Zimmer Biomet Annual Report 2014

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FY2014 Annual Report · Zimmer Biomet

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2 0 1 4 A N N U A L R E P O R T

Financial Highlights

(Dollars in millions except per-share amounts)

Sales b y Geographic Segment

2010

2011

2012

2013

2014

56%

27%

17%

Americas

$2,432

Europe

1,099

Asia Pacific

689

$2,441

1,214

797

$2,476

$2,620

$2,594

1,178

818

1,212

791

1,269

810

Consolidated

$4,220

$4,452

$4,472

$4,623

$4,673

Sales b y Product Category

2010

2011

2012

2013

2014

Reconstructive

$3,210

$3,355

$3,350

$3,434

$3,496

42%

Knees

Hips

28%

Extremities

Dental

Trauma

Spine

1,798

1,262

150

219

246

234

9% 5%

Surgical & Other

311

1,836

1,356

163

248

286

225

338

1,834

1,342

174

238

308

209

367

1,910

1,330

194

239

316

202

432

1,966

1,326

204

243

317

207

410

Consolidated

$4,220

$4,452

$4,472

$4,623

$4,673

% Change 2013-2014

Constant
Reported Currency(1)

-1%

% Change 2013-2014

Constant
Reported Currency(1)

-5%

-3%

Net Sales
Zimmer delivered solid global

Operating Proﬁt
Zimmer continued to achieve

Operating Cash Flow
Zimmer’s operating cash ﬂows

Diluted Earnings per Share
The ongoing success of Zimmer’s

revenues in 2014, recording

solid adjusted operating proﬁt

continued to support the ongoing

value creation framework

constant currency net sales

margins in 2014. The Company

commercialization of new

supported a steady 5.4% growth

growth of 2.4%. Focused

commercial execution

has recorded six consecutive

offerings in 2014, while funding

in adjusted earnings per share

quarters of year-over-year

strategic investments and

for 2014.

supported strong growth in the

adjusted operating margin

programs to enhance stockholder

Asia Paciﬁc and Europe, Middle

expansion through

value, including increased

East and Africa regions, as well

process-driven improvements

dividends and a disciplined

as a steady performance in the

that have delivered signiﬁcant

share repurchase program ahead

Americas. Global sales were

cost savings and efﬁciencies.

of the transformational

also supported by accelerated

contributions from certain

global businesses.

1% Reported

3
7
6
4

3
2
6
4

2
5
4
4

2
7
4
4

0
2
2
4

5% Adjusted(2)
0% Reported

2
3
2
1

7
1
9

9
6
2
1

4
2
0
1

9
1
3
1

7
4
0
1

0
7
3
1

6
3
0
1

4
3
4
1

5
3
0
1

combination with Biomet.

9% Reported

4
9
1
1

7
7
1
1

2
5
1
1

3
5
0
1

3
6
9

5% Adjusted(2)

-5% Reported

5
7
5

3
4
4

0
3
5

9
2
4

0
8
4

3
0
4

3
3
4

7
9
2

6
0
6

9
1
4

(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 79.

(2) “Adjusted” refers to performance measures that exclude inventory step-up and other inventory and manufacturing charges, special items, the provision for certain Durom® Acetabular Component
product claims, goodwill impairment, financing and other expenses related to the pending Biomet merger and certain tax adjustments. See the reconciliations of these non-GAAP financial
measures to the most directly comparable GAAP measures on page 79.

To Our Stockholders:

Since 1927, the people of Zimmer have been committed to restoring mobility, alleviating
pain and improving quality of life for patients around the world. We proudly carried on that
tradition in 2014, with an enduring commitment to our core values. Through the execution
of a proven strategic framework, we continued to meet our ﬁnancial commitments and
return substantial value to our stockholders.

Zimmer delivered steady sales growth throughout 2014, with notable contributions
coming from across our diversiﬁed portfolio. Sales for the year totaled $4.67 billion, with
fully diluted adjusted earnings per share of $6.06, which was an increase of 5.4% over the
prior year. Our performance was highlighted by solid growth in the Europe, Middle East
and Africa region and the Asia Paciﬁc region, including key emerging markets.

Throughout the year, Zimmer released a number of new offerings from our innovation
pipeline, while continuing to expand ongoing product releases. We also continued
executing a business transformation agenda, achieving process efﬁciencies and cost
savings across our operations. As a result, we improved our operating margin in each
quarter of 2014, further supporting our ability to fund our capital allocation priorities.

In April 2014, we embarked upon a new chapter in our history by announcing our planned
combination with Biomet. When the combination is ﬁnalized, we will be known as Zimmer
Biomet. This landmark expansion of our global organization will support our mission to
lead the industry by providing innovative products and solutions that deliver exceptional
value to healthcare providers, their patients and our stockholders.

Driving Growth Through Innovation

Through a broad-based approach to innovation, Zimmer has built a legacy of offering
solutions that embrace the unique needs of our surgeon customers and their patients. In
2014, we introduced a broad range of new products to an expanded customer base and
achieved milestone clinical acceptance.

We continue to be excited about Persona® The Personalized Knee System. Built on the
clinical legacy of our leading NexGen® and Natural-Knee® Systems, the Persona Knee offers
unprecedented anatomical accuracy and innovative features. This revolutionary total knee
system, as well as its accompanying suite of intelligent instrument offerings, continues
to garner customer acclaim and capture market growth. Promising sales of the Persona
System contributed to the steady performance of our market-leading Knee franchise in 2014.

Turning to our Hips business, in 2014, our hip liners featuring Vivacit-E® Vitamin E Highly
Crosslinked bearing material successfully completed more than 90 million cycles of
laboratory wear-testing, without signs of oxidation or strength reduction. This platform
technology, which we apply across our reconstructive portfolio, has now become the only
orthopaedic bearing material laboratory tested to mimic the number of walking steps and
environment patients typically experience during a lifetime following hip replacement.
During the year, Zimmer also began European commercialization of a differentiated new
diagnostic technology, the Synovasure® PJI Alpha Defensin Test for Periprosthetic Joint
Infection.

It was an exciting year for our Spine business, which successfully launched 12 new
products in 2014. These portfolio additions included the Optio-C® Anterior Cervical
System, a next generation, modular stand-alone cervical device, and the Virage® OCT
Spinal Fixation System, winner of the Life Science Alley New Technology Showcase. Zimmer
also added six new products to our comprehensive family of Puros® Demineralized Bone
Matrix Grafting solutions for spinal surgery.

In addition, we continued to expand our biologics portfolio for the early stages of joint
disease, which includes the Gel-One® Cross-linked Hyaluronate for early intervention,
and joint preservation solutions such as the Zimmer Knee Creations™ Subchondroplasty®
Procedure. In October, we completed the acquisition of Massachusetts-based ETEX
Holdings, Inc., which offers bone void ﬁller technologies for early joint disease. We are
pleased to have the opportunity to offer these innovative solutions.

These new products reﬂect our vision to introduce solutions that make a meaningful
difference for our surgeon customers and their patients. Technologies such as these
also advance our objective to become the single-solution provider at every stage of the
continuum of care, offering the most personalized and appropriate therapies for every
condition and patient.

Operational Excellence: Delivering Savings and Funding Growth

In 2014, Zimmer continued to drive an ambitious global transformation, quality and
operational excellence agenda. We are achieving efﬁciencies and process improvement
with these programs and applying innovative thinking to nearly every aspect of our
operations. Ongoing operational excellence programs include our strategic sourcing
campaign for supplies and raw materials, the implementation of manufacturing best
practices and the optimization of our logistics and inventory management systems.

Since launching our global operational excellence initiatives in 2009, they have been a
testament to continuously improving our business. Cost savings from these programs have
supported operating margin expansion and funded growth-driving investments, including
our research and development programs. The success of these initiatives also reinforces
our conﬁdence in our ability to continue creating and returning value to stockholders in the
future, as a combined entity with Biomet.

Zimmer Biomet: Enhancing Our Leadership in the Global Musculoskeletal
Healthcare Industry

We continue to be excited as we anticipate concluding our historic combination with
Biomet. Under the leadership of an experienced executive team drawn from both
organizations, Zimmer Biomet will build upon the guiding principles and best practices
that have made both companies innovation pioneers.

As we have communicated previously, the compelling synergies inherent in this planned
combination include operational excellence, manufacturing optimization and go-to-
market strategies. Zimmer Biomet will offer attractive growth potential through a broader
and more scalable portfolio of musculoskeletal solutions, including enhanced cross-
selling opportunities. In addition to more diversiﬁed revenues, we expect to beneﬁt from
signiﬁcant cash ﬂow generation and double-digit accretion to adjusted diluted earnings
per share. Perhaps most important, this combination will signiﬁcantly enhance the
resources and capabilities of our research and development pipeline. As a combined
entity, Zimmer Biomet will be able to more rapidly and efﬁciently bring a comprehensive
portfolio of solutions and services to the global market.

Since announcing the transaction, we have worked closely with the leadership team and
highly talented business units of Biomet. The success of this early collaboration has given
us a greater appreciation for our shared values and capabilities on a combined basis. Our
corporate cultures clearly represent a natural ﬁt, and we are proud to share a history of
innovation based in Warsaw, Indiana.

Our joint planning teams have done an impressive job of meeting key integration planning
milestones, and we expect the transaction to close in the ﬁrst quarter of 2015 or shortly
thereafter. As we forge ahead with integration planning activities, Zimmer will remain
intently-focused on the highest level of customer support and driving our ongoing new
product releases.

A Transformational Year Ahead

Our results in 2014 are evidence of Zimmer’s sustained focus on our strategic growth
platform. We continued to drive the execution of our innovation and commercial
strategies, while strengthening our culture of quality and operational excellence and
growing our participation in exciting new markets. Looking to 2015, we remain bullish
on our ability to seize the opportunities offered by the $45 billion global market for
musculoskeletal technologies and treatments.

While the year ahead promises to be a transformational one for Zimmer, we believe the
Company is well positioned to continue delivering on our commitments. We will remain
focused on clinical innovations that enhance the quality, efﬁciency and cost-effectiveness
of musculoskeletal care for an evolving healthcare environment. On that basis, we will
continue offering exceptional value to healthcare providers, their patients and healthcare
systems. We will also carry forward our track record of operational excellence and sound
capital management into this next phase of our development, backed by a comprehensive
product portfolio and robust innovation pipeline.

Zimmer’s ongoing success is in large part attributable to the dedicated efforts of more than
9,000 Team Members around the world. We join them in thanking you for the privilege to
serve the global healthcare community, and for your ongoing support for Zimmer.

David C. Dvorak
President and
Chief Executive Ofﬁcer

Larry C. Glasscock
Chairman of the Board

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, 2014
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. Í

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 $17,501,425,466 (based on the closing price of these shares on the
New York Stock Exchange on June 30, 2014 and assuming solely for the purpose of this calculation that all directors and executive
officers of the registrant are “affiliates”). As of February 16, 2015, 169,902,991 shares of the registrant’s $.01 par value common
stock were outstanding.

Document

Portions of the Proxy Statement with respect to the 2015 Annual Meeting of Stockholders

Form 10-K

Part III

Documents Incorporated by Reference

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN 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 may be identified by the fact that they do not relate strictly to historical or current facts. They often
include words such as “may,” “will,” “can,” “should,” “would,” “could,” “anticipate,” “expect,” “plan,” “seek,” “believe,” “predict,”
“estimate,” “potential,” “project,” “assume,” “guide,” “target,” “forecast,” “intend,” “strategy,” “is confident that,” “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

Mine Safety Disclosures

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 HOL D I NG S , I NC .

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.

On April 24, 2014, we entered into a definitive agreement

to merge with LVB Acquisition, Inc. (LVB), the parent
company of Biomet, Inc. (Biomet), in a cash and stock
transaction valued at approximately $13.35 billion. We will pay
$10.35 billion in cash, subject to certain adjustments, and issue
32.7 million shares of our common stock. In connection with
the Biomet merger, we will pay off all of LVB’s outstanding
funded debt, and the aggregate cash merger consideration will
be reduced by such amount. The Biomet merger, which is
subject to customary closing conditions and regulatory
approvals, is expected to close in the first quarter of 2015. The
merger will position the combined company as a leader in the
$45 billion musculoskeletal industry. The Biomet merger is
expected to be a transformational event for us and have
significant effects on all aspects of our business. The
description of our business in this report is for Zimmer on a
standalone basis and does not address the consequences of the
planned Biomet merger.

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. 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 African markets; and Asia Pacific, which is
comprised primarily of Japan and includes other Asian and
Pacific markets.

We market and sell products through three principal
channels: 1) direct to healthcare institutions, such as hospitals,
referred to as direct channel accounts; 2) through stocking
distributors and healthcare dealers; and 3) directly to dental

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

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
75 percent of our net sales in 2014. 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 2014.

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
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, some 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.

The following is a summary of our three reportable

segments. See Note 17 to the consolidated financial statements
for more information regarding our segments.

Americas. The Americas is our largest geographic

segment, accounting for $2,594.2 million, or 56 percent, of
2014 net sales, with the U.S. accounting for 92 percent of net
sales in this region. The U.S. sales force consists of a
combination of employees and independent sales agents, most
of whom sell products exclusively for Zimmer. The sales force
in the U.S. receives a commission on product sales and is
responsible for many operating decisions and costs.

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.

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

In the Americas, we monitor and rank independent sales

Products

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

Europe. The European geographic segment accounted

for $1,269.5 million, or 27 percent, of 2014 net sales, with
France, Germany, Italy, Spain, Switzerland and the United
Kingdom collectively accounting for 68 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. 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 government
budgets impact healthcare spending, which can affect our sales
in this segment.

Asia Pacific. The Asia Pacific geographic segment
accounted for $809.6 million, or 17 percent, of 2014 net sales,
with Japan being the largest market within this segment,
accounting for 42 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. The knowledge and skills of these sales
associates play a critical role in providing service, product
information and support to surgeons. We have a research and
development center in Beijing, China, which focuses on
products and technologies designed to meet the unique needs
of Asian patients and their healthcare providers.

Seasonality

Our business is seasonal in nature to some extent, 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 met
on health insurance plans.

Distribution

Our products include orthopaedic reconstructive

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

ORTHOPAEDIC RECONSTRUCTIVE IMPLANTS

Knees

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. 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. Our knee portfolio also includes early intervention
and joint preservation products, which seek to preserve the
joint by repairing or regenerating damaged tissues and by
treating osteoarthritis.

Our significant knee brands include the following:

(cid:129) Persona® The Personalized Knee System
(cid:129) NexGen® Complete Knee Solution
(cid:129) Natural-Knee® II System
(cid:129) Innex® Total Knee System
(cid:129) Zimmer® Unicompartmental High Flex Knee
(cid:129) Zimmer Patient Specific Instruments
(cid:129) Gel-One®1 Cross-linked Hyaluronate

Hips

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. Hip implant
procedures involve the use of bone cement to attach or affix
the prosthetic components to the surrounding bone, or are
press-fit into bone, which means that they have a surface that
bone affixes to through either ongrowth or ingrowth
technologies.

