Zimmer Biomet Annual Report 2011

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FY2011 Annual Report · Zimmer Biomet

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ZIMMER HOLDINGS, INC.
2011 ANNUAL REPORT

Financial Highlights

(Dollars in millions except per-share amounts)

Sales b y Geographic Segment

2007

2008

2009

2010

2011

55%

27%

18%

Americas

$2,277

$2,354

$2,372

$2,432

$2,441

Europe

Asia Pacific

1,081

540

1,179

588

1,119

604

1,099

689

1,214

797

Consolidated

$3,898

$4,121

$4,095

$4,220

$4,452

Sales b y Product Category

2007

2008

2009

2010

2011

Reconstructive

$ 2,958

$3,162

$3,120

$3,202

$3,344

41%

Knees

Hips

30%

Extremities

Dental

Trauma

Spine

Surgical & Other

1,633

1,221

104

221

206

197

316

1,761

1,280

121

227

222

230

280

1,756

1,228

136

205

235

253

282

1,790

1,262

150

219

246

234

319

1,825

1,356

163

248

286

225

349

Consolidated

$ 3,898

$4,121

$4,095

$4,220

$4,452

% Change 2010-2011

Constant
Reported Currency(1)

10%

16%

% Change 2010-2011

Constant
Reported Currency(1)

13%

16%

-4%

-1%

12%

13%

-6%

Net Sales
Zimmer recorded net sales of

Operating Proﬁ t
Progress in our business

Operating Cash Flow
Disciplined financial

transformation programs will

management has enabled us

$4.45 billion in 2011 driven by

help Zimmer maintain

to build a balanced and

above-market performances in

industry-leading operating

conservative capital structure

a number of markets and the

proﬁt margins.

with high levels of operating

Diluted Earnings per Share
Zimmer again delivered
against our ﬁ nancial
commitments with adjusted
earnings per share of $4.80.

positive impact of new product

introductions.

5% Reported

2
5
4
4

0
2
2
4

1
2
1
4

5
9
0
,
4

8
9
8
3

3% Adjusted(2)

12% Reported

5
3
2
1

0
9
0
1

3
8
1
1

9
1
0
1

3
2
3
1

8
2
1
1

9
6
2
1

4
2
0
1

2
3
2
1

7
1
9

cash flow.

-1% Reported

8
1
1
1

4
8
0
1

8
3
0
1

4
9
1
1

7
7
1
1

11% Adjusted(2)

36% Reported

5
0
4

6
2
3

5
0
4

2
7
3

4
9
3

2
3
3

0
8
4

3
0
4

3
3
4

7
9
2

(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 76.

(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 76.

To Our Stockholders:

In 2011, Zimmer Holdings proudly celebrated our 10th anniversary as a publicly listed company
on the New York Stock Exchange. On the day of our IPO in 2001, Zimmer’s market value made
our spin-oﬀ the largest such transaction in healthcare at the time. In the ten years since,
Zimmer has become the world’s leading company dedicated solely to musculoskeletal health
– combining the industry’s most comprehensive and innovative product portfolio with robust
clinical, health economics and commercial capabilities.

Our success is driven by a passion and commitment to one fundamental goal – to support
healthcare professionals with products, technologies and training to help them restore mobil-
ity and quality of life to millions of patients suﬀ ering from debilitating joint pain and musculo-
skeletal conditions. Through this unwavering commitment to patients, healthcare profession-
als and institutions, Zimmer continues to drive sales growth, deliver leveraged earnings and
increase value to our stockholders.

A Year of Global Growth

Zimmer achieved record sales in 2011 totaling $4.45 billion, with fully diluted adjusted earn-
ings per share of $4.80. These results were driven by above-market performances in a number
of geographies and product categories. The year was characterized by improved execution by
our global sales teams and the ongoing positive impact of new product introductions across
the portfolio.

In the United States, Zimmer’s performance was consistent with a challenging market in our
core reconstructive franchises, and we continued to win share in certain of our emerging busi-
nesses. Zimmer’s performance in established and emerging global markets reinforced our
broad growth potential. We gained market share and delivered strong growth in a number of
established markets in our Europe, Middle East and Africa, and Asia Paciﬁ c segments. Recent
strategic investments to improve sales and operational performance contributed to impressive
results in these regions.

ZIMMER HOLDINGS, INC.
2011 ANNUAL REPORT

On the Cover

Recently, mountaineering legend

Lou Whittaker (left) and his surgeon

Dr. Richard Moore (right) visited

Zimmer headquarters in Warsaw,

Indiana to share Lou’s comeback

story following bilateral knee

replacement surgery and to thank

Zimmer employees for his NexGen

Knees. The pair are photographed

here at the Sun Valley Resort in Sun

Valley, Idaho, their favorite skiing

location. To learn more about Lou’s

story, please turn to page 4.

Responding to the evolving needs of payors and governments in a number of major markets, Zimmer’s strong track record of clini-
cal success enables us to demonstrate how our technologies improve outcomes while also reducing healthcare costs – a clear
long-term value proposition for our Customers. In 2011, this value proposition resulted in Zimmer being the successful bidder in a
number of large tenders in key European markets.

Emerging markets, including China, Brazil and Russia, among others, continued to generate strong growth in 2011, reinforcing
their signiﬁ cant long-term potential. Zimmer will continue to invest in emerging markets, including a focus on medical training
and education programs designed to assist healthcare professionals in meeting the demands of growing patient populations. In
late 2011, Zimmer announced a new Research and Development Center in China that will focus on innovation to meet the unique
needs of Asian patients and clinicians.

Innovation Focus: Delivering More Personalized Solutions

Building on Zimmer’s unmatched experience in the development of implant technologies, we are accelerating the pace of our
innovation program, producing clinically-relevant products that deliver long-term value to patients, hospitals and healthcare sys-
tems. The foundation of Zimmer’s innovation strategy is to deliver personalized solutions across the musculoskeletal continuum
of care. These solutions include customizable implant and instrumentation systems that enable surgeons to deliver a personal-
ized care experience to every patient, including options for all lifestyle demands.

In line with this strategy, Zimmer continued to introduce a range of products across our portfolio in 2011, and the pipeline is
populated with exciting innovations to come in 2012 and beyond. In Knees, we continue to see increased adoption of Zimmer®
Patient Speciﬁc Instruments, which use MRI technology to develop personalized surgical guides for each patient. In early 2012,
we expanded the application of this technology with the introduction of Patient Speciﬁc Instruments for partial knee arthroplasty.
In our Hip business, the recently-introduced CLS® Brevius™ Hip stem builds on the more than 25 years of clinical history of the
CLS Spotorno® stem with the addition of Kinectiv® technology, which oﬀ ers a range of neck options, enabling increased control
for a more accurate restoration of the patient’s natural anatomy.

Members of the Zimmer leadership team visited the New York Stock Exchange in August 2011 to ring the
closing bell in honor of Zimmer’s 10th anniversary as an NYSE listed company. Pictured here from left to
right are: Jim Crines, Stephen Ooi, Jeﬀ McCaulley, Bruno Melzi, Derek Davis, David Dvorak, Chad Phipps,
John McGoldrick (Zimmer Board Chairman), Bill Fisher, Cheryl Blanchard, Rick Stair and Norm Finch
(All titles listed on the inside back cover).

In 2011, most of Zimmer’s emerging businesses delivered consistent above-market growth globally, supported by numerous new
product introductions. In our Dental business, the introduction of the Trabecular Metal™ Dental Implant expands our application
of this unique, proprietary material to a new treatment area. We also announced a strategic arrangement to provide Zfx Digital
Dentistry Solutions, which positions us to enter the CAD/CAM crown and bridge market. In our Trauma division, we introduced
several new components to the Zimmer Natural Nail® Family, which features anatomical designs and a wide variety of nail lengths
and widths. We also completed the acquisition of the XtraFix ® External Fixation System in late 2011, which strengthens our posi-
tion in the attractive external ﬁ xation market. Moving into 2012, Zimmer’s Surgical business will beneﬁ t from the addition of newly
acquired product lines, including the Zimmer® Universal power system, and the STABLECUT® portfolio of surgical blades, which
together represent an estimated $1 billion global market.

As Zimmer drives growth across our reconstructive and emerging businesses, we also continue to explore opportunities to expand
our reach into early-intervention product solutions. In 2011, the DeNovo® NT Natural Tissue Graft for cartilage repair enjoyed
continued success, with utilization in more than 3,500 cases to date. Also in 2011, Seikagaku Corporation received FDA approval
for a single-injection hyaluronic acid injectable treatment for osteoarthritis pain of the knee. Zimmer plans to market this product
in the United States through an exclusive distribution agreement with Seikagaku.

Meeting Global Economic Challenges Through Financial Discipline

Global economic conditions remained challenging in 2011, with low consumer conﬁ dence and continued high unemployment
rates reﬂ ected in sustained rates of surgical procedure deferrals above that which would be considered normal. This trend par-
ticularly aﬀ ected the U.S. market where unemployment levels are linked to lower enrollment in private health insurance plans.

Looking ahead, Zimmer is not waiting for broader economic conditions to improve to deliver increased value to our stockholders.
Our goal is to deliver consistent above market growth in each of our geographic segments and product categories. To succeed, we
will maintain a rigorous focus on our strategic priorities, including product innovation, an ongoing emphasis on emerging markets,
operational excellence and disciplined capital deployment.

To generate incremental resources to accelerate growth, we implemented several business transformation initiatives globally in
2011, including, among others, a management delayering initiative, a strategic sourcing consolidation and an optimization of
manufacturing capabilities. Beyond operational improvements, these programs also demonstrate Zimmer’s commitment to build-
ing the industry’s most performance-driven culture. Pursuing world-class benchmarks across the Company will accelerate growth
and deliver increased value to stockholders.

The Next Decade: Expanding Leadership

Zimmer’s current portfolio comprises the industry’s most comprehensive, clinically-successful and customizable products, en-
abling us to continue to create value for all stakeholders. The performance of Zimmer’s global sales teams in 2011 demonstrates
what can be achieved when the industry’s leading musculoskeletal solutions are delivered with strong sales execution. Zimmer is
dedicated to meeting our ﬁ nancial commitments into the future, and to delivering both short- and long-term value to stockholders.

Zimmer is also committed to our role as an industry leader. In addition to providing training for nearly 25,000 healthcare profes-
sionals in 2011, Zimmer sponsored more than 70 medical mission trips to support surgical teams providing care to remote and
underserved areas around the world. Moreover, we expanded our industry-leading commitment to supporting multi-cultural and
minority initiatives to address musculoskeletal healthcare disparities. Finally, we sponsored more than 300 Arthritis Foundation
walks and related patient education events. In these and other areas, Zimmer is proud to be out front, helping to drive positive
change, especially for those individuals who are in the greatest need.

The musculoskeletal care market remains one of the most exciting and dynamic intersections of medicine and technology – and
one that holds enormous opportunities to grow our Company while simultaneously making a valuable contribution to society. As
we embark on our 85th anniversary as a Company serving the musculoskeletal market and our second decade as an independent,
public company, our entire team has great pride and conﬁ dence in knowing that Zimmer is uniquely positioned to provide health-
care professionals with the world’s best products, technologies and training to help renew their patients’ lives.

David C. Dvorak
President and
Chief Executive Oﬃ cer

John L. Mc Goldrick
Chairman

On the comeback trail
with Lou Whittaker: Lou
cross country skiing in
Sun Valley, Idaho (left);
Lou and his wife Ingrid
on Bald Mountain in Sun
Valley, Idaho (center);
and Lou taking a break
during the Himalayas
expedition.

The Lou Whittaker Comeback Story

Lou Whittaker is a mountain climbing
legend. He was the expedition leader for
the ﬁ rst successful American ascent of
the North Wall of Mt. Everest, and he has
led expeditions to many of the highest
mountains in the world, including more
than 250 ascents of Mt. Rainier in his
home state of Washington.

In 2004, after 40 years literally on the
top of the world, Lou Whittaker began
the most epic journey of his life – his
comeback from debilitating knee pain.

“I’d been climbing and guiding people up
the world’s highest mountains for almost
half a century, but knee pain brought me
down to earth,” Lou said. “I was reduced
to lowering myself hand-over-hand on the
railing just to get down a single ﬂ ight of
stairs.”

Based on the recommendation of a fellow
skier, Lou sought medical attention from
his orthopaedic surgeon, Dr. Richard
Moore.

“When I ﬁ rst saw Lou, he could not stand
for more than a couple of minutes at a
time,” said Dr. Moore.

Over the next few months, Dr. Moore
replaced both of Lou’s knees with Zimmer
NexGen knees, the world’s most trusted
knee replacement system.

“As an orthopaedic surgeon, it is
important to take the time to understand
d
and embrace a patients’ dreams for
recovery,” Dr. Moore said. “Lou is a
lifelong climber and skier, and his
comeback dream was to return to those
activities.”

“Working with Zimmer’s NexGen knee
system, I was able to personalize a
surgical approach to alleviate Lou’s pain,
restore his mobility and help him return
to an active lifestyle.”

“Within a few months, I could do things
again that I had not done for 20 years,”
Lou said. “Together with Dr. Moore,
Zimmer gave me back my life.”

To celebrate his comeback, Lou and Dr.
Moore led a group of friends on a 50-mile
trek through the Himalayas in Southeast
Asia in 2008. Included on that expedition
was Lou’s long-time friend and climbing
partner, Nawang Gombu, the ﬁ rst person
ever to climb Mt. Everest twice. Shortly
after their trip, Gombu died from cancer
in 2011.

“I waited too long to get my knees
replaced, and I nearly missed the
opportunity to make one last memorable
climb with Gombu,” Lou said. “Now, I tell
people all the time, if you need a joint
replacement, get it done and get on with
your life.”

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For year ended December 31, 2011
Commission file number 001-16407

ZIMMER HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State of Incorporation)
345 East Main Street Warsaw, Indiana

13-4151777
(IRS Employer Identification No.)
46580

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (574) 267-6131

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

Title of each class
Common Stock, $.01 par value

Name of each exchange on which registered
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes Í No ‘

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No Í

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Í

No ‘

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files). Yes Í No ‘

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. ‘

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check One):

Large accelerated filer Í Accelerated filer ‘

Non-accelerated filer ‘
(Do not check if a smaller reporting company)

Smaller reporting company ‘

Indicate by checkmark whether the registrant is a shell company (as defined Exchange Act Rule 12b-2). Yes ‘

No Í

The aggregate market value of shares held by non-affiliates was $12,030,750,799 (based on the closing price of these shares on the
New York Stock Exchange on June 30, 2011 and assuming solely for the purpose of this calculation that all directors and executive
officers of the registrant are “affiliates”). As of February 10, 2012, 178,122,539 shares of the registrant’s $.01 par value common
stock were outstanding.

Document

Portions of the Proxy Statement with respect to the 2012 Annual Meeting of Stockholders

Form 10-K

Part III

Documents Incorporated by Reference

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Cautionary Note About Forward-Looking Statements

This Annual Report on Form 10-K includes “forward-looking” statements within the meaning of federal securities laws.
Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often
include words such as “may,” “will,” “should,” “would,” “could,” “anticipate,” “expect,” “plan,” “seek,” “believe,” “predict,”
“estimate,” “potential,” “project,” “target,” “forecast,” “intend,” “strategy,” “future,” “opportunity,” and similar expressions.
Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which
may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties
that could cause actual results and events to differ materially from such forward-looking statements is included in the section titled
“Risk Factors” (refer to Part I, Item 1A of this report). Readers of this report are cautioned not to place undue reliance on these
forward-looking statements. While we believe the assumptions on which the forward-looking statements are based are reasonable,
there can be no assurance that these forward-looking statements will prove to be accurate. We expressly disclaim any obligation to
update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related subjects in our Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K.

Table of Contents

PART I

Item 1.

Item 1A.

Item 1B.

Item 2.

Item 3.

Item 4.

PART II

Item 5.

Item 6.

Item 7.

Business

Risk Factors

Unresolved Staff Comments

Properties

Legal Proceedings

[Removed and Reserved]

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities

Selected Financial Data

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

Financial Statements and Supplementary Data

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Controls and Procedures

Other Information

Directors, Executive Officers and Corporate Governance

Executive Compensation

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Certain Relationships and Related Transactions and Director Independence

Principal Accounting Fees and Services

Item 8.

Item 9.

Item 9A.

Item 9B.

PART III

Item 10.

Item 11.

Item 12.

Item 13.

Item 14.

PART IV

Item 15.

Exhibits, Financial Statement Schedules

Page

Z I M M E R H O L D I N G S , I N C .

PART I

ITEM 1. Business

OVERVIEW

We are a global leader in the design, development,
manufacture and marketing of orthopaedic reconstructive,
spinal and trauma devices, biologics, dental implants and
related surgical products. We also provide other healthcare
related services. In this report, “Zimmer,” “we,” “us,” “our” and
similar words refer collectively to Zimmer Holdings, Inc. and its
subsidiaries. Zimmer Holdings refers to the parent company
only.

Zimmer Holdings was incorporated in Delaware in 2001.

Our history dates to 1927, when Zimmer Manufacturing
Company, a predecessor, was founded in Warsaw, Indiana. On
August 6, 2001, Zimmer Holdings was spun off from its former
parent and became an independent public company.

CUSTOMERS, SALES AND MARKETING

Our primary customers include orthopaedic surgeons,
neurosurgeons, oral surgeons, dentists, hospitals, stocking
distributors, healthcare dealers and, in their capacity as
agents, healthcare purchasing organizations or buying groups.
These customers range from large multinational enterprises to
independent clinicians and dentists.

We have operations in more than 25 countries and market

products in more than 100 countries, with corporate
headquarters in Warsaw, Indiana, and more than 100
manufacturing, distribution and warehousing and/or office
facilities worldwide. We manage our operations through three
major geographic segments — the Americas, which is
comprised principally of the U.S. and includes other North,
Central and South American markets; Europe, which is
comprised principally of Europe and includes the Middle East
and Africa markets; and Asia Pacific, which is comprised
primarily of Japan and Australia and includes other Asian and
Pacific markets.

We market and sell products through three principal
channels: 1) direct to healthcare institutions, such as hospitals
or direct channel accounts; 2) through stocking distributors
and healthcare dealers; and 3) directly to dental practices and
dental laboratories. With direct channel accounts, inventory is
generally consigned to sales agents or customers. With sales to
stocking distributors, healthcare dealers, dental practices and
dental laboratories, title to product passes upon shipment or
upon implantation of the product. Direct channel accounts
represented approximately 80 percent of our net sales in 2011.
No individual direct channel account, stocking distributor,
healthcare dealer, dental practice or dental laboratory
accounted for more than 1 percent of our net sales for 2011.

We stock inventory in our warehouse facilities and retain

title to consigned inventory in sufficient quantities so that
products are available when needed for surgical procedures.
Safety stock levels are determined based on a number of
factors, including demand, manufacturing lead times and
quantities required to maintain service levels. We also carry

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

trade accounts receivable balances based on credit terms that
are generally consistent with local market practices.

We utilize a network of sales associates, sales managers

and support personnel, most of whom are employed or
contracted by independent distributors and sales agencies. We
invest a significant amount of time and expense in training
sales associates in how to use specific products and how to
best inform surgeons of product features and uses. Sales force
representatives must have strong technical selling skills and
medical education to provide technical support for surgeons.

In response to the different healthcare systems

throughout the world, our sales and marketing strategies and
organizational structures differ by region. We utilize a global
approach to sales force training, marketing and medical
education to provide consistent, high quality service.
Additionally, we keep current with key surgical developments
and other issues related to orthopaedic surgeons,
neurosurgeons, dentists and oral surgeons and the medical
procedures they perform.

Americas. The Americas is our largest geographic

segment, accounting for $2,440.8 million, or 55 percent, of
2011 net sales, with the U.S. accounting for 93 percent of net
sales in this region. The U.S. sales force primarily consists of
independent sales agents, most of whom sell products
exclusively for Zimmer. Sales agents in the U.S. receive a
commission on product sales and are responsible for many
operating decisions and costs. Sales commissions are accrued
at the time of sale.

In this region, we contract with group purchasing

organizations and managed care accounts and have promoted
unit growth by offering volume discounts to customer
healthcare institutions within a specified group. Generally, we
are designated as one of several preferred purchasing sources
for specified products, although members are not obligated to
purchase our products. Contracts with group purchasing
organizations generally have a term of three years, with
extensions as warranted.

In the Americas, we monitor and rank independent sales

agents across a range of performance metrics, including the
achievement of certain sales targets and maintenance of
efficient levels of working capital.

Europe. The European geographic segment accounted

for $1,214.5 million, or 27 percent, of 2011 net sales, with
France, Germany, Italy, Spain, Switzerland and the United
Kingdom collectively accounting for 72 percent of net sales in
the region. This segment also includes other key markets,
including Benelux, Nordic, Central and Eastern Europe, the
Middle East and Africa. Our sales force in this segment is
comprised of direct sales associates, commissioned agents,
independent distributors and sales support personnel. In
Europe, we emphasize the advantages of our clinically proven,
established designs and innovative solutions and new and
enhanced materials and surfaces. In most European countries,
healthcare is sponsored by the government and therefore

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

government budgets have a role in healthcare spending, which
can affect our sales in this segment.

Asia Pacific. The Asia Pacific geographic segment
accounted for $796.5 million, or 18 percent, of 2011 net sales,
with Japan being the largest market within this segment,
accounting for approximately 52 percent of the region’s sales.
This segment also includes key markets such as Australia, New
Zealand, Korea, China, Taiwan, India, Thailand, Singapore,
Hong Kong and Malaysia. In Japan and most countries in the
Asia Pacific region, we maintain a network of dealers, who act
as order agents on behalf of hospitals in the region, and sales
associates, who build and maintain relationships with
orthopaedic surgeons, neurosurgeons and dental surgeons in
their markets. These sales associates cover over 7,000
hospitals in the region. The knowledge and skills of these sales
associates play a critical role in providing service, product
information and support to surgeons. In November 2011 we
announced that we will establish a new research and
development center in Beijing, China, which will focus on
products and technologies to meet the unique needs of Asian
patients and their healthcare providers.

SEASONALITY

Our business is somewhat seasonal in nature, as many of
our products are used in elective procedures, which typically
decline during the summer months and can increase at the end
of the year once annual deductibles have been attained on
health insurance plans.

DISTRIBUTION

We operate distribution facilities domestically in Warsaw,

Indiana; Dover, Ohio; Statesville, North Carolina; Memphis,
Tennessee; Carlsbad, California; and Austin, Texas and
internationally in Australia, Austria, Belgium, Canada, the
Czech Republic, China, Finland, France, Germany, Hong Kong,
India, Italy, Japan, Korea, Malaysia, the Netherlands, New
Zealand, Portugal, Russia, Singapore, South Africa, Spain,
Sweden, Switzerland, Taiwan, Thailand and the United
Kingdom.

We generally ship our orders via expedited courier. We do

not consider our backlog of firm orders to be material to an
understanding of our business.

PRODUCTS

Our products include orthopaedic reconstructive, spinal

and trauma devices, biologics, dental implants and related
surgical products.

We utilize our exclusive Trabecular Metal™ Technology

across the majority of our product categories. Trabecular
Metal Material is a structural biomaterial with a cellular
architecture that resembles bone and approximates its
physical and mechanical properties more closely than other
prosthetic materials. The highly porous trabecular
configuration is conducive to more normal bone formation and
bone in-growth. Trabecular Metal Implants are fabricated
using elemental tantalum metal and a patented vapor

deposition technique that creates a metallic strut configuration
resembling cancellous bone with nano-textured surface
features.

Orthopaedic Reconstructive Implants

Knee Implants

Total knee replacement surgeries typically include a
femoral component, a patella (knee cap), a tibial tray and an
articular surface (placed on the tibial tray). Knee replacement
surgeries include first-time, or primary, joint replacement
procedures and revision procedures for the replacement,
repair or enhancement of an implant or component from a
previous procedure. Knee implants are designed to
accommodate different levels of ligament stabilization of the
joint. While some knee implant designs, called cruciate
retaining (CR) designs, require the retention of the posterior
cruciate ligament, other designs, called posterior stabilized
(PS) and ultracongruent (UC) designs, provide joint stability
without the posterior cruciate ligament. There are also
procedures for partial reconstruction of the knee, which treat
limited knee degeneration and involve the replacement of only
one side, or compartment, of the knee with a
unicompartmental knee prosthesis.

We offer a wide range of products for specialized knee

procedures, including the following:

NexGen® Complete Knee Solution. The number

one selling knee brand in the world, the NexGen Knee product
line is a comprehensive system for knee replacement surgery
which has significant application across the continuum of care
in aspects of primary and revision knee arthroplasty, including
CR, PS and revision procedures. The NexGen Knee System
offers joint stability, sizing and performance options in a
unified system of interchangeable components that can be
tailored to an individual patient. The NexGen Knee System
provides surgeons with complete and versatile knee
instrument options spanning multiple surgeon and treatment
philosophies. The breadth and versatility of the NexGen Knee
System allows surgeons to transition from one type of implant
to another during surgery, according to the respective needs of
the patient, and to support current surgical philosophies. In
national joint replacement registries, databases that track the
performance of artificial joints implanted in many thousands of
patients, NexGen Knee replacement products are consistently
reported to have among the lowest rates of revision surgeries
for the most frequently used knee systems.

The NexGen CR product line is designed to be used
in conjunction with a functioning posterior cruciate ligament.
Similar to the posterior stabilized design, the NexGen CR-Flex
Fixed Bearing Knee is designed to provide a greater range of
motion for patients who require deep bending in their activities
of daily living. The NexGen CR-Flex Femoral Components
offer a tissue balancing (flexion balancing) solution which
allows the surgeon to adjust component sizing and balance and
stabilize the implant without removing additional bone or
wasting critical procedure time.

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The NexGen Legacy® Posterior Stabilized Knee

Innex® Total Knee System. The Innex Knee

product line provides stability in the absence of the posterior
cruciate ligament. The PS capabilities can be augmented via
the use of a NexGen Legacy Posterior Stabilized Flex (LPS-
Flex) Knee, a high-flexion implant that has the potential to
accommodate knee flexion up to 155-degrees range of motion
for patients whose lifestyle and body type demand and can
accommodate this performance standard. With our NexGen
LPS-Flex Mobile Knee, we are one of only two companies that
can offer a mobile-bearing total knee treatment option in the
U.S. market.

Gender Solutions® NexGen Femorals represent the
first knee implants specifically shaped to offer fit and function
optimized for the unique anatomical considerations more
commonly seen in female patients. Gender™ Implants are an
important strategic focus, as more than half of total knee
arthroplasty patients are female. Gender Solutions Femorals
are available in both NexGen CR-Flex and LPS-Flex
configurations. The concept of advancing implant design
through customization based on anatomy or other patient
characteristics has manifested in rapidly expanding gender
technologies across the continuum of our products and into
other important brands in our growing portfolio.

The NexGen Revision Knee product line consists of

several different products that are designed to provide clinical
solutions to surgeons for various revision situations, including
multiple constraint levels for ligament and soft tissue
inefficiencies and a bone augmentation implant system made
from our Trabecular Metal Technology material. These
augments are designed to address significant bone loss in
revision surgery while allowing natural bone to reconstruct
within the implant construct.

We offer improved polyethylene performance in the

NexGen Knee System with our conventional polyethylene and
Prolong® Highly Crosslinked Polyethylene, which offers
reduced wear and resistance to oxidation, pitting and cracking.
Prolong Highly Crosslinked Polyethylene is available in
designs compatible with both NexGen CR-Flex and LPS-Flex
Femoral Components.

Natural-Knee® II System. The Natural-Knee II
System consists of a range of interchangeable, anatomically
designed implants which include a proprietary CSTi™
Cancellous-Structured Titanium Porous Coating option for
stable fixation in active patients.

Gender Solutions Natural-Knee Flex System. The

Gender Solutions Natural-Knee Flex System adds our High
Flex and Gender Solutions Knee design concepts to the
Natural-Knee System. The Gender Solutions Natural-Knee
Flex System recognizes that two distinct populations exist in
total knee arthroplasty (female and male) and offers two
distinct implant shapes for enhanced fit. The system
accommodates high flexion capacity up to 155 degrees. The
system features the proven clinical success of our asymmetric
tibial plate, CSTi Porous Coating, Prolong Highly Crosslinked
Polyethylene and ultracongruent articular surface.

System offers fixed bearing and mobile bearing knee
components all designed within the same system philosophy.
While the Innex Knee System is best known for its mobile
bearing knee offering and the availability of differing levels of
articular constraint, the Innex Revision Knee and Innex
Gender Solutions Knee components make this offering a
comprehensive mobile and fixed bearing knee system. The
Innex Knee System is distributed in Europe and Asia Pacific
and is not currently available for commercial distribution in the
U.S.

Zimmer® Unicompartmental Knee Systems. The

Zimmer Unicompartmental Knee System offers a high flexion
design for unicompartmental knee surgery. The system offers
the surgeon the ability to conserve bone by replacing only the
compartment of the knee that has had degenerative changes. A
Gender Solutions Patello-Femoral Joint System is also
available, a system which incorporates key gender specific
design features and a proprietary guided milling surgical
technique for use in patello-femoral joint replacement.

Zimmer® Patient Specific Instruments. The
Zimmer Patient Specific Instruments simplify a total or partial
knee procedure and help enhance appropriate placement of
the final implant based on a surgeon’s preoperative surgical
plan. Based on a patient’s MRI scan, a computer generated,
custom guide is produced to conform to a patient’s unique
knee anatomy. This guide is then utilized intraoperatively to
aid in the surgical correction of the patient’s knee.

Zimmer® Segmental System. Adding to our broad
portfolio of revision options, the Zimmer Segmental System is
a comprehensive system designed to address patients with
severe bone loss associated with disease, trauma or revision.
This important addition realizes our strategic goal of
expanding our product solutions across the continuum of care
and, with the incorporation of Trabecular Metal Technology,
expands the possibilities for treatment, short and long-term
fixation and stability.

Hip Implants

Total hip replacement surgeries replace both the head of
the femur and the socket portion of the pelvis (acetabulum) of
the natural hip. Hip procedures include first time, or primary,
joint replacement as well as revision procedures.
Approximately 30 percent of hip implant procedures involve
the use of bone cement to attach or affix the prosthetic
components to the surrounding bone. The remaining are
press-fit into bone, which means that they have a surface that
bone affixes to through either ongrowth or ingrowth
technologies.

Our key hip replacement products include:

Zimmer® M/L Taper Hip Prosthesis. The Zimmer M/L

Taper Hip Prosthesis offers a proximally porous-coated wedge-
shaped design based on long-term clinically proven concepts.
The M/L Taper has become widely used due to several key
design features.

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Zimmer M/L Taper Hip Prosthesis with Kinectiv®

Technology. The Zimmer M/L Taper with Kinectiv
Technology is a system of modular stem and neck components
designed to help the surgeon restore the natural hip joint
center intraoperatively by addressing the key variables of leg
length, offset and version independently.

Alloclassic® (Zweymüller®) Hip System. The

Alloclassic (Zweymüller) Hip System has become one of the
most used, primary, cementless hip systems in the world. This
is one of the few stems available today that is practically
unchanged since its introduction in 1979. A new offset design
was added in 2004 and offers the surgeon increased capability
to restore the patient’s anatomical joint movement.

CLS® Spotorno® Hip System. The CLS Spotorno

Stem is one of our best selling hip prostheses, especially in the
European markets. Additions to the product line provide the
capability for restoration of the physiological center of rotation.

CLS Brevius™ Hip Stem with Kinectiv

Introduced in 2011, this hip stem is based on the

Technology.
CLS Spotorno Stem, which has more than 25 years of clinical
use. The new technology enables surgeons to better match
patients’ individual anatomies with modular neck options
designed for independent, intraoperative adjustments.

Fitmore® Hip Stem. The Fitmore Hip Stem offers
the surgeon a short, bone preserving stem. Maintaining bone
stock is particularly important for patients who may undergo a
later revision procedure. Its shape facilitates minimally
invasive procedures.

Continuum® Acetabular System, Trilogy® IT

Acetabular System and Allofit® IT Alloclassic Acetabular
System. Each of these acetabular systems offer the surgeon a
choice of advanced bearing options to meet the clinical and
lifestyle needs of each patient. Bearing options include
Longevity® Highly Crosslinked Polyethylene, Metasul®
Metal-on-Metal Technology and a BIOLOX®1 delta
Ceramic-on-Ceramic Technology (where Zimmer has
regulatory clearances). The acetabular systems also provide
surgeons a choice of fixation method that accommodates their
surgical philosophy. Continuum is now our most widely sold
acetabular cup system.

Maxera® Cup. The Maxera Cup provides a large-

head, ceramic-on-ceramic option for the younger and more
active patient. The cup is an established hemispherical design
that provides increased stability with a familiar surgical
technique. The Maxera Cup presents orthopaedic surgeons
with a system that offers a high range of motion and a
low-wear bearing to better enable the restoration of a patient’s
active lifestyle.

System that provides the surgeon with a variety of off-the-shelf
options to address a wide range of bone deficiencies
encountered during acetabular revisions and to achieve a
stable construct.

Extremity Implants

Our extremity portfolio, primarily shoulder and elbow

products, is designed to treat arthritic conditions, soft tissue
injuries and fractures.

Our key products include:

Bigliani/Flatow® Complete Shoulder Solution

Family. The Bigliani/Flatow Shoulder product line
combined with the Trabecular Metal Humeral Stem give us a
significant presence in the global shoulder implant market.

Trabecular Metal Glenoid. The Trabecular Metal

Glenoid offers surgeons a glenoid component designed to
improve fixation. Trabecular Metal Material’s properties allow
for more normal bone formation and maintenance.

Trabecular Metal Reverse Shoulder System. The

Trabecular Metal Reverse Shoulder System incorporates
advanced materials and design to offer improved biological
ingrowth potential through the utilization of Trabecular Metal
Technology, while addressing significant loss of rotator cuff
function. The reverse shoulder system is designed to restore
function to patients who, because of debilitating rotator cuff
tears, are not candidates for traditional shoulder surgery and
have exhausted other means of repair.

