(incorporatedbyreferencetoExhibit10.28totheRegistrant’sAnnualReportonForm10-KfiledFebruary25,2010)10.30*FormofNonqualifiedStockOptionAwardLetterforNon-U.S.EmployeesundertheZimmerHoldings,Inc.2009StockIncentivePlan(incorporatedbyreferencetoExhibit10.29totheRegistrant’sAnnualReportonForm10-KfiledFebruary25,2010)10.31*FormofPerformance-BasedRestrictedStockUnitAwardLetterundertheZimmerHoldings,Inc.2009StockIncentivePlan(incorporatedbyreferencetoExhibit10.30totheRegistrant’sAnnualReportonForm10-KfiledFebruary25,2010)10.32*FormofPerformance-BasedRestrictedStockUnitAwardLetterforNon-U.S.EmployeesundertheZimmerHoldings,Inc.2009StockIncentivePlan(incorporatedbyreferencetoExhibit10.31totheRegistrant’sAnnualReportonForm10-KfiledFebruary25,2010)10.33*FormofRestrictedStockUnitAwardLetter(five-yearvesting)undertheZimmerHoldings,Inc.2009StockIncentivePlan(incorporatedbyreferencetoExhibit10.32totheRegistrant’sAnnualReportonForm10-KfiledFebruary25,2010)10.34*SummaryCompensationSheet10.35$1,350,000,000AmendedandRestatedCreditAgreementdatedasofNovember30,2007(incorporatedbyreferencetoExhibit10.1totheRegistrant’sCurrentReportonForm8-KfiledDecember6,2007)10.36CorporateIntegrityAgreementdatedSeptember27,2007,amongZimmerHoldings,Inc.,Zimmer,Inc.andtheOfficeofInspectorGeneraloftheDepartmentofHealthandHumanServices(incorporatedbyreferencetoExhibit10.2totheRegistrant’sQuarterlyReportonForm10-QfiledNovember9,2007)ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT72IndextoExhibits(Continued)ExhibitNoDescription10.36FormofIndemnificationAgreementwithNon-EmployeeDirectorsandOfficers(incorporatedbyreferencetoExhibit10.1totheRegistrant’sCurrentReportonForm8-KfiledJuly31,2008)21ListofSubsidiariesofZimmerHoldings,Inc.23ConsentofPricewaterhouseCoopersLLP31.1CertificationpursuanttoRule13a-14(a)/15d-14(a)oftheSecuritiesExchangeActof1934oftheChiefExecutiveOfficer,asadoptedpursuanttoSection302oftheSarbanes-OxleyActof200231.2CertificationpursuanttoRule13a-14(a)/15d-14(a)oftheSecuritiesExchangeActof1934oftheChiefFinancialOfficer,asadoptedpursuanttoSection302oftheSarbanes-OxleyActof200232Certificationpursuantto18U.S.C.Section1350,asadoptedpursuanttoSection906oftheSarbanes-OxleyActof2002101.INS**XBRLInstanceDocument101.SCH**XBRLTaxonomyExtensionSchemaDocument101.CAL**XBRLTaxonomyExtensionCalculationLinkbaseDocument101.LAB**XBRLTaxonomyExtensionLabelLinkbaseDocument101.PRE**XBRLTaxonomyExtensionPresentationLinkbaseDocument101.DEF**XBRLTaxonomyExtensionDefinitionLinkbaseDocument*Managementcontractorcompensatoryplanorarrangement**PursuanttoRegulationS-T,thisinteractivedatafileisdeemednotfiledorpartofaregistrationstatementorprospectusforpurposesofSections11or12oftheSecuritiesActof1933,isdeemednotfiledforpurposesofSection18oftheSecuritiesExchangeActof1934,andotherwiseisnotsubjecttoliabilityunderthesesectionsandshallnotbeincorporatedbyreferenceintoanyregistrationstatementorotherdocumentfiledundertheSecuritiesActof1933,asamended,exceptasexpresslysetforthbyspecificreferenceinsuchfiling.ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT73IndextoExhibits(Continued)ValuationandQualifyingAccountsScheduleIIDescriptionBalanceatBeginningofPeriodAdditionsCharged(Credited)toExpenseDeductionstoReserveEffectsofForeignCurrencyAcquiredAllowancesBalanceatEndofPeriod(inmillions)DoubtfulAccounts:YearEndedDecember31,2008$21.7$(0.5)$(1.9)$(1.2)$1.9$20.0YearEndedDecember31,200920.00.1(1.8)0.5–18.8YearEndedDecember31,201018.8(1.0)(3.1)(0.6)0.314.4ExcessandObsoleteInventory:YearEndedDecember31,2008$143.7$66.5$(23.1)$(2.6)$15.1$199.6YearEndedDecember31,2009199.681.7(33.5)7.3–255.1YearEndedDecember31,2010255.145.8(42.2)7.42.3268.4ExcessandObsoleteInstruments:YearEndedDecember31,2008$31.7$5.6$(2.9)$0.3$2.4$37.1YearEndedDecember31,200937.122.7(6.5)0.5–53.8YearEndedDecember31,201053.812.1(3.6)0.7–63.0ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT74ReconciliationsReconciliationofOperatingProfittoAdjustedOperatingProfitfortheYearsEndedDecember31,2010,2009,2008,2007and200620102009200820072006(inmillions,unaudited)FortheYearsEndedDecember31,OperatingProfit...............................$916.7$1,018.8$1,090.0$1,127.6$1,165.2Inventorystep-up..............................1.412.57.00.5—Settlement...................................———169.5—Certainclaims.................................75.035.069.0——Goodwillimpairment............................204.073.0———Specialitems.................................34.775.368.525.26.1Netcurtailmentandsettlement.....................—(32.1)———AdjustedOperatingProfit.........................$1,231.8$1,182.5$1,234.5$1,322.8$1,171.3ReconciliationofDilutedEPStoAdjustedDilutedEPSfortheYearsEndedDecember31,2010,2009,2008,2007and200620102009200820072006(unaudited)FortheYearsEndedDecember31,DilutedEPS.........................................$2.97$3.32$3.72$3.26$3.40Inventorystep-up......................................0.010.060.03——Settlement..........................................———0.71—Certainclaims........................................0.370.160.30——Goodwillimpairment...................................1.010.34———Specialitems.........................................0.170.350.300.110.03Netcurtailmentandsettlement............................