Our significant hip brands include the following:

(cid:129) Zimmer M/L Taper Hip Prosthesis and Zimmer M/L Taper

Hip Prosthesis with Kinectiv® Technology

(cid:129) Alloclassic® (Zweymüller®) Hip System
(cid:129) CLS® Spotorno® Hip Stem and CLS Brevius® Stem

We operate distribution facilities domestically in
Southaven, Mississippi; and Carlsbad, California and
internationally in Australia, Canada, China, France, Germany,
India, Italy, Japan, Korea, Russia, South Africa, Spain,
Switzerland, the United Kingdom, and various other countries.
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.

with Kinectiv Technology

(cid:129) Fitmore® Hip Stem
(cid:129) Avenir® Müller Stem
(cid:129) Wagner SL Revision® Hip Stem
(cid:129) Continuum® Acetabular System
(cid:129) Trilogy® IT Acetabular System
(cid:129) Allofit® IT Alloclassic Acetabular System
(cid:129) Trabecular MetalTM Modular Acetabular System

1 Registered trademark of Seikagaku Corporation

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

(cid:129) Vivacit-E® Highly Crosslinked Polyethylene Liners
(cid:129) BIOLOX®2 delta Heads

Extremities

Our extremity portfolio, including shoulder, elbow and
ankle products, is designed to treat arthritic conditions, soft
tissue injuries and fractures.

Our significant extremity brands include the following:

(cid:129) Zimmer Trabecular Metal Reverse Shoulder System
(cid:129) Bigliani/Flatow® Complete Shoulder Solution Family
(cid:129) Sidus® Stem-Free Shoulder
(cid:129) Zimmer Trabecular Metal Total Ankle
(cid:129) Zimmer Coonrad/Morrey Total Elbow
(cid:129) Nexel® Total Elbow

DENTAL

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 prosthetic products – aimed at providing a more
natural restoration to resemble the original teeth; and
(3) dental regenerative products – for soft tissue and bone
rehabilitation.

Our significant dental brands include the following:

(cid:129) Tapered Screw-Vent® Implant System
(cid:129) Hex-Lock® Contour Abutment and Restorative Products
(cid:129) Puros® Allograft Products3

TRAUMA

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.

Our significant trauma brands include the following:

(cid:129) Zimmer Natural Nail® System
(cid:129) NCB® Polyaxial Locking Plate System
(cid:129) Zimmer Periarticular Locking Plate System
(cid:129) Zimmer Universal Locking System
(cid:129) Cable-Ready® Cable Grip System

Our significant spine brands include the following:

(cid:129) PathFinder NXT® Minimally Invasive Pedicle Screw System
(cid:129) Trabecular Metal Implants
(cid:129) Sequoia® Pedicle Screw System
(cid:129) Trinica® Select Anterior Cervical Plate System
(cid:129) Dynesys® Dynamic Stabilization System

SURGICAL

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, blood management and fluid waste management.
Our significant surgical brands include the following:

(cid:129) Transposal® and Transposal Ultra® Fluid Waste

Management Systems

(cid:129) PALACOS®4 Bone Cement
(cid:129) A.T.S.® Automatic Tourniquet Systems

Research and Development

We have extensive research and development activities to

develop new surgical techniques, materials, biologics and
product designs. The research and development teams 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 offerings in each of our product

categories and exploring new technologies with possible
applications in multiple areas. Our primary research and
development facility is located in Warsaw, Indiana. We have
other research and development personnel based in, among
other places, Montreal, Canada; Beijing, China; Winterthur,
Switzerland; Austin, Texas; Minneapolis, Minnesota; Carlsbad,
California; Philadelphia, Pennsylvania; Dover, Ohio; and
Parsippany, New Jersey. As of December 31, 2014, we
employed approximately 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.

SPINE

Government Regulation and Compliance

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.

2 Registered trademark of CeramTec GmbH
3 Manufactured by RTI Surgical in Alachua, FL and Tutogen Medical
GmbH, Germany (an RTI Surgical, Inc. company) and distributed by
Zimmer Dental, Inc.

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

4 Registered trademark of Heraeus Medical GmbH

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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 application 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 some devices
which were in commercial distribution prior to May 28, 1976.
The FDA has grandfathered these devices, so new FDA
submissions are not required.

Both before and after a product is commercially released,

we have ongoing responsibilities under FDA regulations. The
FDA reviews design and manufacturing practices, labeling and
record keeping, and manufacturers’ required reports of
adverse experiences and other information to identify potential
problems with marketed medical devices. We are also subject
to periodic inspection by the FDA for compliance with the
FDA’s Quality System regulations among other FDA
requirements, such as restrictions on advertising and
promotion. The Quality System regulations govern the
methods used in, and the facilities and controls used for, the
design, manufacture, packaging and servicing of all finished
medical devices intended for human use. If the FDA were to
conclude that we are not in compliance with applicable laws or
regulations, or that any of our medical devices are ineffective
or pose an unreasonable health risk, the FDA could require us
to notify healthcare professionals and others that the devices
present unreasonable risks of substantial harm to the public
health, order a recall, repair, replacement, or refund payment
of such devices, detain or seize adulterated or misbranded
medical devices, or ban such medical devices.

regulatory requirements on the import of our products,
including inspection and possible sanctions for noncompliance.
We are also subject to foreign trade controls administered by
certain U.S. government agencies, including the Bureau of
Industry and Security within the Commerce Department and
the Office of Foreign Assets Control within the Treasury
Department.

There are also 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, state and
foreign laws concerning healthcare fraud and abuse, including
false claims and anti-kickback laws, as well as the U.S.
Physician Payments Sunshine Act and similar state and foreign
healthcare professional payment transparency 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, state attorneys general and
various foreign government agencies. 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. 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.

The FDA may also impose operating restrictions, enjoin

Our facilities and operations are also subject to complex

and/or restrain certain conduct resulting in violations of
applicable law pertaining to medical devices, and assess civil or
criminal penalties against our officers, employees or us. The
FDA may also recommend prosecution to the U.S. Department
of Justice.

The FDA, in cooperation with U.S. Customs and Border

Protection (CBP), administers controls over the import of
medical devices into the U.S. The CBP imposes its own

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.

Z I M M E R HOL D I NG S , I NC .

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: the DePuy Synthes Companies
of Johnson & Johnson, Stryker Corporation, Biomet, and
Smith & Nephew plc.

In the Americas geographic segment, we and the DePuy

Synthes Companies, Stryker Corporation, Biomet, and Smith &
Nephew, Inc. (a subsidiary of Smith & Nephew plc) account
for a large majority of the total reconstructive and trauma
implant sales. There are also many smaller competitors
actively engaging in this market. Some of these smaller
competitors have success by focusing on smaller subsegments
of the industry.

The European reconstructive implant and trauma product

markets are more fragmented than those markets in 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), Limacorporate S.p.A., 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 intend to continue to develop and produce
specially tailored products to meet specific European needs.
In the Asia Pacific market for reconstructive implant and

trauma products, we compete primarily with the DePuy
Synthes Companies, Stryker Corporation, Smith & Nephew plc
and Biomet, 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 more
developed healthcare markets in the Asia Pacific region.
In the spinal implant category, we compete globally
primarily with the spinal and biologic business of Medtronic,
Inc., the DePuy Synthes Companies, Stryker Corporation,
Biomet Spine (a subsidiary of Biomet), NuVasive, Inc. and
Globus Medical, 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).

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.

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Ireland; and Beijing, China. We also strategically outsource
some manufacturing to qualified suppliers who are highly
capable of producing components.

The manufacturing operations at our 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 4,500 issued patents and
patent applications throughout the world that relate to aspects
of the technology incorporated in many of our products.

Manufacturing and Raw Materials

Employees

We manufacture our products at various sites. Our
significant manufacturing locations include Warsaw, Indiana;
Winterthur, Switzerland; Ponce, Puerto Rico; Dover, Ohio;
Carlsbad, California; Parsippany, New Jersey; Shannon,

As of December 31, 2014, we employed approximately

10,000 employees worldwide, including approximately
1,000 employees dedicated to research and development.
Approximately 5,600 employees are located within the U.S.

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and approximately 4,400 employees are located outside of the
U.S., primarily throughout Europe and in Japan. We have
approximately 4,200 employees dedicated to manufacturing
our products worldwide. The Warsaw, Indiana production
facility employs approximately 1,800 employees.

Approximately 190 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, AFL-CIO,
CLC for and on behalf of Local 2737-15 covering employees at
the Dover, Ohio facility, which continues in effect until
May 15, 2015.

EXECUTIVE OFFICERS

The following table sets forth certain information with respect to our executive officers as of February 19, 2015.

Name

David C. Dvorak

James T. Crines

Joseph A. Cucolo

Derek M. Davis

Katarzyna Mazur-Hofsaess, M.D., Ph.D.

Stephen H.L. Ooi

Chad F. Phipps

Age

Position

President and Chief Executive Officer

Executive Vice President, Finance and Chief Financial Officer

President, Americas

Vice President, Finance and Corporate Controller and Chief Accounting Officer

President, Europe, Middle East and Africa

President, Asia Pacific

Senior Vice President, General Counsel and Secretary

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.

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. Cucolo was appointed President, Americas in September
2012. He is responsible for sales and management of the direct
and indirect sales channels in the Americas region, including
the United States, Canada and Latin America. From 1997 until
he joined Zimmer as President, Americas, Mr. Cucolo was sole
owner and President of Zimmer New England, Inc., an
independent third-party distributor of Zimmer products in the
northeast region of the United States. Prior to that, Mr. Cucolo
was employed by Zimmer as a sales representative and
territory manager in the New York area from 1987 to 1997.

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.

Dr. Mazur-Hofsaess was appointed President, Europe, Middle
East and Africa in April 2013. She is responsible for the sales,

marketing and distribution of products in the European,
Middle Eastern and African (EMEA) regions. Dr. Mazur-
Hofsaess joined Zimmer in February 2010 as Senior Vice
President, EMEA Sales and Marketing and was appointed
President, EMEA Reconstructive in February 2012. She has
approximately 20 years’ experience within the pharmaceutical,
diagnostics and medical device sectors. Prior to joining
Zimmer, Dr. Mazur-Hofsaess served in various management
positions with Abbott Laboratories since 2001, including
service as Vice President, Diagnostics – Europe.

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

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 Corporate
Compliance, 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.

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

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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, Securities and Exchange Commission (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:
(cid:129) 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 SEC;
(cid:129) 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;

(cid:129) press releases on quarterly earnings, product

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

(cid:129) 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, Corporate Governance Committee and
Research, Innovation and Technology Committee, and other
governance-related policies;

(cid:129) stockholder services information, including ways to contact
our transfer agent and information on how to sign up for
direct deposit of dividends or enroll in our dividend
reinvestment plan; and

(cid:129) 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. 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.

Risks Relating to the Proposed Biomet Merger and

the Combined Company Following the Merger

The following risk factors relate to certain risks and

uncertainties associated with the pending Biomet merger

and the combined company following the merger. The
following discussion does not, however, contain all risks
and uncertainties that relate to Biomet and its business on
a standalone basis, which additional risks and
uncertainties may also affect our actual results and could
harm our business, financial condition and results of
operations following the completion of the Biomet merger.
There is no assurance when or if the merger will be

completed. Any delay in completing the merger may
substantially reduce the benefits that we expect to
obtain from the merger.

Completion of the merger is subject to the satisfaction or
waiver of a number of conditions. There can be no assurance
that we and LVB will be able to satisfy the closing conditions or
that closing conditions beyond our control will be satisfied or
waived. We and LVB can agree at any time to terminate the
merger agreement, even though LVB stockholders have
approved the merger, and we and LVB can also terminate the
merger agreement under other specified circumstances. If the
merger and the integration of the companies’ respective
businesses are not completed within the expected timeframe,
such delay may materially and adversely affect the synergies
and other benefits that we expect to achieve as a result of the
merger and could result in additional transaction costs, loss of
revenue or other effects associated with uncertainty about the
merger.

We expect to incur substantial expenses related to

the merger and the integration of Biomet.

We expect to incur substantial expenses in connection
with the merger and the integration of Biomet. There are a
large number of processes, policies, procedures, operations,
technologies and systems that must be integrated, including
purchasing, accounting and finance, sales, billing, payroll,
manufacturing, marketing and employee benefits. While we
expect to incur integration and restructuring costs following
completion of the merger in 2015 that are estimated to exceed
$400 million in the first two years post-merger, many of the
expenses that will be incurred are, by their nature, difficult to
estimate accurately. These expenses could, particularly in the
near term, exceed the savings that we expect to achieve from
elimination of duplicative expenses and the realization of
economies of scale and cost savings. Although we expect that
the realization of efficiencies related to the integration of the
businesses may offset incremental transaction, merger-related
and restructuring costs over time, we cannot give any
assurance that this net benefit will be achieved in the near
term, or at all.

We and LVB may be unable to obtain the regulatory

approvals required to complete the merger.

Completion of the merger is conditioned upon, among
other conditions, the expiration or termination of any waiting
period under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, the approval of the European
Commission and the receipt of approval or expiration or
termination of any waiting period under applicable antitrust,
competition, fair trade or similar laws of Japan. We and LVB
are pursuing all required consents, orders and approvals in
accordance with the merger agreement. These consents,

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orders and approvals may impose conditions on or require
divestitures relating to our or Biomet’s divisions, operations or
assets, or may impose requirements, limitations or costs or
place restrictions on the conduct of the combined company’s
business. The merger agreement requires us and LVB, among
other things, to accept all such conditions, divestitures,
requirements, limitations, costs or restrictions that may be
imposed by regulatory entities. Such conditions, divestitures,
requirements, limitations, costs or restrictions may jeopardize
or delay completion of the merger, may reduce the anticipated
benefits of the merger or may result in the abandonment of the
merger. Further, no assurance can be given that the required
consents, orders and approvals will be obtained or that the
required conditions to closing will be satisfied, and, even if all
such consents, orders and approvals are obtained and such
conditions are satisfied, no assurance can be given as to the
terms, conditions and timing of such consents, orders and
approvals.

The pendency of the merger could have an adverse

effect on our and/or Biomet’s business, financial
condition, results of operations or business prospects.
The pendency of the merger could disrupt our and/or
Biomet’s businesses in the following ways, among others:
(cid:129) our and/or Biomet’s employees may experience uncertainty

regarding their future roles in the combined company, which
might adversely affect our and/or Biomet’s ability to retain,
recruit and motivate key personnel;

(cid:129) the attention of our and/or Biomet’s management may be
directed towards the completion of the merger and other
transaction-related considerations and may be diverted from
the day-to-day business operations of us and/or Biomet, as
applicable, and matters related to the merger may require
commitments of time and resources that could otherwise
have been devoted to other opportunities that might have
been beneficial to us and/or Biomet, as applicable; and
(cid:129) customers, suppliers and other third parties with business

relationships with us and/or Biomet may decide not to renew
or may decide to seek to terminate, change and/or
renegotiate their relationships with us and/or Biomet as a
result of the merger, whether pursuant to the terms of their
existing agreements with us and/or Biomet or otherwise.

Any of these matters could adversely affect the businesses

of, or harm the financial condition, results of operations or
business prospects of, us and/or Biomet.

Failure to complete the merger could negatively

impact our future business and financial results.

If the merger is not completed, our ongoing business may

be adversely affected. We will be subject to several risks,
including the following:
(cid:129) having to pay certain costs relating to the merger, such as

legal, accounting, financial advisory, filing and printing fees;
and

(cid:129) focusing our management on the merger instead of on

pursuing other opportunities that could have been beneficial
to us and our stockholders, without realizing any of the
benefits of having the merger completed.

We cannot assure you that, if the merger is not completed,
these risks will not materialize and will not materially adversely
affect our business and financial results.

Successful integration of Biomet with us and
successful operation of the combined company are not
assured. Also, integrating our business with that of
Biomet may divert the attention of management away
from operations.