Zimmer® Anatomical Shoulder™ System. The

Anatomical Shoulder System can be adjusted to each
patient’s individual anatomy. This portfolio of products
includes the Anatomical Shoulder Inverse/Reverse System,
designed to address significant loss of rotator cuff function,
and the Anatomical Shoulder Fracture System. Both the
primary and fracture shoulder implants can be converted to a
reverse shoulder without removal of the initial implant.

Coonrad/Morrey Total Elbow. The Coonrad/Morrey

Total Elbow product line is a family of elbow replacement
implant products to address patients with conditions of severe
arthritis or trauma.

Dental Implants

Our dental products division manufactures and/or

distributes: (1) dental reconstructive implants — for
individuals who are totally without teeth or are missing one or
more teeth; (2) dental restorative products — aimed at
providing a more natural restoration to resemble the original
teeth; and (3) dental regenerative products — for soft tissue
and bone rehabilitation.

Trabecular Metal Modular Acetabular System. The

Dental Reconstructive Implants

Trabecular Metal Modular Acetabular System incorporates
the advanced fixation surface of Trabecular Metal Material. In
addition, we offer a Trabecular Metal Acetabular Revision

1 Registered trademark of CeramTec GmbH

Our dental reconstructive implant products and surgical

and restorative techniques include:

Tapered Screw-Vent® Implant System. Our highest

selling dental product line provides the clinician a tapered

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geometry which resembles the natural shape of a tooth root.
The Tapered Screw-Vent Implant System, with its two-stage
design, was developed to minimize valuable chair time for
restorations. The Tapered Screw-Vent Implant System is a
technologically advanced dental implant featuring a
proprietary internal hex connection, multiple lead threads for
reduced insertion time and selective surface coatings. The
Zimmer® One-Piece Implant System, designed to complement
the success of the Tapered Screw-Vent Implant System,
enhances this product line by offering clinicians a fast,
convenient restorative option.

AdVent® Implant System. Utilizing many features of
the Tapered Screw-Vent Implant System, the AdVent Implant
System is a transgingival, one stage design that utilizes the
same surgical system as the Tapered Screw-Vent Implant
System, allowing the clinician to use both design concepts
without incurring the added cost of a second surgical system.

Tapered SwissPlus® Implant System. Designed to

meet the needs of clinicians who prefer a transgingival, one
stage, dental implant, the Tapered SwissPlus Implant System
incorporates multiple lead threads for faster insertion time and
a tapered body to allow it to be placed in tight interdental
spaces. The Tapered SwissPlus Implant System also
incorporates an internal connection.

Dental Restorative Products

We commercialize products for the aesthetic market
aimed at providing a more natural restoration. We offer a full
line of prosthetic devices for each of the above dental implant
systems as well as a custom solution, as follows:

Zimmer Hex-Lock® Contour Abutment and
Restorative Products. Designed to be used with our Tapered
Screw-Vent and Zimmer One-Piece Implant Systems, our
contour lines are a solution for addressing the diversity of
patients’ needs. Featuring prepared margins, titanium and
ceramic options and snap-on impression caps, our abutments
are designed to simplify the restoration process, save time for
clinicians and technicians and offer versatility.

Our Hex-Lock Short Abutment and Restorative

System is an all-inclusive solution that promotes posterior
restorations. We also offer the Zimmer® Contour Zirconia
Abutment. Both are engineered for use with the Tapered
Screw-Vent Implant System.

Dental Regenerative Products

use together or separately for various bone and soft tissue
grafting needs: Puros Cancellous Particulate, Puros Cortical
Particulate, Puros Block Allografts, Puros Pericardium
Membranes, Puros Dermis Membranes, Puros Demineralized
Bone Matrix (DBM) and Puros DBM Putty with Chips.

We distribute the Puros Allograft Products through

an exclusive, worldwide agreement with RTI Biologics, Inc.,
which was amended and renewed in 2010.

Through this same agreement with RTI Biologics,

Inc., we provide CopiOs® Pericardium Membrane in the U.S.
Sourced from bovine pericardial tissue, the CopiOs
Pericardium Membrane provides the characteristics of natural
tissue and can be used as a direct substitute for Puros
Pericardium Membranes.

Spine Implants

Our Spine products division designs, manufactures and
distributes medical devices and surgical instruments to deliver
comprehensive solutions for those with back or neck pain
caused by degenerative conditions, deformities or traumatic
injury of the spine. We provide surgeons a broad range of
technologies for posterior and anterior procedures in the
cervical, thoracic and lumbar regions of the spine.

Zimmer Spine’s portfolio of spinal solutions includes:

PathFinder NXT ™ Minimally Invasive Pedicle
Screw System. Released in 2010, the PathFinder NXT
System builds on the legacy of the PathFinder® Device, a
pioneering technology in minimally invasive spinal fusion
procedures. The Pathfinder NXT System is designed to allow
for a mini-open or true percutaneous approach, depending on
the preferred surgeon technique and patient need. In addition,
the PathFinder NXT System incorporates enhanced features
that provide improved efficiency in performing minimally
invasive fusion procedures.

Zimmer Universal Clamp™ Spinal Fixation

System. The design of the Universal Clamp Implant allows
it to be used alongside traditional hooks, screws and wires to
treat scoliotic deformities and correct complex spinal
pathologies.

Sequoia® Pedicle Screw System. The Sequoia

System was developed to simplify surgical flow, reduce
implantation time and improve ergonomic tool design. This
pedicle screw system combines ergonomic instrumentation
with an effective design that reduces implant metal volume.

We market the following product lines for use in

Ardis® Interbody System. The Ardis Implant

regenerative techniques in oral surgery:

Puros® Allograft Products. The Puros biologic

offering is an allograft material, which in the case of
mineralized bone and dermal tissues, utilizes the Tutoplast®2
Tissue Processing Technique to provide exceptional bone and
soft tissue grafting material for use in oral surgery. Zimmer
Dental offers a number of distinct Puros Allograft products to

features a self-distracting nose, convex geometry and wide
range of sizes. This versatile PEEK-OPTIMA®3 Device
incorporates a large space for graft placement, plus an
advanced tooth design to effectively resist migration and
expulsion during procedures. Ardis Instrumentation was also
designed to streamline the surgical procedure and improve
surgeon comfort.

2 Registered trademark of RTI Biologics, Inc.

3 Registered trademark of Ivibio, Ltd.

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Trinica® Select Anterior Cervical Plating
System. The Trinica Select System is designed to simplify
the surgical procedure with the Secure-Twist® Anti-Migration
System, which provides visual confirmation of screw capture,
as well as a wide variety of screw options to customize the
construct depending on patient need.

Biological Products. Zimmer Spine offers a full line

of bone void filler products to accommodate most surgical
procedures. Puros® Demineralized Bone Matrix is available in
Putty and Putty with Chips formulations, and the CopiOs®
Bone Void Filler family of products includes synthetic bone
graft material in the form of sponges or pastes that are used to
fill bone voids during spine surgery.

Dynesys® Dynamic Stabilization System. The
Dynesys Implant family was designed to facilitate a more
physiologic approach to low back spinal stabilization. The
system threads flexible components, instead of traditional rigid
titanium rods, through pedicle screws in order to stabilize
affected spinal segments in a more natural anatomic position
and to alleviate pain. The Dynesys Dynamic Stabilization
System is currently only indicated for use as an adjunct to
fusion in the U.S.

Wallis® Posterior Dynamic Stabilization System
(available outside the U.S. only). The Wallis System is a
spinal implant that was designed to stabilize the lumbar spine
while preserving the anatomy and minimizing the need for
bony resection. The Wallis System combines a PEEK-OPTIMA
Spacer linked to the vertebrae via a polyester band that
permits an even distribution of stresses on bone.

NCB® Polyaxial Locking Plate System. NCB Polyaxial

Locking Plates provide surgeons with the ability to place screws
with polyaxial freedom and utilize both conventional and locking
technology in the treatment of complex fractures of the distal
femur, proximal humerus and proximal tibia. We continue to
invest in additional applications of this technology.

Zimmer® Periarticular Locking Plate System. The

Zimmer Periarticular Locking Plate System combines
anatomic designs with locking screw technology to create
constructs for use in comminuted fractures or where deficient
bone stock or poor bone quality is encountered. By combining
locking screw holes with compression slots, the plates can be
used as both locking devices and fracture compression
devices.

Zimmer® Universal Locking System. The Zimmer
Universal Locking System is a comprehensive system of mini
and small fragment plates, screws and instruments for fracture
fixation. The Universal Locking System plates resemble
standard plates, but have figure-8 shaped holes which allow
the plates to be used as compression plates, locked internal
fixators or as an internal fixation system combining both
techniques.

Zimmer® Cable-Ready® System. The Zimmer

Cable-Ready System includes a series of instruments, cables
and other implants that help a surgeon treat several different
fracture types, including those that occur around a previously
implanted device (periprosthetic). The cables are wrapped
around the bone and then secured, either to themselves or to
plates, to provide fixation for fractured limbs.

Trauma

Surgical

Trauma products include devices used to stabilize
damaged or broken bones and their surrounding tissues to
support the body’s natural healing processes. Fractures are
most often stabilized using internal fixation devices such as
plates, screws, nails, wires and pins, but may also be stabilized
using external fixation devices. Biologics treatments are used
in conjunction with traditional trauma devices to encourage
healing and replace bone lost during an injury. We are focused
on providing exceptional options to treat a broad range of
traumatic injuries, addressing unmet clinical needs and
implementing next-generation technologies into our portfolio
of trauma solutions.

Zimmer Trauma offers a comprehensive line of products,

including:

Zimmer Natural Nail® System. The Zimmer

Natural Nail System includes a series of intramedullary nails
designed to address a broad range of long bone fractures. The
nails are anatomically shaped and incorporate a feature that
allows the screws to be linked to the nails, creating a construct
even in poor quality bone. Instrumentation for nail placement
is designed to make it easy for surgeons to utilize the implants
as well as to address growing concerns with obesity and
osteoporosis.

We develop, manufacture and market products that
support reconstructive, trauma, spine and dental implant
procedures, with a focus on Bone Cements, Surgical Wound
Site Management and Blood Management. The Surgical
product portfolio includes:

PALACOS®4 Bone Cement. We have exclusive U.S.
and Canada distribution rights for the PALACOS line of bone
cement products manufactured by Heraeus Kulzer GmbH.
Included in these brands are PALACOS R and PALACOS R+G
Bone Cements, as well as PALACOS LV and PALACOS LV+G
Bone Cements. The PALACOS R+G and PALACOS LV+G
products are bone cements with the antibiotic gentamicin
pre-mixed in the formulation. Both are used by orthopaedic
surgeons to reduce the risk of postoperative infection in
second stage revisions. The PALACOS family’s history of
clinical success, fatigue strength, high visualization and
handling characteristics make it well-suited for orthopaedics.

Hi-Fatigue™5 Bone Cement. We have exclusive

European and Asian distribution rights for the Hi-Fatigue line
of bone cement products manufactured by aap Biomaterials
GmbH & Co. KG. Included in these brands are Hi-Fatigue and
Hi-Fatigue G Bone Cements. The Hi-Fatigue G Bone Cement

4 Registered trademark of Heraeus Kulzer GmbH
5 Registered trademark of aap Biomaterials GmbH & Co. KG

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utilizes the antibiotic gentamicin pre-mixed in the formulation
and is used by orthopaedic surgeons to reduce the risk of
postoperative infection.

A.T.S.® Automatic Tourniquet Systems. The A.T.S.

Tourniquet Systems Product Line is our family of tourniquet
machines and cuffs that are designed to safely create a
bloodless surgical field. The portfolio includes the A.T.S. 3000
Tourniquet System, which utilizes proprietary technology to
determine the patient’s appropriate “Limb Occlusion Pressure”
(LOP) based on the patient’s specific physiology. Through
reduction of a patient’s LOP, the clinician may reduce the risk
of tissue and/or nerve damage. Complementing A.T.S.
Tourniquet Systems machines is a wide range of cuffs that
provide the flexibility to occlude blood flow safely with
convenience and accuracy for limbs of virtually every size and
shape.

Pulsavac® Plus, Pulsavac Plus AC and Pulsavac

Plus LP Wound Debridement Systems. The Pulsavac
Systems are used for cleaning and debridement of
contaminants and foreign matter from wounds using
simultaneous irrigation and suction. All three Pulsavac
Systems are disposable to reduce the risk of cross
contamination. While Pulsavac Plus and Pulsavac Plus LP
Wound Debridement Systems are both battery-powered, the
Pulsavac Plus AC Wound Debridement System is a disposable
system that is powered by a reusable AC power source to help
alleviate environmental concerns associated with battery
disposal.

Zimmer® Blood Reinfusion System (ZBRS) and
Hemovac® Blood Management System. These two blood
management products are part of a larger family that supports
the clinician in managing patient blood loss after a surgical
procedure. The ZBRS product is a closed-loop postoperative
system that effectively salvages and filters the patient’s own
blood to help reduce dependency on banked blood and/or
preoperative autologous donation.

HEALTHCARE CONSULTING

Our healthcare consulting services subsidiary, Accelero

Health Partners, LLC (Accelero), is based in Canonsburg,
Pennsylvania. Accelero consultants work to design a
customized program for each client that promotes the active
participation and collaboration of the physicians and the
hospital-based departments with the goal of consistently
producing a superior outcome in the form of a growing,
efficient and effective care delivery network. Currently,
revenue related to Accelero services represents less than 1
percent of our total net sales.

BIOLOGICS

Our research and development efforts include a Biologics

group based in Austin, Texas, with its own full-time staff and
dedicated projects focusing on the development of a variety of
biologic technologies for musculoskeletal applications. This
group works on biological solutions to repair and regenerate

damaged or degenerated musculoskeletal tissues using
biomaterials/cell therapies which offer the possibility of
treating damaged joints by biological repair rather than
replacing them. A sampling of some of our key projects in the
Biologics area is set forth below.

We are collaborating with ISTO Technologies, Inc. (ISTO)

to develop chondral grafts for cartilage repair. ISTO creates
cell-based therapies for cartilage regeneration using cells from
juvenile donor cartilage. DeNovo® NT Natural Tissue Graft
represents our first product entry into the cartilage repair
market. This tissue product provides particulated juvenile
cartilage tissue for repair of articular cartilage defects of the
knee, ankle, shoulder, hip, elbow and toe joints. More than
1,600 procedures utilizing this innovative cartilage repair
product were performed in 2011. Our biologics portfolio also
features Chondrofix® Osteochondral Allograft designed to
address osteochondral lesions in a single-stage procedure. The
Chondrofix Implant is an osteochondral plug comprised of
articular cartilage and subchondral bone.

Many musculoskeletal surgical procedures use bone grafts

to help regenerate lost or damaged bone. Our Spine, Dental
and Trauma divisions have introduced a technologically
advanced all-human demineralized bone matrix, Puros DBM
Putty and Putty with bone chips. This bone-derived allograft
material is used to fill bone voids or defects. It is placed into
the bone void where it is then completely replaced by natural
bone during the healing process.

RESEARCH AND DEVELOPMENT

We have extensive research and development activities to

develop new surgical techniques, materials, biologics and
product designs. The research and development functions
work closely with our strategic brand marketing function. The
rapid commercialization of innovative new materials, biologics
products, implant and instrument designs and surgical
techniques remains one of our core strategies and continues to
be an important driver of sales growth.

We are broadening our product offerings in each of our

product categories and exploring new technologies with
possible applications in multiple areas. For the years ended
December 31, 2011, 2010 and 2009, we spent $238.6 million,
$218.5 million and $205.7 million, respectively, on research
and development. Our primary research and development
facility is located in Warsaw, Indiana. We have other research
and development personnel based in, among other places,
Winterthur, Switzerland; Austin, Texas; Minneapolis,
Minnesota; Carlsbad, California; Dover, Ohio; and Parsippany,
New Jersey. As of December 31, 2011, we employed more than
1,000 research and development employees worldwide.

We expect to continue to identify innovative technologies,

which may include acquiring complementary products or
businesses, establishing technology licensing arrangements or
strategic alliances.

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GOVERNMENT REGULATION AND COMPLIANCE

We are subject to government regulation in the countries
in which we conduct business. In the U.S., numerous laws and
regulations govern all the processes by which medical devices
are brought to market. These include, among others, the
Federal Food, Drug and Cosmetic Act and regulations issued or
promulgated thereunder. The Food and Drug Administration
(FDA) has enacted regulations that control all aspects of the
development, manufacture, advertising, promotion and
postmarket surveillance of medical products, including medical
devices. In addition, the FDA controls the access of products to
market through processes designed to ensure that only
products that are safe and effective are made available to the
public.

Most of our new products fall into an FDA classification

that requires the submission of a Premarket Notification
(510(k)) to the FDA. This process requires us to demonstrate
that the device to be marketed is at least as safe and effective
as, that is, substantially equivalent to, a legally marketed
device. We must submit information that supports our
substantial equivalency claims. Before we can market the new
device, we must receive an order from the FDA finding
substantial equivalence and clearing the new device for
commercial distribution in the U.S.

Other devices we develop and market are in a category

(class) for which the FDA has implemented stringent clinical
investigation and Premarket Approval (PMA) requirements.
The PMA process requires us to provide clinical and laboratory
data that establishes that the new medical device is safe and
effective. The FDA will approve the new device for commercial
distribution if it determines that the data and information in
the PMA constitute valid scientific evidence and that there is
reasonable assurance that the device is safe and effective for
its intended use(s).

All of our devices marketed in the U.S. have been cleared

or approved by the FDA, with the exception of certain
pre-amendment devices which were in commercial distribution
prior to May 28, 1976. The FDA has grandfathered these
devices, so new FDA submissions are not required.

The FDA has the authority to: halt the distribution of

certain medical devices; detain or seize adulterated or
misbranded medical devices; or order the repair, replacement
or refund of the costs of such devices and to seek criminal
prosecution of executives for violation of FDA regulations.
There are also certain requirements of state, local and foreign
governments that we must comply with in the manufacture
and marketing of our products.

In many of the foreign countries in which we market our
products, we are subject to local regulations affecting, among
other things, design and product standards, packaging
requirements and labeling requirements. Many of the
regulations applicable to our devices and products in these
countries are similar to those of the FDA. The member
countries of the European Union have adopted the European
Medical Device Directive, which creates a single set of medical
device regulations for products marketed in all member
countries. Compliance with the Medical Device Directive and

certification to a quality system enable the manufacturer to
place a CE mark on its products. To obtain authorization to
affix the CE mark to a product, a recognized European
Notified Body must assess a manufacturer’s quality systems
and the product’s conformity to the requirements of the
Medical Device Directive. We are subject to inspection by the
Notified Bodies for compliance with these requirements.

Further, we are subject to various federal and state laws
concerning healthcare fraud and abuse, including false claims
and anti-kickback laws. These laws are administered by, among
others, the U.S. Department of Justice, the Office of Inspector
General of the Department of Health and Human Services and
state attorneys general. Many of these agencies have increased
their enforcement activities with respect to medical device
manufacturers in recent years. Violations of these laws are
punishable by criminal and/or civil sanctions, including, in some
instances, fines, imprisonment and, within the U.S., exclusion
from participation in government healthcare programs,
including Medicare, Medicaid and Veterans Administration
(VA) health programs.

Our operations in foreign countries are subject to the

extraterritorial application of the U.S. Foreign Corrupt
Practices Act (FCPA). Our global operations are also subject
to foreign anti-corruption laws, such as the UK Bribery Act,
among others. As part of our global compliance program, we
seek to address anti-corruption risks proactively.

Our facilities and operations are also subject to complex

federal, state, local and foreign environmental and
occupational safety laws and regulations, including those
relating to discharges of substances in the air, water and land,
the handling, storage and disposal of wastes and the clean-up
of properties by pollutants. We do not expect that the ongoing
costs of compliance with these environmental requirements
will have a material impact on our consolidated earnings,
capital expenditures or competitive position.

We continue to assess the impact that the healthcare

reform legislation passed in 2010 by the U.S. federal
government will have on our business. The new law includes a
2.3 percent excise tax on a majority of our U.S. sales that is
scheduled to be implemented in 2013.

COMPETITION

The orthopaedics and broader musculoskeletal care
industry is highly competitive. In the global markets for
reconstructive implants, trauma and related surgical products,
our major competitors include: DePuy Orthopaedics, Inc. (a
subsidiary of Johnson & Johnson), Stryker Corporation,
Biomet, Inc., Smith & Nephew plc, Wright Medical Group, Inc.,
Synthes, Inc. and Tornier, Inc.

In the Americas geographic segment, we and DePuy
Orthopaedics, Inc., Stryker Corporation, Biomet, Inc., Smith &
Nephew, Inc. (a subsidiary of Smith & Nephew plc), Wright
Medical Group, Inc. and Synthes, Inc. account for a large
majority of the total reconstructive and trauma implant sales.
In the Asia Pacific market for reconstructive implant and

trauma products, we compete primarily with DePuy
Orthopaedics, Inc., Stryker Corporation, Synthes, Inc.,

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Smith & Nephew plc and Biomet, Inc., as well as regional
companies, including Japan Medical Materials Corporation and
Japan Medical Dynamic Marketing, Inc. Factors, such as the
dealer system and complex regulatory environments, make it
difficult for smaller companies, particularly those that are
non-regional, to compete effectively with the market leaders in
the Asia Pacific region.

The European reconstructive implant and trauma product

markets are more fragmented than the Americas or the Asia
Pacific segments. The variety of philosophies held by European
surgeons regarding hip reconstruction, for example, has
fostered the existence of many regional European companies,
including Aesculap AG (a subsidiary of B. Braun), Waldemar
LINK GmbH & Co., KG and Mathys AG which, in addition to the
global competitors, compete with us. Many hip implants sold in
Europe are products developed specifically for the European
market. We will continue to develop and produce specially
tailored products to meet specific European needs.

In the spinal implant category, we compete globally
primarily with the spinal and biologic business of Medtronic,
Inc., DePuy Spine (a subsidiary of Johnson & Johnson),
Synthes, Inc., Stryker Corporation, Biomet Spine (a subsidiary
of Biomet, Inc.) and NuVasive, Inc.

In the dental implant category, we compete primarily with

Nobel Biocare Holding AG, Straumann Holding AG, Dentsply
International and Biomet 3i (a subsidiary of Biomet, Inc.).
Competition within the industry is primarily based on

technology, innovation, quality, reputation and customer
service. A key factor in our continuing success in the future
will be our ability to develop new products and improve
existing products and technologies.

MANUFACTURING AND RAW MATERIALS

We manufacture our products at twelve sites, including
Warsaw, Indiana; Winterthur, Switzerland; Ponce, Puerto Rico;
Dover, Ohio; Statesville, North Carolina; Carlsbad, California;
Parsippany, New Jersey; Shannon, Ireland; Etupes, France;
Beijing and Xianning, China; and Geneva, Switzerland. We also
strategically outsource some manufacturing to qualified
suppliers who are highly capable of producing components.

We believe that our manufacturing facilities are among the

best in our industry in terms of automation and productivity
and have the flexibility to accommodate future growth. The
manufacturing operations at these facilities are designed to
incorporate the cellular concept for production and to
implement tenets of a manufacturing philosophy focused on
continuous improvement efforts in product quality, lead time
reduction and capacity optimization. Our continuous
improvement efforts are driven by Lean and Six Sigma
methodologies. In addition, at certain of our manufacturing
facilities, many of the employees are cross-trained to perform a
broad array of operations.

We generally target operating our manufacturing facilities
at optimal levels of total capacity. We continually evaluate the
potential to in-source and out-source production as part of our
manufacturing strategy to provide value to our stakeholders.

We have improved our manufacturing processes to protect

our profitability and offset the impact of inflationary costs. We
have, for example, employed computer-assisted robots and
multi-axis grinders to precision polish medical devices;
automated certain manufacturing and inspection processes,
including on-machine inspection and process controls;
purchased state-of-the-art equipment; in-sourced core products
and processes; and negotiated cost reductions from third-party
suppliers.

We use a diverse and broad range of raw materials in the

manufacturing of our products. We purchase all of our raw
materials and select components used in manufacturing our
products from external suppliers. In addition, we purchase
some supplies from single sources for reasons of quality
assurance, sole source availability, cost effectiveness or
constraints resulting from regulatory requirements. We work
closely with our suppliers to assure continuity of supply while
maintaining high quality and reliability. To date, we have not
experienced any significant difficulty in locating and obtaining
the materials necessary to fulfill our production schedules.

INTELLECTUAL PROPERTY

Patents and other proprietary rights are important to the

continued success of our business. We also rely upon trade
secrets, know-how, continuing technological innovation and
licensing opportunities to develop and maintain our
competitive position. We protect our proprietary rights
through a variety of methods, including confidentiality
agreements and proprietary information agreements with
vendors, employees, consultants and others who may have
access to proprietary information. We own or control through
licensing arrangements more than 5,000 issued patents and
patent applications throughout the world that relate to aspects
of the technology incorporated in many of our products.

EMPLOYEES

As of December 31, 2011, we employed more than 8,700
employees worldwide, including more than 1,000 employees
dedicated to research and development. Approximately 4,700
employees are located within the U.S. and approximately
4,000 employees are located outside of the U.S., primarily
throughout Europe and in Japan. We have approximately 3,600
employees dedicated to manufacturing our products
worldwide. The Warsaw, Indiana production facility employs
more than 1,400 employees. Approximately 150 U.S.
employees are members of a trade union covered by a
collective bargaining agreement.

We have a collective bargaining agreement with the
United Steel, Paper and Forestry, Rubber Manufacturing,
Energy, Allied Industrial and Service Workers International
Union for and on behalf of Local 2737-15 covering employees
at the Dover, Ohio facility, which continues in effect until
May 15, 2012.

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EXECUTIVE OFFICERS

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

The following table sets forth certain information with respect to our executive officers as of February 20, 2012.

Name

David C. Dvorak

Cheryl R. Blanchard, Ph.D.

James T. Crines

Derek M. Davis

Jeffery A. McCaulley

Bruno A. Melzi

Stephen H.L. Ooi

Jeffrey B. Paulsen

Chad F. Phipps

Age

Position

President and Chief Executive Officer

Senior Vice President and Chief Scientific Officer

Executive Vice President, Finance and Chief Financial Officer

Vice President, Finance and Corporate Controller and Chief Accounting Officer

President, Zimmer Reconstructive

Chairman, Europe, Middle East and Africa

President, Asia Pacific

Group President, Global Businesses

Senior Vice President, General Counsel and Secretary

14 years with GE Healthcare in numerous positions of
increasing responsibility, including President and Chief
Executive Officer of GE Clinical Services from 2000.

Mr. Melzi was appointed Chairman, Europe, Middle East and
Africa in October 2003. He is responsible for the sales,
marketing and distribution of products in the European,
Middle Eastern and African regions. Mr. Melzi joined Zimmer
in 1990.

Mr. Ooi was appointed President, Asia Pacific in December
2005. He is responsible for the sales, marketing and
distribution of products in the Asia Pacific region. Prior to
that, he had served as President, Australasia since September
2003. Mr. Ooi joined Zimmer in 1986.

Mr. Paulsen was appointed Group President, Global Businesses
in December 2009. He has responsibility for Zimmer Spine,
Zimmer Dental, Zimmer Trauma and Zimmer Surgical. Prior to
joining Zimmer, Mr. Paulsen served as Chief Operating Officer
of MPS Group, Inc., a privately held environmental services
and facility management firm, from September 2008 to
December 2009. Prior to that, he served as Group President of
TriMas Corporation, a specialty manufacturing company, from
January 2007 to June 2008. Previously, Mr. Paulsen had held a
number of increasingly responsible executive roles at Stryker
Corporation from 1996 to December 2006, including President,
Orthopaedic Reconstructive Division.

Mr. Phipps was appointed Senior Vice President, General
Counsel and Secretary in May 2007. He has global
responsibility for our legal affairs and he serves as Secretary to
the Board of Directors. Mr. Phipps also oversees our
Government Affairs, Corporate Marketing and
Communications and Public Relations activities. From
December 2005 to May 2007, he served as Associate General
Counsel and Corporate Secretary. Prior to that, he had served
as Associate Counsel and Assistant Secretary since September
2003. Mr. Phipps joined Zimmer in 2003.

Mr. Dvorak was appointed President, Chief Executive Officer
and a member of the Board of Directors in May 2007. From
December 2005 to April 2007, he served as Group President,
Global Businesses and Chief Legal Officer. Prior to that, he
had served as Executive Vice President, Corporate Services,
Chief Counsel and Secretary, as well as Chief Compliance
Officer, since October 2003. Mr. Dvorak joined Zimmer in
2001.

Dr. Blanchard was appointed Senior Vice President and Chief
Scientific Officer in December 2005. She is responsible for
Corporate Research, Regulatory Affairs, Global Medical
Affairs, Biologics Research and Development and Biologics
Sales and Marketing. Previously, she had served as Vice
President, Corporate Research and Clinical Affairs since
October 2003. Dr. Blanchard joined Zimmer in 2000.

Mr. Crines was appointed Executive Vice President, Finance
and Chief Financial Officer in May 2007. From December 2005
to April 2007, he served as Senior Vice President, Finance,
Operations and Corporate Controller and Chief Accounting
Officer. Prior to that, he had served as Senior Vice President,
Finance/Controller and Information Technology since October
2003. Mr. Crines joined Zimmer in 1995.

Mr. Davis was appointed Vice President, Finance and Corporate
Controller and Chief Accounting Officer in May 2007. He has
responsibility for internal and external reporting, planning and
analysis, and corporate and business unit accounting. From
March 2006 to May 2007, he served as Director, Financial
Planning and Accounting. Prior to that, he had served as
Director, Finance, Operations and Logistics since December
2003. Mr. Davis joined Zimmer in 2003.

Mr. McCaulley was appointed President, Zimmer Reconstructive
in November 2008. He has overall responsibility for the Global
Reconstructive Division, including direct responsibility for
Global Brand Management, Product Research and
Development, Quality and Regulatory Affairs, and Medical
Training and Education, as well as Americas Marketing and
Sales. Prior to joining Zimmer, he served as President and
Chief Executive Officer of the Health Division of Wolters
Kluwer from 2005, Vice President and General Manager of the
Diabetes Division of Medtronic, Inc. from 2002, and spent

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AVAILABLE INFORMATION

Our Internet address is www.zimmer.com. We routinely

post important information for investors on our website in the
“Investor Relations” section, which may be accessed from our
homepage at www.zimmer.com or directly at http://
investor.zimmer.com. We use this website as a means of
disclosing material, non-public information and for complying
with our disclosure obligations under Regulation FD.
Accordingly, investors should monitor the Investor Relations
section of our website, in addition to following our press
releases, SEC filings, public conference calls, presentations
and webcasts. Our goal is to maintain the Investor Relations
website as a portal through which investors can easily find or
navigate to pertinent information about us, free of charge,
including:
• our Annual Reports on Form 10-K, Quarterly Reports on

Form 10-Q, Current Reports on Form 8-K and amendments
to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as
amended (Exchange Act), as soon as reasonably practicable
after we electronically file that material with or furnish it to
the Securities and Exchange Commission (SEC);

• announcements of investor conferences and events at which

our executives talk about our products and competitive
strategies. Podcasts and archives of these events are also
available;

• press releases on quarterly earnings, product

announcements, legal developments and other material
news that we may post from time to time;

• corporate governance information including our Corporate
Governance Guidelines, Code of Business Conduct, Code of
Ethics for Chief Executive Officer and Senior Financial
Officers, information concerning our Board of Directors and
its committees, including the charters of the Audit
Committee, Compensation and Management Development
Committee and Corporate Governance Committee, and
other governance-related policies;

• shareholder services information, including ways to contact

our transfer agent; and

• opportunities to sign up for email alerts and RSS feeds to

have information provided in real time.

The information available on our website is not
incorporated by reference in, or a part of this or any other
report we file with or furnish to the SEC.

ITEM 1A. Risk Factors

Risk factors which could cause actual results to differ
from our expectations and which could negatively impact
our financial condition and results of operations are
discussed below and elsewhere in this report. The risks
and uncertainties described below are not the only ones we
face. Additional risks and uncertainties not presently
known to us or that are currently not believed to be
significant to our business may also affect our actual
results and could harm our business, financial condition
and results of operations. If any of the risks or

uncertainties described below or any additional risks and
uncertainties actually occur, our business, results of
operations and financial condition could be materially
and adversely affected.

If we fail to comply with the terms of the Corporate

Integrity Agreement we entered into in September
2007, we may be subject to exclusion from federal
healthcare programs.

As previously reported, in September 2007 we settled an
investigation conducted by the U.S. Attorney’s Office for the
District of New Jersey (U.S. Attorney) into financial
relationships between major orthopaedic manufacturers and
consulting orthopaedic surgeons. As part of that settlement,
we entered into a five-year Corporate Integrity Agreement
(CIA) with the Office of Inspector General of the Department
of Health and Human Services (OIG-HHS). A copy of the CIA is
filed as an exhibit to this report. If we do not comply with the
terms of the CIA, we could be subject to exclusion by OIG-HHS
from participation in federal healthcare programs, including
Medicaid and Medicare.

The ongoing investigation by the U.S. Securities and

Exchange Commission and the U.S. Department of
Justice regarding potential violations of the Foreign
Corrupt Practices Act in the sale of medical devices in a
number of foreign countries by companies in the
medical device industry could have a material adverse
effect on our business, financial condition and cash
flows.

We are cooperating fully with the U.S. Securities and
Exchange Commission and the U.S. Department of Justice with
regard to an ongoing investigation of potential violations of the
Foreign Corrupt Practices Act in the sale of medical devices in
a number of foreign countries by companies in the medical
device industry. Although we have adopted policies and
procedures designed to prevent improper payments and we
train our employees, distributors and others concerning these
issues, we cannot assure that violations of these requirements
will not occur. If we are found to have violated the Foreign
Corrupt Practices Act, we may face sanctions including fines,
criminal penalties, disgorgement of profits and suspension or
debarment of our ability to contract with governmental
agencies or receive export licenses.