—(0.15)———Taxesoninventorystep-up,settlement,certainclaims,specialitems,andnetcurtailmentandsettlement*.............(0.20)(0.14)(0.16)(0.03)0.01Taxbenefitfromsettlement...............................——(0.14)——AdjustedDilutedEPS...................................$4.33$3.94$4.05$4.05$3.44*Thetaxeffectiscalculatedbaseduponthestatutoryratesforthejurisdictionswheretheitemswereincurred.ReconciliationofSalesGrowthRatetoConstantCurrencySalesGrowthRatefortheYearEndedDecember31,2010Reported%GrowthForeignExchangeImpactConstantCurrency%Growth(unaudited)FortheYearEndedDecember31,2010GeographicSegmentAmericas...............................................................2%—%2%Europe................................................................(2)(3)1AsiaPacific.............................................................1486Consolidated...........................................................312ProductCategoryReconstructive...........................................................312Knees...............................................................211Hips................................................................312Extremities...........................................................11110Dental................................................................7(1)8Trauma................................................................523Spine.................................................................(8)(1)(7)SurgicalandOther........................................................13211Consolidated...........................................................312ZIMMERHOLDINGS,INC.2010FORM10-KANNUALREPORT75(This page intentionally left blank)Corporate InformationBoard of DirectorsJohn L. Mc Goldrick Chairman of the Board, Zimmer Holdings, Inc. Special Advisor, International AIDS Vaccine Initiative Betsy J. Bernard Retired President, AT&T Corp. Marc N. Casper President and Chief Executive Officer, Thermo Fisher Scientific Inc.David C. Dvorak President and Chief Executive Officer, Zimmer Holdings, Inc.Larry C. Glasscock Retired Chairman, WellPoint, Inc.Robert A. Hagemann Senior Vice President and Chief Financial Officer, Quest Diagnostics IncorporatedArthur J. Higgins Consultant, Blackstone Healthcare PartnersCecil B. Pickett, Ph.D. Retired President, Research and Development, Biogen Idec Inc.Officers and Key ManagementDavid C. Dvorak President and Chief Executive OfficerCheryl R. Blanchard, Ph.D. Senior Vice President and Chief Scientific OfficerJames T. Crines Executive Vice President, Finance and Chief Financial OfficerDerek M. Davis Vice President, Finance and Corporate Controller and Chief Accounting OfficerNorman D. Finch Jr. Vice President, Associate General Counsel and Chief Compliance OfficerWilliam P. Fisher Senior Vice President, Global Human ResourcesJeffery A. McCaulley President, Zimmer ReconstructiveBruno A. Melzi Chairman, Europe, Middle East and AfricaStephen H. L. Ooi President, Asia PacificJeffrey B. Paulsen Group President, Global BusinessesChad F. Phipps Senior Vice President, General Counsel and SecretaryRichard C. Stair Senior Vice President, Global Operations and LogisticsStockholder InformationHeadquarters Zimmer Holdings, Inc. 345 East Main Street Warsaw, IN 46580, U.S.A. +1-574-267-6131 www.zimmer.comStock Listing Zimmer is listed on the New York Stock Exchange and the SIX Swiss Exchange under the symbol ZMH.Transfer Agent Communications concerning stock transfer requirements, loss of certificates and change of address should be directed to Zimmer’s Transfer Agent:BNY Mellon Shareholder Services P.O. Box 358015 Pittsburgh, PA 15252-8015 +1-888-552-8493 (Domestic) +1-201-680-6685 (International) http://www.bnymellon.com/shareownerInvestor Relations Zimmer invites stockholders, security analysts, portfolio managers and other interested parties to contact:Robert J. Marshall Jr. Vice President, Investor Relations and Treasurer +1-574-371-8042 robert.marshall@zimmer.com James T. Crines Executive Vice President, Finance and Chief Financial Officer +1-574-372-4264 james.crines@zimmer.comTo obtain a free copy of Zimmer’s annual report on form 10-K, quarterly reports on form 10-Q, news releases, earnings releases, proxy statements, or to obtain Zimmer’s financial calendar, access SEC filings, listen to earnings calls, or to look up Zimmer stock quotes, please visit http://investor.zimmer.com or call +1-866-688-7656.Independent Auditors PricewaterhouseCoopers LLP Chicago, IL, U.S.A.This annual report is printed on paper that contains 10% post-consumer waste.Stock Performance Graph Comparison of Cumulative Total Return for years ended December 31Assumes $100 was invested on December 31, 2004 in Zimmer common stock and each index and dividends were reinvested. No cash dividends have been declared or paid on Zimmer stock. Returns over the indicated period should not be considered indicative of future returns.$0$50$100$150 2005 2006 2007 2008 2009 2010 Zimmer Holdings, Inc. $100 $116 $ 98 $ 60 $ 88 $ 80 S&P 500 Stock Index 100 114 118 72 89 101 S&P 500 Health Care Equipment Index 100 103 108 77 98 95Zimmer Holdings, Inc.345 East Main Street, P.O. Box 708Warsaw, IN 46580, U.S.A.

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