If the merger is completed, Biomet will become an indirect

wholly owned subsidiary of ours, but will initially continue its
operations on a basis that is separate from our operations.
There can be no assurance that after the merger Biomet will be
able to maintain and grow its business and operations. In
addition, the market segments in which Biomet operates may
experience declines in demand and/or new competitors.
Integrating and coordinating certain aspects of the operations
and personnel of Biomet with ours will involve complex
operational, technological and personnel-related challenges.
This process will be time-consuming and expensive, will
disrupt the businesses of both companies and may not result in
the full benefits expected by us and Biomet, including cost
synergies expected to arise from supply chain efficiencies and
overlapping general and administrative functions. The
potential difficulties, and resulting costs and delays, include:
(cid:129) managing a larger combined company;
(cid:129) consolidating corporate and administrative infrastructures;
(cid:129) issues in integrating manufacturing, warehouse and

distribution facilities, research and development and sales
forces;

(cid:129) difficulties attracting and retaining key personnel;
(cid:129) loss of customers and suppliers and inability to attract new

customers and suppliers;

(cid:129) unanticipated issues in integrating information technology,

communications and other systems;

(cid:129) incompatibility of purchasing, logistics, marketing,

administration and other systems and processes; and

(cid:129) unforeseen and unexpected liabilities related to the merger

or Biomet’s business.

Additionally, the integration of our and Biomet’s
operations, products and personnel may place a significant
burden on management and other internal resources. The
diversion of management’s attention, and any difficulties
encountered in the transition and integration process, could
harm the combined company’s business, financial condition
and operating results.

We will incur substantial additional indebtedness in
connection with the merger and may not be able to meet
all of our debt obligations.

In connection with the merger, we entered into a $7.66

billion bridge credit agreement and a $4.35 billion bank credit
agreement. Proceeds from the bank credit agreement and the
anticipated issuance by us of up to $7.66 billion in aggregate
principal amount of senior unsecured notes (or, if senior
unsecured notes are not issued and sold prior to the closing
date of the merger, drawings under the bridge credit
agreement) will be used to finance, in part, the cash
consideration for the merger, pay fees and the expenses
incurred in connection with the merger and pay off all of

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Biomet’s funded debt. Our debt outstanding as of
December 31, 2014 was approximately $1.43 billion and,
immediately after the completion of the merger, the combined
company’s debt is anticipated to be approximately $12.09
billion. As of December 31, 2014, our debt service obligations,
comprised of principal and interest (excluding capital leases
and equipment notes), during the next 12 months would, in
the absence of the merger, have been approximately
$64.0 million. As a result of the increase in debt related to the
merger, demands on the combined company’s cash resources
will increase after the completion of the merger. The increased
level of debt could, among other things:
(cid:129) require the combined company to dedicate a large portion of
its cash flow from operations to the servicing and repayment
of its debt, thereby reducing funds available for working
capital, capital expenditures, research and development
expenditures and other general corporate requirements;
(cid:129) limit the combined company’s ability to obtain additional

financing to fund future working capital, capital
expenditures, research and development expenditures and
other general corporate requirements;

(cid:129) limit the combined company’s flexibility in planning for, or

reacting to, changes in its business and the industry in which
we operate;

(cid:129) restrict the combined company’s ability to make strategic

acquisitions or dispositions or to exploit business
opportunities;

(cid:129) place the combined company at a competitive disadvantage

compared to its competitors that have less debt;

(cid:129) adversely affect the combined company’s credit rating, with
the result that the cost of servicing the combined company’s
indebtedness might increase and its ability to obtain surety
bonds could be impaired;

(cid:129) adversely affect the market price of our common stock; and
(cid:129) limit the combined company’s ability to apply proceeds from
an offering or asset sale to purposes other than the servicing
and repayment of debt.

If we are unable to obtain alternate financing through
senior unsecured notes, it is unlikely that we will be able to
repay the outstanding amounts under the bridge loan at
maturity on the 364th day after completion of the merger. Any
debt incurred to refinance the bridge loan may be on
unfavorable terms.

The merger may cause dilution to our earnings per
share, which may negatively affect the market price of
our common stock.

Although we anticipate that the merger will have an
immediate accretive impact on the combined company’s
adjusted earnings per share, this expectation is based on
factors that may not be realized and estimates that may
materially change. We could also encounter additional
transaction-related costs or other factors, such as the failure to
realize all of the benefits anticipated to result from the merger.
In addition, we expect that LVB stockholders and holders of
LVB equity-based awards immediately prior to the merger will
own, in the aggregate, approximately 16% of our outstanding
shares after the merger, based on the number of outstanding
shares of our common stock on December 31, 2014. Once

additional shares are issued in the merger, the combined
company’s earnings per share may be lower than our adjusted
earnings per share would have been in the absence of the
merger. All of these factors could cause dilution to earnings
per share or decrease or delay the expected accretive effect of
the merger, and cause a decrease in the market price of our
common stock. There can be no assurance that any increase in
adjusted earnings per share will occur, even over the long
term. Any increase in adjusted earnings per share as a result of
the merger is likely to require us, among other things, to
successfully manage the combined company’s operations to
increase our consolidated earnings after the merger.

Risks Relating to Our Business Regardless of
Whether the Proposed Biomet Merger is Consummated

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:
(cid:129) technology;
(cid:129) innovation;
(cid:129) quality;
(cid:129) reputation; and
(cid:129) customer service.

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

competition as well, including:
(cid:129) local distribution systems;
(cid:129) complex regulatory environments; and
(cid:129) differing medical philosophies and product preferences.

Our competitors may:

(cid:129) have greater financial, marketing and other resources than

us;

(cid:129) respond more quickly to new or emerging technologies;
(cid:129) undertake more extensive marketing campaigns;
(cid:129) adopt more aggressive pricing policies; or
(cid:129) 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.

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.

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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.

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

ways we may not anticipate because of:
(cid:129) evolving customer needs;
(cid:129) changing demographics;
(cid:129) slowing industry growth rates;
(cid:129) declines in the reconstructive implant market;
(cid:129) the introduction of new products and technologies;
(cid:129) evolving surgical philosophies; and
(cid:129) 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:
(cid:129) properly identify and anticipate customer needs;
(cid:129) commercialize new products in a timely manner;
(cid:129) manufacture and deliver instruments and products in

sufficient volumes on time;

(cid:129) differentiate our offerings from competitors’ offerings;
(cid:129) achieve positive clinical outcomes for new products;
(cid:129) satisfy the increased demands by healthcare payors,

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

(cid:129) innovate and develop new materials, product designs and

surgical techniques; and

(cid:129) provide adequate medical education relating to new

products.

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:
(cid:129) entrenched patterns of clinical practice;
(cid:129) the need for regulatory clearance; and
(cid:129) 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.

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.
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 U.S. healthcare reform law includes provisions

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

The Patient Protection and Affordable Care Act of 2010,

as amended by the Health Care and Education Affordability
Reconciliation Act of 2010 (collectively, the Affordable Care
Act), was signed into law in March 2010 and mandates health
insurance coverage and other healthcare reforms with
staggered effective dates from 2010 to 2018. As part of the
Affordable Care Act, in January 2013 we began paying a 2.3
percent medical device excise tax on the vast majority of our
U.S sales. We continue to identify ways to reduce spending in
other areas to offset the earnings impact due to the tax. We
have not been able to pass along the cost of the tax to
hospitals, which continue to face cuts to their Medicare
reimbursement under the Affordable Care Act and other
legislation. Nor have we been 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 medical device excise tax
regulations and subsequent guidance from the
U.S. Department of Treasury have not lessened the burden of
complying with the excise tax statute. In addition, without the
implementation of proper safeguards, the Affordable Care
Act’s Medicare payment reforms, such as accountable care
organizations and bundled payments, could provide additional
incentives for healthcare providers to reduce spending on
some of 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 full
impact of the Affordable Care Act on our business, ongoing
implementation could have a material adverse effect on our
results of operations and cash flows.

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

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2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

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.

We are subject to various governmental regulations
relating to the manufacturing, labeling and marketing of
our products, non-compliance with which could
adversely affect our business, financial condition and
results of operations.

selling our products and could have a material adverse effect
on our business, financial condition and results of operations.
In 2012, we received a warning letter from the FDA citing

concerns relating to certain manufacturing and validation
processes pertaining to Trilogy Acetabular System products
manufactured at our Ponce, Puerto Rico manufacturing
facility. As of December 31, 2014, the warning letter remains
pending. Until the violations are corrected, we may become
subject to additional regulatory action by the FDA, the FDA
may refuse to grant premarket approval applications and/or the
FDA may refuse to grant export certificates, any of which
could have a material adverse effect on our business, financial
condition and results of operations. Additional information
regarding this and other FDA regulatory matters can be found
in Note 19 to our consolidated financial statements (See
Part II, Item 8 of this report).

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.

The medical devices we design, develop, manufacture and

If we fail to comply with healthcare fraud and abuse

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.

Both before and after a product is commercially released,

we have ongoing responsibilities under FDA regulations.
Compliance with the FDA’s requirements, including the
Quality System regulation, recordkeeping regulations, labeling
and promotional requirements and adverse event reporting
regulations, is subject to continual review and is monitored
rigorously through periodic inspections by the FDA, which may
result in observations on Form 483, and in some cases warning
letters, that require corrective action, or other forms of
enforcement. If the FDA were to conclude that we are not in
compliance with applicable laws or regulations, or that any of
our medical devices are ineffective or pose an unreasonable
health risk, the FDA could ban such medical devices, detain or
seize adulterated or misbranded medical devices, order a
recall, repair, replacement, or refund of payment of such
devices, refuse to grant pending premarket approval
applications, refuse to provide certificates to foreign
governments for exports, and/or require us to notify healthcare
professionals and others that the devices present unreasonable
risks of substantial harm to the public health. The FDA may
also impose operating restrictions on a company-wide basis,
enjoin and restrain certain violations of applicable law
pertaining to medical devices and assess civil or criminal
penalties against our officers, employees or us. The FDA may
also recommend prosecution to the U.S. Department of
Justice. Any adverse regulatory action, depending on its
magnitude, may restrict us from effectively marketing and

laws and regulations, we could face substantial
penalties and our business, operations and financial
condition could be adversely affected.

Our industry is subject to various federal, state and

foreign laws and regulations pertaining to healthcare fraud and
abuse, including the federal False Claims Act, the federal Anti-
Kickback Statute, the federal Stark law, the federal Physician
Payments Sunshine Act and similar state and foreign 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.
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 almost 50 percent of our net sales in 2014 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:
(cid:129) changes in foreign medical reimbursement policies and

programs;

(cid:129) unexpected changes in foreign regulatory requirements;
(cid:129) differing local product preferences and product

requirements;

(cid:129) fluctuations in foreign currency exchange rates;
(cid:129) diminished protection of intellectual property in some

countries outside of the U.S.;

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2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

(cid:129) 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;

(cid:129) foreign exchange controls that might prevent us from
repatriating cash earned in countries outside the U.S.;

(cid:129) complex data privacy requirements and labor relations laws;
(cid:129) extraterritorial effects of U.S. laws such as the Foreign

Corrupt Practices Act;

(cid:129) effects of foreign anti-corruption laws, such as the UK

Bribery Act;

(cid:129) difficulty in staffing and managing foreign operations;
(cid:129) labor force instability;
(cid:129) potentially negative consequences from changes in tax laws;

and

(cid:129) 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 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
representing earnings of foreign subsidiaries may significantly
impact our 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.

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.

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 are defending product
liability lawsuits relating to the Durom® Acetabular
Component (Durom Cup) and certain products within the
NexGen Knee System. The majority of the Durom Cup cases
are pending in a federal Multidistrict Litigation in the District
of New Jersey (In Re: Zimmer Durom Hip Cup Products
Liability Litigation) and the majority of the NexGen Knee
System cases are pending in a federal Multidistrict Litigation in
the Northern District of Illinois (In Re: Zimmer NexGen Knee
Implant Products Liability Litigation). 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 substantially dependent on patent and other

proprietary rights, and failing to protect such rights or
to be successful in litigation related to our rights or the
rights of others may result in our payment of significant
monetary damages and/or royalty payments, negatively
impact our ability to sell current or future products, or
prohibit us from enforcing our patent and other
proprietary rights against others.

A substantial portion of our foreign revenues is generated

Claims of intellectual property infringement and litigation

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.

regarding patent and other intellectual property rights are
commonplace in our industry and are frequently time
consuming and costly. At any given time, we may be involved
as either plaintiff or defendant in a number of patent
infringement actions, the outcomes of which may not be
known for prolonged periods of time. While it is not possible to
predict the outcome of patent and other intellectual property
litigation, such litigation could result in our payment of
significant monetary damages and/or royalty payments,
negatively impact our ability to sell current or future products,
or prohibit us from enforcing our patent and proprietary rights

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against others, which could have a material adverse effect on
our business and results of operations.

Patents and other proprietary rights are essential to our
business. We rely on a combination of patents, trade secrets
and non-disclosure and other agreements to protect our
proprietary intellectual property, and we will continue to do so.
While we intend to defend against any threats to our
intellectual property, these patents, trade secrets and other
agreements may not adequately protect our intellectual
property. Further, our currently pending or future patent
applications may not result in patents being issued to us,
patents issued to or licensed by us in the past or in the future
may be challenged or circumvented by competitors, and such
patents may be found invalid, unenforceable or insufficiently
broad to protect our technology or to provide us with any
competitive advantage. Third parties could obtain patents that
may require us to negotiate licenses to conduct our business,
and the required licenses may not be available on reasonable
terms or at all.

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 non-disclosure and
other agreements with our employees, consultants and
collaborators. We cannot be certain that these agreements will
not be breached, that we will have adequate remedies for any
breach, that others will not independently develop
substantially equivalent proprietary information, or that third
parties will not otherwise gain access to our trade secrets or
proprietary knowledge.

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
litigation and claims 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 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 are increasingly dependent on sophisticated
information technology and if we fail to effectively
maintain or protect the integrity of our information
systems and data, our business could be adversely
affected.

We are increasingly dependent on sophisticated

information technology for our products and infrastructure. As
a result of technology initiatives, recently enacted regulations,

changes in our system platforms and integration of new
business acquisitions, we have been consolidating and
integrating the number of systems we operate and have
upgraded and expanded our information systems
capabilities. Our information systems require an ongoing
commitment of significant resources to maintain, protect, and
enhance existing systems and develop new systems to keep
pace with continuing changes in information technology,
evolving systems and regulatory standards, and the increasing
need to protect patient and customer information. In addition,
third parties may attempt to gain unauthorized access to our
products or systems and may obtain data relating to patients or
our proprietary information. If we fail to maintain or protect
our information systems and data integrity effectively, we
could lose existing customers, have difficulty attracting new
customers, have problems in determining product cost
estimates and establishing appropriate pricing, have difficulty
preventing, detecting, and controlling fraud, have disputes
with customers, physicians, and other healthcare professionals,
have regulatory sanctions or penalties imposed, have increases
in operating expenses, incur expenses or lose revenues as a
result of a data privacy breach, or suffer other adverse
consequences. While we have invested heavily in the
protection of our data and information technology, there can
be no assurance that our activities related to consolidating the
number of systems we operate, upgrading and expanding our
information systems capabilities, protecting and enhancing our
systems and implementing new systems will be successful or
that systems issues will not arise in the future. Any significant
breakdown, intrusion, interruption, corruption, or destruction
of these systems could have a material adverse effect on our
business.

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 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

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2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

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.
The “conflict minerals” rule may adversely affect

the sourcing, availability and pricing of materials used
in the manufacture of our products, may increase our
costs, cause our profitability to decline and harm our
reputation.