In July 2011, we received Form FDA-483

Inspectional Observations from the FDA concerning
quality systems at our Warsaw, Indiana manufacturing
facility and we may not be able to timely and adequately
address the quality system issues raised by the FDA.

Following a July 2011 routine inspection of our Warsaw,

Indiana manufacturing facility, the FDA issued a Form 483
notice. The Form 483 notice identified certain inspectional
observations regarding the facility’s quality systems. The
facility manufactures reconstructive products that are sold
globally. We have responded in writing to the observations and
met with representatives of the district office of the FDA to
discuss our response and action plans. We expect the FDA to
conduct a re-inspection of this facility in the future to
determine whether we have taken sufficient actions to address
the observations described in the Form 483 notice. If the FDA

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is not satisfied with our response to the issues identified in the
Form 483 notice, the FDA could take additional actions such as
issuing a warning letter to us, which, among other things, could
adversely affect our ability to receive approvals of regulatory
applications until the issues are resolved. Any of these possible
sanctions could have an adverse impact on our revenues,
financial position, results of operations and cash flows, and
otherwise harm our business and reputation.

• manufacture and deliver instruments and products in

sufficient volumes on time;

• differentiate our offerings from competitors’ offerings;
• achieve positive clinical outcomes for new products;
• satisfy the increased demands by healthcare payors,

providers and patients for shorter hospital stays, faster post-
operative recovery and lower-cost procedures;

• innovate and develop new materials, product designs and

Challenging global economic conditions could

surgical techniques; and

adversely affect our results of operations.

• provide adequate medical education relating to new

During 2011, growth in the healthcare industry and our

products.

revenue growth were adversely affected by continuing
challenges in the global economy. Although the U.S. economy
is recovering from the worst recession in decades,
unemployment remains high and consumer confidence
remains low, resulting in reduced numbers of insured patients
and the deferral of elective reconstructive procedures. Global
economic conditions, particularly in Europe, our second-
largest operating segment, remain uncertain. We believe that
European austerity measures implemented to address the
ongoing financial crisis contributed to decreased healthcare
utilization and increased pricing pressure for some of our
products. We cannot assure you that challenges in the global
economy will not continue to negatively impact procedure
volumes, average selling prices and reimbursement rates from
third-party payors, any of which could adversely affect our
results of operations. In addition, we have experienced delays
in the collection of receivables from hospitals in certain
countries that have national healthcare systems, including
certain regions in Spain, Italy, Greece and Portugal, which are
the countries most directly affected by the Euro zone crisis.
Repayment of these receivables is dependent upon the
financial stability of the economies of those countries.
Continuing high unemployment in the U.S., a worsening of the
European financial crisis or a failure to receive payment of all
or a significant portion of our European receivables could
adversely affect our results of operations.

If we do not introduce new products in a timely
manner, our products may become obsolete over time,
customers may not buy our products and our revenue
and profitability may decline.

In addition, new materials, product designs and surgical
techniques that we develop may not be accepted quickly, in
some or all markets, because of, among other factors:
• entrenched patterns of clinical practice;
• the need for regulatory clearance; and
• uncertainty with respect to third-party reimbursement.
Moreover, innovations generally require a substantial

investment in research and development before we can
determine their commercial viability and we may not have the
financial resources necessary to fund the production. In
addition, even if we are able to successfully develop
enhancements or new generations of our products, these
enhancements or new generations of products may not
produce revenue in excess of the costs of development and
they may be quickly rendered obsolete by changing customer
preferences or the introduction by our competitors of products
embodying new technologies or features.

We conduct a significant amount of our sales
activity outside of the U.S., which subjects us to
additional business risks and may cause our
profitability to decline due to increased costs.

We sell our products in more than 100 countries and

derived more than 45 percent of our net sales in 2011 from
outside the U.S. We intend to continue to pursue growth
opportunities in sales internationally, including in emerging
markets, which could expose us to additional risks associated
with international sales and operations. Our international
operations are, and will continue to be, subject to a number of
risks and potential costs, including:
• changes in foreign medical reimbursement policies and

Demand for our products may change, in certain cases, in

programs;

ways we may not anticipate because of:
• evolving customer needs;
• changing demographics;
• slowing industry growth rates;
• declines in the reconstructive implant market;
• the introduction of new products and technologies;
• evolving surgical philosophies; and
• evolving industry standards.

Without the timely introduction of new products and
enhancements, our products may become obsolete over time.
If that happens, our revenue and operating results would
suffer. The success of our new product offerings will depend
on several factors, including our ability to:
• properly identify and anticipate customer needs;
• commercialize new products in a timely manner;

• unexpected changes in foreign regulatory requirements;
• differing local product preferences and product

requirements;

• fluctuations in foreign currency exchange rates;
• diminished protection of intellectual property in some

countries outside of the U.S.;

• trade protection measures and import or export

requirements that may prevent us from shipping products to
a particular market and may increase our operating costs;

• foreign exchange controls that might prevent us from
repatriating cash earned in countries outside the U.S.;

• complex data privacy requirements and labor relations laws;
• extraterritorial effects of U.S. laws such as the Foreign

Corrupt Practices Act;

• effects of foreign anti-corruption laws, such as the UK

Bribery Act;

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• difficulty in staffing and managing foreign operations;
• labor force instability;
• potentially negative consequences from changes in tax laws;

and

• political and economic instability.

Violations of foreign laws or regulations could result in

fines, criminal sanctions against us, our officers or our
employees, prohibitions on the conduct of our business and
damage to our reputation.

We are subject to risks arising from currency

exchange rate fluctuations, which can increase our
costs, cause our profitability to decline and expose us
to counterparty risks.

A substantial portion of our foreign revenues is generated

in Europe and Japan. The U.S. dollar value of our foreign-
generated revenues varies with currency exchange rate
fluctuations. Significant increases in the value of the U.S. dollar
relative to the Euro or the Japanese Yen, as well as other
currencies, could have a material adverse effect on our results
of operations. Although we address currency risk management
through regular operating and financing activities, and, on a
limited basis, through the use of derivative financial
instruments, those actions may not prove to be fully effective.
We may fail to adequately protect our proprietary
technology and other intellectual property, which would
allow competitors or others to take advantage of our
research and development efforts.

Our long-term success largely depends on our ability to

market technologically competitive products. If we fail to
obtain or maintain adequate intellectual property protection,
we may not be able to prevent third parties from using our
proprietary technologies. Also, our currently pending or future
patent applications may not result in issued patents, and
issued patents are subject to claims concerning priority, scope
and other issues.

The U.S. Patent and Trademark Office and the courts have

not consistently treated the breadth of claims allowed or
interpreted in orthopaedic reconstructive implant and
biotechnology patents. Future changes in, or unexpected
interpretations of, the patent laws may adversely affect our
ability to enforce our patent position.

In addition, intellectual property rights may be unavailable

or of limited effect in some foreign countries. If we do not
obtain sufficient international protection for our intellectual
property, our competitiveness in international markets could
be impaired, which could limit our growth and revenue.

We also attempt to protect our trade secrets, proprietary

know-how and continuing technological innovation with
security measures, including the use of confidentiality
agreements with our employees, consultants and collaborators.
These measures may prove to be ineffective and any remedies
available to us may be insufficient to compensate our damages.

Pending and future intellectual property litigation

and infringement claims could cause us to incur
significant expenses or prevent us from selling our
products.

A successful claim of patent or other intellectual property
infringement against us could adversely affect our growth and

profitability, in some cases materially. From time to time, we
receive notices from third parties of potential infringement and
receive claims of potential infringement. We may be unaware
of intellectual property rights of others that may cover some of
our technology. If someone claims that our products infringed
their intellectual property rights, any resulting litigation could
be costly and time consuming and would divert the attention of
management and key personnel from other business issues. If
we were to lose such litigation involving material intellectual
property rights, such loss could result in significant damage
awards and injunctions that could prevent our manufacture
and sale of affected products or require us to pay significant
royalties in order to continue to manufacture or sell affected
products.

Pending and future product liability claims and
litigation could adversely impact our financial condition
and results of operations and impair our reputation.

Our business exposes us to potential product liability risks

that are inherent in the design, manufacture and marketing of
medical devices. In the ordinary course of business, we are the
subject of product liability lawsuits alleging that component
failures, manufacturing flaws, design defects or inadequate
disclosure of product-related risks or product-related information
resulted in an unsafe condition or injury to patients. As
previously reported, we temporarily suspended the marketing
and distribution of our Durom® Acetabular Component (Durom
Cup) in the U.S. in July 2008. Subsequently, a number of product
liability lawsuits and other claims have been asserted against us.
We have settled some of these claims and the others are still
pending. Additional claims may be asserted in the future. We are
also currently defending a number of other product liability
lawsuits and claims related to various other products. Any
product liability claim brought against us, with or without merit,
can be costly to defend. Product liability lawsuits and claims,
safety alerts or product recalls, regardless of their ultimate
outcome, could have a material adverse effect on our business
and reputation and on our ability to attract and retain customers.

Although we maintain third-party product liability

insurance coverage, we have substantial self-insured retention
amounts that we must pay in full before obtaining any
insurance proceeds to satisfy a judgment or settlement.
Furthermore, even if any product liability loss is covered by
our insurance, it is possible that claims against us may exceed
the coverage limits of our insurance policies and we would
have to pay the amount of any settlement or judgment that is
in excess of our policy limits. Product liability claims in excess
of applicable insurance could have a material adverse effect on
our business, financial condition and results of operations.

We are involved in legal proceedings that may

result in adverse outcomes.

In addition to intellectual property and product liability
claims and lawsuits, we are involved in various commercial and
securities litigation and claims, government investigations and
other legal proceedings that arise from time to time in the
ordinary course of our business. Although we believe we have
substantial defenses in these matters, litigation and other
claims are subject to inherent uncertainties and management’s

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view of these matters may change in the future. Given the
uncertain nature of legal proceedings generally, we are not
able in all cases to estimate the amount or range of loss that
could result from an unfavorable outcome. We could in the
future incur judgments or enter into settlements of claims that
could have a material adverse effect on our results of
operations in any particular period.

We depend on a limited number of suppliers for

some key raw materials and outsourced activities.

We use a number of suppliers for raw materials that we

need to manufacture our products and to outsource some key
manufacturing activities. These suppliers must provide the
materials and perform the activities to our standards for us to
meet our quality and regulatory requirements. Some key raw
materials and outsourced activities can only be obtained from a
single source or a limited number of sources. A prolonged
disruption or other inability to obtain these materials or
outsource key manufacturing activities could materially and
adversely affect our ability to satisfy demand for our products.
If we fail to retain the independent agents and
distributors upon whom we rely heavily to market our
products, customers may not buy our products and our
revenue and profitability may decline.

Our marketing success in the U.S. and abroad depends

significantly upon our agents’ and distributors’ sales and
service expertise in the marketplace. Many of these agents
have developed professional relationships with existing and
potential customers because of the agents’ detailed knowledge
of products and instruments. A loss of a significant number of
these agents could have a material adverse effect on our
business and results of operations.

We may make additional acquisitions or enter into

strategic alliances that could increase our costs or
liabilities or be disruptive.

We intend to continue to look for additional strategic
acquisitions of other businesses that are complementary to our
businesses and other companies with whom we could form
strategic alliances or enter into other arrangements to develop
or exploit intellectual property rights. These activities involve
risks, including the following:
• we may need to divert more management resources to

integration than we planned, which may adversely affect our
ability to pursue other more profitable activities;

• the difficulties of integrating acquired businesses may be

increased if we need to integrate geographically separated
organizations, personnel with disparate business
backgrounds and companies with different corporate
cultures;

• we may not recognize expected cost savings or the

anticipated benefits of acquisitions or strategic alliances;
• our acquisition candidates or strategic partners may have

unexpected liabilities or prove unable to meet their
obligations to us or the joint venture; and

• the priorities of our strategic partners may prove

incompatible with ours.

Future material impairments in the carrying value

of our intangible assets, including goodwill, would
negatively affect our operating results.

Our assets include intangible assets, primarily goodwill.

The goodwill results from our acquisition activity and
represents the excess of the consideration transferred over the
fair value of the net assets acquired. We assess at least
annually whether events or changes in circumstances indicate
that the carrying value of our intangible assets may not be
recoverable. If the operating performance at one or more of
our business units falls significantly below current levels, if
competing or alternative technologies emerge, or if market
conditions or future cash flow estimates for one or more of our
businesses decline, we could be required, under current U.S.
accounting rules, to record a non-cash charge to operating
earnings for the amount of the impairment. Any write-off of a
material portion of our unamortized intangible assets would
negatively affect our results of operations.

We may have additional tax liabilities.
We are subject to income taxes in the U.S. and many

foreign jurisdictions. Significant judgment is required in
determining our worldwide provision for income taxes. In the
ordinary course of our business, there are many transactions
and calculations where the ultimate tax determination is
uncertain. We regularly are under audit by tax authorities.
Although we believe our tax estimates are reasonable, the final
determination of tax audits and any related litigation could be
materially different from our historical income tax provisions
and accruals. The results of an audit or litigation could have a
material effect on our financial statements in the period or
periods for which that determination is made.

We earn a significant amount of our operating income
from outside the U.S., and any repatriation of funds currently
held in foreign jurisdictions may result in higher effective tax
rates. In addition, there have been proposals to change U.S. tax
laws that would significantly impact how U.S. multinational
corporations are taxed on foreign earnings. Although we
cannot predict whether or in what form this proposed
legislation will pass, if enacted it could have a material adverse
impact on our tax expense and cash flow.

In May 2011, the IRS concluded its examinations of our
U.S. federal returns for years 2005 through 2007 and issued
income tax assessments reallocating profits between certain of
our U.S. and foreign subsidiaries. We believe that we have
followed applicable U.S. tax laws and will vigorously defend
our income tax positions. However, the ultimate resolution of
this matter is uncertain and could have a material impact on
our income tax expense, results of operations and cash flows
for future periods.

U.S. healthcare reform legislation includes

provisions that may adversely affect our business and
results of operations.

As the 2010 U.S. healthcare law continues to be phased in,

we believe the law will have an impact on various aspects of
our business operations. The 2013 imposition of the 2.3
percent medical device excise tax is forcing us to identify ways
to reduce spending in other areas to offset the increased
expense that we will incur because of the tax. We do not

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

expect to be able to pass along the cost of the tax to hospitals,
which continue to face cuts to their Medicare reimbursement
per the healthcare law. Nor do we expect to be able to offset
the cost of the tax through higher sales volumes resulting from
the expansion of health insurance coverage because of the
demographics of the current uninsured population. The level
of difficulty in terms of complying with the medical device tax
will depend on the regulations put forth by the U.S.
Department of Treasury. In addition, the law’s Medicare
payment reforms, such as accountable care organizations and
bundled payments, will provide additional incentives for
healthcare providers to reduce spending on our medical device
products and reduce utilization of hospital procedures that use
our products. Accordingly, while it is still too early to fully
understand and predict the ultimate impact of the law on our
business, ongoing implementation of this legislation could have
a material adverse effect on our results of operations and cash
flows.

We are subject to healthcare fraud and abuse

regulations on an ongoing basis that could require us to
change our business practices and restrict our
operations in the future.

Our industry is subject to various federal and state laws
pertaining to healthcare fraud and abuse, including false claims
laws, the federal Anti-Kickback Statute, similar state laws and
physician self-referral laws. Violations of these laws are
punishable by criminal and/or civil sanctions, including, in
some instances, fines, imprisonment and, within the U.S.,
exclusion from participation in government healthcare
programs, including Medicare, Medicaid and Veterans
Administration (VA) health programs. The interpretation and
enforcement of these laws and regulations are uncertain and
subject to rapid change.

If third-party payors decline to reimburse our
customers for our products or reduce reimbursement
levels, the demand for our products may decline and our
ability to sell our products profitably may be harmed.
We sell our products and services to hospitals, doctors,
dentists and other healthcare providers, all of which receive
reimbursement for the healthcare services provided to their
patients from third-party payors, such as domestic and
international government programs, private insurance plans
and managed care programs. These third-party payors may
deny reimbursement if they determine that a device used in a
procedure was not in accordance with cost-effective treatment
methods, as determined by the third-party payor, or was used
for an unapproved indication. Third-party payors may also
decline to reimburse for experimental procedures and devices.
If our products are not considered cost-effective by third-party
payors, our customers may not be reimbursed for our products.
In addition, third-party payors are increasingly attempting

to contain healthcare costs by limiting both coverage and the
level of reimbursement for medical products and services. If
third-party payors reduce reimbursement levels to hospitals
and other healthcare providers for our products, demand for
our products may decline, or we may experience increased
pressure to reduce the prices of our products, which could have
a material adverse effect on our sales and results of operations.

We have also experienced downward pressure on product

pricing and other effects of healthcare reform in our
international markets. If key participants in government
healthcare systems reduce the reimbursement levels for our
products, our sales and results of operations may be adversely
affected.

The ongoing cost-containment efforts of healthcare

purchasing organizations may have a material adverse
effect on our results of operations.

Many customers for our products have formed group
purchasing organizations in an effort to contain costs. Group
purchasing organizations negotiate pricing arrangements with
medical supply manufacturers and distributors, and these
negotiated prices are made available to a group purchasing
organization’s affiliated hospitals and other members. If we are
not one of the providers selected by a group purchasing
organization, affiliated hospitals and other members may be
less likely to purchase our products, and, if the group
purchasing organization has negotiated a strict compliance
contract for another manufacturer’s products, we may be
precluded from making sales to members of the group
purchasing organization for the duration of the contractual
arrangement. Our failure to respond to the cost-containment
efforts of group purchasing organizations may cause us to lose
market share to our competitors and could have a material
adverse effect on our sales and results of operations.

Our success depends on our ability to effectively
develop and market our products against those of our
competitors.

We operate in a highly competitive environment. Our
present or future products could be rendered obsolete or
uneconomical by technological advances by one or more of our
present or future competitors or by other therapies, including
biological therapies. To remain competitive, we must continue
to develop and acquire new products and technologies.
Competition is primarily on the basis of:
• technology;
• innovation;
• quality;
• reputation; and
• customer service.

In markets outside of the U.S., other factors influence

competition as well, including:
• local distribution systems;
• complex regulatory environments; and
• differing medical philosophies and product preferences.

Our competitors may:

• have greater financial, marketing and other resources than

us;

• respond more quickly to new or emerging technologies;
• undertake more extensive marketing campaigns;
• adopt more aggressive pricing policies; or
• be more successful in attracting potential customers,

employees and strategic partners.

Any of these factors, alone or in combination, could cause

us to have difficulty maintaining or increasing sales of our
products.

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Moreover, the FDA recently issued several guidance
documents that may impact the amount of data required for
510(k) clearance of new products. The guidance documents
may also require additional submissions for minor changes to
products currently on the market, where none were required
in the past. Additionally, reauthorization of the Medical Device
User Fee Act, to be completed by September 30, 2012, may
lead to additional post-market requirements for certain 510(k)
products. We expect these 510(k)-related changes could delay
new products from reaching the market in the U.S. and
increase the costs of introducing new products and features,
which could adversely affect our business.

Our products and operations are also often subject to the
rules of industrial standards bodies, such as the International
Standards Organization. If we fail to adequately address any of
these regulations, our business could be harmed.

ITEM 1B. Unresolved Staff Comments

Not Applicable.

We and our customers are subject to various

governmental regulations relating to the
manufacturing, labeling and marketing of our products,
and we may incur significant expenses to comply with
these regulations and develop products compatible with
these regulations.

The medical devices we design, develop, manufacture and

market are subject to rigorous regulation by the FDA and
numerous other federal, state and foreign governmental
authorities. The process of obtaining regulatory approvals to
market a medical device can be costly and time consuming and
approvals might not be granted for future products on a timely
basis, if at all. Delays in receipt of, or failure to obtain,
approvals for future products could result in delayed
realization of product revenues or in substantial additional
costs.

In addition, if we fail to comply with applicable material
regulatory requirements, including, for example, the Quality
System Regulation, recordkeeping regulations, labeling and
promotional requirements and adverse event reporting
regulations, we may be subject to a range of sanctions
including:
• warning letters;
• fines or civil penalties;
• injunctions;
• repairs, replacements or refunds;
• recalls or seizures of products;
• total or partial suspension of production;
• the FDA’s refusal to grant future premarket clearances or

approvals;

• withdrawals or suspensions of current product applications;

and

• criminal prosecution.

Z I M M E R H O L D I N G S , I N C .

ITEM 2. Properties

We have the following properties:

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Location

Warsaw, Indiana

Warsaw, Indiana
Warsaw, Indiana
Carlsbad, California
Minneapolis, Minnesota
Statesville, North Carolina
Dover, Ohio

Parsippany, New Jersey

Memphis, Tennessee
Austin, Texas
Sydney, Australia
Vienna, Austria
Wemmel, Belgium
Mississauga, Canada
Beijing, China
Xianning, China
Shanghai, China
Etupes, France
Eschbach, Germany
Freiburg, Germany
Shannon, Ireland
Milan, Italy
Gotemba, Japan
Tokyo, Japan
Seoul, Korea
Utrecht, Netherlands
Ponce, Puerto Rico
Singapore
Barcelona, Spain
Winterthur, Switzerland
Münsingen, Switzerland
Geneva, Switzerland
Swindon, United Kingdom

Use

Owned /Leased

Square Feet

Research & Development, Manufacturing, Warehousing, Marketing &
Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Headquarters and The Zimmer Institute . . . . . . . . . . . . . . . . . .
Offices, Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices, Research & Development & Manufacturing . . . . . . . . . . . . . . . . .
Offices & Research & Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research & Development, Manufacturing & . . . . . . . . . . . . . . . . . . . . . . . .
Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office, Research & Development, Manufacturing, Warehousing & The
Zimmer Institute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices, Administration, Research & Development
. . . . . . . . . . . . . . . . . .
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices & Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices, Research & Development & Manufacturing . . . . . . . . . . . . . . . . .
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices, Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices & Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices, Service Center & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices, Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices, Research & Development & Manufacturing . . . . . . . . . . . . . . . . .
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices, Research & Development & Manufacturing . . . . . . . . . . . . . . . . .
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Owned
Owned
Leased
Leased
Owned
Owned
Owned
Leased

Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Owned
Leased
Owned
Leased
Owned
Leased
Leased
Leased
Owned
Leased
Leased
Leased
Owned
Leased
Leased

1,400,000
117,000
90,000
118,000
51,000
156,000
140,000
61,000

115,000
30,000
97,000
36,000
18,000
15,000
52,000
80,000
53,000
18,000
90,000
94,000
51,000
125,000
47,000
87,000
24,000
22,000
33,000
213,000
19,000
16,000
374,000
76,000
15,000
70,000

We believe the current facilities, including manufacturing, warehousing, research and development and office space provide

sufficient capacity to meet ongoing demands.

In addition to the above, we maintain more than 100 other offices and warehouse facilities in more than 25 countries around
the world, including the U.S., Japan, Australia, France, Russia, India, Germany, Italy, Switzerland and China. We believe that all of
the facilities and equipment are in good condition, well maintained and able to operate at present levels.

ITEM 3. Legal Proceedings

Information pertaining to legal proceedings in which we are involved can be found in Note 19 to our consolidated financial

statements (see Part II, Item 8 of this report).

ITEM 4.

[Removed and Reserved]

Not Applicable.

Z I M M E R H O L D I N G S , I N C .

PART II

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

ITEM 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of

Equity Securities

Our common stock is traded on the New York Stock Exchange and the SIX Swiss Exchange under the symbol “ZMH.” The high
and low sales prices for our common stock on the New York Stock Exchange for the calendar quarters of fiscal years 2011 and 2010
are set forth as follows:

Quarterly High-low Share Prices

Year Ended December 31, 2011:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

Year Ended December 31, 2010:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

High

Low

$65.22
$69.93
$66.03
$55.43

$52.15
$59.49
$49.92
$47.00

$64.77
$62.50
$58.08
$54.99

$54.72
$52.26
$46.27
$47.09

In December 2011, our Board of Directors declared a dividend of $0.18 per share to be paid in April 2012 to stockholders of

record as of the close of business on March 30, 2012. Prior to this declaration, we had not paid dividends on our common stock
since becoming a public company in 2001. We expect to continue paying cash dividends on a quarterly basis; however, future
dividends are subject to approval of the Board of Directors and may be adjusted as business needs or market conditions change.

The number of holders of our common stock on February 10, 2012 was approximately 271,400. On February 10, 2012, the

closing price of the common stock, as reported on the New York Stock Exchange, was $60.84 per share.

The information required by this Item concerning equity compensation plans is incorporated by reference to Item 12 of this

report.

The following table summarizes repurchases of common stock settled during the three months ended December 31, 2011:

October 2011
November 2011
December 2011

Total

Total Number of
Shares Purchased

Average Price
Paid per Share

1,274,600
900,000
553,000

2,727,600

$55.53
51.17
47.90

$52.55

Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (1)

Approximate Dollar Value of
Shares that May Yet Be
Purchased Under Plans or
Programs (1)

76,483,850
77,383,850
77,936,850

77,936,850

$ 228,665,592
182,610,442
1,500,000,000

$1,500,000,000

(1)In December 2011, we announced a new program authorizing purchases of up to $1.5 billion of shares through December 31, 2014 and announced that we

were no longer authorized to repurchase shares under prior programs.

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

ITEM 6. Selected Financial Data

The financial information for each of the past five years ended December 31 is set forth below (in millions, except per share

amounts):

Summary of Operations

Net sales
Net earnings of Zimmer Holdings, Inc.
Earnings per common share

Basic
Diluted

Dividends declared per share of common stock
Average common shares outstanding

Basic
Diluted

Balance Sheet Data
Total assets
Long-term debt
Other long-term obligations
Stockholders’ equity

2011

2010

2009

2008

2007

$4,451.8
760.8

$4,220.2
596.9

$4,095.4
717.4

$4,121.1
848.6

$3,897.5
773.2

4.05
4.03
0.18

2.98
2.97
–

3.34
3.32
–

3.73
3.72
–

3.28
3.26
–

187.6
188.7

200.0
201.1

215.0
215.8

227.3
228.3

235.5
237.5

$8,515.3
1,576.0
557.4
5,514.8

$7,999.9
1,142.1
384.0
5,771.3

$7,785.5
1,127.6
328.5
5,638.7

$7,239.0
460.1
353.9
5,653.9

$6,633.7
104.3
328.4
5,452.4

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

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

The following discussion and analysis should be read in
conjunction with the consolidated financial statements and the
corresponding notes included elsewhere in this Form 10-K.
Certain percentages presented in this discussion and analysis
are calculated from the underlying whole-dollar amounts and
therefore may not recalculate from the rounded numbers used
for disclosure purposes. Certain amounts in the 2010 and 2009
consolidated financial statements have been reclassified to
conform to the 2011 presentation.

OVERVIEW

We believe the following developments or trends are
important in understanding our financial condition, results of
operations and cash flows for the year ended December 31,
2011.

Demand (Volume and Mix) Trends

Increased volume and changes in the mix of product sales
contributed 4 percentage points of 2011 sales growth, which is
1 percentage point above the rate of growth from 2010
compared to 2009.

Volume and mix trends continued to be challenged by the
global economy. We believe reconstructive procedure volumes
in 2011 continued to be lower than historical utilization rates
and lower than demographic trends would indicate. This effect
was particularly pronounced in our Americas operating
segment, where the impact of ongoing high unemployment
and low consumer confidence contributed to softness.

Long-term indicators still point toward sustained growth

driven by an aging global population, obesity, more active
lifestyles, growth in emerging markets, new material
technologies, advances in surgical techniques and proven
clinical benefits of joint replacement procedures. In addition,
the ongoing shift in demand to premium products, such as
Prolong Highly Crosslinked Polyethylene, Trabecular Metal
Technology products, hip stems with Kinectiv Technology,
high-flex knees, porous hip stems and the introduction of
patient specific devices, is expected to continue to positively
affect sales growth.

Pricing Trends

Global average selling prices declined by 1 percent in
2011 compared to 2010. Selling prices in the Americas, Europe
and Asia Pacific declined by 2 percent, were flat, and declined
by 1 percent, respectively, during 2011. We continue to see
pricing pressure from governmental healthcare cost
containment efforts and from local hospitals and health
systems. Due to these pressures and a biannual price
adjustment in Japan in April 2012, we expect selling prices will
have approximately a negative 2 percent effect on sales on a
global basis in 2012.

Foreign Currency Exchange Rates

For 2011, foreign currency exchange rates resulted in a 2

percent increase in sales. If foreign currency exchange rates
remain consistent with 2011 year end rates, we estimate that a
stronger dollar versus foreign currency exchange rates will
have a negative effect in 2012 of approximately 1 percent on
sales. We address currency risk through regular operating and
financing activities and through the use of forward contracts
and options solely to manage foreign currency volatility and
risk. Changes to foreign currency exchange rates affect sales
growth, but due to gains/losses on hedge contracts and
options, which are recorded in cost of products sold, the effect
on net earnings in the near term is expected to be minimal.

Global Economic Conditions

We believe adverse conditions in the global economy
continue to negatively affect elective hospital procedures.
However, we continue to believe that procedure deferrals will
diminish slowly over time, and that growth rates will trend
higher as they track more in line with historical usage rates
among the aging population. We believe these demographic
trends will ultimately foster long-term sustained growth even
if in the short-term the timing of these elective procedures
continues to be adversely affected.

2012 Outlook

We estimate our sales will grow between 1 and 3 percent
in 2012. Such sales growth assumes knee and hip procedures
will grow in low single digits with modest global economic
growth and relatively stable employment. As discussed
previously, we expect pricing to have a negative effect on sales
growth of 2 percent, and foreign currency exchange rates to
have a negative effect on sales growth of approximately 1
percent based upon December 31, 2011 rates.

Assuming currency rates remain at December 31, 2011
levels, we expect our gross margin to be between 74 and 75
percent of sales in 2012. This takes into account the cost
pressures we have experienced from lower than planned
manufacturing volumes, as well as anticipated losses from
foreign currency hedges. However, if currency rates remain at
December 31, 2011 levels the hedge losses we recognize in
2012 will be less than the hedge losses recognized in 2011. We
expect to continue making investments in research and
development (R&D) in the range of 5 to 6 percent of sales.
Selling, general and administrative expenses (SG&A) as a
percent of sales is expected to be between 39.5 and 40.5
percent as we realize operational efficiencies from global
restructuring and transformation initiatives and further
leverage revenue growth.

We expect to incur approximately $100 million of
expenses in 2012 related to certain restructuring and
transformation initiatives. The programs are targeted at
streamlining the organization and business processes. They

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

are expected to be mostly completed in 2012. We also expect
to incur approximately $10 million for certain acquisition and
integration costs connected with recent acquisitions. We
expect to recognize the majority of these $110 million of
expenses in “Special items” on our statement of net earnings.
The gross margin and SG&A percentages discussed above do
not include these expenses.

RESULTS OF OPERATIONS

Net Sales by Reportable Segment

Assuming variable rates remain at December 31, 2011

levels, we expect interest income and expense, net, to be
approximately $65 million in 2012, which is higher than 2011
primarily due to a $550 million offering of senior notes
completed in November 2011.

The following tables present net sales by reportable segment and the components of the percentage changes (dollars in

millions):

Americas

Europe

Asia Pacific

Total

Americas

Europe

Asia Pacific

Total

Year Ended December 31,

2011

2010

% Inc/(Dec)

Volume/
Mix

Price

Foreign
Exchange

$2,440.8

$2,431.6

–%

2% (2)%

–%

1,214.5

1,099.5

796.5

689.1

$4,451.8

$4,220.2

–

(1)

Year Ended December 31,

2010

2009

% Inc/(Dec)

Volume/
Mix

Price

Foreign
Exchange

$2,431.6

$2,372.4

3% (1)%

–%

1,099.5

1,119.2

689.1

603.8

$4,220.2

$4,095.4

(2)

–

(2)

(1)

(3)

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

sales growth.

Net Sales by Product Category

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

Reconstructive

Knees
Hips
Extremities

Total

Dental
Trauma
Spine
Surgical and other

Total

Year Ended December 31,

2011

2010

% Inc (Dec)

Volume/
Mix

Price

Foreign
Exchange

$1,825.1
1,355.6
163.4

$1,789.9
1,262.3
150.1

3,344.1

3,202.3

248.1
285.8
225.0
348.8

219.0
245.5
234.4
319.0

$4,451.8

$4,220.2

2%
7
9

13
16
(4)
9

1% (2)% 3%
(2)
6
(1)
8

3
2

5
13
(4)
6

(2)

7
–
(2)
–

(1)

1
3
2
3

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Reconstructive

Knees
Hips
Extremities

Total

Dental
Trauma
Spine
Surgical and other

Total

Year Ended December 31,

2010

2009

% Inc (Dec)

Volume/
Mix

Price

Foreign
Exchange

$1,789.9
1,262.3
150.1

$1,756.3
1,228.5
135.6

3,202.3

3,120.4

219.0
245.5
234.4
319.0

204.7
234.8
253.6
281.9

$4,220.2

$4,095.4

2%
3
11

7
5
(8)
13

3% (2)%
4
10

(2)
–

4
1
(6)
11

(2)

4
2
(1)
–

(1)

1%
1
1

(1)
2
(1)
2

The following table presents net sales by product category by region (dollars in millions):

2011

2010

2009

Year Ended December 31,

2011 vs. 2010
% Inc (Dec)

2010 vs. 2009
% Inc (Dec)

$1,067.5
462.6
295.0

$1,110.5
418.7
260.7

$1,098.7
428.1
229.5

(4)%
10
13

600.7
470.5
284.4

125.0
27.5
10.9

589.7
433.2
239.4

115.9
24.4
9.8

565.9
448.6
214.0

103.7
23.9
8.0

3,344.1

3,202.3

3,120.4

134.7
85.3
28.1

145.5
63.5
76.8

150.9
53.5
20.6

216.5
51.6
80.7

113.9
80.0
25.1

130.1
50.2
65.2

166.5
51.5
16.4

205.0
41.5
72.5

102.8
78.2
23.7

125.9
52.7
56.2

192.6
46.9
14.1

182.8
40.8
58.3

$4,451.8

$4,220.2

$4,095.4

2
9
19

8
13
12

18
7
12

12
26
18

(9)
4
25

6
24
11

1%
(2)
14

4
(3)
12

12
2
22

11
2
6

3
(5)
16

(14)
10
17

12
2
24

Reconstructive

Knees

Americas
Europe
Asia Pacific

Hips

Americas
Europe
Asia Pacific

Extremities
Americas
Europe
Asia Pacific

Total

Dental

Americas
Europe
Asia Pacific

Trauma

Americas
Europe
Asia Pacific

Spine

Americas
Europe
Asia Pacific
Surgical and other
Americas
Europe
Asia Pacific

Total

Z I M M E R H O L D I N G S , I N C .

Knees

Knee sales experienced 2 percent growth in each of the
past two years, including double digit growth in Europe and
Asia Pacific in 2011 offset by a decline in sales in the Americas.
We estimate that industry procedure volumes were flat to
slightly positive on a global basis in 2011, while pricing was
negative. We believe procedure volumes will continue to be
pressured from a cyclical downturn related to uncertain global
economic conditions.

The NexGen Complete Knee Solution product line,
including Gender Solutions Knee Femoral Implants, the
NexGen LPS-Flex Knee and the NexGen CR-Flex Knee,
together with the Gender Solutions Natural-Knee Flex
System, led knee sales. In addition, sales of the Gender
Solutions Patello Femoral Joint and Zimmer Patient Specific
Instruments exhibited growth.

In Europe, changes in foreign currency exchange rates
affected knee sales in the years ended December 31, 2011 and
2010 by positive 4 percent and negative 2 percent,
respectively. In Asia Pacific, changes in foreign currency
exchange rates positively affected knee sales in the years
ended December 31, 2011 and 2010 by 9 percent and 10
percent, respectively.

Hips

Hip sales grew by 7 percent in 2011 driven by new
product introductions, such as our Continuum Acetabular
System and our Zimmer M/L Taper Stem with Kinectiv
Technology. Additionally, negative publicity in the marketplace
over the use of hip systems that use metal-on-metal technology
may have contributed to an increase in sales of hip systems
with alternative bearing surfaces. Metal-on-metal technology
represents only a small portion of our hip sales. Therefore, our
market share position may have benefited from customers
using our hip systems instead of a competitor’s metal-on-metal
system.

The Zimmer M/L Taper Stem, the Zimmer M/L Taper
Stem with Kinectiv Technology, the CLS Spotorno Stem from
the CLS Hip System and the Alloclassic Zweymüller Hip Stem
led hip stem sales. In addition, sales of the Continuum
Acetabular System, Trilogy IT Acetabular System and Allofit
IT Alloclassic Acetabular System and the Trabecular Metal
Revision Shell and Augment Cups were strong when compared
to the prior year periods, as were sales of BIOLOX delta Heads
and Fitmore Hip Stems.

In Europe, changes in foreign currency exchange rates

affected hip sales in the years ended December 31, 2011 and
2010 by positive 6 percent and negative 2 percent,
respectively. In Asia Pacific, our December 2010 acquisition of
Beijing Montagne Medical Device Co., Ltd. made a contribution
to that operating segment’s sales growth in 2011. Additionally
in Asia Pacific, changes in foreign currency exchange rates
positively affected hip sales in the years ended December 31,
2011 and 2010 by 10 percent and 8 percent, respectively.

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Extremities

Extremities delivered solid sales growth the past two
years, led by the Zimmer Trabecular Metal Reverse Shoulder
System and the Bigliani/Flatow Complete Shoulder Solution.
Trabecular Metal Technology is playing a critical role in
addressing previously unmet clinical needs in the expanding
extremities market. We continue to see competitive pressure
in this category, but expect that new product and instrument
introductions will help to accelerate growth.

Dental

Dental experienced sales growth of 13 percent in 2011

compared to 7 percent growth in 2010, including a 7 percent
increase in 2011 due to pricing. A significant portion of this
pricing increase was due to a change in the agreement that
started in the fourth quarter of 2010 by which we distribute
certain regenerative products. Under the prior agreement, we
did not take title to the products and only received a
commission from the end-user sale. Under the new agreement,
we take title to the product and recognize the final end-user
sale along with the cost of products sold and any other selling-
related costs. Sales were led by the Tapered Screw-Vent
Implant System.

Trauma

Trauma sales increased by 16 percent in 2011 after
experiencing 5 percent sales growth in 2010. In 2011, we
continued the launch of the Zimmer Natural Nail System,
which contributed significantly to our trauma sales. In addition
to the Zimmer Natural Nail System, Zimmer Periarticular
Locking Plates and the Zimmer NCB Plating System led
trauma sales, while sales of cable products also made a strong
contribution.

Spine

We experienced mid to high single digit sales declines in

Spine each of the past two years. The sales declines have come
from our Americas segment, as both Europe and Asia Pacific
have experienced sales growth in each of the past two years. In
the Americas segment, we have experienced operational
challenges with our sales force, a difficult reimbursement
landscape and a significant decline in sales of our Dynesys
Dynamic Stabilization System. Overall, solid sales of the
PathFinder and Sequoia Pedicle Screw Systems, our
Universal Clamp System and Trabecular Metal Technology
products partly offset a decline in sales of the Dynesys
System.

Surgical and other

Surgical and other delivered solid sales growth the past

two years. Surgical and other sales were led by PALACOS
Bone Cement and tourniquet products. Our wound
debridement products also made a strong contribution to sales
results, as did our December 2010 acquisition of Sodem
Diffusion S.A.

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

The following table presents estimated* 2011 global
market size and market share information (dollars in billions):

Reconstructive

Knees
Hips
Extremities

Total

Dental
Trauma
Spine***

Global
Market
Size

$ 7.2
6.3
1.4

$14.9

$ 3.3
$ 5.5
$ 9.3

Global Market
% Growth**

Zimmer
Market
Share

Zimmer
Market
Position

–%
2
10

4
5
1

26%
21
12

8
5
2

1
2
3

5
4
7

* Estimates are not precise and are based on competitor annual filings, Wall
Street equity research and Company estimates
** Excludes the effect of changes in foreign currency exchange rates on
sales growth
*** Spine includes related orthobiologics

Expenses as a Percent of Net Sales

Year Ended December 31,

2011

2010

2009

2011 vs. 2010
Inc (Dec)

2010 vs. 2009
Inc (Dec)

Cost of products sold
Research and

development
Selling, general and
administrative

Certain claims
Goodwill impairment
Net curtailment and

settlement
Special items
Operating margin

25.2% 24.0% 24.2%

5.4

5.2

5.0

41.2
3.5
–

–
1.7
23.0

41.6
1.8
4.8

–
0.8
21.7

42.2
0.9
1.8

(0.8)
1.8
24.9

1.2

0.2

(0.4)
1.7
(4.8)

–
0.9
1.3

(0.2)

0.2

(0.6)
0.9
3.0

0.8
(1.0)
(3.2)

Cost of Products Sold

Gross margin declined in 2011 after minimal change from
2009 to 2010. The most significant impact on gross margin in
2011 was from our foreign currency hedging program. Under
the program, for derivatives which qualify as hedges of future
cash flows, the effective portion of changes in fair value is
temporarily recorded in other comprehensive income and then
recognized in cost of products sold when the hedged item
affects earnings. Due to the weakening of the U.S. Dollar in
2011, we recognized foreign currency hedge losses in costs of
products sold versus hedge gains in 2010.

Also in 2011, lower selling prices, higher average costs per
unit sold, and higher inventory step-up charges all contributed
to lower gross margins. In 2010, lower average selling prices,
higher average costs per unit sold and the impact of our
hedging program also negatively affected gross margin, but
were offset by lower excess and obsolescence charges from
improved inventory management and certain product-specific
matters that were experienced in 2009 which did not recur in
2010.

The following table reconciles the gross margin changes

for 2011 and 2010:

Year Ended December 31,

Prior year gross margin
Lower average selling prices
Increased average cost per unit
Excess and obsolete inventory
Foreign currency exchange impact, net
Inventory step-up
Other

Current year gross margin

Operating Expenses

2011

2010

76.0% 75.8%
(0.2) (0.2)
(0.2) (0.6)
0.9
(1.0) (0.4)
0.3
(0.2)
0.2
0.4

–

74.8% 76.0%

R&D expense and R&D expense as a percent of sales
increased in each of the last two years. These increases are in
line with our strategy to invest in new product development
activities across nearly all of our product categories, as well as
to increase spending on external research, clinical, regulatory
and quality initiatives. We continue to expect R&D spending to
be between 5 to 6 percent of sales in 2012.

SG&A has increased in dollars terms over the last three

years, but has decreased as a percent of sales.

In 2011, SG&A increased in dollar terms from 2010

primarily due to variable selling and distribution expenses from
higher sales, increased intangible asset amortization from
acquisitions completed in December 2010 and higher bad debt
expenses primarily from our Europe operating segment. These
were partially offset by lower product liability charges
recorded in SG&A related to the Durom Cup. For more
information regarding Durom Cup claims, see Note 19 to the
consolidated financial statements. SG&A as a percent of sales
decreased by 40 basis points from 2010 reflecting disciplined
spending and the effect of our transformation initiatives, which
has lowered expenses such as salaries, wages and benefits.
In 2010, SG&A increased in dollar terms from 2009

primarily due to variable selling and distribution expenses from
higher sales and from increased spending to fund medical
education programs. SG&A as a percent of sales in 2010
decreased by 60 basis points from 2009, reflecting disciplined
spending combined with a higher base of sales, and no expense
in 2010 related to corporate monitoring that ended after the
first quarter of 2009.

“Certain claims” expense is a provision for estimated

liabilities to Durom Cup patients undergoing revision
surgeries. Provisions of $75.0 million, $35.0 million and $69.0
million were originally recorded during 2010, 2009 and 2008,
respectively, with an additional $157.8 million recorded during
2011, bringing the total provision to $336.8 million for these
claims, excluding a subset of Durom Cup claims that were
recorded in SG&A. For more information regarding these
claims, see Note 19 to the consolidated financial statements.
In connection with our annual goodwill impairment tests
performed in the fourth quarters of 2010 and 2009, we noted
that the carrying values of the net assets of our U.S. Spine
reporting unit were in excess of the reporting unit’s estimated

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

fair value. As a result, we recorded goodwill impairment
charges of $204.0 million and $73.0 million during the years
ended December 31, 2010 and 2009, respectively. For more
information regarding goodwill impairment and the factors that
led to the impairment, see Note 9 to the consolidated financial
statements.

We recognized a net curtailment and settlement gain of
$32.1 million during 2009 related to amending our U.S. and
Puerto Rico postretirement benefit plans. For more
information regarding the net curtailment and settlement gain,
see Note 14 to the consolidated financial statements.
“Special items” expenses for the years ended

December 31, 2011, 2010 and 2009 were $75.2 million, $34.7
million, and $75.3 million, respectively. In 2011, we continued
reducing management layers and restructured certain areas,
resulting in $23.1 million of severance and termination-related
expenses. In 2011, we also incurred $26.0 million in consulting
and professional fees associated with acquisitions and our
business transformation initiatives. As a result of our
acquisitions and transformation initiatives, we also incurred
asset impairments, facility and employee relocation costs,
contract termination expenses and other costs.

“Special items” in 2010 included expenses related to
restructuring of our information technology infrastructure as
well as our management structure. This resulted in $7.7 million
of asset impairment charges and $6.7 million of employee
severance and termination-related expenses. In 2010, we also
incurred consulting and professional fees, facility and
employee relocation costs, contract termination expenses and
other various expenses resulting from acquisitions. “Special
items” also included the impairment of an available-for-sale
security that was acquired as part of a business acquisition and
certain litigation related matters.

“Special items” in 2009 included a workforce realignment,

which resulted in the elimination of positions in some areas
and increases in others to support long-term growth. As a
result of this realignment and headcount reductions from
acquisitions, we incurred approximately $19.0 million of
severance and termination-related expenses. Other “Special
items” in 2009 included approximately $9.4 million of expenses
related to contract termination costs, $23.4 million related to
certain litigation matters that were recognized during the
period and various costs related to acquisitions.

See Note 2 to the consolidated financial statements for

more information regarding “Special items” charges.

Interest Income, Interest Expense, Income Taxes and
Net Earnings

Interest expense decreased in 2011 after a significant
increase in 2010 from 2009. In November 2009 we issued $1.0
billion of senior unsecured notes which was the primary cause
of the increase in 2010. The decrease in interest expense in
2011 is the result of interest rate swap agreements we entered
into in late 2010 and early 2011 to convert a portion of our
fixed-rate debt into variable-rate debt. Interest income has
increased due to higher balances of cash and cash equivalents
and short-term and long-term investments and higher returns
on certain investments.

Our effective tax rate (ETR) on earnings before income
taxes for the years ended December 31, 2011, 2010 and 2009
was 22.4 percent, 30.6 percent and 28.1 percent, respectively.
The variation of our ETR has largely been affected by “Certain
claims” and goodwill impairment charges. “Certain claims”
expense favorably affects our ETR because it lowers the
income within our U.S. operations relative to our foreign
operations. Goodwill impairment charges negatively affect our
ETR because no tax benefit is recorded on such charges.
Additionally, in 2011 and 2010 our ETR was favorably
impacted by the resolution of certain tax contingencies. These
discrete items account for the majority of the variation in our
ETRs in the past three years.

As a result of the revenues and expenses discussed

previously, net earnings in 2011 increased 27 percent
compared to 2010. In 2010, net earnings decreased 17 percent
compared to 2009. Basic and diluted earnings per share
increased 36 percent in 2011 compared to 2010, while 2010
basic and diluted earnings per share decreased 11 percent
from 2009. The disproportionate change in earnings per share
as compared to net earnings is attributed to the effect of share
repurchases.

Non-GAAP operating performance measures

We use non-GAAP financial measures to evaluate our
operating performance that differ from financial measures
determined in accordance with U.S. generally accepted
accounting principles (GAAP). Our non-GAAP financial
measures exclude the impact of inventory step-up charges,
“Special items,” “Certain claims,” net curtailment and
settlement and goodwill impairment, and the taxes on those
items in addition to certain other tax adjustments. We use this
information internally and believe it is helpful to investors
because it allows more meaningful period-to-period
comparisons of our ongoing operating results, it helps to
perform trend analysis and to better identify operating trends
that may otherwise be masked or distorted by these types of
items, and it provides a higher degree of transparency of
certain items. Certain of these non-GAAP financial measures
are used as metrics for our incentive compensation programs.
Our non-GAAP adjusted net earnings used for internal
management purposes for the years ended December 31, 2011,
2010 and 2009 were $905.6 million, $871.6 million, and $849.9
million, respectively, and our non-GAAP adjusted diluted
earnings per share were $4.80, $4.33, and $3.94, respectively.

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

The following are reconciliations from our GAAP net
earnings and diluted earnings per share to our non-GAAP
adjusted net earnings and non-GAAP adjusted diluted earnings
per share used for internal management purposes.

Year Ended December 31,

2011

2010

2009

Net Earnings of Zimmer Holdings, Inc.
Inventory step-up
Special items
Certain claims
Net curtailment and settlement
Goodwill impairment
Taxes on inventory step-up, special items,
certain claims and net curtailment and
settlement and tax adjustments related
to resolution of certain tax matters*

Adjusted Net Earnings

$760.8
11.4
75.2
157.8
–
–

$596.9
1.4
34.7
75.0
–
204.0

$717.4
12.5
75.3
35.0
(32.1)
73.0

(99.6)

(40.4)

(31.2)

$905.6

$871.6

$849.9

Year Ended December 31,

2011

2010

2009

Diluted EPS
Inventory step-up
Special items
Certain claims
Net curtailment and settlement
Goodwill impairment
Taxes on inventory step-up, special items,
certain claims and net curtailment and
settlement and tax adjustments related
to resolution of certain tax matters*

Adjusted Diluted EPS

$ 4.03
0.06
0.40
0.84
–
–

$ 2.97
0.01
0.17
0.37
–
1.01

$ 3.32
0.06
0.35
0.16
(0.15)
0.34

(0.53)

(0.20)

(0.14)

$ 4.80

$ 4.33

$ 3.94

* The tax effect is calculated based upon the statutory rates for the
jurisdictions where the items were incurred.

Healthcare Reform in the U.S.

We continue to assess the impact that federal healthcare

reform will have on our business. Federal healthcare reform
includes a 2.3 percent excise tax on a majority of our U.S. sales
that is scheduled to be implemented in 2013.

LIQUIDITY AND CAPITAL RESOURCES

Cash flows provided by operating activities were $1,176.9

million in 2011 compared to $1,193.5 million in 2010. The
principal source of cash from operating activities in 2011 was
net earnings. Non-cash charges included in net earnings
accounted for another $412.1 million of operating cash. All
other items of operating cash flows in 2011 provided $4.8
million of cash. The lower cash flows provided by operating
activities in the 2011 period were primarily due to lower
receivable collections and increased product liability
payments. We paid approximately $60 million, $45 million and
$25 million in 2011, 2010 and 2009, respectively, related to
Durom Cup product liability claims. We estimate the net
remaining liability after insurance recovery for Durom Cup
claims as of December 31, 2011, is $234.8 million. We expect to
pay the majority of this amount over the next five years.
At December 31, 2011, we had 64 days of sales

outstanding in trade accounts receivable, an increase of 6 days

when compared to December 31, 2010, reflecting changes in
certain accounts receivable factoring programs and the
economic environment in our Europe operating segment. At
December 31, 2011, we had 277 days of inventory on hand, a
decrease of 30 days compared to December 31, 2010. Days of
inventory on hand have decreased due to higher cost of
products sold as a percentage of net sales, most notably from
foreign currency hedge losses, and a reduction in U.S.
consignment inventory that was achieved through new
inventory management strategies.

Cash flows used in investing activities were $624.4 million in

2011, compared to $726.9 million in 2010. Additions to
instruments decreased in 2011 compared to the 2010 period
because the 2010 period included investments in new product
launches, such as our Continuum Acetabular System, and
included instrumentation in our knee product category, such as
posterior referencing instrumentation. Spending on other
property, plant and equipment increased in 2011 compared to
the 2010 period as there were no significant infrastructure
initiatives in 2010. During 2012, for both instruments and
property, plant and equipment, we expect to purchase
approximately $120 to $140 million. We feel this level of capital
spending is necessary to support new product-related
investments and replacement of older machinery and equipment.
Beginning in 2009 and with more significance thereafter, we
began investing some of our cash and cash equivalents in highly-
rated debt securities. The purchases and any sales or maturities
of these investments are reflected as cash flows from investing
activities. Acquired intellectual property rights relate to
lump-sum payments made to certain healthcare professionals
and institutions in place of future royalty payments that
otherwise would have been due under the terms of existing
contractual arrangements. In the past three years, we have made
various business acquisitions including ExtraOrtho, Inc., Beijing
Montagne Medical Device Co., Ltd., Sodem Diffusion S.A. and
certain foreign-based distributors.

Cash flows used in financing activities were $455.8 million

for 2011, compared to $489.6 million in 2010. In 2011 and
2009, we issued senior unsecured notes in public offerings. We
used some of the proceeds to repurchase our common stock
and to repay outstanding debt on our revolving credit facilities.
In December 2011, our Board of Directors declared a

dividend of $0.18 per share to be paid in April 2012 to
stockholders of record as of the close of business on March 30,
2012. Based upon shares outstanding as of December 31, 2011,
we would pay $32.1 million. We expect to continue paying cash
dividends on a quarterly basis; however future dividends are
subject to approval of the Board of Directors and may be
adjusted as business needs or market conditions change.

We have four tranches of senior notes outstanding: $250

million aggregate principal amount of 1.4 percent notes due
November 30, 2014, $500 million aggregate principal amount of
4.625 percent notes due November 30, 2019, $300 million
aggregate principal amount of 3.375 percent notes due
November 30, 2021 and $500 million aggregate principal
amount of 5.75 percent notes due November 30, 2039. Interest
on each series is payable on May 30 and November 30 of each
year until maturity.

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

We may redeem the senior notes at our election in whole
or in part at any time prior to maturity at a redemption price
equal to the greater of 1) 100 percent of the principal amount
of the notes being redeemed; or 2) the sum of the present
values of the remaining scheduled payments of principal and
interest (not including any portion of such payments of
interest accrued as of the date of redemption), discounted to
the date of redemption on a semi-annual basis at the Treasury
Rate (as defined in the debt agreement), plus 15 basis points
in the case of the 2014 notes, 20 basis points in the case of the
2019 and 2021 notes, and 25 basis points in the case of the
2039 notes. We will also pay the accrued and unpaid interest
on the senior notes to the redemption date.

We have a five year $1,350 million revolving, multi-

currency, senior unsecured credit facility maturing
November 30, 2012 (Senior Credit Facility). We had $143.0
million outstanding under the Senior Credit Facility at
December 31, 2011, and an availability of $1,207.0 million. We
intend to secure another senior credit facility in 2012 before
our current Senior Credit Facility matures.

We also have available uncommitted credit facilities

totaling $63.6 million.

We place our cash and cash equivalents in highly-rated
financial institutions and limit the amount of credit exposure to
any one entity. We invest only in high-quality financial
instruments in accordance with our internal investment policy.
As of December 31, 2011, we had short-term and long-
term investments in debt securities with a fair value of $672.7
million. These investments are in debt securities of many
different issuers and therefore we have no significant
concentration of risk with a single issuer. All of these debt
securities remain highly-rated and therefore we believe the
risk of default by the issuers is low.

As of December 31, 2011, $1,131.9 million of our cash and
cash equivalents and short-term and long-term investments are
held in jurisdictions outside of the U.S. and are expected to be
indefinitely reinvested for continued use in foreign operations.
Repatriation of these assets to the U.S. would have negative
tax consequences. Approximately $970.0 million of this
amount is denominated in U.S. Dollars and therefore bears no
foreign currency translation risk. The balance of these assets is
denominated in currencies of the various countries where we
operate.

We may use excess cash to repurchase additional common

stock under our share repurchase program. As of
December 31, 2011, we had authority to repurchase up to $1.5
billion shares of common stock through December 31, 2014.

Management believes that cash flows from operations and

available borrowings under the Senior Credit Facility are
sufficient to meet our expected working capital, capital
expenditure and debt service needs. Should investment
opportunities arise, we believe that our earnings, balance sheet
and cash flows will allow us to obtain additional capital, if
necessary.

CONTRACTUAL OBLIGATIONS

We have entered into contracts with various third parties

in the normal course of business that will require future
payments. The following table illustrates our contractual
obligations (in millions):

Contractual Obligations

Total

2012

2013
and
2014

2015
and
2016

2017
and
Thereafter

Long-term debt

$1,550.0

–

$250.0

–

$1,300.0

Interest payments

1,102.8

Operating leases

179.7

66.5

43.5

131.0

124.0

58.2

36.5

781.3

41.5

Purchase

obligations

Other long-term

liabilities

Total contractual
obligations

26.1

24.8

1.3

–

380.7

–

157.3

141.2

82.2

$3,239.3

$134.8

$597.8

$301.7

$2,205.0

$48.2 million of the other long-term liabilities on our
balance sheet are liabilities related to defined benefit pension
plans. Defined benefit plan liabilities are based upon the
underfunded status of the respective plans; they are not based
upon future contributions. Due to uncertainties regarding
future plan asset performance, changes in interest rates and
our intentions with respect to voluntary contributions, we are
unable to reasonably estimate future contributions beyond
2012. Therefore, this table does not include any amounts
related to future contributions to our plans. See Note 14 to our
consolidated financial statements for further information on
our defined benefit plans.

Also included in other long-term liabilities on our balance

sheet are liabilities related to unrecognized tax benefits and
corresponding interest and penalties thereon. Due to the
uncertainties inherent in these liabilities, such as the ultimate
timing and resolution of tax audits, we are unable to
reasonably estimate the amount or period in which potential
tax payments related to these positions will be made.
Therefore, this table does not include any obligations related
to unrecognized tax benefits. See Note 15 to our consolidated
financial statements for further information on these
unrecognized tax benefits.

We have entered into various agreements that may result
in future payments dependent upon various events such as the
achievement of certain product R&D milestones, sales
milestones, or at our discretion to maintain exclusive rights to
distribute a product. Since there is uncertainty on the timing
or whether such payments will have to be made, we have not
included them in this table. These payments could range from
$0 to $72 million.

Z I M M E R H O L D I N G S , I N C .

CRITICAL ACCOUNTING ESTIMATES

Our financial results are affected by the selection and
application of accounting policies and methods. Significant
accounting policies which require management’s judgment are
discussed below.

Excess Inventory and Instruments – We must

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

Income Taxes – Our income tax expense, deferred

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

We estimate income tax expense and income tax liabilities

and assets by taxable jurisdiction. Realization of deferred tax
assets in each taxable jurisdiction is dependent on our ability
to generate future taxable income sufficient to realize the
benefits. We evaluate deferred tax assets on an ongoing basis
and provide valuation allowances unless we determine it is
“more likely than not” that the deferred tax benefit will be
realized. Federal income taxes are provided on the portion of
the income of foreign subsidiaries that is expected to be
remitted to the U.S.

The calculation of our tax liabilities involves dealing with

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

We recognize tax liabilities in accordance with the
Financial Accounting Standards Board’s (FASB) guidance on
income taxes and we adjust these liabilities when our judgment
changes as a result of the evaluation of new information not

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

previously available. Due to the complexity of some of these
uncertainties, the ultimate resolution may result in a payment
that is materially different from our current estimate of the tax
liabilities. These differences will be reflected as increases or
decreases to income tax expense in the period in which they
are determined.

Commitments and Contingencies – Accruals for
product liability and other claims are established with the
assistance of internal and external legal counsel based on
current information and historical settlement information for
claims, related legal fees and for claims incurred but not
reported. We use an actuarial model to assist management in
determining an appropriate level of accruals for product
liability claims. Historical patterns of claim loss development
over time are statistically analyzed to arrive at factors which
are then applied to loss estimates in the actuarial model.
In addition to our general product liability, we have
recorded provisions totaling $388.2 million related to the
Durom Cup, including $162.0 million in 2011. See Note 19 to
our consolidated financial statements for further discussion of
the Durom Cup.

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

In the fourth quarter of 2010, we determined our U.S.

Spine reporting unit’s carrying value was in excess of its
estimated fair value. Fair value was determined using an equal
weighting of income and market approaches. Fair value under
the income approach was determined by discounting to
present value the estimated future cash flows of the reporting
unit. Fair value under the market approach utilized the
comparable transaction methodology, which uses valuation
indicators determined from sales of other businesses that are
similar to our U.S. Spine reporting unit.

As a result, we recorded a goodwill impairment charge for
the U.S. Spine reporting unit of $204.0 million during the year
ended December 31, 2010. In the year ended December 31,
2009, we also recorded an impairment charge related to this
reporting unit of $73.0 million. See Note 9 to our consolidated
financial statements for further discussion and the factors that
contributed to these impairment charges.

In our annual impairment testing in 2011, we employed a

similar methodology of using income and market approaches to
estimate fair value for the U.S. Spine reporting unit. The 2011
impairment test concluded that goodwill was not impaired.
However, since goodwill had been written down to its implied
fair value of $137.0 million in the prior year, the estimated fair
value of the reporting unit was only 13 percent greater than its
carrying value. Therefore, minor changes to the estimated

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

discounted cash flows or market conditions may cause us to
recognize further impairment charges in the future.

We have six other reporting units with goodwill assigned
to them. We estimated the fair value of those reporting units
using the income approach by discounting to present value the
estimated future cash flows of the reporting unit, or by doing a
qualitative assessment of changes in fair value from the prior
year’s income approach. For each of those six reporting units,
the estimated fair values substantially exceeded their carrying
value.

As of December 31, 2011, we had intangible assets of
$205.8 million related to trademarks and trade names, of
which $192.3 million are classified as having an indefinite life.
We currently have and anticipate future product development
efforts that may replace the current products that use those
trademarks and trade names. While it is anticipated, it is not
certain that these new products will utilize these trademarks
and trade names. If these new products do not use these
trademarks and trade names, these assets may be impaired
and/or their useful lives may need adjusted.

Share-based Payment – We measure share-based

payment expense at the grant date based on the fair value of
the award and recognize expense over the requisite service
period. Determining the fair value of share-based awards at
the grant date requires judgment, including estimating the
expected life of stock options and the expected volatility of
our stock. Additionally, we must estimate the amount of share-
based awards that are expected to be forfeited. We estimate
expected volatility based upon the implied volatility of actively
traded options on our stock. The expected life of stock options
and estimated forfeitures are based upon our employees’
historical exercise and forfeiture behaviors. The assumptions
used in determining the grant date fair value and the expected
forfeitures represent management’s best estimates.

RECENT ACCOUNTING PRONOUNCEMENTS

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

Z I M M E R H O L D I N G S , I N C .

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ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

MARKET RISK

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

FOREIGN CURRENCY EXCHANGE RISK

We operate on a global basis and are exposed to the risk

that our financial condition, results of operations and cash
flows could be adversely affected by changes in foreign
currency exchange rates. We are primarily exposed to foreign
currency exchange rate risk with respect to transactions and
net assets denominated in Euros, Swiss Francs, Japanese Yen,
British Pounds, Canadian Dollars, Australian Dollars, Korean
Won, Swedish Krona, Czech Koruna, Thai Baht, Taiwan
Dollars, South African Rand, Russian Rubles and Indian
Rupees. We manage the foreign currency exposure centrally,
on a combined basis, which allows us to net exposures and to
take advantage of any natural offsets. To reduce the
uncertainty of foreign currency exchange rate movements on
transactions denominated in foreign currencies, we enter into
derivative financial instruments in the form of foreign
currency exchange forward contracts and options with major
financial institutions. These forward contracts and options are
designed to hedge anticipated foreign currency transactions,
primarily intercompany sale and purchase transactions, for
periods consistent with commitments. Realized and unrealized
gains and losses on these contracts and options that qualify as
cash flow hedges are temporarily recorded in other
comprehensive income, then recognized in cost of products
sold when the hedged item affects net earnings.

For contracts outstanding at December 31, 2011, we had
obligations to purchase U.S. Dollars and sell Euros, Japanese
Yen, British Pounds, Canadian Dollars, Australian Dollars,
Korean Won, Swedish Krona, Czech Koruna, Thai Baht,
Taiwan Dollars, South African Rand, Russian Rubles and
Indian Rupees and purchase Swiss Francs and sell U.S. Dollars
at set maturity dates ranging from January 2012 through June
2014. The notional amounts of outstanding forward contracts
entered into with third parties to purchase U.S. Dollars at
December 31, 2011 were $1.3 billion. The notional amounts of
outstanding forward contracts entered into with third parties
to purchase Swiss Francs at December 31, 2011 were $246.7
million. The weighted average contract rates outstanding at
December 31, 2010 were Euro:USD 1.36, Swiss Franc:USD
0.91, USD:Japanese Yen 81.18, British Pound:USD 1.58,
USD:Canadian Dollar 1.02, Australian Dollar:USD 0.91,

USD:Korean Won 1,159, USD:Swedish Krona 6.89, USD:Czech
Koruna 18.32, USD:Thai Baht 31.54, USD:Taiwan Dollar 29.21,
USD:South African Rand 8.12, USD:Russian Ruble 32.01 and
USD:Indian Ruppee 48.98.

We maintain written policies and procedures governing

our risk management activities. Our policy requires that
critical terms of hedging instruments are the same as hedged
forecasted transactions. On this basis, with respect to cash
flow hedges, changes in cash flows attributable to hedged
transactions are generally expected to be completely offset by
changes in the fair value of hedge instruments. As part of our
risk management program, we also perform sensitivity
analyses to assess potential changes in revenue, operating
results, cash flows and financial position relating to
hypothetical movements in currency exchange rates. A
sensitivity analysis of changes in the fair value of foreign
currency exchange forward contracts outstanding at
December 31, 2011 indicated that, if the U.S. Dollar uniformly
changed in value by 10 percent relative to the various
currencies, with no change in the interest differentials, the fair
value of those contracts would increase or decrease earnings
before income taxes in periods through 2013, depending on
the direction of the change, by the following average
approximate amounts (in millions):

Currency

Euro
Swiss Franc
Japanese Yen
British Pound
Canadian Dollar
Australian Dollar
Korean Won
Swedish Krona
Czech Koruna
Thai Baht
Taiwan Dollars
South African Rand
Russian Rubles
Indian Rupees

Average
Amount

$53.7
23.4
33.4
11.7
7.6
11.4
2.8
2.3
0.6
0.8
1.8
0.4
1.1
0.9

Any change in the fair value of foreign currency exchange

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

We had net investment exposures to net foreign currency

denominated assets and liabilities of $2,404.7 million at
December 31, 2011, primarily in Euros and Japanese Yen.
$1,314.3 million of the net asset exposure at December 31,
2011 relates to goodwill recorded in the Europe and Asia
Pacific geographic segments.

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

We enter into foreign currency forward exchange
contracts with terms of one month to manage currency
exposures for monetary assets and liabilities denominated in a
currency other than an entity’s functional currency. As a
result, foreign currency remeasurement gains/losses
recognized in earnings are generally offset with gains/losses on
the foreign currency forward exchange contracts in the same
reporting period.

COMMODITY PRICE RISK

We purchase raw material commodities such as cobalt
chrome, titanium, tantalum, polymer and sterile packaging. We
enter into supply contracts generally with terms of 12 to 24
months, where available, on these commodities to alleviate the
effect of market fluctuation in prices. As part of our risk
management program, we perform sensitivity analyses related
to potential commodity price changes. A 10 percent price
change across all these commodities would not have a material
effect on our consolidated financial position, results of
operations or cash flows.