We are subject to the SEC’s rule regarding disclosure of

the use of certain minerals, known as “conflict minerals”
(tantalum, tin and tungsten (or their ores) and gold), which
are mined from the Democratic Republic of the Congo and
adjoining countries. We filed a report on Form SD with the
SEC regarding such matters on June 2, 2014 and are required

to file on an annual basis going forward. This rule could
adversely affect the sourcing, availability and pricing of
materials used in the manufacture of our products, which
could adversely affect our manufacturing operations and our
profitability. In addition, we are incurring additional costs to
comply with this rule, including costs related to determining
the source of any relevant minerals and metals used in our
products. We have a complex supply chain and we may not be
able to sufficiently verify the origins of the minerals and metals
used in our products through the due diligence procedures
that we implement. As a result, we may face reputational
challenges with our customers and other stakeholders.

Item 1B. Unresolved Staff Comments

Not Applicable.

Z I M M E R HOL D I NG S , I NC .

Item 2. Properties

We have the following properties:

Location

Use

Warsaw, Indiana

Parsippany, New Jersey

Warsaw, Indiana
Warsaw, Indiana
Carlsbad, California
Minneapolis, Minnesota
Southaven, Mississippi
Dover, Ohio

Research & Development, Manufacturing, Warehousing, Marketing &
Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Headquarters & The Zimmer Institute . . . . . . . . . . . . . . . . . . . . . . .
Offices, Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices, Research & Development & Manufacturing . . . . . . . . . . . . . . . . . . . . .
Offices & Research & Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research & Development, Manufacturing & . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office, Research & Development, Manufacturing, Warehousing & The
Zimmer Institute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Memphis, Tennessee
Offices, Administration, Research & Development . . . . . . . . . . . . . . . . . . . . . .
Austin, Texas
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sydney, Australia
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mississauga, Canada
Offices & Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Beijing, China
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shanghai, China
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Saint Priest, France
Distribution Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eschbach, Germany
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Freiburg, Germany
Offices & Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shannon, Ireland
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Milan, Italy
Offices, Service Center & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gotemba, Japan
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tokyo, Japan
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Seoul, Korea
Offices, Manufacturing & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ponce, Puerto Rico
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Singapore
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Barcelona, Spain
Offices, Research & Development & Manufacturing . . . . . . . . . . . . . . . . . . . . .
Winterthur, Switzerland
Münsingen, Switzerland
Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Swindon, United Kingdom Offices & Warehousing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

Owned /Leased

Square Feet

Owned
Owned
Leased
Leased
Owned
Leased
Owned
Leased

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

1,400,000
117,000
83,000
125,000
51,000
189,000
138,000
64,000

132,000
30,000
71,000
60,000
52,000
89,000
52,000
13,000
94,000
75,000
125,000
55,000
87,000
20,000
34,000
225,000
19,000
30,000
425,000
76,000
10,000

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., Australia, Canada, China, France, Germany, India, Italy, Japan, Korea, Russia, South Africa, Spain,
Switzerland, the United Kingdom. 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. Mine Safety Disclosures

Not Applicable.

Z I M M E R HOL D I NG S , I NC .

PART II

2 0 1 4 F O R M 1 0 - K AN 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 and the dividends declared for the calendar quarters
of fiscal years 2014 and 2013 are set forth as follows:

QUARTERLY HIGH-LOW SHARE PRICES AND DECLARED DIVIDENDS

Year Ended December 31, 2014:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

Year Ended December 31, 2013:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

High

Low

Declared
Dividends

$ 98.95
$108.33
$105.68
$116.14

$90.77
$90.48
$94.73
$95.33

$ 76.75
$ 81.92
$ 85.08
$ 93.70

$67.34
$72.31
$74.85
$80.55

$0.22
$0.22
$0.22
$0.22

$0.20
$0.20
$0.20
$0.20

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. As further discussed in Item 7 of this
report, our debt facilities restrict the payment of dividends under certain circumstances.

The number of holders of our common stock on February 16, 2015 was approximately 237,703. On February 19, 2015, the

closing price of our common stock, as reported on the New York Stock Exchange, was $120.20 per share.

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

report.

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN 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):

STATEMENT OF EARNINGS DATA
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

2014

2013

2012

2011

2010

$4,673.3
720.1

$4,623.4
761.0

$4,471.7
755.0

$4,451.8
760.8

$4,220.2
596.9

4.26
4.19
0.88

4.49
4.43
0.80

4.32
4.29
0.54

4.05
4.03
0.18

2.98
2.97
–

169.0
171.7

169.6
171.8

174.9
176.0

187.6
188.7

200.0
201.1

$9,634.7
1,425.5
648.6
6,522.6

$9,580.6
1,672.3
576.6
6,300.1

$9,012.4
1,720.8
559.3
5,866.3

$8,515.3
1,576.0
557.4
5,514.8

$7,999.9
1,142.1
384.0
5,771.3

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN 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 2013 and 2012
consolidated financial statements have been reclassified to
conform to the 2014 presentation.

Despite the increase in net sales, net earnings decreased,

driven by increased spending on our operational excellence
initiatives, integration planning expenses related to the
pending Biomet merger, a $70.0 million contingent legal
liability recognized in 2014, and increased debt issuance costs
and unused commitment fees recognized on new debt facilities
that we entered into in May 2014 in order to fund the pending
Biomet merger.

Forward-looking financial information provided in this

2015 Outlook

management’s discussion and analysis does not include
estimated results of operations, cash flows or financial position
related to the pending Biomet merger, except for certain costs
and expenses we expect to incur that are necessary to
consummate the merger and that we will incur for integration
planning prior to the merger closing. The Biomet merger is
expected to be a transformational event for us and have
significant effects on all aspects of our business. This
management’s discussion and analysis of our historical
financial condition and results of operations on a standalone
basis is not indicative of the financial condition and results of
operations for future periods on a combined company basis
following the merger.

EXECUTIVE LEVEL OVERVIEW

2014 Results

Our 2014 sales results reflected increased growth as
compared with 2013. Sales from recent product introductions,
such as Persona The Personalized Knee System, as well as a
stable joint replacement market, drove sales volume and
product mix growth. This was partially offset by continued
pricing pressure, negative effects from changes in foreign
currency exchange rates, and a year-over-year decline in sales
of our Transposal Fluid Waste Management System.

RESULTS OF OPERATIONS

Net Sales by Reportable Segment

The pending Biomet merger, which we expect to close in
the first quarter of 2015, will have a significant impact on our
2015 operating results. This report does not include guidance
for 2015 on a combined company basis.

However, for Zimmer on a standalone basis, we project

that our net sales will face significant headwinds from the
U.S. Dollar strengthening against the Euro, Japanese Yen and
various other currencies around the world based upon recent
foreign currency exchange rates. Additionally for net sales, we
expect to experience volume and mix growth from a stable
joint replacement market and continued pricing pressure.

In regards to expenses on a Zimmer standalone basis, due

to our hedging program, we project that the expected
decrease in net sales caused by changes in foreign currency
exchange rates will be partially offset by hedge gains to be
recognized in 2015. We expect research and development
(R&D) spending will remain similar compared to prior years as
a percentage of net sales. For our selling, general and
administrative (SG&A) expenses, we expect to continue to
realize efficiencies from our operational excellence initiatives.
However, since many of our fixed SG&A expenses are
denominated in U.S. Dollars, such as corporate and business
unit headquarter expenses and intangible asset amortization,
our SG&A expenses may not decrease in similar proportion to
net sales decreases expected from changes in foreign currency
exchange rates.

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

millions):

Americas

Europe

Asia Pacific

Total

Year Ended December 31,

2014

2013 % Inc/(Dec)

Volume/
Mix

Price

Foreign
Exchange

$2,594.2

$2,619.8

(1)%

2% (3)%

1,269.5

1,212.6

809.6

791.0

$4,673.3

$4,623.4

–%

–

(6)

(2)

(1)

(2)

(1)

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

Americas

Europe

Asia Pacific

Total

Year Ended December 31,

2013

2012 % Inc/(Dec)

Volume/
Mix

Price

Foreign
Exchange

$2,619.8

$2,476.3

1,212.6

1,177.4

791.0

818.0

(3)

$4,623.4

$4,471.7

8% (2)%

(1)

(2)

–%

(10)

(2)

“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):

Year Ended December 31,

2014

2013

% Inc (Dec)

Volume/
Mix

Price

Foreign
Exchange

Reconstructive

Knees
Hips
Extremities

Total

Dental
Trauma
Spine
Surgical and other

Total

Reconstructive

Knees
Hips
Extremities

Total

Dental
Trauma
Spine
Surgical and other

Total

$1,965.8
1,326.4
204.3

$1,909.9
1,330.5
193.8

3,496.5

3,434.2

242.8
316.7
207.2
410.1

239.3
315.6
202.3
432.0

$4,673.3

$4,623.4

3%
–
5

1
–
2
(5)

7% (3)% (1)%
4
9

(3)
(3)

(1)
(1)

2
3
5
(3)

(3)

–
(1)
(2)
–

(2)

(1)

(1)
(2)
(1)
(2)

(1)

Year Ended December 31,

2013

2012

% Inc (Dec)

Volume/
Mix

Price

Foreign
Exchange

$1,909.9
1,330.5
193.8

$1,833.8
1,342.0
173.8

3,434.2

3,349.6

239.3
315.6
202.3
432.0

237.7
307.9
208.9
367.6

$4,623.4

$4,471.7

4%
(1)
11

1
2
(3)
18

7% (2)% (1)%
3
14

(2)
(2)

(2)
(1)

–
6
(1)
21

(2)

–
(1)
(2)
–

(2)

(1)

1
(3)
–
(3)

(2)

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

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

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

Year Ended December 31,

2014

2013

2012

2014 vs. 2013
% Inc (Dec)

2013 vs. 2012
% Inc (Dec)

$1,157.4
498.6
309.8

$1,135.3
468.3
306.3

$1,077.9
447.3
308.6

607.8
448.9
269.7

149.6
40.6
14.1

621.0
445.0
264.5

148.1
34.0
11.7

606.7
446.0
289.3

133.8
29.0
11.0

3,496.5

3,434.2

3,349.6

142.1
80.3
20.4

147.3
82.1
87.3

131.3
50.8
25.1

258.7
68.2
83.2

141.6
78.6
19.1

155.6
76.4
83.6

129.6
49.8
22.9

288.6
60.5
82.9

137.8
79.8
20.1

155.2
69.5
83.2

140.0
49.3
19.6

224.9
56.5
86.2

$4,673.3

$4,623.4

$4,471.7

2%
6
1

(2)
1
2

1
19
20

–
2
7

(5)
8
4

1
2
10

(10)
13
–

5%
5
(1)

2
–
(9)

11
17
7

3
(2)
(5)

–
10
–

(7)
1
17

28
7
(4)

Demand (Volume and Mix) Trends

Increased volume and changes in the mix of product sales
contributed 4 percentage points of year-over-year sales growth
in 2014, which was a lower growth rate than experienced in
2013 compared to 2012. In 2013, accelerated growth was
fueled by the introduction of new products, such as Persona
The Personalized Knee System and the Transposal Fluid
Waste Management System. In 2014, while new products
continued to drive sales growth, their impact on a year-over-
year basis was not as significant.

We believe long-term indicators point toward sustained

growth driven by an aging global population, growth in
emerging markets, obesity, proven clinical benefits, new
material technologies, advances in surgical techniques and
more active lifestyles, among other factors. In addition,
demand for clinically proven premium products and patient
specific devices are expected to continue to positively affect
sales growth in markets that recognize the value of these
advanced technologies.

Pricing Trends

Global selling prices had a negative effect of 2 percent on
year-over-year sales during 2014. The negative 2 percent was

consistent with prior years as we continued to experience
pricing pressure from governmental healthcare cost
containment efforts and from local hospitals and health
systems. For 2015, we expect continued pricing pressure
similar to prior years.

Foreign Currency Exchange Rates

For 2014, foreign currency exchange rates resulted in a 1

percent decrease in sales, driven by the strengthening of the
U.S. Dollar versus the Japanese Yen as well as a few other
currencies in other regions in which we operate. If foreign
currency exchange rates remain consistent with December 31,
2014 rates, we estimate that a stronger dollar versus foreign
currency exchange rates will have a greater negative effect on
sales in 2015 than in 2014. We address currency risk through
regular operating and financing activities and through the use
of foreign currency forward contracts and foreign currency
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 partially
offset.

Z I M M E R HOL D I NG S , I NC .

Sales by Product Category

Knees

Knee sales increased 3 percent in 2014 compared to a 4

percent increase in 2013. Our Knee product category has
benefited from recent product introductions, such as Persona
The Personalized Knee System and joint preservation
solutions. However, the volume/mix growth from new product
introductions has been tempered by pricing pressure in all our
reporting segments.

In 2014, we continued a broader launch of Persona The
Personalized Knee System. We intend to continue to deploy
implant and instrument sets for this knee system to all
geographic regions in 2015 and beyond. Our NexGen Complete
Knee Solution product line is still our leading global knee
system in terms of sales. Products driving growth in this
category, in addition to Persona The Personalized Knee
System, included the Zimmer Unicompartmental High Flex
Knee and our joint preservation solutions.

In Europe, changes in foreign currency exchange rates
affected Knee sales in 2014 and 2013 by negative 1 percent
and positive 2 percent, respectively. In Asia Pacific, changes in
foreign currency exchange rates had negative effects on Knee
sales of 5 percent and 9 percent in 2014 and 2013,
respectively.

Hips

Hip sales were flat in 2014 after a decline of 1 percent in
2013. Positive volume and mix trends continue to be offset by
pricing pressure.

Leading hip stem sales were the Zimmer M/L Taper Hip

Prosthesis, the Zimmer M/L Taper Hip Prosthesis with
Kinectiv Technology, the CLS Spotorno Stem from the CLS
Hip System, the Alloclassic Zweymüller Hip Stem and the
Fitmore Hip Stem. Products experiencing growth in this
category included the Avenir Müller Stem, the Wagner SL
Revision Hip Stem, the Continuum Acetabular System, the
Trilogy IT Acetabular System, the Allofit IT Alloclassic
Acetabular System, Vivacit-E Highly Crosslinked Polyethylene
Liners and BIOLOX delta Heads.

In Europe, changes in foreign currency exchange rates
affected Hip sales in 2014 and 2013 by negative 1 percent and
positive 2 percent, respectively. In Asia Pacific, changes in
foreign currency exchange rates had negative effects on Hip
sales of 6 percent and 11 percent in 2014 and 2013,
respectively.

Extremities

Extremities sales increased 5 percent in 2014 compared to

an 11 percent increase in 2013. The sales increase in both
years reflected growth from our shoulder systems, such as the
Zimmer Trabecular Metal Reverse Shoulder System and the

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

Sidus Stem-Free Shoulder, and a broader product portfolio to
compete in the foot and ankle and hand and wrist areas of the
Extremities category. The broader portfolio includes the
Zimmer Trabecular Metal Total Ankle and products from the
acquisition of NORMED Medizin-Technik GmbH in June 2013.

Dental

Dental sales increased 1 percent in 2014, which was the
same as the prior year sales growth. Increased sales of dental
reconstructive implants and digital solutions have been
partially offset by decreases in restorative products. Sales were
led by the Tapered Screw-Vent Implant System. In our Dental
product category, in certain markets, especially in our Asia
Pacific region, our customers are distributors. The timing of
distributor purchases can have a significant influence on sales
in those markets in any particular year.