INTEREST RATE RISK

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

We invest our cash and cash equivalents primarily in
highly-rated corporate commercial paper and bank deposits.
We also have short-term and long-term investments in highly-
rated corporate debt securities, U.S. government and agency
debt securities, U.S. government treasury funds, municipal
bonds, foreign government debt securities, commercial paper
and certificates of deposit. The primary investment objective is
to ensure capital preservation of our invested principal funds.
Currently, we do not use derivative financial instruments in
our investment portfolio.

We are exposed to interest rate risk on our debt

obligations and our cash and cash equivalents. Presently, all of
our debt outstanding under the Senior Credit Facility bears
interest at short-term rates.

In 2010, we entered into interest rate swap agreements
with a consolidated notional amount of $250 million that hedge
a portion of our $500 million 4.625 percent Senior Notes due
November 30, 2019. On the interest rate swap agreements
outstanding as of December 31, 2011, we receive a fixed
interest rate of 4.625 percent and we pay variable interest
equal to the three-month LIBOR plus an average of 133 basis
points.

The interest rate swap agreements are to manage our
exposure to interest rate movements by converting fixed-rate
debt into variable-rate debt. The objective of the instruments is
to more closely align interest expense with interest income
received on cash and cash equivalents.

These derivative instruments are designated as fair value

hedges under U.S. GAAP. Changes in the fair value of the

derivative instrument are recorded in earnings and are offset
by gains or losses on the underlying debt instrument.

In 2011, we entered into multiple cross-currency interest

rate swap agreements with a total notional amount of
11,798 million Japanese Yen to hedge U.S. Dollar debt
borrowed by our Japan subsidiary. We designated these swaps
as cash flow hedges of the foreign currency exchange and
interest rate risks. The effective portion of changes in fair
value of the cross-currency interest rate swaps is temporarily
recorded in other comprehensive income and then recognized
in interest expense when the hedged item affects net earnings.
On the cross-currency interest rate swap agreements
outstanding as of December 31, 2011, we pay a fixed interest
rate of 0.1 percent and receive variable interest equal to the
three-month LIBOR plus 18.5 basis points.

The cross-currency interest rate swap agreements manage

foreign currency exchange risk associated with remeasuring
the debt to Japanese Yen and the interest rate risk associated
with the variable-rate debt. We entered into these instruments
in order to take advantage of a market situation where we
could lock-in interest at a very low, fixed-rate on debt.

Based upon our overall interest rate exposure as of
December 31, 2011, a change of 10 percent in interest rates,
assuming the amount outstanding remains constant, would not
have a material effect on net interest expense. This analysis
does not consider the effect of the change in the level of
overall economic activity that could exist in such an
environment.

CREDIT RISK

Financial instruments, which potentially subject us to

concentrations of credit risk, are primarily cash and cash
equivalents, short-term and long-term investments, derivative
instruments, counterparty transactions and accounts
receivable.

We place our investments in highly-rated financial
institutions or highly-rated debt securities and limit the
amount of credit exposure to any one entity. We believe we do
not have any significant credit risk on our cash and cash
equivalents and investments.

We are exposed to credit loss if the financial institutions

or counterparties issuing the debt security fail to perform.
However, this loss is limited to the amounts, if any, by which
the obligations of the counterparty to the financial instrument
contract exceed our obligation. We also minimize exposure to
credit risk by dealing with a diversified group of major financial
institutions. We manage credit risk by monitoring the financial
condition of our counterparties using standard credit
guidelines. We do not anticipate any nonperformance by any of
the counterparties.

Concentration of credit risk with respect to trade accounts
receivable is limited due to the large number of customers and
their dispersion across a number of geographic areas and by
frequent monitoring of the creditworthiness of the customers
to whom credit is granted in the normal course of business.
Substantially all of our trade receivables are concentrated in
the public and private hospital and healthcare industry in the

Z I M M E R H O L D I N G S , I N C .

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U.S. and internationally or with distributors or dealers who
operate in international markets and, accordingly, are exposed
to their respective business, economic and country specific
variables.

Repayment is dependent upon the financial stability of
these industry sectors and the respective countries’ national
economic and healthcare systems. Most notably, in Europe
healthcare is sponsored by the government. Because we sell
products to public hospitals in those countries, we are
indirectly exposed to government budget constraints. We
continue to monitor the financial crisis in the Euro zone and
the indirect credit exposure we have to those governments
through their public hospitals. In countries that have been
widely recognized as presenting the highest risk, our accounts

receivable, net of allowances for doubtful accounts, in Greece,
Italy, Portugal and Spain total $231.1 million, or 28% of our
total accounts receivable balance, net, with Italy and Spain
accounting for $217.9 million of that amount. We are actively
monitoring the situations in these countries and, to the extent
the respective governments’ ability to fund their public
hospital programs deteriorates, we may have to record
significant bad debt expenses in the future.

While we are exposed to risks from the broader

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

Z I M M E R H O L D I N G S , I N C .

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Management’s Report on Internal Control Over Financial Reporting

The management of Zimmer Holdings, Inc. is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) or 15d-15(f) promulgated under the
Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and
principal financial officers and effected by the company’s Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:

• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions

of the assets of the company;

• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in

accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and

• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the

company’s assets that could have a material effect on the financial statements.

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

The company’s management assessed the effectiveness of the company’s internal control over financial reporting as of
December 31, 2011. In making this assessment, the company’s management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

Based on that assessment, management has concluded that, as of December 31, 2011, the company’s internal control over

financial reporting is effective based on those criteria.

The company’s independent registered public accounting firm has audited the effectiveness of the company’s internal control

over financial reporting as of December 31, 2011, as stated in its report which appears in Item 8 of this Annual Report on
Form 10-K.

Z I M M E R H O L D I N G S , I N C .

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ITEM 8. Financial Statements and Supplementary Data

Zimmer Holdings, Inc.
Index to Consolidated Financial Statements

Financial Statements:

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Earnings for the Years Ended December 31, 2011, 2010 and 2009

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2011, 2010 and 2009

Consolidated Balance Sheets as of December 31, 2011 and 2010

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2011, 2010 and 2009

Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 2010 and 2009

Notes to Consolidated Financial Statements

Page

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Report of Independent Registered Public Accounting Firm

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

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all

material respects, the financial position of Zimmer Holdings, Inc. and its subsidiaries at December 31, 2011 and 2010, and the
results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity
with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement
schedule listed in the accompanying index appearing under Item 15(a)(2) presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria
established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule,
for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our
responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s
internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.

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

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

PricewaterhouseCoopers LLP
Chicago, Illinois
February 24, 2012

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Consolidated Statements of Earnings

For the Years Ended December 31,

Net Sales
Cost of products sold

Gross Profit

Research and development
Selling, general and administrative
Certain claims (Note 19)
Goodwill impairment (Note 9)
Net curtailment and settlement (Note 14)
Special items (Note 2)

Operating expenses

Operating Profit
Interest income
Interest expense

Earnings before income taxes
Provision for income taxes

Net earnings
Less: Net loss attributable to noncontrolling interest

Net Earnings of Zimmer Holdings, Inc.

Earnings Per Common Share – Basic

Earnings Per Common Share – Diluted

Weighted Average Common Shares Outstanding

Basic
Diluted

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

(in millions, except per share amounts)

2011

2010

2009

$4,451.8
1,122.0

$4,220.2
1,012.2

$4,095.4
990.7

3,329.8

3,208.0

3,104.7

238.6
1,834.1
157.8
–
–
75.2

218.5
1,759.1
75.0
204.0
–
34.7

205.7
1,729.0
35.0
73.0
(32.1)
75.3

2,305.7

2,291.3

2,085.9

1,024.1
10.1
(55.3)

978.9
218.9

760.0
(0.8)

916.7
3.7
(60.2)

1,018.8
1.8
(22.4)

860.2
263.3

596.9
–

998.2
280.8

717.4
–

$ 760.8

$ 596.9

$ 717.4

4.05

4.03

2.98

2.97

3.34

3.32

187.6
188.7

200.0
201.1

215.0
215.8

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Consolidated Statements of Comprehensive Income

For the Years Ended December 31,

Net Earnings

Other Comprehensive Income (Loss):

Foreign currency cumulative translation adjustments

Unrealized cash flow hedge gains/(losses), net of tax effects of $4.3 in 2011, $10.1 in 2010 and $8.9

in 2009

Reclassification adjustments on cash flow hedges, net of tax effects of $(16.7) in 2011, $(4.3) in

2010 and $(0.1) in 2009

Unrealized gains/(losses) on securities, net of tax effects of $0.0 in 2011, $0.3 in 2010 and $0.1 in

2009

Reclassification adjustments on securities, net of tax effects of $(1.2) in 2010

Adjustments to prior service cost and unrecognized actuarial assumptions, net of tax effects of

$23.0 in 2011, $4.4 in 2010 and $(1.4) in 2009

Total Other Comprehensive Income (Loss)

Comprehensive Income

Comprehensive Loss Attributable to Noncontrolling Interest

(in millions)

2011

2010

2009

$760.0 $596.9 $717.4

4.6

(38.6)

114.0

(30.6)

21.6

(28.9)

24.5

(11.6)

(18.1)

0.2

–

(0.8)

(0.3)

2.2

–

(48.3)

(10.4)

51.9

(49.6)

(37.6)

118.6

710.4

559.3

836.0

(0.9)

–

Comprehensive Income Attributable to Zimmer Holdings, Inc.

$ 711.3

$ 559.3

$ 836.0

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

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

(in millions)

2011

2010

768.3
455.5
838.8
929.8
73.7
210.5

3,276.6
1,207.3
2,626.0
798.5
606.9

668.9
265.1
775.9
936.4
127.7
235.7

3,009.7
1,213.8
2,580.8
827.1
368.5

$ 8,515.3

$ 7,999.9

143.3
8.6
143.3
571.9

867.1
557.4
1,576.0

129.6
48.9
–
524.0

702.5
384.0
1,142.1

3,000.5

2,228.6

2.5
3,399.2
6,426.8
271.4
(4,592.7)

2.5
3,293.5
5,699.4
321.0
(3,545.1)

5,507.2
7.6

5,771.3
–

5,514.8

5,771.3

$ 8,515.3

$ 7,999.9

Consolidated Balance Sheets

As of December 31,

ASSETS
Current Assets:

Cash and cash equivalents
Short-term investments
Accounts receivable, less allowance for doubtful accounts
Inventories
Prepaid expenses and other current assets
Deferred income taxes

Total Current Assets

Property, plant and equipment, net
Goodwill
Intangible assets, net
Other assets

Total Assets

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
Income taxes
Short-term debt
Other current liabilities

Total Current Liabilities
Other long-term liabilities
Long-term debt

Total Liabilities

Commitments and Contingencies (Note 19)
Stockholders’ Equity:

Common stock, $0.01 par value, one billion shares authorized,

255.9 million (254.6 million in 2010) issued

Paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock, 77.9 million shares (59.0 million shares in 2010)

Total Zimmer Holdings, Inc. stockholders’ equity

Noncontrolling interest

Total Stockholders’ Equity

Total Liabilities and Stockholders’ Equity

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

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Consolidated Statements of Stockholders’ Equity

Zimmer Holdings, Inc. Stockholders

Common Shares
Number Amount

Paid-in
Capital

Retained
Earnings

Accumulated
Other
Comprehensive

Treasury Shares

Income Number

Amount

Noncontrolling
Interest

Total
Stockholders’
Equity

253.7

$2.5 $3,138.5 $4,385.5

$240.0

(30.1) $(2,116.2)

$ 3.6

$ 5,653.9

(in millions)

–

0.4

–

(5.0)

81.1

–

717.4

–

(0.4)

–

118.6

–

0.4

(19.8)

(923.7)

254.1

2.5

3,214.6

5,102.5

358.6

(49.9)

(3,039.5)

–

0.5

–

78.9

–

596.9

–

(37.6)

–

(9.1)

(505.6)

254.6

2.5

3,293.5

5,699.4

321.0

(59.0)

(3,545.1)

–

1.3

–

105.7

–

760.8

–

(32.1)

(1.3)

–

(49.6)

–

2.4

(18.9)

(1,050.0)

–

(3.6)

–

(0.8)

(0.1)

717.4

118.6

(8.6)

81.1

(923.7)

5,638.7

596.9

(37.6)

78.9

(505.6)

5,771.3

760.0

(49.7)

8.5

–

(32.1)

106.8

(1,050.0)

Balance January 1, 2009
Net earnings

Other comprehensive income

Purchase of noncontrolling interest

Stock compensation plans, including tax

benefits

Share repurchases

Balance December 31, 2009
Net earnings

Other comprehensive loss

Stock compensation plans, including tax

benefits

Share repurchases

Balance December 31, 2010
Net earnings

Other comprehensive loss

Business combination with a noncontrolling

interest

Cash dividend declared of $0.18 per share of

common stock

Stock compensation plans, including tax

benefits

Share repurchases

Balance December 31, 2011

255.9

$2.5 $3,399.2 $6,426.8

$271.4

(77.9) $(4,592.7)

$ 7.6

$ 5,514.8

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

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Consolidated Statements of Cash Flows

For the Years Ended December 31,

Cash flows provided by (used in) operating activities:

Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities:

Depreciation and amortization
Goodwill impairment
Net curtailment and settlement
Share-based compensation
Income tax benefit from stock option exercises
Excess income tax benefit from stock option exercises
Inventory step-up
Deferred income tax provision
Changes in operating assets and liabilities, net of acquired assets and liabilities

Income taxes payable
Receivables
Inventories
Accounts payable and accrued liabilities
Other assets and liabilities

(in millions)

2011

2010

2009

760.0

$ 596.9

$ 717.4

359.9
–
–
60.5
12.9
(5.0)
11.4
(19.7)

14.6
(63.2)
7.2
20.0
18.3

340.2
204.0
–
62.0
4.2
(1.3)
1.4
(72.5)

7.7
(33.0)
25.8
(0.8)
58.9

337.4
73.0
(32.1)
75.3
3.5
(0.4)
12.5
(19.7)

7.0
(4.6)
36.2
(132.6)
44.6

Net cash provided by operating activities

1,176.9

1,193.5

1,117.5

(155.4)
(113.8)
(18.9)
(662.1)
394.8
(56.8)
(12.2)

(192.5)
(79.2)
(8.5)
(413.3)
67.5
(82.6)
(18.3)

(123.7)
(105.1)
(35.8)
(66.4)
–
(39.5)
(10.7)

(624.4)

(726.9)

(381.2)

549.3
0.5
(4.0)
43.4
5.0
–
(1,050.0)

–
(2.2)
–
16.9
1.3
–
(505.6)

998.8
(330.0)
(8.5)
9.5
0.4
(8.6)
(923.7)

(455.8)

(489.6)

(262.1)

2.7

99.4
668.9

0.2

(22.8)
691.7

4.9

479.1
212.6

768.3

$ 668.9

$ 691.7

Cash flows provided by (used in) investing activities:

Additions to instruments
Additions to other property, plant and equipment
Acquisition of intellectual property rights
Purchases of investments
Sales of investments
Other business combination investments
Investments in other assets

Net cash used in investing activities

Cash flows provided by (used in) financing activities:

Proceeds from issuance of notes
Net proceeds (payments) under revolving credit facilities
Debt issuance costs
Proceeds from employee stock compensation plans
Excess income tax benefit from stock option exercises
Acquisition of noncontrolling interest
Repurchase of common stock

Net cash used in financing activities

Effect of exchange rates on cash and cash equivalents

Increase (decrease) in cash and cash equivalents

Cash and cash equivalents, beginning of year

Cash and cash equivalents, end of year

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

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Notes to Consolidated Financial Statements

BUSINESS

We design, develop, manufacture and market orthopaedic

reconstructive, spinal and trauma devices, biologics, dental
implants and related surgical products. We also provide other
healthcare related services. Orthopaedic reconstructive
devices restore function lost due to disease or trauma in joints
such as knees, hips, shoulders and elbows. Dental
reconstructive implants restore function and aesthetics in
patients who have lost teeth due to trauma or disease. Spinal
devices are utilized by orthopaedic surgeons and
neurosurgeons in the treatment of degenerative diseases,
deformities and trauma in all regions of the spine. Trauma
products are devices used primarily to reattach or stabilize
damaged bone and tissue to support the body’s natural healing
process. Our related surgical products include surgical
supplies and instruments designed to aid in orthopaedic
surgical procedures and post-operation rehabilitation. We have
operations in more than 25 countries and market our products
in more than 100 countries. We operate in a single industry but
have three reportable geographic segments, the Americas,
Europe and Asia Pacific.

The words “we,” “us,” “our” and similar words refer to

Zimmer Holdings, Inc. and its subsidiaries. Zimmer Holdings
refers to the parent company only.

SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation – The consolidated financial
statements include the accounts of Zimmer Holdings and its
subsidiaries in which it holds a controlling financial interest.
Investments in companies in which we exercise significant
influence over the operating and financial affairs, but do not
control, are accounted for under the equity method. Under the
equity method, we record the investment at cost and adjust
the carrying amount of the investment by our proportionate
share of the investee’s net earnings or losses. All significant
intercompany accounts and transactions are eliminated. The
consolidated financial statements for some of our international
subsidiaries are for an annual period that ended on
December 25, 2011, 2010 and 2009. Certain amounts in the
2010 and 2009 consolidated financial statements have been
reclassified to conform to the 2011 presentation.

Use of Estimates – The consolidated financial statements

are prepared in conformity with accounting principles
generally accepted in the U.S. which require us to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.

Foreign Currency Translation – The financial statements
of our foreign subsidiaries are translated into U.S. dollars using
period-end exchange rates for assets and liabilities and average

exchange rates for operating results. Unrealized translation
gains and losses are included in accumulated other
comprehensive income in stockholders’ equity. When a
transaction is denominated in a currency other than the
subsidiary’s functional currency, we recognize a transaction
gain or loss when the transaction is settled. Foreign currency
transaction gains and losses included in net earnings for the
years ended December 31, 2011, 2010 and 2009 were not
significant.

Revenue Recognition – We sell product through three
principal channels: 1) direct to healthcare institutions, referred
to as direct channel accounts; 2) through stocking distributors
and healthcare dealers; and 3) directly to dental practices and
dental laboratories. The direct channel accounts represent
approximately 80 percent of our net sales. Through this
channel, inventory is generally consigned to sales agents or
customers so that products are available when needed for
surgical procedures. No revenue is recognized upon the
placement of inventory into consignment as we retain title and
maintain the inventory on our balance sheet. Upon
implantation, we issue an invoice and revenue is recognized.
Pricing for products is generally predetermined by contracts
with customers, agents acting on behalf of customer groups or
by government regulatory bodies, depending on the market.
Price discounts under group purchasing contracts are
generally linked to volume of implant purchases by customer
healthcare institutions within a specified group. At negotiated
thresholds within a contract buying period, price discounts
may increase.

Sales to stocking distributors, healthcare dealers, dental
practices and dental laboratories account for approximately
20 percent of our net sales. With these types of sales, revenue
is recognized when title to product passes, either upon
shipment of the product or in some cases upon implantation of
the product. Product is generally sold at contractually fixed
prices for specified periods. Payment terms vary by customer,
but are typically less than 90 days.

If sales incentives are earned by a customer for

purchasing a specified amount of our product, we estimate
whether such incentives will be achieved and, if so, recognize
these incentives as a reduction in revenue in the same period
the underlying revenue transaction is recognized. Occasionally
products are returned, and, accordingly, we maintain an
estimated sales return reserve that is recorded as a reduction
in revenue. Product returns were not significant for the years
ended December 31, 2011, 2010 and 2009.

Taxes collected from customers and remitted to
governmental authorities are presented on a net basis and
excluded from revenues.

Shipping and Handling – Amounts billed to customers

for shipping and handling of products are reflected in net sales
and are not significant. Expenses incurred related to shipping
and handling of products are reflected in selling, general and
administrative and were $142.1 million, $129.1 million and

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Notes to Consolidated Financial Statements (Continued)

$121.8 million for the years ended December 31, 2011, 2010
and 2009, respectively.

Research and Development – We expense all research and

development costs as incurred. Research and development
costs include salaries, prototypes, depreciation of equipment
used in research and development, consultant fees and service
fees paid to collaborative partners. Where contingent
milestone payments are due to third parties under research
and development arrangements, the milestone payment
obligations are expensed when the milestone results are
achieved.

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

Special Items – We recognize expenses resulting directly

from our business combinations, employee termination
benefits, certain contract terminations, consulting and
professional fees and asset impairment charges connected with
global restructuring, quality excellence and transformation
initiatives, and other items as “Special items” in our
consolidated statement of earnings. “Special items” included
(in millions):

For the Years Ended December 31,

2011

2010

2009

Adjustment or impairment of assets and

obligations, net

Consulting and professional fees
Employee severance and retention, including
share-based compensation acceleration

Information technology integration
Vacated facilities
Facility and employee relocation
Distributor acquisitions
Certain litigation matters
Contract terminations
Other

$ 8.4
26.0

$11.4
4.9

$(1.5)
11.7

23.1
0.5
–
3.2
2.0
0.1
6.3
5.6

6.7
0.1
0.2
2.0
1.9
(0.3)
3.9
3.9

19.0
1.1
1.4
5.4
1.1
23.4
9.4
4.3

Special items

$75.2

$34.7

$75.3

Adjustment or impairment of assets and obligations
relates to impairment on assets that were acquired in business
combinations, impairment of fixed assets related to our
transformation initiatives or adjustments to certain liabilities of
acquired companies due to changes in circumstances
surrounding those liabilities subsequent to the related
measurement period.

Consulting and professional fees relate to third-party

consulting and professional fees related to our quality
excellence and transformation initiatives, third-party
consulting fees related to certain information system
implementations, third-party integration consulting performed
in a variety of areas such as tax, compliance, logistics and
human resources for our business combinations, third-party
fees related to severance and termination benefits matters and
legal fees related to litigation matters involving acquired
businesses that existed prior to our acquisition or resulted
from our acquisition.

In 2011, 2010 and 2009, we terminated some employees as

we reduced management layers, restructured certain areas,
and commenced initiatives to focus on business opportunities
that best support our strategic priorities. In 2011, 2010 and
2009, approximately 500, 60 and 300 employees, respectively,
from across the globe were affected by these actions. As a
result of these changes in our work force and headcount
reductions from acquisitions, we incurred expenses related to
severance benefits, redundant salaries as we worked through
transition periods, share-based compensation acceleration and
other employee termination-related costs. The majority of
these termination benefits were provided in accordance with
our existing or local government policies and are considered
ongoing benefits. These costs were accrued when they became
probable and estimable and were recorded as part of other
current liabilities. The majority of these costs were paid during
the year they were incurred.

Information technology integration relates to the
non-capitalizable costs associated with integrating the
information systems of acquired businesses.

Vacated facilities relates to certain leased facilities we

ceased using in 2010 and 2009. Accordingly, we recorded
expense for the remaining lease payments, less estimated
sublease recoveries, and wrote-off any assets being used in
those facilities.

Facility and employee relocation relates to costs
associated with relocating certain facilities, employee
relocation resulting from our business combinations and
salaries and benefits of employees who are involved with our
transformation initiatives.

Over the past few years we have acquired a number of
U.S. and foreign-based distributors. We have incurred various
costs related to the consummation and integration of those
businesses.

Certain litigation matters relate to costs and adjustments

recognized during the year for the estimated or actual
settlement of various legal matters, including patent litigation
matters, commercial litigation matters and matters arising
from our acquisitions of certain competitive distributorships in
prior years. In 2009, we made a concerted effort to settle some
of these matters to avoid further litigation costs.

Contract termination costs relate to terminated
agreements in connection with the integration of acquired
companies and changes to our distribution model as part of
business restructuring and transformation. The terminated
contracts primarily relate to sales agents and distribution
agreements.

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

Investments – We invest our excess cash and cash
equivalents in debt securities. Our investments include
corporate debt securities, U.S. government and agency debt

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Notes to Consolidated Financial Statements (Continued)

securities, municipal bonds, foreign government debt
securities, commercial paper and certificates of deposit and
are classified and accounted for as available-for-sale.
Available-for-sale debt securities are recorded at fair value on
our consolidated balance sheet. Investments with a contractual
maturity of less than one year are classified as short-term
investments on our consolidated balance sheet, or in other
non-current assets if the contractual maturity is greater than
one year. Changes in fair value for available-for-sale securities
are recorded, net of taxes, as a component of accumulated
other comprehensive loss on our consolidated balance sheet.
We review our investments for other-than-temporary
impairment at each reporting period. If an unrealized loss for
any investment is considered to be other-than-temporary, the
loss will be recognized in the consolidated statement of
earnings in the period the determination is made. See Note 7
for more information regarding our investments.

Accounts Receivable – Accounts receivable consists of

trade and other miscellaneous receivables. We grant credit to
customers in the normal course of business and maintain an
allowance for doubtful accounts for potential credit losses. We
determine the allowance for doubtful accounts by geographic
market and take into consideration historical credit
experience, creditworthiness of the customer and other
pertinent information. We make concerted efforts to collect all
accounts receivable, but sometimes we have to write-off the
account against the allowance when we determine the account
is uncollectible. The allowance for doubtful accounts was $17.2
million and $14.4 million as of December 31, 2011 and 2010,
respectively.

Inventories – Inventories are stated at the lower of cost or

market, with cost determined on a first-in first-out basis.

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

Software Costs – We capitalize certain computer software

and software development costs incurred in connection with
developing or obtaining computer software for internal use
when both the preliminary project stage is completed and it is
probable that the software will be used as intended.
Capitalized software costs generally include external direct
costs of materials and services utilized in developing or
obtaining computer software and compensation and related
benefits for employees who are directly associated with the

software project. Capitalized software costs are included in
property, plant and equipment on our balance sheet and
amortized on a straight-line or weighted average estimated
user basis when the software is ready for its intended use over
the estimated useful lives of the software, which approximate
three to ten years.

Instruments – Instruments are hand-held devices used by

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

Goodwill – Goodwill is not amortized but is subject to

annual impairment tests. Goodwill has been assigned to
reporting units. We perform annual impairment tests by either
comparing a reporting unit’s estimated fair value to its carrying
amount or doing a qualitative assessment of a reporting unit’s
fair value from the last quantitative assessment to determine if
there is potential impairment. We do a qualitative assessment
when the results of the previous quantitative test indicated the
reporting unit’s estimated fair value was significantly in excess
of the carrying value of its net assets and we do not believe
there have been significant changes in the reporting unit’s
operations that would significantly decrease its estimated fair
value or significantly increase its net assets. If a quantitative
assessment is performed, the fair value of the reporting unit
and the implied fair value of goodwill are determined based
upon a discounted cash flow analysis. Significant assumptions
are incorporated into these discounted cash flow analyses such
as estimated growth rates and risk-adjusted discount rates. We
perform this test in the fourth quarter of the year or whenever
events or changes in circumstances indicate that the carrying
value of the reporting unit’s assets may not be recoverable. If
the fair value of the reporting unit is less than its carrying
value, an impairment loss is recorded to the extent that the
implied fair value of the reporting unit goodwill is less than the
carrying value of the reporting unit goodwill. During the years
ended December 31, 2010 and 2009, we recorded goodwill
impairment charges of $204.0 million and $73.0 million,
respectively, related to our U.S. Spine reporting unit. See Note
9 for more information regarding goodwill and goodwill
impairment.

Intangible Assets – Intangible assets are initially

measured at their fair value. We have determined the fair value
of our intangible assets either by the fair value of the
consideration exchanged for the intangible asset or the
estimated after-tax discounted cash flows expected to be

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Notes to Consolidated Financial Statements (Continued)

generated from the intangible asset. Intangible assets with an
indefinite life, including certain trademarks and trade names,
are not amortized. Indefinite life intangible assets are assessed
annually to determine whether events and circumstances
continue to support an indefinite life. Intangible assets with a
finite life, including core and developed technology, certain
trademarks and trade names, customer-related intangibles,
intellectual property rights and patents and licenses are
amortized on a straight-line basis over their estimated useful
life, ranging from less than one year to 40 years. Intangible
assets with a finite life are tested for impairment whenever
events or circumstances indicate that the carrying amount may
not be recoverable. Intangible assets with an indefinite life are
tested for impairment annually or whenever events or
circumstances indicate that the carrying amount may not be
recoverable. An impairment loss is recognized if the carrying
amount exceeds the estimated fair value of the asset. The
amount of the impairment loss to be recorded would be
determined based upon the excess of the asset’s carrying value
over its fair value. The fair values of indefinite lived intangible
assets are determined based upon a discounted cash flow
analysis using the relief from royalty method. The relief from
royalty method estimates the cost savings associated with
owning, rather than licensing, assets. Significant assumptions
are incorporated into these discounted cash flow analyses such
as estimated growth rates, royalty rates and risk-adjusted
discount rates.

In determining the useful lives of intangible assets, we

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

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

the differences are expected to reverse. The effect of a change
in tax rates on deferred tax assets and liabilities is recognized
in income in the period that includes the enactment date.
We reduce our deferred tax assets by a valuation
allowance if it is more likely than not that we will not realize
some portion or all of the deferred tax assets. In making such
determination, we consider all available positive and negative
evidence, including future reversals of existing taxable
temporary differences, projected future taxable income, tax
planning strategies and recent financial operations. In the
event we were to determine that we would be able to realize
our deferred income tax assets in the future in excess of their
net recorded amount, we would make an adjustment to the
valuation allowance which would reduce the provision for
income taxes. Federal income taxes are provided on the
portion of the income of foreign subsidiaries that is expected
to be remitted to the U.S.

We operate on a global basis and are subject to numerous

and complex tax laws and regulations. Our income tax filings
are regularly under audit in multiple federal, state and foreign
jurisdictions. Income tax audits may require an extended
period of time to reach resolution and may result in significant
income tax adjustments when interpretation of tax laws or
allocation of company profits is disputed. Because income tax
adjustments in certain jurisdictions can be significant, we
record accruals representing management’s best estimate of
the probable resolution of these matters. To the extent
additional information becomes available, such accruals are
adjusted to reflect the revised estimated probable outcome.

Derivative Financial Instruments – We measure all

derivative instruments at fair value and report them on our
consolidated balance sheet as assets or liabilities. We maintain
written policies and procedures that permit, under appropriate
circumstances and subject to proper authorization, the use of
derivative financial instruments solely for hedging purposes.
The use of derivative financial instruments for trading or
speculative purposes is prohibited by our policy. See Note 13
for more information regarding our derivative and hedging
activities.

Other Comprehensive Income – Other comprehensive
income refers to revenues, expenses, gains and losses that
under generally accepted accounting principles are included in
comprehensive income but are excluded from net earnings as
these amounts are recorded directly as an adjustment to
stockholders’ equity. Other comprehensive income is
comprised of foreign currency translation adjustments,
unrealized gains and losses on cash flow hedges, unrealized
gains and losses on available-for-sale securities and
amortization of prior service costs and unrecognized gains and
losses in actuarial assumptions.

Treasury Stock – We account for repurchases of common

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

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Notes to Consolidated Financial Statements (Continued)

Noncontrolling Interest – On January 1, 2009, we adopted

the FASB’s new guidance related to noncontrolling interests.
This guidance changed the accounting and reporting for
minority interests, which are now characterized as
noncontrolling interests and classified as a component of
equity. This adoption did not have a material impact on our
consolidated financial statements. During the year ended
December 31, 2009, we acquired 100 percent ownership of an
outstanding noncontrolling interest for approximately
$8.6 million. This purchase was recorded as an equity
transaction and is reflected as a financing activity in our
consolidated statement of cash flows. As a result, the carrying
balance of the noncontrolling interests of $3.6 million was
eliminated, and the remaining $5.0 million, representing the
difference between the purchase price and carrying balance,
was recorded as a reduction in paid-in capital.

In 2011, we made an investment in a company in which we
acquired a controlling financial interest, but not 100 percent of
the equity. Further information related to the noncontrolling
interests of that investment has not been provided as it is not
significant to our consolidated financial statements.

Accounting Pronouncements – In 2011, the FASB issued
an accounting standard update (ASU) that allowed companies
when performing their annual goodwill impairment test to do a
qualitative assessment to evaluate whether impairment has
occurred versus performing a quantitative calculation of
estimated fair value. We elected to early adopt this standard
and performed a qualitative assessment on three of our
reporting units that in prior years had estimated fair values
that were substantially in excess of their carrying values. This
ASU just changed the methodology of testing for goodwill
impairment and would not affect the outcome of impairment
testing. Therefore, it did not have an effect on our financial
position, results of operations or cash flows.

In 2011 the FASB issued an ASU requiring companies to
present net income and other comprehensive income in either a
single continuous statement or in two separate, but consecutive,
statements of net income and other comprehensive income. The
ASU also required the reclassifications adjustments from
accumulated other comprehensive income to net income be
presented on the statement of earnings by line item, but this
provision of the ASU has been delayed indefinitely. The
requirement regarding presentation of net income and other
comprehensive income in a single or two separate, but
consecutive, statements will be effective for us on January 1,
2012. The ASU only changes the presentation requirements of
other comprehensive income and does not change any
accounting for other comprehensive income and therefore will
have no effect on our financial position, results of operations or
cash flows. We intend to show other comprehensive income in a
separate, consecutive statement and have already done so in
this Annual Report on Form 10-K. Information regarding our
reclassification adjustments to net income may already be found
on our Consolidated Statements of Comprehensive Income,
Note 13 and Note 14.

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

SHARE-BASED COMPENSATION

Our share-based payments primarily consist of stock
options, restricted stock, restricted stock units (RSUs), and an
employee stock purchase plan. Share-based compensation
expense is as follows (in millions):

For the Years Ended December 31,

2011

2010

2009

Stock options

RSUs and other

Total expense, pre-tax

Tax benefit related to awards

Total expense, net of tax

$ 41.7

$ 47.6

$ 61.9

18.8

60.5

14.4

62.0

13.4

75.3

(17.8)

(16.2)

(20.9)

$ 42.7

$ 45.8

$ 54.4

Share-based compensation cost capitalized as part of

inventory for the years ended December 31, 2011, 2010 and
2009 was $8.8 million, $12.2 million, and $17.2 million,
respectively. As of December 31, 2011 and 2010,
approximately $4.8 million and $6.6 million of capitalized costs
remained in finished goods inventory.

Stock Options

We had two equity compensation plans in effect at

December 31, 2011: the 2009 Stock Incentive Plan (2009 Plan)
and the Stock Plan for Non-Employee Directors. The 2009 Plan
succeeds the 2006 Stock Incentive Plan (2006 Plan) and the
TeamShare Stock Option Plan (TeamShare Plan). Following
stockholder approval of the 2009 Plan in May 2009, no further
awards were granted under the 2006 Plan or under the
TeamShare Plan, and shares remaining available for grant
under those plans have been merged into the 2009 Plan.
Vested and unvested stock options and unvested restricted
stock and RSUs previously granted under the 2006 Plan, the
TeamShare Plan and another prior plan, the 2001 Stock
Incentive Plan, remained outstanding as of December 31,
2011. We have reserved the maximum number of shares of
common stock available for award under the terms of each of
these plans. We have registered 57.9 million shares of common
stock under these plans. The 2009 Plan provides for the grant
of nonqualified stock options and incentive stock options, long-
term performance awards in the form of performance shares or
units, restricted stock, RSUs and stock appreciation rights. The
Compensation and Management Development Committee of
the Board of Directors determines the grant date for annual
grants under our equity compensation plans. The date for
annual grants under the 2009 Plan to our executive officers is
expected to occur in the first quarter of each year following
the earnings announcements for the previous quarter and full
year. The Stock Plan for Non-Employee Directors provides for
awards of stock options, restricted stock and RSUs to

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Notes to Consolidated Financial Statements (Continued)

non-employee directors. It has been our practice to issue
shares of common stock upon exercise of stock options from
previously unissued shares, except in limited circumstances
where they are issued from treasury stock. The total number
of awards which may be granted in a given year and/or over
the life of the plan under each of our equity compensation
plans is limited. At December 31, 2011, an aggregate of
10.6 million shares were available for future grants and awards
under these plans.

Stock options granted to date under our plans generally

vest over four years and generally have a maximum
contractual life of 10 years. As established under our equity

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

A summary of stock option activity for the year ended December 31, 2011 is as follows (options in thousands):

Outstanding at January 1, 2011

Options granted

Options exercised

Options cancelled

Options expired

Outstanding at December 31, 2011

Vested or expected to vest as of December 31, 2011

Exercisable at December 31, 2011

We use a Black-Scholes option-pricing model to
determine the fair value of our stock options. Expected
volatility was derived from the implied volatility of traded
options on our stock that were actively traded around the
grant date of the stock options with exercise prices similar to
the stock options and maturities of over one year. The
expected term of the stock options has been derived from
historical employee exercise behavior. The risk-free interest
rate is determined using the implied yield currently available
for zero-coupon U.S. government issues with a remaining term
approximating the expected life of the options. We used a
dividend yield of zero percent as we had not paid any
dividends since becoming a public company in 2001. In
December 2011, we declared our first dividend and,
accordingly, we will take our new dividend policy into
consideration in our assumptions for future grants.

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Life

Intrinsic
Value
(in millions)

Stock Options

17,438

$66.76

1,617

60.07

(1,137)

35.21

(416)

59.32

(754)

75.21

16,748

$68.04

16,224

$68.40

12,608

$71.30

5.4

5.3

4.5

$27.2

$26.0

$16.5

The following table presents information regarding the

weighted average fair value for stock options granted, the
assumptions used to determine fair value, and the intrinsic
value of options exercised in the indicated year:

For the Years Ended December 31,

2011

2010

2009

Dividend yield

Volatility

Risk-free interest rate

Expected life (years)

–%

26.1% 26.3% 41.6%

2.2%

2.8%

1.7%

6.1

5.9

5.4

Weighted average fair value of options

granted

$18.33

$18.17

$16.02

Intrinsic value of options exercised (in

millions)

$ 27.5

$ 8.5

$ 3.3

As of December 31, 2011, there was $45.3 million of

unrecognized share-based payment expense related to
nonvested stock options granted under our plans. That
expense is expected to be recognized over a weighted average
period of 2.3 years.

RSUs

We have awarded RSUs to our employees. The terms of

the awards have been either four or five years with vesting
occurring ratably on the anniversary date of the award.
However, based upon meeting certain criteria, as established
under our equity compensation plans, these awards may

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Notes to Consolidated Financial Statements (Continued)

accelerate upon retirement after the first anniversary date of
the award. Accordingly, the requisite service period used for
share-based payment expense ranges from one to five years.
A summary of nonvested RSU activity for the year ended

December 31, 2011 is as follows (in thousands):

Outstanding at January 1, 2011

Granted

Vested

Forfeited

Outstanding at December 31, 2011

Weighted Average
Grant Date
Fair Value

$52.30

60.14

48.18

58.95

56.25

RSUs

948

651

(195)

(217)

1,187

The fair value of the awards was determined based upon

the fair market value of our common stock on the date of
grant. We are required to estimate the number of RSUs that
will vest and recognize share-based payment expense on a
straight-line basis over the requisite service period. As of
December 31, 2011, we estimate that approximately 1,067,000
outstanding RSUs will vest. If our estimate were to change in
the future, the cumulative effect of the change in estimate will
be recorded in that period. Based upon the number of RSUs
that we expect to vest, the unrecognized share-based payment
expense as of December 31, 2011 was $38.0 million and is
expected to be recognized over a weighted average period of
2.7 years. The fair value of RSUs vesting during the years
ended December 31, 2011, 2010 and 2009 based upon our
stock price on the date of vesting was $11.8 million, $3.2
million and $7.0 million, respectively.

INVENTORIES

Inventories consisted of the following (in millions):

As of December 31,

Finished goods
Work in progress
Raw materials

Inventories

2011

2010

$743.0
47.8
139.0

$757.3
47.0
132.1

$929.8

$936.4

Amounts charged to the consolidated statement of
earnings for excess and obsolete inventory in the years ended
December 31, 2011, 2010 and 2009 were $47.6 million, $45.8
million and $81.7 million, respectively.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following

(in millions):

As of December 31,

Land
Building and equipment
Capitalized software costs
Instruments
Construction in progress

Accumulated depreciation

2011

2010

22.3
1,196.8
208.4
1,509.2
76.4

22.0
1,162.0
172.0
1,365.6
66.5

3,013.1
(1,805.8)

2,788.1
(1,574.3)

Property, plant and equipment, net

$ 1,207.3

$ 1,213.8

Depreciation expense was $266.1 million, $247.9 million

and $244.2 million for the years ended December 31, 2011,
2010 and 2009, respectively.

ACQUISITIONS

We made a number of business acquisitions during the
years 2011, 2010 and 2009. In November 2011 we acquired
ExtraOrtho, Inc. (ExtraOrtho). The ExtraOrtho acquisition
enhances our position in the estimated $820 million external
fixation market. In December 2010 we acquired Beijing
Montagne Medical Device Co., Ltd. (Montagne) and Sodem
Diffusion S.A. (Sodem). The Montagne acquisition makes us a
significant provider of orthopaedic solutions in China and
provides product lines tailored exclusively to the rapidly
growing Chinese market. The Sodem acquisition broadens our
portfolio of surgical power tools and strengthens our position
in the estimated $1 billion surgical power tool market.
Additionally, we have acquired a number of foreign-based
distributors during the three year period.

The results of operations of the acquired companies have

been included in our consolidated results of operations
subsequent to the transaction dates, and the respective assets
and liabilities of the acquired companies have been recorded at
their estimated fair values in our consolidated statement of
financial position as of the transaction dates, with any excess
purchase price being allocated to goodwill. The estimated fair
values of the ExtraOrtho assets are preliminary. Pro forma
financial information and other information required have not
been included as the acquisitions did not have a material
impact upon our financial position or results of operations.

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Notes to Consolidated Financial Statements (Continued)

INVESTMENTS

We invest in short and long-term investments classified as

available-for-sale securities. Information regarding our
investments is as follows (in millions):

The amortized cost and fair value of our available-for-sale
fixed-maturity securities by contractual maturity are as follows
(in millions):

As of December 31, 2011

Amortized Cost

Amortized
Cost

Gross Unrealized

Gains

Losses

Fair value

Due in one year or less
Due after one year through two years

$324.8

$0.2

$(0.3) $324.7

Total

$455.4
217.3

$672.7

Fair
Value

$455.5
217.2

$672.7

As of December 31, 2011

Corporate debt securities
U.S. government and agency

debt securities
Municipal bonds
Foreign government debt

securities

Commercial paper
Certificates of deposit

Total short and long-term

investments

As of December 31, 2010

Corporate debt securities
U.S. government and agency

debt securities
Municipal bonds
Foreign government debt

securities

Commercial paper
Certificates of deposit

Total short and long-term

investments

177.1
1.0

0.1
–

6.8
74.5
88.5

–
–
–

–
–

–
–
–

177.2
1.0

6.8
74.5
88.5

$672.7

$0.3

$(0.3) $672.7

$203.9

$0.1

$(0.2) $203.8

47.9
1.1

10.3
16.1
131.5

–
–

–
–
–

–
–

–
–
(0.1)

47.9
1.1

10.3
16.1
131.4

$410.8

$0.1

$(0.3) $410.6

The following table shows the fair value and gross

unrealized losses for all available-for-sale securities in an
unrealized loss position deemed to be temporary (in millions):

As of December 31, 2011

As of December 31, 2010

Fair
Value

Unrealized
Losses

Fair
value

Unrealized
Losses

Corporate debt securities

$164.5

$(0.3)

$126.1

$(0.2)

Certificates of deposit

–

50.6

(0.1)

Derivatives, current and

long-term

Total

$164.5

$(0.3)

$176.7

$(0.3)

All securities in the table above have been in an unrealized

loss position for less than twelve months. A total of 97
securities were in an unrealized loss position as of
December 31, 2011.

The unrealized losses on our investments in corporate
debt securities were caused by increases in interest yields
resulting from adverse conditions in the global credit markets.
We believe the unrealized losses associated with our
available-for-sale securities as of December 31, 2011 are
temporary because we do not intend to sell these investments
before maturity, and we do not believe we will be required to
sell them before recovery of their amortized cost basis.

FAIR VALUE MEASUREMENTS OF ASSETS AND LIABILITIES

The following financial assets and liabilities are recorded

at fair value on a recurring basis (in millions):

As of December 31, 2011

Fair Value Measurements at Reporting Date Using:

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Recorded
Balance

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Description

Assets

Available-for-sale securities

Corporate debt securities

$324.7

$–

$324.7

$–

U.S. government and

agency debt securities

177.2

Municipal bonds

Foreign government debt

securities

Commercial paper

Certificates of deposit

1.0

6.8

74.5

88.5

Total available-for-sale

securities

672.7

Foreign currency forward
contracts and options

Interest rate swaps

18.3

27.8

–

177.2

1.0

6.8

74.5

88.5

672.7

18.3

27.8

–

Liabilities

Derivatives, current and

long-term

Foreign currency forward
contracts and options

Cross-currency interest

rate swaps

$718.8

$–

$718.8

$–

$ 25.2

8.2

$ 33.4

$–

–

$–

$ 25.2

8.2

$ 33.4

$–

–

$–

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Notes to Consolidated Financial Statements (Continued)

As of December 31, 2010

The following nonfinancial assets were measured at fair

Fair Value Measurements at Reporting Date Using:

value on a nonrecurring basis (in millions):

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Recorded
Balance

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Description

Assets

Available-for-sale securities

Corporate debt securities

$203.8

$–

$203.8

$–

U.S. government and

agency debt securities

Municipal bonds

Foreign government debt

securities

Commercial paper

Certificates of deposit

Total available-for-sale

securities

Derivatives, current and

long-term

47.9

1.1

10.3

16.1

131.4

410.6

Foreign currency forward
contracts and options

Interest rate swaps

34.5

1.5

–

47.9

1.1

10.3

16.1

131.4

410.6

34.5

1.5

–

$446.6

$–

$446.6

$–

Liabilities

Derivatives, current and

long-term

Foreign currency forward
contracts and options

$ 40.0

$–

$ 40.0

$–

We value our available-for-sale securities using a market

approach based on broker prices for identical assets in
over-the-counter markets and assess counterparty credit risk.
We value our foreign currency forward contracts and

foreign currency options using a market approach based on
foreign currency exchange rates obtained from active markets
and perform ongoing assessments of counterparty credit risk.
We value our interest rate swaps using a market approach
based on publicly available market yield curves and the terms
of our swaps and assess counterparty credit risk.

We value our cross-currency interest rate swaps using a
market approach based upon publicly available market yield
curves, foreign currency exchange rates obtained from active
markets and the terms of our swaps. We also perform ongoing
assessments of counterparty credit risk.

Fair Value Measurements Using:

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Total
Losses

$–

$137.0

$204.0

$137.0

$204.0

Description

Goodwill

Year Ended
December 31,
2010

$137.0

Fair Value Measurements Using:

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Total
Losses

$–

$342.9

$73.0

$342.9

$73.0

Year Ended
December 31,
2009

$342.9

Description

Goodwill

In 2010, goodwill relating to our U.S. Spine reporting unit
with a carrying amount of $341.0 million was written down to
its implied fair value of $137.0 million, resulting in an
impairment charge of $204.0 million. The implied fair value of
goodwill equals the estimated fair value of a reporting unit
minus the fair value of the reporting unit’s net assets. In
determining the implied fair value of the U.S. Spine reporting
unit’s goodwill, we used unobservable inputs to estimate the
fair value of the reporting unit and its assets and liabilities. Fair
value was determined using an equal weighting of income and
market approaches. Fair value under the income approach was
determined by discounting to present value the estimated
future cash flows of the reporting unit. Fair value under the
market approach utilized the comparable transaction
methodology, which uses valuation indicators determined from
sales of other businesses that are similar to our U.S. Spine
reporting unit. In estimating the future cash flows of the
reporting unit, we utilized a combination of market and
company specific inputs that a market participant would use in
assessing the fair value of the reporting unit. The primary
market input was revenue growth rates. These rates were
based upon historical trends and estimated future growth
drivers such as an aging global population, obesity and more
active lifestyles. Significant company specific inputs included
assumptions regarding how the reporting unit could leverage
operating expenses as revenue grows and the impact any new
products will have on revenues. Under the comparable
transaction methodology, we took into consideration when the
comparable transaction occurred and the differences that may
exist due to changes in the economic environment. We also
took into consideration differences between the comparable
companies and our U.S. Spine reporting unit that could affect
fair value, such as cash and debt levels.

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Notes to Consolidated Financial Statements (Continued)

The fair value of the reporting unit’s assets and liabilities

was determined by using the same methods that are used in
business combination purchase accounting. See Note 9 for
further information regarding this goodwill impairment.

In 2009, the implied fair value of goodwill was determined

using the same methodologies utilized in the 2010 valuation.

GOODWILL AND OTHER INTANGIBLE ASSETS

The following table summarizes the changes in the

carrying amount of goodwill (in millions):

Balance at January 1, 2010

Goodwill
Accumulated impairment

Americas

Europe

Asia Pacific

Total

$1,547.9

$1,173.1

$135.5

$2,856.5

losses

(73.0)

–

(73.0)

U.S. Spine reporting unit

impairment

Acquisitions
Currency translation

Balance at December 31,

2010
Goodwill
Accumulated impairment

losses

Acquisitions
Currency translation

Balance at December 31,

2011
Goodwill
Accumulated impairment

1,474.9

1,173.1

135.5

2,783.5

(204.0)
13.1
1.8

–
3.7
(69.7)

–
37.3
15.1

(204.0)
54.1
(52.8)

1,562.8

1,107.1

187.9

2,857.8

(277.0)

1,285.8
26.7
(0.8)

–

(277.0)

1,107.1
6.6
4.7

187.9
–
8.0

2,580.8
33.3
11.9

1,588.7

1,118.4

195.9

2,903.0

losses

(277.0)

–

(277.0)

$1,311.7

$1,118.4

$195.9

$2,626.0

We conduct our annual impairment test in the fourth

quarter of every year or whenever events occur or
circumstances change that would more likely than not reduce
the fair value of a reporting unit below its carrying amount.
During our 2009 and 2010 annual impairment tests, it was
determined that our U.S. Spine reporting unit’s carrying value
was in excess of its estimated fair value. Fair value was
determined using an equal weighting of income and market
approaches.

In the 2009 period, factors that contributed to the

estimated fair value of the reporting unit being below its
carrying value included a decrease in projected revenues
related to the Dynesys Dynamic Stabilization System. This
product line experienced increased competition and insurance
reimbursement issues in 2009. We had been seeking approval
from the FDA to market this product differently in the U.S.,
which would have enhanced its position in the market.
However, in November 2009 an FDA advisory panel issued a
non-approvable recommendation, increasing the uncertainty
of the estimated future cash flows at that time. In addition to
the Dynesys product, revenues from other products had been

affected as we worked through the integration of the sales
channel following an acquisition.

For our annual impairment testing in 2010, factors in the

broader U.S. spine marketplace as well as company specific
factors contributed to a further decrease in the estimated fair
value of the reporting unit. At the time of our 2009 impairment
test, we estimated that the U.S. spine market was
experiencing year-over-year revenue growth in the low double
digits that would continue into the foreseeable future. Since
the time of our 2009 test, year-over-year growth continued to
decelerate and after multiple quarters of deceleration we
estimated this may be a longer-term trend instead of a
temporary phenomenon. In our 2010 impairment test, we
concluded that year-over-year growth had fallen to the low to
mid single digits which we estimate to be the trend in the
near-term. A portion of this decrease has come from lower
pricing as hospitals try to reduce their costs.

Another factor in the lower growth trend included
increased scrutiny from insurance companies and continued
discussion in the healthcare community on whether certain
spine procedures are necessary. As an example, late in the
third quarter of 2010 in one state an insurer provided notice
that starting January 1, 2011, the insurer would require prior
review and certification that the patient has met specific
clinical criteria before the procedure would be covered. While
revenues from these procedures in this one state are not
significant to our overall revenues, it caused uncertainty on
whether more insurers may take similar actions.

As discussed above, we believed such deceleration and

uncertainty as to revenue growth also decreased the
valuations of other spine companies in the U.S. market and
thus affected our estimated fair value of our U.S. Spine
reporting unit.

In addition, following the FDA advisory panel decision in

November 2009 we continued to evaluate our regulatory
options for marketing the Dynesys product differently. In
2010, we concluded that obtaining regulatory approval would
take more time and cost more money than originally expected.
This conclusion also contributed to the decrease in our
estimated fair value of the reporting unit.

As a result, we recorded goodwill impairment charges of

$204.0 million and $73.0 million during the years ended
December 31, 2010 and 2009, respectively.

In our 2011 impairment test, we concluded that the
estimated fair value of the U.S. Spine reporting unit was 13
percent higher than its carrying value.

We have six other reporting units with goodwill assigned

to them. We estimate the fair value of those reporting units
using the income approach by discounting to present value the
estimated future cash flows of the reporting unit. For three of
those reporting units, in 2011 we only performed a qualitative
assessment of changes in fair value as allowed by a new
accounting pronouncement as discussed in Note 2. For each of
those six reporting units, the estimated fair value substantially
exceeded its carrying value.

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Notes to Consolidated Financial Statements (Continued)

We will continue to monitor the fair value of our U.S.
Spine reporting unit as well as our other six reporting units in
our interim and annual reporting periods. If our estimated
cash flows for these reporting units decrease, we may have to
record further impairment charges in the future. Factors that
could result in our cash flows being lower than our current
estimates include: 1) decreased revenues caused by

unforeseen changes in the healthcare market, or our inability
to generate new product revenue from our research and
development activities, and 2) if we are not able to achieve the
estimated operating margins in our forecasts due to
unforeseen factors. Additionally, changes in the broader
economic environment could cause changes to our estimated
discount rates, which will impact our estimated fair values.

The components of identifiable intangible assets are as follows (in millions):

As of December 31, 2011:
Intangible assets subject to amortization:

Gross carrying amount
Accumulated amortization

Intangible assets not subject to amortization:

Gross carrying amount

Core
Technology

Developed
Technology

Intellectual
Property
Rights

Trademarks
and Trade
Names

Customer
Relationships

Other

Total

$144.1
(59.9)

$ 530.8
(255.5)

$ 172.5
(100.2)

$ 40.4
(26.9)

$164.3
(46.7)

$ 82.7
(39.4)

$1,134.8
(528.6)

–

192.3

–

192.3

Total identifiable intangible assets

$ 84.2

$ 275.3

$ 72.3

$205.8

$117.6

$ 43.3

$ 798.5

As of December 31, 2010:
Intangible assets subject to amortization:

Gross carrying amount
Accumulated amortization

Intangible assets not subject to amortization:

Gross carrying amount

$144.1
(52.0)

$ 511.5
(219.3)

$ 153.7
(73.4)

$ 36.8
(23.4)

$147.7
(32.8)

$ 70.0
(33.1)

$1,063.8
(434.0)

–

197.3

–

197.3

Total identifiable intangible assets

$ 92.1

$ 292.2

$ 80.3

$210.7

$114.9

$ 36.9

$ 827.1

We currently have and anticipate future product
development efforts that may replace the current products
that use our trademarks and trade names. While it is
anticipated, it is not certain that these new products will
utilize these trademarks and trade names. If these new
products do not use these trademarks and trade names, these
assets may be impaired and/or their useful lives may need
adjusted.

Intangible amortization expense was recorded as follows

(in millions):

For the Years Ended December 31,

2011

2010

2009

Cost of products sold

Selling, general and administrative

$26.7

$33.1

$33.6

67.1

59.2

59.6

Total intangible amortization

$93.8

$92.3

$93.2

Estimated annual amortization expense based upon
intangible assets recognized as of December 31, 2011 for the
years ending December 31, 2012 through 2016 is (in millions):

For the Years Ending December 31,

2012

2013

2014

2015

2016

$94.1

88.1

84.9

71.4

67.1

10. OTHER CURRENT AND LONG-TERM LIABILITIES

Other current and long-term liabilities consisted of the

following (in millions):

As of December 31,

Other current liabilities:

License and service agreements

Certain claims accrual (Note 19)

Salaries, wages and benefits

Accrued liabilities

Total other current liabilities

Other long-term liabilities:

Long-term income tax payable

Certain claims accrual (Note 19)

Other long-term liabilities

Total other long-term liabilities

2011

2010

$106.1

$108.5

50.0

116.5

299.3

42.5

118.1

254.9

$571.9

$524.0

$125.8

$113.5

261.1

170.5

90.3

180.2

$557.4

$384.0

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Notes to Consolidated Financial Statements (Continued)

–

141.8

We and certain of our wholly owned foreign subsidiaries

11. DEBT

Our debt consisted of the following (in millions):

As of December 31,

Short-term debt

Senior Credit Facility

Other short-term debt

Total short-term debt

Long-term debt

Senior Notes due 2014

Senior Notes due 2019

Senior Notes due 2021

Senior Notes due 2039

Debt discount

Adjustment related to interest rate swaps

Senior Credit Facility

Total long-term debt

2011

2010

$ 143.0

0.3

$ 143.3

$ 250.0

–

500.0

300.0

500.0

(1.8)

27.8

500.0

–

500.0

(1.2)

1.5

$1,576.0

$1,142.1

In November 2011, we sold $250 million aggregate

principal amount of our 1.4 percent Senior Notes due
November 30, 2014 (2014 Notes) and $300 million aggregate
principal amount of our 3.375 percent Senior Notes due
November 30, 2021 (2021 Notes, and together with the 2014
Notes, the 2011 Notes) in a public offering. Interest is payable
on May 30 and November 30 of each year until maturity. We
received net proceeds of $549.3 million, net of an offering
discount of $0.7 million. The 2014 Notes and 2021 Notes carry
an effective interest rate of 1.424 percent and 3.396 percent,
respectively.

In November 2009, we sold $500 million aggregate
principal amount of our 4.625 percent Senior Notes due
November 30, 2019 (2019 Notes) and $500 million aggregate
principal amount of our 5.75 percent Senior Notes due
November 30, 2039 (2039 Notes, and together with the 2019
Notes the 2009 Notes) in a public offering. Interest is payable
on May 30 and November 30 of each year until maturity. We
received net proceeds of $998.8 million, net of an offering
discount of $1.2 million. The 2019 Notes and 2039 Notes carry
an effective interest rate of 4.634 percent and 5.762 percent,
respectively.

The aggregate estimated fair values of the 2011 Notes and

2009 Notes (together, the Senior Notes) as of December 31,
2011 and 2010 was $1,693.0 million and $1,022.0 million,
respectively.

We may redeem the Senior Notes at our election in whole

or in part at any time prior to maturity at a redemption price
equal to the greater of 1) 100 percent of the principal amount
of the notes being redeemed; or 2) the sum of the present
values of the remaining scheduled payments of principal and
interest (not including any portion of such payments of
interest accrued as of the date of redemption), discounted to
the date of redemption on a semi-annual basis at the Treasury
Rate (as defined in the debt agreement), plus 15 basis points

in the case of the 2014 Notes, 20 basis points in the case of the
2019 Notes and 2021 Notes, and 25 basis points in the case of
the 2039 Notes. We will also pay the accrued and unpaid
interest on the Senior Notes to the redemption date.

In December 2010, we entered into interest rate swap

agreements which we designated as fair value hedges of
underlying fixed-rate obligations on our Senior Notes due
2019. See Note 13 for additional information regarding the
interest rate swap agreements.

We have a five year $1,350 million senior credit agreement

(Senior Credit Facility). The Senior Credit Facility is a
revolving, multi-currency, senior unsecured credit facility
maturing November 30, 2012. Available borrowings under the
Senior Credit Facility at December 31, 2011 were
$1,207.0 million. The carrying value of the Senior Credit
Facility approximates fair value, as the underlying instruments
have variable interest rates at market value.

are the borrowers under the Senior Credit Facility. Borrowings
under the Senior Credit Facility bear interest at a LIBOR-based
rate plus an applicable margin determined by reference to our
senior unsecured long-term credit rating and the amounts
drawn under the Senior Credit Facility, at an alternate base
rate, or at a fixed-rate determined through a competitive bid
process. The Senior Credit Facility contains customary
affirmative and negative covenants and events of default for an
unsecured financing arrangement, including, among other
things, limitations on consolidations, mergers and sales of
assets. Financial covenants include a maximum leverage ratio
of 3.0 to 1.0 and a minimum interest coverage ratio of 3.5 to
1.0. If we fall below an investment grade credit rating,
additional restrictions would result, including restrictions on
investments, payment of dividends and stock repurchases. We
were in compliance with all covenants under the Senior Credit
Facility as of December 31, 2011. Commitments under the
Senior Credit Facility are subject to certain fees, including a
facility and a utilization fee. Borrowings under the Senior
Credit Facility at December 31, 2011 were U.S. Dollar-based
and at December 31, 2010 were Japanese Yen-based
borrowings.

We also have available uncommitted credit facilities

totaling $63.6 million.

At December 31, 2011, the weighted average interest rate
for short-term and long-term borrowings was 0.1 percent and
3.8 percent, respectively. We paid $55.0 million, $59.8 million
and $17.0 million in interest during 2011, 2010 and 2009,
respectively.

12. OTHER COMPREHENSIVE INCOME

Other comprehensive income items represent certain
amounts that are reported as components of shareholders’
equity in our consolidated balance sheet, including foreign
currency translation adjustments, unrealized gains and losses,
net of tax, on available-for-sale investments and hedging
instruments and pension liability adjustments.

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Notes to Consolidated Financial Statements (Continued)

Accumulated other comprehensive income consisted of

the following:

As of December 31,

Foreign currency translation
Cash flow hedges
Unrealized loss on securities
Unrecognized prior service cost and unrecognized

2011

2010

$ 399.4
(10.1)
–

$394.8
(4.0)
(0.2)

loss in actuarial assumptions

(117.9)

(69.6)

Accumulated other comprehensive income

$ 271.4

$321.0

13. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We are exposed to certain market risks relating to our

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

Interest Rate Risk

Derivatives Designated as Fair Value Hedges

We use interest rate derivative instruments to manage our

exposure to interest rate movements by converting fixed-rate
debt into variable-rate debt. Under these agreements, we agree
to exchange, at specified intervals, the difference between
fixed and variable interest amounts calculated by reference to
an agreed-upon notional principal amount. The objective of the
instruments is to more closely align interest expense with
interest income received on cash and cash equivalents. These
derivative instruments are designated as fair value hedges
under GAAP. Changes in the fair value of the derivative
instrument are recorded in current earnings and are offset by
gains or losses on the underlying debt instrument.

In 2010, we entered into multiple nine-year

fixed-to-variable interest rate swap agreements with a total
notional amount of $250 million. These interest rate swap
agreements were designated as fair value hedges of the fixed
interest rate obligation of our 2019 Notes. We receive a fixed
interest rate of 4.625 percent and pay variable interest equal to
the three-month LIBOR plus an average of 133 basis points on
these interest rate swap agreements.

foreign currency exchange rate risk with respect to
transactions and net assets denominated in Euros, Swiss
Francs, Japanese Yen, British Pounds, Canadian Dollars,
Australian Dollars, Korean Won, Swedish Krona, Czech
Koruna, Thai Baht, Taiwan Dollars, South African Rand,
Russian Rubles and Indian Rupees. We do not use derivative
financial instruments for trading or speculative purposes.

Derivatives Designated as Cash Flow Hedges

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

We perform quarterly assessments of hedge effectiveness

by verifying and documenting the critical terms of the hedge
instrument and that forecasted transactions have not changed
significantly. We also assess on a quarterly basis whether there
have been adverse developments regarding the risk of a
counterparty default. For derivatives which qualify as hedges
of future cash flows, the effective portion of changes in fair
value is temporarily recorded in other comprehensive income
and then recognized in cost of products sold when the hedged
item affects net earnings. The ineffective portion of a
derivative’s change in fair value, if any, is immediately reported
in cost of products sold.

For forward contracts and options outstanding at
December 31, 2011, we have obligations to purchase U.S.
Dollars and sell Euros, Japanese Yen, British Pounds, Canadian
Dollars, Australian Dollars, Korean Won, Swedish Krona, Czech
Koruna, Thai Baht, Taiwan Dollars, South African Rand,
Russian Rubles and Indian Rupees and purchase Swiss Francs
and sell U.S. Dollars at set maturity dates ranging from January
2012 through June 2014. As of December 31, 2011, the
notional amounts of outstanding forward contracts and options
entered into with third parties to purchase U.S. Dollars were
$1.3 billion. As of December 31, 2011, the notional amounts of
outstanding forward contracts and options entered into with
third parties to purchase Swiss Francs were $246.7 million.

Foreign Currency Exchange Rate Risk

Derivatives Not Designated as Hedging Instruments

We operate on a global basis and are exposed to the risk

that our financial condition, results of operations and cash
flows could be adversely affected by changes in foreign
currency exchange rates. To reduce the potential effects of
foreign currency exchange rate movements on net earnings,
we enter into derivative financial instruments in the form of
foreign currency exchange forward contracts and options with
major financial institutions. We are primarily exposed to

We enter into foreign currency forward exchange
contracts with terms of one month to manage currency
exposures for monetary assets and liabilities denominated in a
currency other than an entity’s functional currency. As a
result, any foreign currency remeasurement gains/losses
recognized in earnings are generally offset with gains/losses on
the foreign currency forward exchange contracts in the same
reporting period. These offsetting gains/losses are recorded in

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Notes to Consolidated Financial Statements (Continued)

cost of products sold as the underlying assets and liabilities
exposed to remeasurement include inventory-related
transactions. These contracts are settled on the last day of
each reporting period. Therefore, there is no outstanding
balance related to these contracts recorded on the balance
sheet as of the end of the reporting period. The notional
amounts of these contracts are typically in a range of $1.2
billion to $1.7 billion per quarter.

Foreign Currency Exchange and Interest Rate Risk

Derivatives Designated as Cash Flow Hedges

In 2011, our subsidiary in Japan, with a functional
currency of Japanese Yen, borrowed variable-rate debt of
$143.0 million denominated in U.S. Dollars under our Senior
Credit Facility. To manage the foreign currency exchange risk
associated with remeasuring the debt to Japanese Yen and the
interest rate risk associated with the variable-rate debt, we
have entered into multiple cross-currency interest rate swap
agreements with a total notional amount of 11,798 million
Japanese Yen. We designated these swaps as cash flow hedges
of the foreign currency exchange and interest rate risks. The
effective portion of changes in fair value of the cross-currency
interest rate swaps is temporarily recorded in other
comprehensive income and then recognized in interest

Derivatives Designated as Cash Flow Hedges

expense when the hedged item affects net earnings. We pay a
fixed interest rate of 0.1 percent and receive variable interest
equal to the three-month LIBOR plus 18.5 basis points on
these cross-currency interest rate swap agreements.

Income Statement Presentation

Derivatives Designated as Fair Value Hedges

Derivative instruments designated as fair value hedges
had the following effects on our consolidated statement of
earnings (in millions):

Gain on
Instrument

Loss on Hedged
Item

Year Ended
December 31,

2011

2010

2011

2010

Location on
Statement of
Earnings

Interest expense

$26.3

$1.5

$(26.3) $(1.5)

Derivative
Instrument

Interest rate
swaps

We had no ineffective fair value hedging instruments nor

any amounts excluded from the assessment of hedge
effectiveness during the years ended December 31, 2011 and
2010.

Derivative instruments designated as cash flow hedges had the following effects on other comprehensive income (OCI) on our
consolidated balance sheet and our consolidated statement of earnings (in millions):

Amount of Gain / (Loss)
Recognized in OCI

Year Ended December 31,

Amount of Gain / (Loss)
Reclassified from OCI

Year Ended December 31,

Derivative Instrument

2011

2010

2009

Location on Statement of Earnings

2011

2010

2009

Foreign exchange forward contracts

$(34.9) $11.2

$(35.8)

Cost of products sold

$(32.9) $7.3

$16.8

Foreign exchange options

Cross-currency interest rate swaps

(0.2)

0.2

0.3

–

(2.0)

–

$(34.9) $11.5

$(37.8)

Cost of products sold

–

Interest expense

(8.3)

–

1.2

–

$(41.2) $7.3

$18.0

The net amount recognized in earnings during the years ended December, 2011, 2010 and 2009 due to ineffectiveness and

amounts excluded from the assessment of hedge effectiveness were not significant.