Trauma

Trauma sales were flat in 2014 and increased by 2 percent

in 2013. New product launches, especially in our Europe and
Asia Pacific reporting segments, positively affected sales in
both years. The Zimmer Natural Nail System and Zimmer
Periarticular Locking Plates System led Trauma sales.

Spine

Spine sales increased 2 percent in 2014 after a decline of 3

percent in 2013. In 2014, we continued to focus on and had
success in commercializing offerings across our core fusion
portfolio and market adjacencies, including minimally invasive
surgeries. Solid sales of the PathFinder NXT Minimally
Invasive Pedicle Screw System and Trabecular Metal
Technology products were partially offset by a decline in sales
of other spine products.

Surgical and other

Surgical and other sales declined by 5 percent in 2014
after an 18 percent sales increase in 2013. The primary cause
of the sales fluctuations in this product category was the
Transposal Fluid Waste Management System. This system is
comprised of a capital equipment component that is used with
a one-time use disposable manifold component. In 2013, our
system benefitted from commercial disruption experienced by
a competitive product, increasing demand for the capital
equipment component. With that competitive product back on
the market in 2014 and since many customers bought our
capital equipment component in 2013, sales of the capital
equipment component decreased significantly in 2014.
However, this decrease was partially offset by an increase in
sales of the related disposable manifold component. Other
products leading sales in this category were PALACOS Bone
Cement, tourniquets and wound debridement devices.

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

The following table presents estimated* 2014 global
market size and market share information (dollars in billions):

Reconstructive

Knees
Hips
Extremities

Total

Dental
Trauma
Spine***

Global
Market
Size

$ 7.6
6.5
1.9

$16.0

$ 3.4
$ 5.9
$ 9.0

Global Market
% Growth**

Zimmer
Market
Share

Zimmer
Market
Position

3%
2
12

3
5
2

26%
21
11

7
5
2

1
2
6

5
4
8

* 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,

2014

2013

2012

2014 vs. 2013
Inc (Dec)

2013 vs. 2012
Inc (Dec)

26.7% 27.8% 25.2%

(1.1)

2.6

4.0

4.4

5.0

(0.4)

(0.6)

39.0
0.5
–
7.6
22.1

39.7
1.0
–
4.7
22.4

40.4
0.3
2.1
3.5
23.4

(0.7)
(0.5)
–
2.9
(0.3)

(0.7)
0.7
(2.1)
1.2
(1.0)

Cost of products sold
Research and

development
Selling, general and
administrative

Certain claims
Goodwill impairment
Special items
Operating margin

Cost of Products Sold

The following table sets forth the factors that contributed

to the gross margin changes in each of 2014 and 2013
compared to the prior year:

Prior year gross margin
Lower average selling prices
Average cost per unit
Excess and obsolete inventory
Discontinued products and other certain excess

Year Ended December 31,

2014

2013

72.2%
(0.6)
0.4
0.4

74.8%
(0.4)
(1.2)
(0.2)

and obsolete inventory charges

0.9

(1.0)

Certain inventory and manufacturing related

charges related to quality

Foreign currency hedges
Inventory step-up
U.S. medical device excise tax
Other

Current year gross margin

0.1
0.5
0.1
(0.5)
(0.2)

(0.3)
0.5
(0.1)
(0.2)
0.3

73.3%

72.2%

The increase in gross margin percentage in 2014

compared to 2013 was primarily due to significant excess and
obsolete inventory charges recorded in 2013 related to
products we intend to discontinue. We also recognized higher
hedge gains in 2014 from our foreign currency hedging
program compared to 2013. Under the hedging 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 items affect earnings.
Further, we experienced improved product category mix,
resulting in lower average costs per unit sold. These favorable
items were partially offset by lower average selling prices and
the U.S. medical device excise tax. While we began paying the
medical device excise tax in 2013, based upon the levels of
inventory we were carrying before the excise tax was effective
on January 1, 2013, we did not recognize any significant
expenses from the excise tax until the fourth quarter of 2013.
We are in discussions with the Internal Revenue Service (IRS)
as to what an appropriate constructive sales price used to
compute our excise tax obligations should be under IRS excise
tax regulations and our specific business model. Our ultimate
medical device excise tax and liability may differ from the
amount we have estimated. Accordingly, the amount we have
recognized as expense is an estimate and subject to change.

The decrease in gross margin in 2013 was primarily due to

higher average costs per unit sold as a result of changes in
product and geographic mix and increased excess and
obsolescence charges related to products we intend to
discontinue. Additionally, lower average selling prices and
certain inventory and manufacturing related charges
connected to quality enhancement and remediation efforts
reduced gross margin. These negative effects were partially
offset by hedge gains recorded in 2013 from our foreign
currency hedging program versus hedge losses recorded in
2012.

Operating Expenses

R&D expenses and R&D as a percentage of sales have
declined in the last three years. The lower spending reflected a
natural decline from certain large projects that achieved
commercialization, including Persona The Personalized Knee
System, and a dedication of resources to our quality and
operational excellence initiatives. We expect R&D spending in
2015 to increase and be between 4 and 4.5 percent of sales as
we transition our resources towards new projects as our
quality and operational excellence initiatives continue to
progress.

SG&A expenses have remained relatively consistent while

SG&A as a percentage of sales has decreased over the last
three years. Improvement in SG&A expenditures as a
percentage of sales reflects the effects of our operational
excellence initiatives. Although variable expenses naturally
increase with higher sales, our SG&A expenses as a percentage
of sales has decreased due to our operational excellence
initiatives which produced lower variable and fixed costs in
SG&A as net sales increased. Additionally, selling and
distribution expenses are lower in our Europe and Asia Pacific
reporting segments compared to our Americas reporting
segment. The mix of revenues with high sales growth in
Europe and Asia Pacific compared to the Americas helped to
lower SG&A as a percentage of sales in 2014 when compared
to 2013.

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

“Certain claims” expense is for estimated liabilities to

Durom Cup patients undergoing revision surgeries. We
recorded additional expense of $21.5 million in 2014, bringing
the total recorded expense to $420.3 million for these claims,
excluding a subset of Durom Cup claims that were recorded in
SG&A. The additional expense recorded in 2014 was the result
of new developments related to international claims activity.
For more information regarding these claims, see Note 19 to
the consolidated financial statements.

In connection with our annual goodwill impairment test

performed in the fourth quarter of 2012, 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 fair value.
As a result, we recorded a goodwill impairment charge of $96.0
million in 2012. We did not record a goodwill impairment
charge in 2014 or 2013, as our annual goodwill impairment
tests revealed that the carrying values of the net assets of our
U.S. Spine reporting unit were less than their estimated fair
value. For more information regarding goodwill impairment
and the factors that led to the 2012 impairment, see Note 8 to
the consolidated financial statements.

“Special items” have increased significantly in the past

three years. The increase in 2014 was a result of higher
professional fees related to the pending Biomet merger,
increased other professional fees, contract labor and dedicated
project personnel related to our quality and operational
excellence initiatives, increased intangible asset impairments
and a $70.0 million accrual for a certain litigation matter. We
continue to implement our quality and operational excellence
initiatives, which are intended to improve our future operating
results by centralizing or outsourcing certain functions and
improving quality, distribution, sourcing, manufacturing and
our information technology systems. “Special items” expenses
include consulting and professional fees, dedicated personnel
costs, severance benefits as well as other costs for those
programs. In addition to expenses for our quality and
operational excellence programs, we recognize expenses
related to integration of acquired businesses, impairment of
assets, certain R&D agreements, certain litigation settlements,
contract termination expenses and other items as “Special
items.” See Note 2 to the consolidated financial statements for
more information regarding “Special items” charges.

Other Expense, Interest Income, Interest Expense, and
Income Taxes

Other expense represents debt issuance costs and unused

commitment fees recognized for our senior credit facility and
bridge credit agreement that we entered into in May 2014 in
order to fund the pending Biomet merger.

Interest income and expense, net, was lower in 2014

compared to 2013 and 2012. In the second half of 2013, we
entered into additional fixed-to-variable rate interest swaps
designated as fair value hedges. In the 2014 periods, the
variable rates we paid on the swaps were lower than the fixed
rate on the hedged debt and, therefore, interest expense
decreased.

Our effective tax rate (ETR) on earnings before income
taxes for the years ended December 31, 2014, 2013 and 2012
was 23.8 percent, 22.6 percent and 24.0 percent, respectively.
The variation of our ETR has largely been affected by “Special
items”, “Certain claims”, goodwill impairment charges and a
$34.3 million benefit in 2012 from the recognition of deferred
tax assets related to a legal entity restructuring. Higher
“Special items” and “Certain claims” expense favorably affect
our ETR because most of these expenses have been incurred
within jurisdictions with higher tax rates, resulting in lower
taxable income in these higher tax jurisdictions. Goodwill
impairment negatively affects our ETR because no tax benefit
is recorded on the charge. In 2014, a portion of our “Special
items” were for non-deductible expenses incurred related to
the pending Biomet merger, which increased our ETR relative
to 2013. In 2013, in addition to the effect of “Special items” and
“Certain claims”, our ETR benefited from the retroactive
reinstatement of the R&D tax credit and other tax benefits
applicable to us that applied to 2012 and 2013. Due to the
timing of the extension and the applicable rules of accounting
principles generally accepted in the United States of America
(GAAP), we recognized the 2012 benefit in 2013. Despite the
$34.3 million benefit in 2012 from the recognition of deferred
tax assets related to a legal entity restructuring, the 2012 ETR
was higher than 2014 and 2013 due to the goodwill impairment
charge and lower “Certain claims” and “Special items”
expenses. The items discussed accounted for the majority of
the variation in our ETRs in the past three years.

Segment Operating Profit

For our reporting segments, operating profit increased in

Europe and Asia Pacific in 2014 compared to 2013, while in the
Americas it decreased. The decrease in the Americas was
primarily from lower gross profit due to lower sales and the
effect of the U.S. medical device excise tax. In Europe, the
increase in operating profit was driven by increased sales
coupled with controlled operating expenses. Operating
expenses increased at a lower percentage compared to sales
increases due to our operational excellence initiatives and the
nature of fixed versus variable expenses resulting in operating
margin expansion in Europe. The increase in operating profit
in Asia Pacific was driven by increases in sales from volume
and product mix. While changes in foreign currency exchange
rates tempered sales growth in Asia Pacific, this decline was
largely offset by increased hedge gains recorded in 2014 versus
2013.

Non-GAAP operating performance measures

We use financial measures that differ from financial
measures determined in accordance with GAAP to evaluate
our operating performance. These non-GAAP financial
measures exclude the impact of inventory step-up, certain
inventory and manufacturing related charges connected to
quality enhancement and remediation efforts, “Certain claims,”
goodwill impairment, “Special items,” other expenses related
to financing obtained for the pending Biomet merger and any
related effects on our income tax provision associated with

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

these items. 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, 2014,
2013 and 2012 were $1,041.0 million, $988.4 million, and
$932.5 million, respectively, and our non-GAAP adjusted
diluted earnings per share were $6.06, $5.75, and $5.30,
respectively.

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

Net Earnings of Zimmer Holdings, Inc.
Inventory step-up and other inventory
and manufacturing related charges

Certain claims
Goodwill impairment
Special items
Other expense on Biomet merger

financing

Taxes on above items and other certain

Year ended December 31,

2014

2013

2012

$ 720.1

$ 761.0

$755.0

21.2
21.5
–
356.5

39.6

70.5
47.0
–
216.7

4.8
15.0
96.0
155.4

–

tax adjustments*

(117.9)

(106.8)

(93.7)

Adjusted Net Earnings

$1,041.0

$ 988.4

$932.5

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

Diluted EPS
Inventory step-up and other inventory and

manufacturing related charges

Certain claims
Goodwill impairment
Special items
Other expense on Biomet merger financing
Taxes on above items and other certain tax

adjustments*

Adjusted Diluted EPS

Year ended December 31,

2014

2013

2012

$ 4.19

$ 4.43

$ 4.29

0.12
0.13
–
2.08
0.23

0.41
0.27
–
1.26
–

0.03
0.09
0.54
0.88
–

(0.69)

(0.62)

(0.53)

$ 6.06

$ 5.75

$ 5.30

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

LIQUIDITY AND CAPITAL RESOURCES

Cash flows provided by operating activities were $1,052.8

million in 2014, compared to $963.1 million in 2013. The
principal source of cash from operating activities was net
earnings. Non-cash items included in net earnings accounted
for another $346.4 million of operating cash in 2014. All other

items of operating cash flows reflect a use of $12.6 million of
cash in 2014, compared to a use of $84.9 million in 2013.

The increased cash flows provided by operating activities
in 2014 were primarily due to improved cash flows generated
from receivables collections, especially in Europe, lower
funding necessary for our U.S. pension plans, and receipt of
insurance proceeds related to Durom Cup product liability
claims. These favorable items were partially offset by higher
tax payments for certain unresolved matters in order to limit
the potential impact of IRS interest charges and inventory
investments.

At December 31, 2014, we had 64 days of sales

outstanding in trade accounts receivable, which was 1 day less
than at December 31, 2013. Our days of sales outstanding
reflect the reimbursement patterns of the healthcare industry
in the markets where we compete. Collection of trade accounts
receivable is influenced by insurance reimbursements and
government budgets, among other things. Days of sales
outstanding are lowest in our Americas reporting segment, as
the U.S. healthcare system has a higher percentage of private-
pay insurers who generally pay more quickly than government-
based healthcare systems. In our Europe and Asia Pacific
reporting segments, days of sales outstanding are higher, as
healthcare is typically sponsored by governments which tend
to pay more slowly. Additionally, there are some seasonal
trends in our days of sales outstanding as it usually trends
higher in our third quarter due to lower sales volumes and is
lower in our fourth quarter when sales volumes are at their
highest. Our days of sales outstanding in the past three years
have ranged between 64 and 73 days. We were at the low end
of this range as of December 31, 2014 due to improved
collections in Europe.

At December 31, 2014, we had 337 days of inventory on

hand, an increase of 52 days compared to December 31, 2013.
In order to maintain high service levels to our hospital
customers in numerous geographic regions, we consign
inventory to them, including all the various sizes of a particular
product, so that our products are available when needed for a
surgical procedure. As a result, we have a significant amount of
inventory on hand. There are some seasonal trends in our days
of inventory on hand, as it usually trends higher in our third
quarter due to lower sales volumes and is lower in our fourth
quarter when sales volumes are at their highest. Other factors
that can affect our days of inventory on hand include when we
build inventory for new product launches, or the level of
excess and obsolete inventory charges and gains/losses related
to foreign currency that is reported in cost of products sold in
any particular period. Our days of inventory on hand in the
past three years have ranged between 285 and 356 days. As of
December 31, 2014, our days of inventory on hand were near
the high end of this range. The higher inventory balance and
days of inventory on hand were driven by the ongoing global
commercialization of new product offerings, the effects of
placing more inventory into distributor and hospital
consignment and additional inventory in certain Eastern
European markets where we now have a direct sales presence
instead of selling to a distributor.

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

Cash flows used in investing activities were $469.4 million

in 2014, compared to $282.5 million in 2013. Additions to
instruments were relatively consistent between 2014 and 2013
as we continued to invest in instruments for significant
product launches, such as Persona The Personalized Knee
System. Spending on other property, plant and equipment
increased in 2014 compared to 2013, reflecting cash outlays
necessary to complete new product-related investments and to
replace older machinery and equipment. We invest 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. The timing of
these investments can vary from period to period depending
on the maturity of the debt securities and other cash and cash
equivalent needs. In the past three years, we have made a
number of business acquisitions including ETEX Holdings,
Inc., Knee Creations, LLC, NORMED Medizin-Technik GmbH,
Dornoch Medical Systems, Inc., and Synvasive Technology,
Inc.