The fair value of outstanding derivative instruments designated as cash flow hedges and recorded on the balance sheet at
December 31, 2011, together with settled derivatives where the hedged item has not yet affected earnings, was a net unrealized loss
of $22.8 million, or $10.1 million after taxes, which is deferred in accumulated other comprehensive income. Of the net unrealized
loss, $16.3 million, or $6.8 million after taxes, is expected to be reclassified to earnings over the next twelve months.

Derivatives Not Designated as Hedging Instruments

The following gains/(losses) from these derivative instruments were recognized on our consolidated statement of earnings (in

millions):

Derivative Instrument

Foreign exchange forward contracts

Total

Location on
Statement of Earnings

Year Ended December 31,

2011

2010

2009

Cost of products sold

$2.7

$3.3

$(10.3)

$2.7

$3.3

$(10.3)

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Notes to Consolidated Financial Statements (Continued)

This impact does not include any offsetting gains/losses recognized in earnings as a result of foreign currency remeasurement

of monetary assets and liabilities denominated in a currency other than an entity’s functional currency.

Balance Sheet Presentation

As of December 31, 2011 and December 31, 2010, all derivative instruments designated as fair value hedges and cash flow

hedges are recorded at fair value on the balance sheet. On our consolidated balance sheet, we recognize individual forward
contracts and options with the same counterparty on a net asset/liability basis if we have a master netting agreement with the
counterparty. The fair value of derivative instruments on a gross basis is as follows (in millions):

As of December 31, 2011

As of December 31, 2010

Balance Sheet Location

Fair
Value

Balance Sheet Location

Fair
Value

Asset Derivatives

Foreign exchange forward contracts

Other current assets

$24.9

Other current assets

$32.2

Foreign exchange options

Foreign exchange forward contracts

Foreign exchange options

Interest rate swaps

Total asset derivatives

Liability Derivatives

Foreign exchange forward contracts

Cross-currency interest rate swaps

Foreign exchange forward contracts

Total liability derivatives

14. RETIREMENT BENEFIT PLANS

Other current assets

Other assets

1.4

14.5

1.0

27.8

$69.6

Other current assets

Other assets

0.4

11.6

2.3

1.5

$48.0

Other current liabilities

$35.6

Other current liabilities

Other long-term liabilities

8.2

13.1

$56.9

Other current liabilities

$37.6

Other current liabilities

–

Other long-term liabilities

14.4

$52.0

We have defined benefit pension plans covering certain U.S. and Puerto Rico employees. The employees who are not

participating in the defined benefit plans receive additional benefits under our defined contribution plans. Plan benefits are
primarily based on years of credited service and the participant’s average eligible compensation. In addition to the U.S. and Puerto
Rico defined benefit pension plans, we sponsor various non-U.S. pension arrangements, including retirement and termination
benefit plans required by local law or coordinated with government sponsored plans.

We use a December 31 measurement date for our benefit plans.

Defined Benefit Plans

The components of net pension expense for our defined benefit retirement plans are as follows (in millions):

For the Years Ended December 31,

Service cost

Interest cost

Expected return on plan assets

Curtailment

Amortization of prior service cost

Amortization of unrecognized actuarial loss

Net periodic benefit cost

U.S. and Puerto Rico

Non-U.S.

2011

2010

2009

2011

2010

2009

$ 11.4

$ 10.9

$ 12.3

$16.8

$14.6

$13.7

13.0

11.5

10.6

7.3

6.7

6.8

(21.9)

(18.1)

(16.4)

(9.6)

(8.0)

(8.2)

–

6.2

–

(0.1)

2.4

0.4

0.1

4.1

–

(0.8)

(0.7)

1.2

1.9

$ 8.7

$ 6.6

$ 11.1

$14.9

$13.8

$13.5

The weighted average actuarial assumptions used to determine net pension expense for our defined benefit retirement plans

were as follows:

For the Years Ended December 31,

Discount rate

Rate of compensation increase

Expected long-term rate of return on plan assets

U.S. and Puerto Rico

Non-U.S.

2011

2010

2009

2011

2010

2009

5.82%

3.81%

7.75%

6.26%

3.80%

7.50%

5.79%

3.84%

7.75%

2.82%

2.64%

4.01%

3.19%

2.63%

4.12%

3.40%

2.39%

4.16%

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Notes to Consolidated Financial Statements (Continued)

The expected long-term rate of return on plan assets is based on the historical and estimated future rates of return on the
different asset classes held in the plans. The expected long-term rate of return is the weighted average of the target asset allocation
of each individual asset class. We believe that historical asset results approximate expected market returns applicable to the
funding of a long-term benefit obligation.

Discount rates were determined for each of our defined benefit retirement plans at their measurement date to reflect the yield

of a portfolio of high quality bonds matched against the timing and amounts of projected future benefit payments.

Changes in projected benefit obligations and plan assets were (in millions):

For the Years Ended December 31,

U.S. and Puerto Rico

Non-U.S.

2011

2010

2011

2010

Projected benefit obligation – beginning of year

$227.1

$187.6

$226.5

$197.3

Service cost

Interest cost

Employee contributions

Benefits paid

Actuarial loss

Prior service cost

Expenses paid

Translation loss

11.4

13.0

–

(4.5)

43.0

–

10.9

11.5

–

(3.6)

20.7

–

16.8

7.3

15.9

14.6

6.7

12.6

(36.7)

(18.1)

0.4

(1.6)

(0.1)

6.6

0.2

–

13.2

Projected benefit obligation – end of year

$290.0

$227.1

$235.1

$226.5

Plan assets at fair market value – beginning of year

$244.9

$202.1

$206.0

$179.0

Actual return on plan assets

Employer contributions

Employee contributions

Benefits paid

Expenses paid

Translation gain

(2.1)

36.8

–

(4.5)

–

23.2

–

(3.6)

–

(2.5)

16.0

15.9

(36.7)

(0.1)

6.5

6.8

14.0

12.6

(18.1)

–

11.7

Plan assets at fair market value – end of year

$275.1

$244.9

$205.1

$206.0

Funded status

$(14.9)

$ 17.8

$(30.0)

$(20.5)

Amounts recognized in consolidated balance sheet:

Prepaid pension

Short-term accrued benefit liability

Long-term accrued benefit liability

Net amount recognized

Amounts recognized in accumulated other comprehensive income:

Unrecognized prior service cost

Unrecognized actuarial loss

Total amount recognized

–

$ 27.0

$ 4.3

$ 3.0

(1.0)

(13.9)

(0.7)

(8.5)

–

(34.3)

(23.5)

$(14.9)

$ 17.8

$(30.0)

$(20.5)

$ 0.6

140.4

$141.0

$ 0.6

79.5

$ 80.1

$ (6.7)

$ (5.7)

45.5

33.5

$ 38.8

$ 27.8

We estimate the following amounts recorded as part of accumulated other comprehensive income will be recognized as part of

our net pension expense during 2012 (in millions):

Unrecognized prior service cost

Unrecognized actuarial loss

U.S. and
Puerto Rico

Non-U.S.

–

13.0

$13.0

$(0.9)

2.0

$ 1.1

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Notes to Consolidated Financial Statements (Continued)

The weighted average actuarial assumptions used to determine the projected benefit obligation for our defined benefit

retirement plans were as follows:

For the Years Ended December 31,

Discount rate

Rate of compensation increase

U.S. and Puerto Rico

Non-U.S.

2011

2010

2009

2011

2010

2009

5.05%

3.81%

5.82%

3.80%

6.26%

3.80%

2.49%

2.76%

2.82%

2.61%

3.25%

2.46%

Plans with projected benefit obligations in excess of plan assets were as follows (in millions):

As of December 31,

Projected benefit obligation

Plan assets at fair market value

U.S. and Puerto Rico

Non-U.S.

2011

2010

2011

2010

$290.0

275.1

$9.2

$211.5

$200.7

–

177.3

Plans with accumulated benefit obligations in excess of plan assets were as follows (in millions):

As of December 31,

Accumulated benefit obligation

Plan assets at fair market value

The accumulated benefit obligation for U.S. and Puerto

Rico defined benefit retirement pension plans was
$241.3 million and $182.1 million as of December 31, 2011 and
2010, respectively. The accumulated benefit obligation for
non-U.S. defined benefit retirement plans was $219.9 million
and $212.9 million as of December 31, 2011 and 2010,
respectively.

The benefits expected to be paid out in each of the next

five years and for the five years combined thereafter are as
follows (in millions):

For the Years Ending December 31,

2012

2013

2014

2015

2016

2017-2021

U.S. and
Puerto Rico

Non-U.S.

$ 6.9

$ 16.1

6.9

8.4

9.6

11.1

81.1

16.2

15.8

16.5

15.7

103.0

The U.S. and Puerto Rico defined benefit retirement
plans’ overall investment strategy is to maximize total returns
by emphasizing long-term growth of capital while avoiding
risk. We have established target ranges of assets held by the
plans of 45 to 50 percent for equity securities, 35 to 40 percent
for debt securities and 5 to 10 percent in non-traditional
investments. The plans strive to have sufficiently diversified
assets so that adverse or unexpected results from one asset
class will not have an unduly detrimental impact on the entire
portfolio. The investments in the plans may be rebalanced
quarterly based upon the target asset allocation of the plans.

U.S. and Puerto Rico

Non-U.S.

2011

2010

2011

2010

$22.4

13.0

$6.1

$190.4

$167.2

–

168.7

154.1

In the U.S. and Puerto Rico, we maintain an investment
policy statement that guides the investment allocation in the
plans. The investment policy statement describes the target
asset allocation positions described above. We have a benefits
committee to monitor compliance with the investment policy
statement and manage the general investment strategy and
objectives of the plans. The benefits committee meets
quarterly to review performance and to ensure that the
current investment allocation is within the guidelines set forth
in the investment policy statement.

The investment strategies of non-U.S. based plans vary
according to the plan provisions and local laws. The majority
of the assets in non-U.S. based plans are located in
Switzerland-based plans. These assets are held in trusts and
are commingled with the assets of other Swiss companies with
representatives of all the companies making the investment
decisions. The overall strategy is to maximize total returns
while avoiding risk. The trustees of the assets have established
target ranges of assets held by the plans of 30 to 50 percent in
debt securities, 20 to 37 percent in equity securities, 15 to 24
percent in real estate, 3 to 15 percent in cash funds and 0 to
12 percent in other funds.

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Notes to Consolidated Financial Statements (Continued)

The fair value of our U.S. and Puerto Rico pension plan

assets by asset category were as follows (in millions):

As of December 31, 2011

Fair Value Measurements at Reporting Date Using:

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Asset Category

Total

1.4

$1.4

–

$–

Cash and cash
equivalents
Equity securities:
U.S. large-cap
U.S. small-cap
International
Real estate

Commodity-linked
mutual funds
Intermediate fixed

income securities

Total

52.9
17.4
50.0
18.7

25.0

109.7

$275.1

–
–
–
–

–

52.9
17.4
50.0
18.7

25.0

109.7

–
–
–
–

–

$1.4

$273.7

$–

As of December 31, 2010

Fair Value Measurements at Reporting Date Using:

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Asset Category

Cash and cash equivalents
Equity securities:

Energy
Materials
Industrials
Consumer discretionary
Consumer staples
Healthcare
Financials
Information technology
Telecommunication

services

Utilities
Other

Fixed income securities:
Government bonds
Corporate bonds
Asset-backed securities
Other debt

Other types of investments:

Mortgage loans
Insurance contracts
Other investments

Real estate

Total

Asset Category

Total

Cash and cash
equivalents
Equity securities:
U.S. large-cap
U.S. small-cap
International
Real estate

Commodity-linked
mutual funds
Intermediate fixed

income securities

Total

0.8

$0.8

–

$–

34.1
12.3
43.8
14.8

25.7

113.4

$244.9

–
–
–
–

–

34.1
12.3
43.8
14.8

25.7

113.4

–
–
–
–

–

$0.8

$244.1

$–

Asset Category

The fair value of our non-U.S. pension plan assets were as

follows (in millions):

Cash and cash equivalents
Equity securities:

Energy
Materials
Industrials
Consumer discretionary
Consumer staples
Healthcare
Financials
Information technology
Telecommunication

services

Utilities
Other

Fixed income securities:
Government bonds
Corporate bonds
Asset-backed securities
Other debt

Other types of investments:

Mortgage loans
Insurance contracts
Other investments

Real estate

Total

As of December 31, 2011

Fair Value Measurements at Reporting Date Using:

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

$10.8

1.9
2.0
3.7
2.1
4.0
6.0
5.8
2.3

1.0
1.6
26.6

–
–
–
–

–

–
–
–
–
–
–
–
–

–
–
2.3

42.5
35.5
8.4
1.1

5.2
5.5
5.0
–

–

–
–
–
–
–
–
–
–

–
–
–

–
–
–
–

–
–
–
31.8

Total

$ 10.8

1.9
2.0
3.7
2.1
4.0
6.0
5.8
2.3

1.0
1.6
28.9

42.5
35.5
8.4
1.1

5.2
5.5
5.0
31.8

$205.1

$67.8

$105.5

$31.8

As of December 31, 2010

Fair Value Measurements at Reporting Date Using:

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

$14.3

2.0
1.6
3.4
2.5
3.7
6.7
7.0
2.8

1.0
2.2
24.2

–
–
–
–

–

–
–
–
–
–
–
–
–

–
–
2.9

33.0
41.0
7.4
1.1

5.6
5.0
7.1
–

–

–
–
–
–
–
–
–
–

–
–
–

–
–
–
–

–
–
–
31.5

Total

$ 14.3

2.0
1.6
3.4
2.5
3.7
6.7
7.0
2.8

1.0
2.2
27.1

33.0
41.0
7.4
1.1

5.6
5.0
7.1
31.5

$206.0

$71.4

$103.1

$31.5

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Notes to Consolidated Financial Statements (Continued)

As of December 31, 2011 and 2010, our defined benefit

pension plans’ assets did not hold any direct investment in
Zimmer Holdings common stock.

Equity securities are valued using a market approach,

based on quoted prices for the specific security from
transactions in active exchange markets (Level 1), or in some
cases where we are invested in mutual or collective funds,
based upon the net asset value per unit of the fund which is
determined from quoted market prices of the underlying
securities in the fund’s portfolio (Level 2). Fixed income
securities are valued using a market approach, based upon
quoted prices for the specific security or from institutional bid
evaluations. Some fixed income securities are in funds with a
net asset value per unit which is determined using similar
techniques for the underlying securities in the fund’s portfolio.
Real estate is valued by discounting to present value the cash
flows expected to be generated by the specific properties.
The following table provides a reconciliation of the
beginning and ending balances of our non-U.S. pension plan
assets measured at fair value that used significant
unobservable inputs (Level 3):

Beginning Balance

Gains on assets sold
Change in fair value of assets
Net purchases and sales
Translation gain

Ending Balance

December 31,
2011

31.5
0.2
0.7
(1.5)
0.9

$31.8

We expect that we will have no legally required minimum
funding requirements in 2012 for the qualified U.S. and Puerto
Rico defined benefit retirement plans. We expect to voluntarily
contribute approximately $54 million to these plans during
2012. Contributions to non-U.S. defined benefit plans are
estimated to be approximately $14 million in 2012. We do not
expect the plan assets in any of our plans to be returned to us
in the next year.

Defined Contribution Plans

We also sponsor defined contribution plans for

substantially all of the U.S. and Puerto Rico employees and
certain employees in other countries. The benefits offered
under these plans are reflective of local customs and practices
in the countries concerned. We expensed $25.7 million, $24.4
million and $21.6 million related to these plans for the years
ended December 31, 2011, 2010 and 2009, respectively.

Postretirement Benefit Plans

Voluntary Employees’ Beneficiary Association (VEBA) trust to
settle any future obligations. We recognized a curtailment gain
and settlement loss that netted to a gain of $32.1 million
related to these actions.

We have not provided further disclosures related to these
postretirement benefit plans as other than the curtailment gain
and settlement loss in 2009 discussed above, these plans were
not significant to our results of operations or financial position.

15.

INCOME TAXES

The components of earnings before taxes consist of the

following (in millions):

For the Years Ended December 31,

2011

2010

2009

United States operations

$485.7

$382.4

$489.7

Foreign operations

493.2

477.8

508.5

Total

$978.9

$860.2

$998.2

The provision for income taxes consists of (in millions):

Current:

Federal

State

Foreign

Deferred:

Federal

State

Foreign

$148.4

$235.3

$204.9

14.3

75.9

19.5

81.0

23.3

72.3

238.6

335.8

300.5

(2.6)

(0.9)

(16.2)

(19.7)

(54.9)

(17.4)

(2.0)

(15.6)

(3.1)

0.8

(72.5)

(19.7)

Provision for income taxes

$218.9

$263.3

$280.8

Income taxes paid during 2011, 2010 and 2009 were
$236.4 million, $330.6 million and $268.5 million, respectively.

A reconciliation of the U.S. statutory income tax rate to

our effective tax rate is as follows:

For the Years Ended December 31,

2011

2010

2009

U.S. statutory income tax rate

35.0%

State taxes, net of federal deduction

0.7

1.3

1.4

Tax impact of foreign operations,
including foreign tax credits

Tax benefit relating to U.S.

manufacturer’s deduction and
export sales

R&D credit

Goodwill impairment

(11.0)

(10.6)

(9.9)

(1.6)

(0.5)

–

(0.2)

(2.6)

(0.8)

8.3

–

(1.5)

(0.3)

2.6

0.8

During 2009, we amended the postretirement healthcare

Other

benefit plans for certain U.S. and Puerto Rico employees.
Participants in the plans between the ages of 55 and 65 who
were previously receiving benefits will continue to receive
benefits until reaching the age of 65. For all other participants
in the plans, no benefits will be paid after January 1, 2010.
Additionally, we contributed approximately $7 million to a

Effective income tax rate

22.4%

30.6%

28.1%

Our operations in Puerto Rico, Switzerland and the State

of Indiana benefit from various tax incentive grants. Unless
these grants are extended, they will expire between fiscal
years 2016 and 2026.

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Notes to Consolidated Financial Statements (Continued)

Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts
used for income tax purposes. Valuation allowances are
recorded to reduce deferred income tax assets when it is more
likely than not that an income tax benefit will not be realized.
The components of deferred taxes consisted of the

undistributed earnings of foreign subsidiaries were remitted, a
significant amount of the additional tax would be offset by the
allowable foreign tax credits. It is not practical for us to
determine the additional tax of remitting these earnings.

The following is a tabular reconciliation of the total

amounts of unrecognized tax benefits (in millions):

following (in millions):

As of December, 31

Deferred tax assets:

Inventory

Net operating loss carryover

Tax credit carryover

Capital loss carryover

Accrued liabilities

Share-based compensation

Unremitted earnings of foreign subsidiaries

Other

Total deferred tax assets

Less: Valuation allowances

2011

2010

For the Years Ended December 31,

2011

2010

2009

Balance at January 1

$168.0

$150.4

$129.5

Increases related to prior periods

11.4

23.1

32.9

$ 218.5

$ 234.3

Decreases related to prior periods

(49.0)

(6.1)

(26.7)

23.5

16.9

4.0

116.1

98.3

103.9

73.1

22.0

32.5

–

91.3

85.4

104.2

59.2

Increases related to current period

34.4

23.7

17.4

Decreases related to settlements with

taxing authorities

(4.8)

(14.1)

(1.1)

Decreases related to lapse of statute of

limitations

(1.6)

(9.0)

(1.6)

Balance at December 31

$158.4

$168.0

$150.4

654.3

628.9

(40.3)

(39.9)

Included in the balance of unrecognized tax benefits at
December 31, 2011 are $132.7 million of tax benefits that, if
recognized, would affect the effective tax rate.

Total deferred tax assets after valuation

614.0

589.0

We recognize accrued interest and penalties related to

Deferred tax liabilities:

Fixed assets

Intangible assets

Accrued liabilities

Other

Total deferred tax liabilities

Total net deferred tax assets

$(111.6) $(101.7)

(148.9)

(151.9)

(1.0)

–

(0.7)

(1.0)

(261.5)

(255.3)

$ 352.5

$ 333.7

The net operating loss carryovers are available to reduce

future federal, state and foreign taxable earnings. At
December 31, 2011, these net operating loss carryovers
generally expire within a period of 1 to 20 years. Valuation
allowances for net operating loss carryovers have been
established in the amount of $14.6 million for both
December 31, 2011 and 2010. The tax credit carryovers are
available to offset future federal, state and foreign tax
liabilities. At December 31, 2011, these tax credit carryovers
generally expire within a period of 1 to 10 years. We have
established valuation allowances for certain tax credit
carryovers in the amount of $15.3 million and $17.5 million at
December 31, 2011 and 2010, respectively. The capital loss
carryover is also available to reduce future federal taxable
earnings. However, the entire $4.0 million capital loss
carryover is subject to a valuation allowance and expires in 5
years. The remaining valuation allowances of $6.4 million and
$7.8 million at December 31, 2011 and 2010, respectively,
relate primarily to potential capital losses.

At December 31, 2011, we had an aggregate of

approximately $2,551 million of unremitted earnings of foreign
subsidiaries that have been, or are intended to be, indefinitely
reinvested for continued use in foreign operations. If the total

unrecognized tax benefits as income tax expense. We
decreased interest and penalties by $12.1 million during 2011,
and as of December 31, 2011, had recognized a liability for
interest and penalties of $10.7 million. During 2010, we
decreased interest and penalties by $5.8 million, and as of
December 31, 2010, had recognized a liability for interest and
penalties of $22.8 million. During 2009, we accrued interest
and penalties of $5.7 million, and as of December 31, 2009, had
recognized a liability for interest and penalties of $28.6 million.
We operate on a global basis and are subject to numerous

and complex tax laws and regulations. Our income tax filings
are regularly under audit in multiple federal, state and foreign
jurisdictions. Income tax audits may require an extended
period of time to reach resolution and may result in significant
income tax adjustments when interpretation of tax laws or
allocation of company profits is disputed. During 2011, we
resolved tax matters with the IRS and multiple foreign and
state tax authorities resulting in a reduction in both the net
amount of tax liability for unrecognized tax benefits and
income tax expense. The net amount of tax liability for
unrecognized tax benefits may change within the next twelve
months due to changes in audit status, expiration of statutes of
limitations and other events which could impact our
determination of unrecognized tax benefits. Currently, we
cannot reasonably estimate the amount by which our
unrecognized tax benefits will change.

During the third quarter of 2009, we settled various tax

matters with the IRS for all years prior to 2005. During the
second quarter of 2011, the IRS concluded their examination
of our U.S. federal returns for years 2005 through 2007 and
issued income tax assessments reallocating profits between
certain of our U.S. and foreign subsidiaries. We believe that we

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Notes to Consolidated Financial Statements (Continued)

have followed applicable U.S. tax laws and are vigorously
defending our income tax positions. The ultimate resolution of
this matter is uncertain and could have a material impact on
our income tax expense, results of operations, and cash flows
for future periods. Our U.S. federal returns for years 2008 and
2009 are currently under IRS examination.

State income tax returns are generally subject to
examination for a period of 3 to 5 years after filing of the
respective return. The state impact of any federal changes
generally remains subject to examination by various states for
a period of up to one year after formal notification to the
states. We have various state income tax returns in the process
of examination, administrative appeals or litigation.

Our tax returns are currently under examination in
various foreign jurisdictions. Foreign jurisdictions have
statutes of limitations generally ranging from 3 to 5 years.
Years still open to examination by foreign tax authorities in
major jurisdictions include: Australia (2007 onward), Canada
(2005 onward), France (2009 onward), Germany (2006
onward), Ireland (2008 onward), Italy (2006 onward), Japan
(2010 onward), Korea (2006 onward), Puerto Rico (2005
onward), Switzerland (2010 onward), and the United Kingdom
(2010 onward).

16. CAPITAL STOCK AND EARNINGS PER SHARE

We are authorized to issue 250 million shares of preferred

stock, none of which were issued or outstanding as of
December 31, 2011.

The numerator for both basic and diluted earnings per

share is net earnings available to common stockholders. The
denominator for basic earnings per share is the weighted
average number of common shares outstanding during the
period. The denominator for diluted earnings per share is
weighted average shares outstanding adjusted for the effect of
dilutive stock options and other equity awards. The following is
a reconciliation of weighted average shares for the basic and
diluted share computations (in millions):

For the Years Ended December 31,

2011

2010

2009

Weighted average shares outstanding for basic

net earnings per share

187.6

200.0

215.0

Effect of dilutive stock options and other

equity awards

1.1

0.8

Weighted average shares outstanding for

diluted net earnings per share

188.7

201.1

215.8

For the year ended December 31, 2011, an average of
13.2 million options to purchase shares of common stock were
not included in the computation of diluted earnings per share
as the exercise prices of these options were greater than the
average market price of the common stock. For the years
ended December 31, 2010 and 2009, an average of 13.7 million
and 14.3 million options, respectively, were not included.

During 2011, we repurchased 18.9 million shares of our
common stock at an average price of $55.54 per share for a
total cash outlay of $1,050.0 million, including commissions. In
December 2011, we announced a new program authorizing
purchases of up to $1.5 billion through December 31, 2014 and
announced that we were no longer authorized to repurchase
shares under prior programs. As of December 31, 2011, all $1.5
billion from the new program remained available to repurchase
shares.

In December 2011, we declared a dividend of $0.18 per
share to be paid in April 2012 to stockholders of record as of
the close of business on March 30, 2012. As of December 31,
2011, we have recognized a dividend payable of $32.1 million
based upon the common stock outstanding on that date.
Future declarations of dividends are subject to approval of the
Board of Directors and may be adjusted as business needs or
market conditions change.

17. SEGMENT DATA

We design, develop, manufacture and market orthopaedic

reconstructive implants, biologics, dental implants, spinal
implants, trauma products and related surgical products which
include surgical supplies and instruments designed to aid in
surgical procedures and post-operation rehabilitation. We also
provide other healthcare-related services. Revenue related to
these services currently represents less than 1 percent of our
total net sales. We manage operations through three major
geographic segments – the Americas, which is comprised
principally of the U.S. and includes other North, Central and
South American markets; Europe, which is comprised
principally of Europe and includes the Middle East and African
markets; and Asia Pacific, which is comprised primarily of
Japan and includes other Asian and Pacific markets. This
structure is the basis for our reportable segment information
discussed below. Management evaluates reportable segment
performance based upon segment operating profit exclusive of
operating expenses pertaining to share-based payment
expense, inventory step-up, “Certain claims”, goodwill
impairment, “Special items”, net curtailment and settlement
and global operations and corporate functions. Global
operations and corporate functions include research,
development engineering, medical education, brand
management, corporate legal, finance, and human resource
functions, U.S., Puerto Rico and Ireland-based manufacturing
operations and logistics and intangible asset amortization
resulting from business combination accounting. Intercompany
transactions have been eliminated from segment operating
profit. Management reviews accounts receivable, inventory,
property, plant and equipment, goodwill and intangible assets
by reportable segment exclusive of U.S., Puerto Rico and
Ireland-based manufacturing operations and logistics and
corporate assets.

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Notes to Consolidated Financial Statements (Continued)

Net sales and other information by segment is as follows (in millions):

Americas

Europe

Asia
Pacific

Global
Operations
and
Corporate
Functions

$2,440.8
81.0
1,220.4

$1,214.5
74.9
414.7

$796.5
36.3
290.6

–
167.7
(596.7)

769.0
2,571.6
–
1.3

330.6
2,345.5
15.2
23.8

107.7
602.4
7.7
4.7

–
2,995.8
132.5
84.0

$2,431.6
78.1
1,214.6

$1,099.5
70.5
398.0

$689.1
30.0
259.9

–
161.6
(578.7)

841.5
2,578.0
–
0.3

281.7
2,210.8
22.9
16.9

90.6
561.4
5.2
7.6

–
2,649.7
164.4
54.4

$2,372.4
86.4
1,168.7

$1,119.2
64.8
436.8

$603.8
26.7
257.4

–
159.5
(605.1)

851.0
3,022.4
–
0.6

285.0
2,273.6
17.0
28.8

85.7
443.6
5.3
5.1

–
2,045.9
101.4
70.6

Total

$4,451.8
359.9
1,329.0
(60.5)
(11.4)
(157.8)
(75.2)

1,024.1
1,207.3
8,515.3
155.4
113.8

$4,220.2
340.2
1,293.8
(62.0)
(1.4)
(75.0)
(204.0)
(34.7)

916.7
1,213.8
7,999.9
192.5
79.2

$4,095.4
337.4
1,257.8
(75.3)
(12.5)
(35.0)
(73.0)
(75.3)
32.1

1,018.8
1,221.7
7,785.5
123.7
105.1

As of and for the Year Ended December 31, 2011

Net sales
Depreciation and amortization
Segment operating profit

Share-based payment expense
Inventory step-up
Certain claims
Special items

Operating profit
Long-lived assets
Total assets
Additions to instruments
Additions to other property, plant and equipment

As of and for the Year Ended December 31, 2010

Net sales
Depreciation and amortization
Segment operating profit

Share-based payment expense
Inventory step-up
Certain claims
Goodwill impairment
Special items

Operating profit
Long-lived assets
Total assets
Additions to instruments
Additions to other property, plant and equipment

As of and for the Year Ended December 31, 2009

Net sales
Depreciation and amortization
Segment operating profit

Share-based payment expense
Inventory step-up
Certain claims
Goodwill impairment
Special items
Net curtailment and settlement

Operating profit
Long-lived assets
Total assets
Additions to instruments
Additions to other property, plant and equipment

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Notes to Consolidated Financial Statements (Continued)

The Americas long-lived tangible assets are located
primarily in the U.S. $233.2 million of Europe long-lived
tangible assets as of December 31, 2011 are located in
Switzerland.

For segment reporting purposes, deployed instruments
are included in the measurement of reportable segment assets
while undeployed instruments at U.S., Puerto Rico and Ireland-
based manufacturing operations and logistics are included in
global operations and corporate functions. The majority of
instruments are purchased by U.S., Puerto Rico and Ireland-
based manufacturing operations and logistics and are deployed
to the reportable segments as needed for the business.
Therefore, the reportable segment assets include deployed
instruments even though that reportable segment may not
report the instrument addition.

U.S. sales were $2,263.7 million, $2,277.2 million and
$2,237.5 million for the years ended December 31, 2011, 2010
and 2009, respectively. Sales within any other individual
country were less than 10 percent of our consolidated sales.
Sales are attributable to a country based upon the customer’s
country of domicile.

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

For the Years Ended December 31,

2011

2010

2009

Reconstructive

Knees

Hips

Extremities

Total

Dental

Trauma

Spine

Surgical and other

$1,825.1

$1,789.9

$1,756.3

1,355.6

1,262.3

1,228.5

163.4

150.1

135.6

3,344.1

3,202.3

3,120.4

248.1

285.8

225.0

348.8

219.0

245.5

234.4

319.0

204.7

234.8

253.6

281.9

Total

$4,451.8

$4,220.2

$4,095.4

18. LEASES

Total rent expense for the years ended December 31,

2011, 2010 and 2009 aggregated $47.0 million, $46.2 million
and $43.5 million, respectively.

Future minimum rental commitments under

non-cancelable operating leases in effect as of December 31,
2011 were (in millions):

For the Years Ending December 31,

2012

2013

2014

2015

2016

Thereafter

$43.5

35.5

22.7

19.9

16.6

41.5

19. COMMITMENTS AND CONTINGENCIES

Product Liability-Related Claims

We are subject to product liability claims arising in the

ordinary course of our business. We establish standard
accruals for product liability claims in conjunction with outside
counsel based on current information and historical settlement
information for open claims, related legal fees and claims
incurred but not reported. These standard product liability
accruals are recognized in selling, general and administrative
expense. We may also establish provisions for certain product
liability claims outside of the standard accruals that are
recorded separately on our statement of earnings, such as the
provision for claims related to the Durom® Acetabular
Component (Durom Cup) discussed below. We maintain
insurance, subject to self-insured retention requirements, for
losses from these and other claims.

On July 22, 2008, we temporarily suspended marketing
and distribution of the Durom Cup in the U.S. Subsequently, a
number of product liability lawsuits and other claims have
been asserted against us. We have settled some of these claims
and the others are still pending. Additional claims may be
asserted in the future.

Initially, we estimated that any revision surgeries required

would manifest themselves within two years of the original
surgery. In the second quarter of 2010, based upon more
recent claims information available, we revised our estimate to
include all claims for revisions of original surgeries performed
before July 22, 2008 (i.e., before our temporary suspension) on
a worldwide basis, regardless of the amount of time between
the revision surgery and the original surgery. In the fourth
quarter of 2011, as additional claims information became
available, we revised our estimates and methodology again to
consolidate all estimated liabilities associated with Durom
Cup-related claims regardless of whether the original surgery
occurred before or after our temporary sales suspension. We
recognized estimated claims that met the parameters noted in
this paragraph during that time period as “Certain claims” on
our statement of earnings. We recognized estimated claims
outside these parameters as part of selling, general and
administrative expense. The following table shows the line of
our statement of earnings and the period in which Durom
Cup-related claims were recognized:

For the Years Ended December 31,

2011

2010

2009

2008

Total

Certain claims

$157.8

$75.0

$35.0

$69.0

$336.8

Selling, general and
administrative

4.2

15.4

24.6

7.2

51.4

Total

$162.0

$90.4

$59.6

$76.2

$388.2

As noted above, we maintain insurance for product

liability claims, subject to self-insurance retention
requirements. In 2008, we notified our insurance carriers of
potential claims related to the Durom Cup. Based upon our
most recent estimates for liabilities associated with the Durom

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Notes to Consolidated Financial Statements (Continued)

Cup, as detailed above, we believe we may exhaust our
self-insured retention under our insurance program. In this
event, we would have a claim for insurance proceeds for
ultimate losses which exceed the self-insured retention
amount, subject to a 20 percent co-payment requirement and a
cap. We believe our contracts with the insurance carriers are
enforceable for these claims and therefore we believe it is
highly probable that we would recover some amount from our
insurance carriers if our ultimate losses exceed our self-
insured retention. Accordingly, we have recognized a $76.3
million receivable in “other assets” on our consolidated balance
sheet that reduced “Certain claims” expense for estimated
insurance recoveries. As is customary in this process, our
insurance carriers have reserved all rights under their
respective policies and could still ultimately deny coverage for
some or all of our insurance claims.