Cash flows used in financing activities were $562.4 million

in 2014, compared to $467.3 million in 2013. In 2014, we
returned cash to our stockholders in the form of cash
dividends of $145.5 million and share repurchases of $400.5
million. In association with the debt facilities we entered into
for the pending Biomet merger, we incurred $64.1 million of
debt issuance costs. In 2014, $250.0 million of our outstanding
senior notes matured and were paid. Additionally, financing
cash flows continued to benefit from our increased stock price,
with many employees exercising stock options.

In 2014, our Board of Directors declared cash dividends of
$0.22 per share in each quarter. 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
2014 dividend declarations equated to an annualized rate of
$0.88 per share, which represented a 10 percent increase over
the 2013 annualized rate.

As of December 31, 2014, $599.5 million remained
authorized under our $1.0 billion share repurchase program,
which has no expiration date. Due to the pending merger with
Biomet, we suspended repurchases after the first quarter of
2014. Upon completion of the merger, in the near to medium
term we intend to use our cash flows for debt repayment and
dividends.

As discussed more completely in Note 15 to our

consolidated financial statements, the IRS has issued proposed
adjustments for years 2006 through 2009 reallocating profits
between certain of our U.S. and foreign subsidiaries. We have
disputed these proposed adjustments and continue to pursue
resolution with the IRS. Although the ultimate timing for
resolution of the disputed tax issues is uncertain, future
payments may be significant to our operating cash flows.

Also as discussed in Note 19 to our consolidated financial

statements, we have recorded a short-term liability of $50.0
million and long-term liability of $307.2 million related to
Durom Cup product liability claims. We expect to continue
paying these claims over the next few years. We expect to be
reimbursed a portion of these payments for product liability

claims from insurance carriers. We have received an initial
amount of the insurance proceeds we estimate to recover. We
have a long-term receivable of $170.3 million remaining for
future expected reimbursements from our insurance carriers.

We expect to fund the $10.35 billion cash portion of the

pending Biomet merger with existing cash on hand, as well as
proceeds to be obtained from a $3.0 billion 5-year unsecured
term loan (Term Loan) and senior notes that we expect to
issue. We have also entered into a $7.66 billion bridge credit
agreement (Bridge Credit Agreement) that may be used to
fund the pending merger if we are unable to issue senior notes.
The lenders’ commitments under the Bridge Credit Agreement
will be reduced dollar-for-dollar by the amount of net cash
proceeds we receive from the issuance of the senior notes.
Currently, we have three tranches of senior notes

outstanding: $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.

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 (i) 100 percent of the principal amount
of the notes being redeemed; or (ii) 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 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 senior credit facility (Senior Credit Facility)

that contains: (i) the 5-year unsecured Term Loan in the
principal amount of $3.0 billion, and (ii) a 5-year unsecured
multicurrency revolving facility (Multicurrency Revolving
Facility) in the principal amount of $1.35 billion. The Senior
Credit Facility replaces a previous credit agreement that
provided for a $1.35 billion revolving credit facility that would
have matured in May 2017. The Multicurrency Revolving
Facility will mature in May 2019, with two one-year extensions
available at our option. Borrowings under the Multicurrency
Revolving Facility may be used for general corporate purposes.
There were no borrowings outstanding under the
Multicurrency Revolving Facility as of December 31, 2014. The
availability of the Term Loan is conditioned on, among other
things, the consummation of the Biomet merger. The Term
Loan will mature five years after the initial borrowing.
Borrowings under the Term Loan may only be used by us to
fund, in part, the Biomet merger, including the payment of any
indebtedness of LVB and its subsidiaries, and to pay all or a
portion of the costs incurred by us in connection with the
Biomet merger. We must reduce unused commitments under
the Term Loan and prepay the borrowings under the Term
Loan with any net cash proceeds received from specified asset
sales, issuances or sales of equity and incurrences of borrowed

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

money indebtedness, subject to certain exceptions. The
commitments under the Term Loan automatically terminate on
the earliest to occur of (i) the funding and disbursement of
Term Loan funds to us, (ii) April 24, 2015, as such date may be
extended pursuant to the merger agreement or
(iii) termination of the merger agreement.

We and certain of our wholly owned foreign subsidiaries

are the borrowers under the Senior Credit Facility. Borrowings
under the Senior Credit Facility bear interest at floating rates
based upon indices determined by the currency of the
borrowings plus an applicable margin determined by reference
to our senior unsecured long-term credit rating, or at an
alternate base rate, or, in the case of borrowings under the
Multicurrency Revolving Facility only, 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 consolidated indebtedness to consolidated
EBITDA ratio of no greater than 3.0 to 1.0 in periods prior to
any Term Loan funding and no greater than 5.0 to 1.0 in
periods after the Term Loan is funded. If our credit rating falls
below investment grade, additional restrictions would result,
including restrictions on investments and payment of
dividends. We were in compliance with all covenants under the
Senior Credit Facility as of December 31, 2014.

applicable margin determined by reference to our senior
unsecured long-term credit rating, or at an alternate base rate.
The Bridge Credit Agreement 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 consolidated indebtedness to
consolidated EBITDA ratio of no greater than 5.0 to 1.0. We
were in compliance with all covenants under the Bridge Credit
Agreement as of December 31, 2014. If our credit rating falls
below investment grade, additional restrictions would result,
including restrictions on investments and payment of
dividends.

We will pay a funding fee if we borrow under the Bridge

Credit Agreement as well as duration fees based on the
outstanding principal amount of the loans in the amount and
on the dates specified in the Bridge Credit Agreement. In
addition, we pay a fee on the daily actual unused commitment
for the period from and including July 23, 2014 through the
day the commitments under the Bridge Credit Agreement
terminate.

We have a term loan agreement with one of the lenders
under the Senior Credit Facility for 11.7 billion Japanese Yen
(Japan Term Loan) that will mature on May 31, 2018.
Borrowings under the Japan Term Loan bear interest at a fixed
rate of 0.61 percent per annum until maturity.

We also have other available uncommitted credit facilities

Commitments under the Senior Credit Facility are subject

totaling $31.9 million.

to certain fees. On the Multicurrency Revolving Facility, we
pay a facility fee at a rate determined by reference to our
senior unsecured long-term credit rating. On the Term Loan,
we pay a fee on the daily actual unused commitment for the
period from and including July 23, 2014 through the day the
commitments under the Term Loan terminate.

The Bridge Credit Agreement is a 364-day unsecured
committed bridge facility in the principal amount of $7.66
billion. Funding of loans under the Bridge Credit Agreement is
conditioned on, among other things, the consummation of the
Biomet merger. Any loans under the Bridge Credit Agreement
will mature 364 days after the funding date of the loans. The
Bridge Credit Agreement requires us to reduce unused
commitments and prepay the loans with any net cash proceeds
received from specified asset sales, issuances or sales of equity
and incurrences of borrowed money indebtedness, such as new
senior notes we intend to issue, subject to certain exceptions.
Commitments under the Bridge Credit Agreement
automatically terminate on the earliest to occur of: (i) the
funding and disbursement of the loans, (ii) April 24, 2015, as
such date may be extended pursuant to the merger agreement,
or (iii) termination of the merger agreement. Proceeds of loans
under the Bridge Credit Agreement may only be used to fund,
in part, the Biomet merger, including the payment of any
indebtedness of LVB and its subsidiaries, and to pay all or a
portion of the costs incurred by us in connection with the
Biomet merger.

Zimmer Holdings is the borrower under the Bridge Credit

Agreement. Borrowings under the Bridge Credit Agreement
bear interest at floating rates based upon LIBOR plus an

We currently have investment grade credit ratings from
Standard and Poor’s Ratings Services (S&P) of A- and Moody’s
Investor Services (Moody’s) of Baa1. After the announcement
of the Biomet merger, S&P placed a CreditWatch with negative
implications on our rating and has indicated that it expects to
lower our rating to BBB if the merger is completed. Moody’s
placed our rating on review for downgrade and expects to
lower our rating to Baa3 if the merger is completed.

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, 2014, we had short-term and long-
term investments in debt securities with a fair value of $868.9
million. These investments are in debt securities of many
different issuers and, therefore, we believe we have no
significant concentration of risk with a single issuer. All of
these debt securities remain highly-rated and we believe the
risk of default by the issuers is low.

As of December 31, 2014, $1,090.1 million of our cash and

cash equivalents and short-term and long-term investments
were 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. may have
tax consequences. $844.0 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.

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

Management believes that cash flows from operations and

available borrowings under the Senior Credit Facility or from
the public and private debt markets are sufficient to meet our
working capital, capital expenditure and debt service needs
and to fund our pending merger with Biomet, as well as return
cash to stockholders in the form of dividends. Should
additional 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

2015

2016
and
2017

2018
and
2019

2020
and
Thereafter

Long-term debt

$1,402.9

–

$602.9

$ 800.0

Interest payments

Operating leases

910.9

182.9

64.0

46.5

127.3

124.3

63.1

41.0

595.3

32.3

Purchase

obligations

Other long-term

liabilities

Total contractual
obligations

11.5

8.9

2.6

–

405.1

–

154.5

125.4

125.2

$2,913.3

$119.4

$347.5

$893.6

$1,552.8

$63.3 million of the other long-term liabilities on our
balance sheet as of December 31, 2014 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 2015. 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. Additionally, other long-term
liabilities on our balance sheet include long-term deferred tax
liabilities, primarily related to intangible assets acquired in
business combinations and fixed assets. We have excluded
these liabilities from this table as well, as they do not represent
liabilities that will be settled in cash. See Note 15 to our
consolidated financial statements for further information on
these tax-related accounts.

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 $60 million.

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

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

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
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 $471.7 million related to the
Durom Cup, including $21.5 million in 2014. 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 value measurements use significant
unobservable inputs. Changes to these assumptions could
require us to record impairment charges on these assets.

In the fourth quarter of 2012, we determined our U.S.

Spine reporting unit’s carrying value was in excess of its
estimated fair value. Fair value was determined using a
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
guideline public company methodology, which uses valuation
indicators determined from 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 $96.0 million in 2012. See Note
8 to our consolidated financial statements for further
discussion and the factors that contributed to these
impairment charges and the factors that could lead to further
impairment. In 2014 and 2013, we employed a similar
combination of income and market approaches to estimate this
reporting unit’s fair value and determined there were no

impairment charges necessary. For our annual impairment test
in 2014, the goodwill balance of the U.S. Spine reporting unit
was $41.0 million. Due to improved operating performance of
our U.S. Spine reporting unit and improving macroenomic
conditions, including higher valuation indicators used in our
market approach, the U.S. Spine reporting unit’s estimated fair
value was in excess of its carrying value of net assets by 24
percent for our 2014 impairment test. Our international Spine
goodwill and related net assets are not tested separately for
goodwill impairment as they are part of reporting units that
contain other product categories.

We have four other reporting units with goodwill assigned

to them. Our 2013 annual impairment test indicated the
estimated fair value of the U.S. Dental reporting unit was in
excess of its carrying value of net assets by 11 percent. For the
annual impairment test in 2014, the goodwill balance of the
U.S. Dental reporting unit was $169.1 million. In our 2014
annual impairment test, due to improved operating
performance and improving macroenomic conditions, including
higher valuation indicators used in our market approach, the
U.S. Dental reporting unit’s estimated fair value was in excess
of its carrying value of net assets by 24 percent.

In 2014, for our three other reporting units’ annual
impairment test, we performed a qualitative assessment of
changes in fair value from the 2013 income approach. A
qualitative assessment was performed because the estimated
fair value of each of the reporting units was significantly in
excess of the carrying value of its net assets in the 2013
impairment test.

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.

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

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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, 2014, 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 2015 through June 2017.
The notional amounts of outstanding forward contracts
entered into with third parties to purchase U.S. Dollars at
December 31, 2014 were $1,289.8 million. The notional
amounts of outstanding forward contracts entered into with
third parties to purchase Swiss Francs at December 31, 2014
were $306.3 million. The weighted average contract rates
outstanding at December 31, 2014 were Euro:USD 1.34,
USD:Swiss Franc: 0.91, USD:Japanese Yen 97.30, British
Pound:USD 1.62, USD:Canadian Dollar 1.08, Australian
Dollar:USD 0.89, USD:Korean Won 1,115, USD:Swedish Krona
6.74, USD:Czech Koruna 19.98, USD:Thai Baht 33.01,
USD:Taiwan Dollar 29.48, USD:South African Rand 11.11,
USD:Russian Ruble 37.37 and USD:Indian Ruppee 67.14.

We maintain written policies and procedures governing
our risk management activities. Our policy requires that critical
terms of hedging instruments be the same as hedged
forecasted transactions. On this basis, with respect to cash

flow hedges, changes in cash flows attributable to hedged
transactions are generally expected to be 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, 2014 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 June
2017, 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
31.3
27.2
15.0
9.6
12.8
3.4
2.2
0.4
1.0
2.0
0.5
0.6
0.6

Any change in the fair value of foreign currency exchange

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

We had net assets in legal entities with non-U.S. Dollar
functional currencies of $2,113.5 million at December 31, 2014,
primarily in Euros, Japanese Yen and Australian Dollars.
$1,221.0 million of the net asset exposure at December 31,
2014 related to goodwill recorded in the Europe and Asia
Pacific geographic segments.

Z I M M E R HOL D I NG S , I NC .

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.

We have multiple fixed-to-variable interest rate swap
agreements that we have designated as fair value hedges of the
fixed interest rate obligations on our senior notes due 2019 and
2021. The total notional amounts are $250 million and $300
million for the senior notes due 2019 and 2021, respectively.
On the interest rate swap agreements for the senior notes due
2019, 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 the interest rate swap
agreements for the senior notes due 2021, we receive a fixed
interest rate of 3.375 percent and pay variable interest equal to
the three-month LIBOR plus an average of 99 basis points.
The interest rate swap agreements are intended 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 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.

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The forward starting interest rate swaps mitigate the risk of
changes in interest rates prior to completion of the senior
notes offering. The total notional amounts of the forward
starting interest rate swaps are $1 billion and will settle in
March 2015. On the forward starting interest rate swaps, we
receive variable interest equal to three-month LIBOR and pay
a fixed interest weighted average rate of 3.01 percent. We will
defer the effective portion of the forward starting interest rate
swaps over the maturity period of the hedged senior notes,
which is thirty years, and recognize any ineffective portion
immediately in earnings.

Based upon our overall interest rate exposure as of
December 31, 2014, a change of 10 percent in interest rates,
assuming the principal 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.

Our concentrations of credit risks with respect to trade

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

Our ability to collect accounts receivable in some

countries depends in part upon the financial stability of these
hospital and healthcare sectors and the respective countries’
national economic and healthcare systems. Most notably, in
Europe healthcare is typically sponsored by the government.
Since we sell products to public hospitals in those countries,

Z I M M E R HOL D I NG S , I NC .

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we are indirectly exposed to government budget constraints.
The ongoing financial uncertainties in the Euro zone impact
the indirect credit exposure we have to those governments
through their public hospitals. As of December 31, 2014, in
Greece, Italy, Portugal and Spain, countries that have been
widely recognized as presenting the highest risk, our gross
short-term and long-term trade accounts receivable combined
were $183.1 million. With allowances for doubtful accounts of
$9.4 million recorded in those countries, the net balance was
$173.7 million, representing 20 percent of our total
consolidated short-term and long-term trade accounts
receivable balance, net. Italy and Spain accounted for $164.4
million of that net amount. We are actively monitoring the
situations in these countries. We maintain contact with

customers in these countries on a regular basis. We continue to
receive payments, albeit at a slower rate than in the past. We
believe our allowance for doubtful accounts is adequate in
these countries, as ultimately we believe the governments in
these countries will be able to pay. 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 HOL D I NG S , I NC .

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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:

(cid:129) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions

of the assets of the company;

(cid:129) 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

(cid:129) 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, 2014. 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 (2013).

Based on that assessment, management has concluded that, as of December 31, 2014, 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, 2014, as stated in its report which appears in Item 8 of this Annual Report on
Form 10-K.

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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, 2014, 2013 and 2012

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013 and 2012

Consolidated Balance Sheets as of December 31, 2014 and 2013

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2014, 2013 and 2012

Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012

Notes to Consolidated Financial Statements

Page

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2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

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, 2014 and 2013, and the
results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 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 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, 2014, based on criteria established in
Internal Control - Integrated Framework 2013 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 Management’s Report on Internal Control over Financial Reporting appearing under Part II,
Item 7A. 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 23, 2015

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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 8)
Special items (Note 2)

Operating expenses

Operating Profit
Other expense
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

Cash Dividends Declared Per Common Share

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

(in millions, except per share amounts)

2014

2013

2012

$4,673.3
1,249.8

$4,623.4
1,286.1

$4,471.7
1,125.2

3,423.5

3,337.3

3,346.5

188.3
1,822.5
21.5
–
356.5

204.2
1,833.8
47.0
–
216.7

225.6
1,807.1
15.0
96.0
155.4

2,388.8

2,301.7

2,299.1

1,034.7
(39.6)
11.9
(63.1)

1,035.6
–
15.6
(70.1)

1,047.4
–
15.6
(72.9)

943.9
224.9

719.0
(1.1)

981.1
221.9

759.2
(1.8)

990.1
237.2

752.9
(2.1)

$ 720.1

$ 761.0

$ 755.0

$
$

4.26
4.19

169.0

171.7
0.88

$
$

4.49
4.43

169.6

171.8
0.80

$
$

4.32
4.29

174.9

176.0
0.54

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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, net of tax

Reclassification adjustments on cash flow hedges, net of tax

Reclassification adjustments on securities, net of tax

Unrealized gains/(losses) on securities, net of tax

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

Total Other Comprehensive Income (Loss)

Comprehensive Income

Comprehensive Loss Attributable to Noncontrolling Interest

Comprehensive Income Attributable to Zimmer Holdings, Inc.

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

(in millions)

2014

2013

2012

$ 719.0

$759.2

$752.9

(241.5)

(44.4)

55.9

33.4

(18.9)

(4.4)

(0.4)

(0.5)

–

0.1

(75.8)

38.5

(281.2)

23.2

46.1

10.9

3.3

–

0.4

11.8

72.5

437.8

782.4

825.4

(1.0)

(2.0)

(2.2)

$ 438.8

$784.4

$827.6

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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
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,

268.4 million (264.3 million in 2013) issued

Paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock, 98.7 million shares (94.5 million shares in 2013)

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.

(in millions)

2014

2013

$ 1,083.3
612.5
912.1
1,169.0
193.7
318.4

$ 1,080.6
727.0
936.6
1,074.5
107.1
271.9

4,289.0
1,288.8
2,514.2
603.5
939.2

4,197.7
1,224.7
2,611.2
707.7
839.3

$ 9,634.7

$ 9,580.6

167.1
72.4
798.5

146.3
221.2
664.1

1,038.0

1,031.6

648.6

576.6

1,425.5

1,672.3

3,112.1

3,280.5

2.7
4,330.7
8,285.2
85.9
(6,183.7)

2.6
4,000.6
7,712.7
367.1
(5,785.7)

6,520.8
1.8

6,297.3
2.8

6,522.6

6,300.1

$ 9,634.7

$ 9,580.6

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN 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
Income

Treasury Shares

Number

Amount

Noncontrolling
Interest

Total
Stockholders’
Equity

(in millions)

Balance January 1, 2012
Net earnings
Other comprehensive income
Cash dividends declared
Stock compensation plans,
including tax benefits

Share repurchases

Balance December 31, 2012
Net earnings
Other comprehensive income
Purchase of additional shares
from noncontrolling interest

Cash dividends declared
Stock compensation plans,
including tax benefits

Share repurchases

Balance December 31, 2013
Net earnings
Other comprehensive loss
Cash dividends declared
Stock compensation plans,
including tax benefits

Share repurchases

255.9
–
–
–

1.2
–

257.1
–
–

–
–

7.2
–

264.3
–
–
–

4.1
–

$2.5
–
–
–

$3,399.2
–
–
–

$6,426.8
755.0
–
(93.3)

$ 271.4
–
72.5
–

(77.9) $(4,592.7)
–
–
–

–
–
–

$ 7.6
(2.1)
(0.1)
–

$5,514.8
752.9
72.4
(93.3)

0.1
–

2.6
–
–

–
–

2.6
–
–
–

0.1
–

101.4
–

3,500.6
–
–

(2.6)
–

7,085.9
761.0
–

(1.1)
–

–
(135.4)

501.1
–

4,000.6
–
–
–

330.1
–

1.2
–

7,712.7
720.1
–
(148.6)

1.0
–

–
–

343.9
–
23.2

0.1
(7.7)

(85.5)
–
–

6.2
(485.6)

(5,072.1)
–
–

–
–

367.1
–
(281.2)
–

–
–

0.1
(9.1)

(94.5)
–
–
–

–
–

5.4
(719.0)

(5,785.7)
–
–
–

–
–

5.4
(1.8)
(0.2)

(0.6)
–

–
–

2.8
(1.1)
0.1
–

105.1
(485.6)

5,866.3
759.2
23.0

(1.7)
(135.4)

507.7
(719.0)

6,300.1
719.0
(281.1)
(148.6)

–
–

–
(4.2)

2.5
(400.5)

–
–

333.7
(400.5)

Balance December 31, 2014

268.4

$2.7

$4,330.7

$8,285.2

$ 85.9

(98.7) $(6,183.7)

$ 1.8

$6,522.6

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

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN 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

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

Net cash provided by operating activities

Cash flows provided by (used in) investing activities:

Additions to instruments

Additions to other property, plant and equipment

Purchases of investments

Sales of investments

Business combination investments

Investments in other assets

Net cash used in investing activities

Cash flows provided by (used in) financing activities:

Payment of senior notes

Net proceeds (payments) under revolving credit facilities

Proceeds from term loans

Dividends paid to stockholders

Debt issuance costs

Equity issuance costs

Proceeds from employee stock compensation plans

Excess income tax benefit from stock option exercises

Purchase of additional shares from noncontrolling interest

Repurchase of common stock

Net cash used in financing activities

Effect of exchange rates on cash and cash equivalents

Increase 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.

(in millions)

2014

2013

2012

719.0

$ 759.2

752.9

375.8

358.5

363.1

–

49.4

37.2

(11.1)

5.4

–

48.5

38.4

(8.6)

8.0

96.0

55.0

11.0

(2.7)

4.8

(84.2)

(126.2)

(64.8)

(51.9)
(40.4)
(154.1)
120.1
87.6

96.8
(74.3)
(128.4)
38.3
(47.1)

59.2
(45.5)
(67.5)
47.8
(57.4)

1,052.8

963.1

1,151.9

(197.4)

(192.9)

(148.9)

(144.9)

(100.0)

(114.7)

(1,350.9)

(732.7)

(1,130.1)

1,282.2

830.8

(54.3)

(4.1)

(74.2)

(13.5)

878.5

(59.0)

(17.9)

(469.4)

(282.5)

(592.1)

(250.0)

–

2.3

–

(97.5)

–

(145.5)

(132.4)

(64.1)

(0.4)

284.7

11.1

–

474.8

8.6

(1.8)

–

(50.1)

147.3

(94.4)

(3.3)

–

46.9

2.7

–

(400.5)

(719.0)

(485.6)

(562.4)

(467.3)

(436.5)

(18.3)

(17.0)

(7.3)

2.7
1,080.6

196.3
884.3

116.0
768.3

$ 1,083.3

$1,080.6

884.3

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN 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.

On April 24, 2014, we entered into a definitive agreement

to merge with LVB, the parent company of Biomet, in a cash
and stock transaction valued at approximately $13.35 billion.
We will pay $10.35 billion in cash, subject to certain
adjustments, and issue 32.7 million shares of our common
stock which had a value of approximately $3.0 billion, based on
a stock price of $91.73 per share using the five day volume
weighted average price immediately preceding the signing of
the agreement. In connection with the merger, we will pay off
all of LVB’s outstanding funded debt, and the aggregate cash
merger consideration will be reduced by such amount. The
merger, which is subject to customary closing conditions and
regulatory approvals, is expected to close in the first quarter of
2015. The merger will position the combined company as a
leader in the $45 billion musculoskeletal industry.

Biomet’s product portfolio includes knee and hip
reconstructive products; sports medicine, extremities and
trauma products; spine, bone healing and microfixation
products; dental reconstructive products; and cement,
biologics and other products. The combination will enhance
enterprise diversification with broader franchises in the Knee,
Hip, Surgical, Spine and Dental categories, as well as in the
faster-growing Sports Medicine, Extremities and Trauma
categories.

We expect to fund the cash portion of the purchase price
with existing cash on hand, as well as proceeds obtained from
a committed $3.0 billion senior unsecured term loan and up to
$7.66 billion in senior unsecured notes we intend to issue. In
May 2014, we entered into a $7.66 billion 364-day bridge credit
facility. To the extent the senior unsecured notes are not

issued and sold on or prior to the closing date of the merger,
we intend to draw on the bridge credit facility to finance, in
part, the cash consideration for the merger and to pay fees and
expenses incurred in connection with the merger. The
commitments of the bridge lenders to provide the bridge loan
will be permanently reduced dollar-for-dollar by the amount of
net cash proceeds we receive from the issuance of senior
unsecured notes. See Note 11 and Item 7 in this Form 10-K for
further information regarding these debt instruments.

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.
All significant intercompany accounts and transactions are
eliminated. Certain amounts in the 2013 and 2012 consolidated
financial statements have been reclassified to conform to the
2014 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, 2014, 2013 and 2012 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 represented
approximately 75 percent of our net sales in 2014. 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.

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 accounted for approximately
25 percent of our net sales in 2014. 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, 2014, 2013 and 2012.

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 $181.9 million, $163.6 million and
$139.5 million for the years ended December 31, 2014, 2013
and 2012, 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 that 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 R&D agreements, certain contract
terminations, consulting and professional fees and asset
impairment or loss on disposal charges connected with global
restructuring, operational and quality excellence initiatives,
and other items as “Special items” in our consolidated
statement of earnings. “Special items” included (in millions):

For the Years Ended December 31,

Impairment/loss on disposal of assets
Consulting and professional fees
Employee severance and retention, including
share-based compensation acceleration

Dedicated project personnel
Certain R&D agreements
Relocated facilities
Distributor acquisitions
Certain litigation matters
Contract terminations
Contingent consideration adjustments
Accelerated software amortization
Other

2014

2013

2012

$ 32.4
176.7

$ 10.9
99.1

$ 14.6
90.1

0.9
50.8
4.5
0.7
0.6
70.0
6.2
0.6
6.0
7.1

14.2
34.0
0.8
3.6
0.4
26.9
3.9
9.0
6.0
7.9

8.2
15.1
–
1.8
0.8
13.7
6.6
(2.8)
4.5
2.8

Special items

$356.5

$216.7

$155.4

Impairment/loss on disposal of assets relates to

impairment of intangible assets that were acquired in business
combinations or impairment of or a loss on the disposal of
other assets. This caption also includes the effect of reducing
the estimated useful life of certain intangible assets to zero,
which resulted in the remaining net book values of those assets
being amortized immediately.

Consulting and professional fees relate to third-party
consulting, professional fees and contract labor related to our
quality and operational excellence 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 and pending
merger with Biomet, third-party fees related to severance and
termination benefits matters and legal fees related to certain
litigation matters. Our quality and operational excellence
initiatives are company-wide and include improvements in
quality, distribution, sourcing, manufacturing and information
technology, among other areas.

In 2014, 2013 and 2012, we eliminated positions as we

reduced management layers, restructured certain areas,
announced closures of certain facilities, and commenced
initiatives to focus on business opportunities that best support
our strategic priorities. As a result of these changes in our
work force and headcount reductions in connection with
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

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

Dedicated project personnel expenses include the salary,

benefits, travel expenses and other costs directly associated
with employees who are 100 percent dedicated to our
operational and quality excellence initiatives or integration of
acquired businesses.

Certain R&D agreements relate to agreements with
upfront payments to obtain intellectual property to be used in
R&D projects that have no alternative future use in other
projects.

Relocated facilities expenses are the moving costs and the

lease expenses incurred during the relocation period in
connection with relocating certain facilities.

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.

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

Certain litigation matters relate to net expenses

Accounts Receivable – Accounts receivable consists of

recognized during the year for the estimated or actual
settlement of certain pending litigation and similar claims,
including matters where we recognized income from a
settlement on more favorable terms than our previous
estimate, or we reduced our estimate of a previously recorded
contingent liability. These litigation matters have included
royalty disputes, patent litigation matters, commercial
litigation matters and matters arising from our acquisitions of
certain competitive distributorships in prior years.

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 operational excellence initiatives.
The terminated contracts primarily relate to sales agents and
distribution agreements.

Contingent consideration adjustments represent the

changes in the fair value of contingent consideration
obligations to be paid to the prior owners of acquired
businesses.

Accelerated software amortization is the incremental
amortization resulting from a reduction in the estimated life of
certain software. Due to an approved plan to replace certain
software, the estimated economic useful life of the existing
software was decreased to represent the period of time
expected to implement replacement software. As a result, the
amortization from the shortened life of this software is
substantially higher than the previous amortization being
recognized.

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.

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 $22.3
million and $22.7 million as of December 31, 2014 and 2013,
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

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

costs of materials and services utilized in developing or
obtaining computer software and compensation and related
benefits for employees who are directly associated with the
software project. Capitalized software costs are included in
property, plant and equipment on our balance sheet and
amortized on a straight-line or weighted average estimated
user basis when the software is ready for its intended use over
the estimated useful lives of the software, which approximate
three to fifteen years.

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 may do a qualitative
assessment when the results of the previous quantitative test
indicated the reporting unit’s estimated fair value was
significantly in excess of the carrying value of its net assets
and we do not believe there have been significant changes in
the reporting unit’s operations that would significantly
decrease its estimated fair value 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 and/or use of a market approach by looking at market
values of comparable companies. Significant assumptions are
incorporated into our discounted cash flow analyses such as
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 year
ended December 31, 2012, we recorded a goodwill impairment
charge of $96.0 million related to our U.S. Spine reporting unit.
We did not record a goodwill impairment charge during the
years ended December 31, 2014 or 2013. See Notes 8 and 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 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 or a qualitative assessment may
be performed for any changes to the asset’s fair value from the
last quantitative assessment. The relief from royalty method
estimates the cost savings associated with owning, rather than
licensing, assets. Significant assumptions are incorporated into
these discounted cash flow analyses such as estimated growth
rates, royalty rates and risk-adjusted discount rates. We may do
a qualitative assessment when the results of the previous
quantitative test indicated that the asset’s fair value was
significantly in excess of its carrying value.

In determining the useful lives of intangible assets, we

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

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 (OCI) 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. Our OCI 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.