Our estimate as of December 31, 2011, of the remaining
liability for all Durom Cup-related claims is $311.1 million, of
which $50.0 million is classified as short-term in “Other current
liabilities” and $261.1 million is classified as long-term in
“Other long-term liabilities” on our consolidated balance sheet.
We expect to pay the majority of the Durom Cup-related
claims within the next five years.

Our understanding of clinical outcomes with the Durom

Cup continues to evolve. We rely on significant estimates in
determining the provisions for Durom Cup-related claims,
including the number of claims that we will receive and the
average amount we will pay per claim. The actual number of
claims that we receive and the amount we pay per claim may
differ from our estimates. Since our understanding of the
clinical outcomes is still evolving, we cannot reasonably
estimate the possible loss or range of loss that may result from
Durom Cup-related claims in excess of the losses we have
accrued.

On August 20, 2008, Margo and Daniel Polett filed an

action against us and an unrelated third party, Public
Communications, Inc. (PCI), in the Court of Common Pleas,
Philadelphia, Pennsylvania seeking an unspecified amount of
damages for injuries and loss of consortium allegedly suffered
by Mrs. Polett and her spouse, respectively. The complaint
alleged that defendants were negligent in connection with
Mrs. Polett’s participation in a promotional video featuring one
of our knee products. The case was tried in November 2010
and the jury returned a verdict in favor of plaintiffs. The jury
awarded $27.6 million in compensatory damages and
apportioned fault 30 percent to plaintiffs, 34 percent to us and
36 percent to PCI. Under applicable law, we may be liable for
any portion of the damages apportioned to PCI that it does not
pay. On December 2, 2010, we and PCI filed a Motion for Post-
Trial Relief seeking a judgment notwithstanding the verdict, a
new trial or a remittitur. On June 10, 2011, the trial court
entered an order denying our Motion for Post-Trial Relief and
affirming the jury verdict in full and entered judgment for
$20.3 million against us and PCI. On June 29, 2011, we filed a
Notice of Appeal to the Superior Court of Pennsylvania and

posted a bond for the verdict amount plus interest. Oral
argument before a panel of the Superior Court is scheduled for
March 13, 2012. We do not believe the facts and evidence
support the jury’s verdict. We have not recorded any charge
relating to this matter in our consolidated statement of
earnings for the year ended December 31, 2011 or for any prior
period, because we believe we have strong arguments for
reversing the jury verdict on appeal. As a result, we do not
believe that it is probable that we have incurred a liability
consistent with the verdict and we cannot reasonably estimate
any loss that might eventually be incurred. Although we
believe we have strong grounds to reverse the jury’s verdict,
the ultimate resolution of this matter is uncertain. We could in
the future be required to record a charge to our consolidated
statement of earnings that could have a material adverse effect
on our results of operations in any particular period.

Following a wide-spread advertising campaign conducted

by certain law firms beginning in 2010, a number of product
liability lawsuits have been filed against us in various
jurisdictions. The plaintiffs seek damages for personal injury,
alleging that certain products within the NexGen Knee System
suffer from defects that cause them to loosen prematurely. The
majority of the cases are currently pending in a federal
Multidistrict Litigation in the Northern District of Illinois.
Other cases are pending in other state and federal courts, and
additional lawsuits may be filed.

As of December 31, 2011, these lawsuits were in the initial

stages of discovery and no trial dates had been set. We have
not recorded any provision relating to these lawsuits because
we believe the plaintiffs’ allegations are not consistent with the
record of clinical success for these products. As a result, we do
not believe that it is probable that we have incurred a liability,
and we cannot reasonably estimate any loss that might
eventually be incurred. Although we intend to vigorously
defend these lawsuits, their ultimate resolution is uncertain.

Intellectual Property-Related Claims

We are involved in certain ongoing contractual and other

disputes pertaining to certain royalty arrangements. We intend
to defend ourselves vigorously against these claims. Because
these matters are in an ongoing dispute resolution process, we
cannot estimate the possible loss, if any, we may incur or
predict the likely outcome of these matters. An adverse result
in the legal proceedings could have an adverse effect on our
results of operations.

Government Investigations

In September 2007, we and other orthopaedic companies

settled a U.S. government investigation pertaining to
consulting contracts, professional services agreements and
other agreements by which remuneration is provided to
orthopaedic surgeons. As part of the settlement, we entered
into a Corporate Integrity Agreement (CIA) with the Office of
Inspector General of the Department of Health and Human

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Notes to Consolidated Financial Statements (Continued)

Services (OIG-HHS). Under the CIA, which has a term expiring
in September 2012, we agreed, among other provisions, to
continue the operation of our enhanced Corporate Compliance
Program, designed to promote compliance with federal
healthcare program requirements. We also agreed to retain an
independent review organization to perform annual reviews to
assist us in assessing our compliance with the obligations set
forth in the CIA to ensure that arrangements we enter into do
not violate the Anti-Kickback Statute (42 U.S.C. § 1320a-7b). A
material breach of the CIA may subject us to exclusion by
OIG-HHS from participation in all federal healthcare programs,
which would have a material adverse effect on our financial
position, results of operations and cash flows.

In September 2007, the Staff of the U.S. Securities and

Exchange Commission (SEC) informed us that it was
conducting an investigation regarding potential violations of
the Foreign Corrupt Practices Act (FCPA) in the sale of
medical devices in a number of foreign countries by companies
in the medical device industry. In November 2007, we received
a letter from the U.S. Department of Justice (DOJ) requesting
that any information provided to the SEC also be provided to
the DOJ on a voluntary basis. In the course of continuing
dialogues with the agencies, we have voluntarily disclosed
information to the SEC and DOJ relating to sales of our
products by independent distributors in two South American
countries. In the first quarter of 2011, we received a subpoena
from the SEC seeking documents and other records pertaining
to our business activities in substantially all countries in the
Asia Pacific region where we operate. We are in the process of
responding to the subpoena. We cannot currently predict the
outcome of this investigation. If the result of the investigation
is that we are found to be in violation of the FCPA, we could
face significant monetary penalties or be required to take other
remedial actions.

Putative Class Actions

On August 5, 2008, a complaint was filed in the
U.S. District Court for the Southern District of Indiana,
Plumbers and Pipefitters Local Union 719 Pension Fund v.
Zimmer Holdings, Inc., et al., naming us and two of our
executive officers as defendants. The complaint related to a
putative class action on behalf of persons who purchased our
common stock between January 29, 2008 and July 22, 2008.
The complaint alleged that the defendants violated the federal
securities law by allegedly failing to disclose developments
relating to our orthopaedic surgical products manufacturing
operations in Dover, Ohio and the Durom Cup. The plaintiff
sought unspecified damages and interest, attorneys’ fees, costs
and other relief. On December 24, 2008, the lead plaintiff filed
a consolidated complaint that alleged the same claims and
related to the same time period. The defendants filed a motion
to dismiss the consolidated complaint on February 23, 2009.
On December 1, 2009, the Court granted defendants’ motion to
dismiss, without prejudice. On January 15, 2010, the plaintiff
filed a motion for leave to amend the consolidated complaint.

On January 28, 2011, the Court denied the plaintiff’s motion
for leave to amend the consolidated complaint and dismissed
the case. On February 25, 2011, the plaintiff filed a notice of
appeal to the U.S. Court of Appeals for the Seventh Circuit.
The appellate court heard oral argument in the appeal on
October 18, 2011 but has not yet ruled. We believe this lawsuit
is without merit, and we and the individual defendants intend
to continue to defend it vigorously.

On November 20, 2008, a complaint was filed in the

U.S. District Court for the Northern District of Indiana,
Dewald v. Zimmer Holdings, Inc., et al., naming us and certain
of our current and former directors and employees as
defendants. The complaint relates to a putative class action on
behalf of all persons who were participants in or beneficiaries
of our U.S. or Puerto Rico Savings and Investment Programs
(plans) between October 5, 2007 and the date of filing and
whose accounts included investments in our common stock.
The complaint alleges, among other things, that the defendants
breached their fiduciary duties in violation of the Employee
Retirement Income Security Act of 1974, as amended, by
continuing to offer Zimmer stock as an investment option in
the plans when the stock purportedly was no longer a prudent
investment and that defendants failed to provide plan
participants with complete and accurate information sufficient
to advise them of the risks of investing their retirement savings
in Zimmer stock. The plaintiff seeks an unspecified monetary
payment to the plans, injunctive and equitable relief, attorneys’
fees, costs and other relief. On January 23, 2009, the plaintiff
filed an amended complaint that alleges the same claims and
clarifies that the class period is October 5, 2007 through
September 2, 2008. The defendants filed a motion to dismiss
the amended complaint on March 23, 2009. On June 12, 2009,
the U.S. Judicial Panel on Multidistrict Litigation entered an
order transferring the Dewald case to the U.S. District Court
for the Southern District of Indiana for coordinated or
consolidated pretrial proceedings with the Plumbers &
Pipefitters Local Union 719 Pension Fund case referenced
above. On December 23, 2011, the Court granted the
defendants’ motion to dismiss the amended complaint. On
January 20, 2012, the plaintiff filed a motion for leave to file a
second amended complaint. That motion is pending with the
Court. We believe this lawsuit is without merit, and we and the
individual defendants intend to continue to defend it
vigorously.

Regulatory Matters

In July 2011, the U.S. Food and Drug Administration

(FDA) conducted an inspection of our Warsaw, Indiana
manufacturing facility, following which it issued a
Form FDA-483 (Form 483 notice). The Form 483 notice
identified certain inspectional observations regarding the
facility’s quality systems. The facility manufactures
reconstructive products that are sold globally. We have
responded in writing to the observations and met with
representatives of the district office of the FDA to discuss our

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Notes to Consolidated Financial Statements (Continued)

response and action plans. We expect the FDA to conduct a
re-inspection of this facility in the future to determine whether
we have taken sufficient actions to address the observations
described in the Form 483 notice. At this time, we do not
know whether the FDA will take additional actions with

respect to the matters included in the Form 483 notice and so
we are unable to estimate the impact, if any, this development
may have on our financial position, results of operations and
cash flows.

20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

(in millions, except per share data)

Net sales

Gross profit

Net earnings of Zimmer Holdings, Inc.

Earnings per common share

Basic

Diluted

2011 Quarter Ended

2010 Quarter Ended

Mar

Jun

Sep

Dec

Mar

Jun

Sep

Dec

$1,115.6

$1,137.4

$1,031.5

$1,167.3

$1,062.8

$1,057.7

$965.0

$1,134.7

836.6

208.9

849.5

203.8

779.6

191.5

864.1

156.6

794.4

205.4

807.1

165.5

745.8

191.1

860.5

34.9

1.08

1.06

1.02

1.01

0.88

0.87

1.01

0.82

0.96

0.18

In the fourth quarter of 2010, we recorded certain adjustments related to prior periods that reduced net earnings by $5.0
million. The adjustments increased operating expenses by $2.9 million and increased the provision for income taxes by $2.1 million.
We assessed the effects of these adjustments had they been made in prior periods to be immaterial.

Z I M M E R H O L D I N G S , I N C .

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None

ITEM 9A. Controls and Procedures

We maintain disclosure controls and procedures (as
defined in Rules 13a-15(e) under the Exchange Act) that are
designed to provide reasonable assurance that information
required to be disclosed in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC’s
rules and forms, and that such information is accumulated and
communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate
to allow timely decisions regarding required disclosures.
Because of inherent limitations, disclosure controls and
procedures, no matter how well designed and operated, can
provide only reasonable, and not absolute, assurance that the
objectives of disclosure controls and procedures are met.
Our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the design and operation of our disclosure
controls and procedures. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that,
as of the end of the period covered by this report, our
disclosure controls and procedures are effective at a
reasonable assurance level.

In 2011, we signed a contract with a third-party service

provider to outsource certain finance functions that
historically have been performed in multiple countries
throughout Europe and in the U.S. We began transitioning
work to the service provider in the quarter ended

ITEM 9B. Other Information

During the fourth quarter of 2011, the Audit Committee of

the Board of Directors was not asked to and did not approve
the engagement of PricewaterhouseCoopers LLP, our
independent registered public accounting firm, to perform any
non-audit services. This disclosure is made pursuant to
Section 10A(i)(2) of the Securities Exchange Act of 1934, as
added by Section 202 of the Sarbanes-Oxley Act of 2002.

December 31, 2011. The outsourcing arrangement is expected
to create cost efficiencies by eliminating redundancies in these
administrative functions. Additionally, we have begun to
centralize other finance functions that historically have been
performed in a decentralized manner. This outsourcing and
centralization is part of our ongoing global business
transformation initiatives, and we plan to continue
transitioning work to the service provider and the centralized
finance departments over the course of 2012.

Also in 2012, we intend to implement new software to
consolidate our worldwide financial information. This software
implementation is part of our transformation initiatives in
order to improve the overall efficiency and effectiveness of our
financial reporting process.

In connection with the outsourcing, centralization of

finance functions, and software implementation and the
resulting business process changes, we continue to enhance
the design and documentation of our internal control
processes to ensure suitable controls over our financial
reporting. There were no other changes in our internal control
over financial reporting (as defined in Rule 13a-15(f) of the
Exchange Act) that occurred during the quarter ended
December 31, 2011 that have materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting. Management’s report on internal control
over financial reporting appears in this report at the
conclusion of Part II, Item 7A.

Z I M M E R H O L D I N G S , I N C .

PART III

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

ITEM 10. Directors, Executive Officers and Corporate Governance

Information required by this item regarding our Directors is incorporated by reference from the section entitled “Proposal
No. 1: Election of Directors” in our definitive Proxy Statement for the annual meeting of stockholders to be held on May 8, 2012
(the “2012 Proxy Statement”). Information about our Audit Committee is incorporated by reference from the section entitled
“Committees of the Board” in our 2012 Proxy Statement. Information regarding the procedures by which stockholders may
recommend nominees to the Board of Directors is incorporated by reference from the section entitled “Corporate Governance –
Nominations for Directors” in our 2012 Proxy Statement. Information regarding our executive officers is set forth in Item 1 of Part I
of this report under the caption “Executive Officers.” Information about compliance with Section 16(a) of the Securities Exchange
Act of 1934 is incorporated by reference from the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in
our 2012 Proxy Statement.

We have adopted the Zimmer Code of Ethics for Chief Executive Officer and Senior Financial Officers (the “finance code of

ethics”), a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and
Corporate Controller, and other finance organization employees. The finance code of ethics is publicly available in the Investor
Relations section of our website, which may be accessed from our homepage at www.zimmer.com or directly at http://
investor.zimmer.com. If we make any substantive amendments to the finance code of ethics or grant any waiver, including any
implicit waiver, from a provision of the code to our Chief Executive Officer, Chief Financial Officer, or Chief Accounting Officer and
Corporate Controller, we will disclose the nature of that amendment in the Investor Relations section of our website.

ITEM 11. Executive Compensation

Information required by this item is incorporated by reference from the sections entitled “Committees of the Board” and

“Executive Compensation” in our 2012 Proxy Statement.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information required by this item is incorporated by reference from the sections entitled “Security Ownership of Certain
Beneficial Owners,” “Security Ownership of Directors and Executive Officers” and “Equity Compensation Plan Information” in our
2012 Proxy Statement.

ITEM 13. Certain Relationships and Related Transactions and Director Independence

Information required by this item is incorporated by reference from the sections entitled “Corporate Governance – Certain

Relationships and Related Person Transactions” and “Corporate Governance – Director Independence” in our 2012 Proxy
Statement.

ITEM 14. Principal Accounting Fees and Services

Information required by this item is incorporated by reference from the sections entitled “Audit and Non-Audit Fees” and

“Audit Committee Pre-Approval of Services of Independent Registered Public Accounting Firm” in “Proposal No. 3” of our 2012
Proxy Statement.

Z I M M E R H O L D I N G S , I N C .

PART IV

ITEM 15. Exhibits, Financial Statement Schedules

(a) 1.

Financial Statements

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

The following consolidated financial statements of Zimmer Holdings, Inc. and its subsidiaries are set forth in Part II,
Item 8.

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Earnings for the Years Ended December 31, 2011, 2010 and 2009

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2011, 2010 and 2009

Consolidated Balance Sheets as of December 31, 2011 and 2010

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2011, 2010 and 2009

Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 2010 and 2009

Notes to Consolidated Financial Statements

Financial Statement Schedules

Schedule II. Valuation and Qualifying Accounts

Other financial statement schedules are omitted because they are not applicable or the required information is shown in
the financial statements or the notes thereto.

3. Exhibits

A list of exhibits required to be filed as part of this report is set forth in the Index to Exhibits, which immediately precedes
such exhibits and is incorporated herein by reference.

Z I M M E R H O L D I N G S , I N C .

Signatures

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.

ZIMMER HOLDINGS, INC.

By: /S/ DAVID C. DVORAK
David C. Dvorak
President and Chief Executive Officer

Dated: February 24, 2012

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.

Signature

Title

Date

/S/ DAVID C. DVORAK

David C. Dvorak

/S/ JAMES T. CRINES

James T. Crines

/S/ DEREK M. DAVIS

Derek M. Davis

/S/ BETSY J. BERNARD

Betsy J. Bernard

Marc N. Casper

/S/ LARRY C. GLASSCOCK

Larry C. Glasscock

President, Chief Executive Officer and Director
(Principal Executive Officer)

Executive Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)

Vice President, Finance, and Corporate Controller
and Chief Accounting Officer
(Principal Accounting Officer)

Director

February 24, 2012

/S/ ROBERT A. HAGEMANN

Director

February 24, 2012

Robert A. Hagemann

/S/ ARTHUR J. HIGGINS

Arthur J. Higgins

/S/ JOHN L. MCGOLDRICK

John L. McGoldrick

Director

February 24, 2012

/S/ CECIL B. PICKETT, PH.D.

Director

February 24, 2012

Cecil B. Pickett, Ph.D.

Z I M M E R H O L D I N G S , I N C .

Index to Exhibits

Exhibit No

Description

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

3.1

3.2

4.1

4.2

4.3

4.4

4.5

4.6

4.7

4.8

10.1*

10.2*

10.3*

10.4*

10.5*

10.6*

10.7*

10.8*

10.9*

10.10*

10.11*

10.12*

10.13*

10.14*

Restated Certificate of Incorporation of Zimmer Holdings, Inc. dated May 13, 2008 (incorporated by reference to
Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed August 5, 2008)

Restated By-Laws of Zimmer Holdings, Inc. effective May 6, 2008 (incorporated by reference to Exhibit 3.1 to the
Registrant’s Current Report on Form 8-K filed May 9, 2008)

Specimen Common Stock certificate (incorporated by reference to Exhibit 4.3 to the Registrant’s Registration
Statement on Form S-8 filed January 20, 2006)

Indenture dated as of November 17, 2009 between Zimmer Holdings, Inc. and Wells Fargo Bank, National Association,
as Trustee (incorporated by reference to the form filed as Exhibit 4.8 to the Registrant’s Registration Statement on
Form S-3 filed November 12, 2009)

First Supplemental Indenture to the Indenture dated as of November 17, 2009 between Zimmer Holdings, Inc. and
Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.2 to the Registrant’s
Current Report on Form 8-K filed November 17, 2009)

Form of 4.625% Note due 2019 (incorporated by reference to Exhibit 4.3 above)

Form of 5.750% Note due 2039 (incorporated by reference to Exhibit 4.3 above)

Second Supplemental Indenture dated as of November 10, 2011, to the Indenture dated as of November 17, 2009
between Zimmer Holdings, Inc. and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to
Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed November 10, 2011)

Form of 1.400% Note due 2014 (incorporated by reference to Exhibit 4.6 above)

Form of 3.375% Note due 2021 (incorporated by reference to Exhibit 4.6 above)

Zimmer Holdings, Inc. 2001 Stock Incentive Plan (incorporated by reference to Appendix B to the Registrant’s
definitive Proxy Statement on Schedule 14A filed March 24, 2003)

First Amendment to the Zimmer Holdings, Inc. 2001 Stock Incentive Plan (incorporated by reference to Exhibit 10.1
to the Registrant’s Current Report on Form 8-K filed December 15, 2005)

Zimmer Holdings, Inc. 2006 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed December 13, 2006)

Zimmer Holdings, Inc. Executive Performance Incentive Plan, as amended (incorporated by reference to Appendix B
to the Registrant’s definitive Proxy Statement on Schedule 14A filed March 20, 2008)

Restated Zimmer, Inc. Long-Term Disability Income Plan for Highly Compensated Employees (incorporated by
reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K filed February 28, 2007)

Change in Control Severance Agreement with David C. Dvorak (incorporated by reference to Exhibit 10.10 to the
Registrant’s Annual Report on Form 10-K filed February 27, 2009)

Form of Change in Control Severance Agreement with Bruno A. Melzi (incorporated by reference to Exhibit 10.3 to
the Registrant’s Quarterly Report on Form 10-Q filed May 8, 2002)

Form of Change in Control Severance Agreement with James T. Crines and Cheryl R. Blanchard (incorporated by
reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K filed February 27, 2009)

Form of Change in Control Severance Agreement with Jeffery A. McCaulley and Chad F. Phipps (incorporated by
reference to Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K filed February 27, 2009)

Form of Change in Control Severance Agreement with Jeffrey B. Paulsen (incorporated by reference to Exhibit 10.1
to the Registrant’s Quarterly Report on Form 10-Q filed May 5, 2010)

Change in Control Severance Agreement with Stephen Hong Liang, Ooi (incorporated by reference to Exhibit 10.21 to
the Registrant’s Annual Report on Form 10-K filed March 12, 2003)

Change in Control Severance Agreement with Derek M. Davis (incorporated by reference to Exhibit 10.14 to the
Registrant’s Annual Report on Form 10-K filed February 27, 2009)

Restated Benefit Equalization Plan of Zimmer Holdings, Inc. and Its Subsidiary or Affiliated Corporations Participating
in the Zimmer Holdings, Inc. Savings and Investment Program (incorporated by reference to Exhibit 10.16 to the
Registrant’s Annual Report on Form 10-K filed February 27, 2009)

Restated Benefit Equalization Plan of Zimmer Holdings, Inc. and Its Subsidiary or Affiliated Corporations Participating
in the Zimmer Holdings, Inc. Retirement Income Plan or the Zimmer Puerto Rico Retirement Income Plan
(incorporated by reference to Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K filed February 27, 2009)

Z I M M E R H O L D I N G S , I N C .

Exhibit No

Description

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

10.15*

10.16*

10.17*

10.18*

10.19*

10.20*

10.21*

10.22*

10.23*

10.24*

10.25*

10.26*

10.27*

10.28*

10.29*

10.30*

10.31*

10.32*

10.33*

Form of Confidentiality, Non-Competition and Non-Solicitation Employment Agreement with U.S.-Based Executive
Officers (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed August 7,
2009)

Non-Disclosure, Non-Competition and Non-Solicitation Employment Agreement with Stephen Hong Liang, Ooi
(incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed March 27, 2006)

Confidentiality, Non-Competition and Non-Solicitation Agreement with Bruno A. Melzi (incorporated by reference to
Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed March 27, 2006)

Form of Nonqualified Stock Option Award Letter under the Zimmer Holdings, Inc. 2001 Stock Incentive Plan
(incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed January 11, 2006)

Form of Nonqualified Performance-Conditioned Stock Option Grant Award Letter under the Zimmer Holdings, Inc.
2001 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
filed January 21, 2005)

Zimmer Holdings, Inc. Stock Plan for Non-Employee Directors, as amended (incorporated by reference to Appendix C
to the Registrant’s Definitive Proxy Statement filed March 20, 2009)

Form of Nonqualified Stock Option Award Letter under the Zimmer Holdings, Inc. Stock Plan for Non-Employee
Directors (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed April 5,
2005)

Form of Restricted Stock Unit Award Letter under the Zimmer Holdings, Inc. Stock Plan for Non-Employee Directors
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed February 21, 2006)

Form of Nonqualified Stock Option Award Letter under the Zimmer Holdings, Inc. 2006 Stock Incentive Plan
(incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed December 13, 2006)

Form of Nonqualified Stock Option Award Letter for Non-U.S. Employees under the Zimmer Holdings, Inc. 2006 Stock
Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed
December 13, 2006)

Form of Restricted Stock Award Letter under the Zimmer Holdings, Inc. 2006 Stock Incentive Plan (five-year vesting)
(incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed December 13, 2006)

Form of Performance-Based Restricted Stock Unit Award Letter under the Zimmer Holdings, Inc. 2006 Stock
Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed
February 17, 2009)

Restated Zimmer Holdings, Inc. Deferred Compensation Plan for Non-Employee Directors (incorporated by reference
to Appendix D to the Registrant’s Definitive Proxy Statement filed March 20, 2009)

Zimmer Holdings, Inc. 2009 Stock Incentive Plan (incorporated by reference to Appendix B to the Registrant’s
Definitive Proxy Statement filed March 20, 2009)

Form of Nonqualified Stock Option Award Letter under the Zimmer Holdings, Inc. 2009 Stock Incentive Plan
(incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed May 5, 2011)

Form of Nonqualified Stock Option Award Letter for Non-U.S. Employees under the Zimmer Holdings, Inc. 2009 Stock
Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed May
5, 2011)

Form of Performance-Based Restricted Stock Unit Award Letter (one-year performance period) under the Zimmer
Holdings, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly
Report on Form 10-Q filed May 5, 2011)

Form of Performance-Based Restricted Stock Unit Award Letter for Non-U.S. Employees (one-year performance
period) under the Zimmer Holdings, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the
Registrant’s Quarterly Report on Form 10-Q filed May 5, 2011)

Form of Restricted Stock Unit Award Letter (five-year vesting) under the Zimmer Holdings, Inc. 2009 Stock Incentive
Plan (incorporated by reference to Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K filed February 25,
2010)

10.34*

Form of Performance-Based Restricted Stock Unit Award Letter (three-year performance period) under the Zimmer
Holdings, Inc. 2009 Stock Incentive Plan

10.35*

Summary Compensation Sheet

Z I M M E R H O L D I N G S , I N C .

Exhibit No

Description

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

10.36

10.37

10.38

31.1

31.2

$1,350,000,000 Amended and Restated Credit Agreement dated as of November 30, 2007 (incorporated by reference
to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed December 6, 2007)

Corporate Integrity Agreement dated September 27, 2007, among Zimmer Holdings, Inc., Zimmer, Inc. and the Office
of Inspector General of the Department of Health and Human Services (incorporated by reference to Exhibit 10.2 to
the Registrant’s Quarterly Report on Form 10-Q filed November 9, 2007)

Form of Indemnification Agreement with Non-Employee Directors and Officers (incorporated by reference to Exhibit
10.1 to the Registrant’s Current Report on Form 8-K filed July 31, 2008)

List of Subsidiaries of Zimmer Holdings, Inc.

Consent of PricewaterhouseCoopers LLP

Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 of the Chief Executive
Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 of the Chief Financial
Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

* Management contract or compensatory plan or arrangement

Valuation and Qualifying Accounts

Description

Allowance for Doubtful Accounts:

Year Ended December 31, 2009

Year Ended December 31, 2010

Year Ended December 31, 2011

Schedule II

Balance at
Beginning
of Period

Additions
Charged
(Credited)
to Expense

Deductions
to Reserve

Effects of
Foreign
Currency

Acquired
Allowances

Balance at
End of
Period

(in millions)

20.0

18.8

14.4

0.1

(1.0)

4.5

(1.8)

(3.1)

(1.7)

0.5

(0.6)

–

0.3

–

18.8

14.4

17.2

Z I M M E R H O L D I N G S , I N C .

Reconciliations

2 0 1 1 F O R M 1 0 - K A N N U A L R E P O R T

Reconciliation of Operating Profit to Adjusted Operating Profit for the Years Ended December 31, 2011, 2010, 2009, 2008 and 2007

(in millions, unaudited)
For the Years Ended December 31,

2011

2010

2009

2008

2007

Operating Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory step-up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net curtailment and settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,024.1
11.4
—
157.8
—
75.2
—

$ 916.7
1.4
—
75.0
204.0
34.7
—

$1,018.8
12.5
—
35.0
73.0
75.3
(32.1)

$1,090.0
7.0
—
69.0
—
68.5
—

$1,127.6
0.5
169.5
—
—
25.2
—

Adjusted Operating Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,268.5

$1,231.8

$1,182.5

$1,234.5

$1,322.8

Reconciliation of Diluted EPS to Adjusted Diluted EPS for the Years Ended December 31, 2011, 2010, 2009, 2008 and 2007

Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory step-up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net curtailment and settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes on inventory step-up, settlement, certain claims, special items, and net

curtailment and settlement and tax adjustments related to resolution of certain tax
matters* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit from settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(unaudited)
For the Years Ended December 31,

2011

2010

2009

2008

2007

$ 4.03
0.06
—
0.84
—
0.40
—

$ 2.97
0.01
—
0.37
1.01
0.17
—

$ 3.32
0.06
—
0.16
0.34
0.35
(0.15)

$ 3.72
0.03
—
0.30
—
0.30
—

$ 3.26
—
0.71
—
—
0.11
—

(0.53)
—

(0.20)
—

(0.14)
—

(0.16)
(0.14)

(0.03)
—

Adjusted Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4.80

$ 4.33

$ 3.94

$ 4.05

* The tax effect is calculated based upon the statutory rates for the jurisdictions where the items were incurred.

Reconciliation of Sales Growth Rate to Constant Currency Sales Growth Rate for the Year Ended December 31, 2011

Geographic Segment

Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Product Category

Reconstructive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Knees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Extremities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dental
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trauma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Spine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surgical and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(unaudited)
For the Year Ended December 31, 2011

Reported
% Growth

Foreign
Exchange
Impact

Constant
Currency
% Growth

—%
10
16
5

4
2
7
9
13
16
(4)
9
5

—%
5
10
2

3
3
3
2
1
3
2
3
2

—%
5
6
3

1
(1)
4
7
12
13
(6)
6
3

Corporate Information

Board of Directors

John L. Mc Goldrick
Chairman of the Board,
Zimmer Holdings, Inc.
Special Advisor,
International AIDS
Vaccine Initiative

Betsy J. Bernard
Retired President,
AT&T Corp.

Ofﬁ cers and Key Management

David C. Dvorak
President and
Chief Executive Oﬃ cer

Cheryl R. Blanchard, Ph.D.
Senior Vice President
and Chief Scientiﬁ c Oﬃ cer

James T. Crines
Executive Vice President,
Finance and Chief Financial Oﬃ cer

Stockholder Information

Headquarters
Zimmer Holdings, Inc.
345 East Main Street
Warsaw, IN 46580, U.S.A.
+1-574-267-6131
www.zimmer.com

Stock Listing
Zimmer is listed on the
New York Stock Exchange
and the SIX Swiss Exchange
under the symbol ZMH.

Marc N. Casper
President and
Chief Executive Oﬃ cer,
Thermo Fisher Scientiﬁ c Inc.

David C. Dvorak
President and
Chief Executive Oﬃ cer,
Zimmer Holdings, Inc.

Larry C. Glasscock
Retired Chairman,
WellPoint, Inc.

Arthur J. Higgins
Consultant,
Blackstone Healthcare Partners

Robert A. Hagemann
Senior Vice President
and Chief Financial Oﬃ cer,
Quest Diagnostics Incorporated

Cecil B. Pickett, Ph.D.
Retired President,
Research and Development,
Biogen Idec Inc.

Derek M. Davis
Vice President, Finance
and Corporate Controller
and Chief Accounting Oﬃ cer

Norman D. Finch Jr.
Vice President,
Associate General Counsel
and Chief Compliance Oﬃ cer

William P. Fisher
Senior Vice President,
Global Human Resources

Katarzyna Mazur-Hofsaess, M.D., Ph.D.
President,
Europe, Middle East and Africa
Reconstructive

Jeffery A. McCaulley
President,
Zimmer Reconstructive

Bruno A. Melzi
Chairman,
Europe, Middle East and Africa

Stephen H. L. Ooi
President,
Asia Paciﬁ c

Jeffrey B. Paulsen
Group President,
Global Businesses

Chad F. Phipps
Senior Vice President,
General Counsel and Secretary

Richard C. Stair
Senior Vice President,
Global Operations and Logistics

Transfer Agent
Communications concerning
stock transfer requirements,
loss of certiﬁ cates 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/
shareowner

Investor 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 Oﬃ cer
+1-574-372-4264
james.crines@zimmer.com

To 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 ﬁ nancial
calendar, access SEC ﬁ lings, 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.

Stock Performance Graph

Comparison of Cumulative Total Return for years ended December 31

Assumes $100 was invested on
December 31, 2006 in Zimmer
common stock and each index and
dividends were reinvested. No cash
dividends were paid on Zimmer stock
during the five-year period ended
December 31, 2011. Returns over the
indicated period should not be
considered indicative of future returns.

$150

$100

$50

Zimmer Holdings, Inc.

S&P 500 Stock Index

S&P 500 Health Care Equipment Index

2006

$100

100

2007

$84

104

2008

$52

2009

$75

2010

$68

2011

$68

This annual report is printed on paper that
contains 10% post-consumer waste.

Zimmer Holdings, Inc.
345 East Main Street, P.O. Box 708
Warsaw, IN 46580, U.S.A.