Noncontrolling Interest – In 2011, we made an

investment in a company in which we acquired a controlling
financial interest, but not 100 percent of the equity. In 2013,
we purchased additional shares of the company from the
minority shareholders. 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 May 2014, the Financial

Accounting Standards Board issued Accounting Standard
Update (ASU) No. 2014-09 – Revenue from Contracts with
Customers (Topic 606). The ASU provides a five-step model
for revenue recognition that all industries will apply to
recognize revenue when a customer obtains control of a good
or service. The ASU will be effective for us beginning
January 1, 2017. We are in the initial phases of our adoption
plans and, accordingly, we are unable to estimate any effect
this may have on our revenue recognition practices.
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 and restricted stock units (RSUs). Share-based
compensation expense was as follows (in millions):

For the Years Ended December 31,

2014

2013

2012

Stock options

RSUs

Total expense, pre-tax

Tax benefit related to awards

$ 24.2

$ 24.7

$ 32.4

25.2

23.8

22.6

49.4

48.5

55.0

(15.5)

(15.6)

(16.6)

Total expense, net of tax

$ 33.9

$ 32.9

$ 38.4

Stock Options

We had two equity compensation plans in effect at

December 31, 2014: the 2009 Stock Incentive Plan (2009 Plan)
and the Stock Plan for Non-Employee Directors. The 2009 Plan
succeeded the 2006 Stock Incentive Plan (2006 Plan) and the
TeamShare Stock Option Plan (TeamShare Plan). No further
awards have been granted under the 2006 Plan or under the
TeamShare Plan since May 2009, and shares remaining
available for grant under those plans have been merged into

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

the 2009 Plan. Vested stock options previously granted under
the 2006 Plan, the TeamShare Plan and another prior plan, the
2001 Stock Incentive Plan, remained outstanding as of
December 31, 2014. 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 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, 2014, an aggregate of 8.7 million shares were
available for future grants and awards under these plans.

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

A summary of stock option activity for the year ended December 31, 2014 is as follows (options in thousands):

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Life

Intrinsic
Value
(in millions)

Stock Options

10,741

$70.06

1,193

(3,811)

(235)

(42)

94.58

73.55

75.84

71.25

7,846

$71.94

7,485

$71.47

4,927

$67.91

5.5

5.4

3.9

$325.5

$314.0

$224.2

historical employee exercise behavior. The risk-free interest
rate was determined using the implied yield currently available
for zero-coupon U.S. government issues with a remaining term
approximating the expected life of the options. The dividend
yield was determined by using an estimated annual dividend
and dividing it by the market price of our stock on the grant
date.

Outstanding at January 1, 2014

Options granted

Options exercised

Options forfeited

Options expired

Outstanding at December 31, 2014

Vested or expected to vest as of December 31, 2014

Exercisable at December 31, 2014

We use a Black-Scholes option-pricing model to
determine the fair value of our stock options. For stock
options granted in 2012, 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. In 2013 and 2014, we used a combination of
historical volatility and implied volatility because the traded
options that were actively traded around the grant date of our
stock options did not have maturities of over one year. The
expected term of the stock options has been derived from

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents information regarding the

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,
2014, we estimate that approximately 866,000 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, 2014 was $31.7 million and is
expected to be recognized over a weighted-average period of
2.2 years. The fair value of RSUs vesting during the years
ended December 31, 2014, 2013 and 2012 based upon our
stock price on the date of vesting was $29.3 million, $32.5
million and $18.9 million, respectively.

Inventories

Inventories consisted of the following (in millions):

As of December 31,

Finished goods

Work in progress

Raw materials

Inventories

2014

2013

$ 899.9

$ 817.0

87.8

181.3

77.4

180.1

$1,169.0

$1,074.5

Amounts charged to the consolidated statement of
earnings for excess and obsolete inventory in the years ended
December 31, 2014, 2013 and 2012 were $51.8 million, $112.0
million and $55.1 million, respectively. The 2013 period was
higher due to our decision to discontinue certain products.

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

Construction in progress

Accumulated depreciation

$67.42

Instruments

2014

2013

20.4

21.7

1,283.4

1,353.1

294.7

272.6

1,696.3

1,610.6

115.8

58.2

3,410.6

3,316.2

(2,121.8)

(2,091.5)

Property, plant and equipment, net

$ 1,288.8

$ 1,224.7

Depreciation expense was $268.6 million, $262.6 million

and $266.0 million for the years ended December 31, 2014,
2013 and 2012, respectively.

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,

2014

2013

2012

Dividend yield

Volatility

Risk-free interest rate

Expected life (years)

0.9%

1.1%

25.2% 24.5% 25.6%

1.8%

1.1%

1.5%

5.5

6.1

Weighted average fair value of options

granted

$22.59

$16.33

$15.40

Intrinsic value of options exercised (in

millions)

$ 99.6

$ 97.9

$ 17.1

As of December 31, 2014, there was $33.8 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 2.6 years.

RSUs

We have awarded RSUs to our employees. The terms of

the awards have been three to four years. Some of the awards
have only service conditions while some have performance and
market conditions in addition to service conditions. The
service condition-only awards vest ratably on the anniversary
date of the award. The awards that have performance and
market conditions vest all at once on the third anniversary
date. Future service conditions may be waived if an employee
retires after the first anniversary date of the award, but
performance and market conditions continue to apply.
Accordingly, the requisite service period used for share-based
payment expense on our RSUs range from one to four years.
A summary of nonvested RSU activity for the year ended

December 31, 2014 is as follows (RSUs in thousands):

Outstanding at January 1, 2014

Granted

Vested

Forfeited

Outstanding at December 31, 2014

RSUs

1,454

455

(306)

(128)

1,475

Weighted Average
Grant Date
Fair Value

94.48

61.46

72.54

76.60

For the RSUs with service conditions only, the fair value of

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

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Acquisitions

Investments

We made a number of business acquisitions during the

We invest in short and long-term investments classified as

years 2014, 2013 and 2012. In October 2014, we acquired
ETEX Holdings, Inc. (Etex). The Etex acquisition enhanced
our biologics portfolio through the addition of Etex’s bone void
filler products. In May 2013, we acquired the business assets of
Knee Creations, LLC (Knee Creations). The Knee Creations
acquisition enhanced our product portfolio of joint
preservation solutions. In June 2013, we acquired NORMED
Medizin-Technik GmbH (Normed). The Normed acquisition
strengthened our Extremities and Trauma product portfolios
and brought new product development capabilities in the foot
and ankle and hand and wrist markets. In January 2012, we
acquired Synvasive Technology, Inc. (Synvasive). The
Synvasive acquisition enhanced our product portfolio through
the addition of the STABLECUT® surgical saw blades, as well
as the eLIBRA® Dynamic Knee Balancing SystemTM for soft
tissue balancing. In October 2012, we acquired Dornoch
Medical Systems, Inc. (Dornoch). The Dornoch acquisition
enhanced our product portfolio through the addition of a
medical waste fluid management and disposal technology.

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 recorded as goodwill. Pro forma financial
information and other information required by GAAP have not
been included as the acquisitions, individually and in the
aggregate, did not have a material impact upon our financial
position or results of operations.

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

As of December 31, 2014

Corporate debt securities
U.S. government and agency debt

securities

Commercial paper
Certificates of deposit

Total short and long-term

investments

As of December 31, 2013

Corporate debt securities
U.S. government and agency debt

securities

Foreign government debt

securities

Commercial paper
Certificates of deposit

Total short and long-term

investments

Gross Unrealized

Amortized
Cost

Gains

Losses

Fair
value

$516.9

$0.1

$(0.5) $516.5

194.3
57.8
100.3

–
–
–

194.3
57.8
100.3

$869.3

$0.1

$(0.5) $868.9

$457.6

$0.4

$(0.1) $457.9

211.1

0.1

3.1
68.3
67.2

–
–
–

–

–
–
–

211.2

3.1
68.3
67.2

$807.3

$0.5

$(0.1) $807.7

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, 2014

Amortized Cost

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

Total

$612.6
256.7

$869.3

Fair
Value

$612.5
256.4

$868.9

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of December 31, 2013

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 $457.9

$–

$457.9

$–

U.S. government and

agency debt securities

211.2

Foreign government debt

securities

Commercial paper

Certificates of deposit

3.1

68.3

67.2

Total available-for-sale

securities

807.7

Derivatives, current and

long-term

Foreign currency

forward contracts and
options

Interest rate swaps

Liabilities

Derivatives, current and

long-term

Foreign currency

forward contracts and
options

Interest rate swaps

68.7

16.3

$892.7

20.6

7.0

$ 27.6

–

$–

–

$–

211.2

3.1

68.3

67.2

807.7

68.7

16.3

$892.7

20.6

7.0

$ 27.6

–

$–

–

$–

We value our available-for-sale securities using a market
approach based on broker prices for identical assets in over-
the-counter markets and we perform ongoing assessments of
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 we perform ongoing assessments of counterparty credit
risk.

We value our interest rate swaps using a market approach
based on publicly available market yield curves and the terms
of our swaps and we perform ongoing assessments of
counterparty credit risk.

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, 2014

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)

$ 516.5

$–

$ 516.5

$–

194.3

57.8

100.3

868.9

–

194.3

57.8

100.3

868.9

125.5

24.0

$1,018.4

–

$–

125.5

24.0

$1,018.4

–

$–

–

$–

Description

Assets

Available-for-sale

securities

Corporate debt
securities

U.S. government and

agency debt
securities

Commercial paper

Certificates of deposit

Total available-for-
sale securities

Derivatives, current and

long-term

Foreign currency

forward contracts
and options

Interest rate swaps

Liabilities

Derivatives, current and

long-term

Foreign currency

forward contracts
and options

Forward starting

1.7

–

1.7

59.3

interest rate swaps

59.3

61.0

$–

61.0

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following nonfinancial assets were measured at fair

value on a nonrecurring basis (in millions):

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

Description

Total

Year Ended December 31, 2014

Indefinite-lived
intangible
assets

$34.2

$–

$34.2

$14.2

Year Ended December 31, 2013

Indefinite-lived
intangible
assets

$21.0

Year Ended December 31, 2012

Goodwill

$41.0

$–

Indefinite-lived
intangible
assets

24.2

–

$–

–

$21.0

$ 2.8

$41.0

$96.0

24.2

11.6

We conduct our annual goodwill impairment testing 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. In
2012, it was determined that our U.S. Spine reporting unit’s
carrying value was in excess of its fair value. The goodwill for
this reporting unit was written down to its implied fair value of
$41.0 million, resulting in a $96.0 million non-cash impairment
charge. 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 a 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 guideline public company methodology, which uses
valuation indicators from publicly traded companies that are
similar to our U.S. Spine reporting unit and considers control
premiums that would result from a sale of the reporting unit
and the level of assets in the reporting unit versus the
comparable companies.

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 guideline public company methodology, we

took into consideration specific risk differences between our
reporting unit and the comparable companies, such as recent
financial performance, size risks and product portfolios, among
other considerations. Based upon our reporting unit’s recent
financial performance, market share and product portfolio, we
valued the reporting unit near the bottom of the valuation
indicators of the comparable companies.

The fair value of the reporting unit’s assets and liabilities
were determined by using the same methods that are used in
business combination purchase accounting.

Factors that contributed to the 2012 impairment of the
U.S. Spine reporting unit included broader market issues as
well as company specific issues. The U.S. spine market was
under pressure due to a constrained economic environment
leading to continuing high unemployment and payer pushback
on the necessity of certain procedures. Additionally, pricing
was declining across the industry. Company specific issues
included turnover with our independent sales agents and lack
of execution in developing new, competitive products which
resulted in a less than optimal product portfolio in our U.S.
Spine reporting unit.

Before the economic downturn in 2008, we estimated the

U.S. spine market was growing in the low double digits, but
declined to flat or in the low single digits in 2012. Previous
goodwill impairment tests forecasted some recovery in the
market which did not occur. As we completed our annual
operating plan in the fourth quarter of 2012, it became clearer
that the U.S. spine market recovery would take longer than we
planned, including the persistence of significant negative
pricing pressures. Additionally, we concluded that new
product introductions made in 2012 would not have as
significant of a positive effect as we had previously forecasted.
As a result, we tempered our expectations of recovery in the
U.S. market and for our U.S. Spine reporting unit and
recognized an impairment charge.

In our 2013 and 2014 annual goodwill impairment tests of

our U.S. Spine reporting unit, we concluded no impairment
charge was necessary. In our 2014 annual impairment test, the
U.S. Spine reporting unit’s estimated fair value was in excess of
its carrying value of net assets by 24 percent.

We have four 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 or a
combination of the income approach and market approach
utilizing the guideline public company methodology. Due to
challenging market conditions associated with our U.S. Dental
reporting unit, our 2013 annual impairment test indicated the
estimated fair value of the U.S. Dental reporting unit was in
excess of its carrying value of net assets by only 11 percent.
For the annual impairment test in 2014, the goodwill balance of

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

the U.S. Dental reporting unit was $169.1 million. In our 2014
annual impairment test, due to improved operating
performance and improving macroenomic conditions,
including higher valuation indicators used in our market
approach, the U.S. Dental reporting unit’s estimated fair value
was in excess of its carrying value of net assets by 24 percent.
In 2014, for our three other reporting units’ annual
impairment test, we performed a qualitative assessment of
changes in fair value from the 2013 income approach. A
qualitative assessment was performed because the estimated
fair value of each of the reporting units was significantly in
excess of the carrying value of its net assets in the 2013
impairment test.

We will continue to monitor the fair value of our U.S.
Spine and U.S. Dental reporting units as well as our other
three reporting units in our interim and annual reporting
periods. If estimated cash flows for these reporting units
decrease, we may be required 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

Goodwill and Other Intangible Assets

revenue from our research and development activities, and 2)
our inability 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 or comparable company valuation
indicators, which may impact our estimated fair values.

In 2014, 2013 and 2012, we also recorded $14.2 million,

$2.8 million and $11.6 million, respectively, of impairment
charges in “Special items” related to certain indefinite lived
intangible assets. The impairment was a result of lower future
estimated revenues from products using certain trademarks.
The lower future estimated revenues resulted from new
competitive products in the marketplace, a trend towards
newer, less invasive products, a decrease in projected
revenues in U.S. Dollar terms due to the strengthening of the
U.S. Dollar versus foreign currencies, negative publicity in the
marketplace related to certain hip devices and our challenges
in the global spine market. Effective in the fourth quarter of
2014 the intangible assets that were impaired have been
reclassified as a finite lived intangible asset and will be
amortized.

The following table summarizes the changes in the carrying amount of goodwill (in millions):

Americas

Europe

Asia Pacific

Total

$1,623.9

$1,128.6

$192.3

$2,944.8

(373.0)

–

(373.0)

1,250.9

1,128.6

192.3

2,571.8

11.0

(5.0)

24.0

34.5

–

(25.1)

35.0

4.4

1,629.9

1,187.1

167.2

2,984.2

(373.0)

–

(373.0)

1,256.9

1,187.1

167.2

2,611.2

40.6

–

40.6

(4.3)

(119.4)

(13.9)

(137.6)

1,666.2

1,067.7

153.3

2,887.2

(373.0)

–

(373.0)

$1,293.2

$1,067.7

$153.3

$2,514.2

Balance at January 1, 2013

Goodwill

Accumulated impairment losses

Acquisitions

Currency translation

Balance at December 31, 2013

Goodwill

Accumulated impairment losses

Acquisitions

Currency translation

Balance at December 31, 2014

Goodwill

Accumulated impairment losses

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

As of December 31, 2014:

Intangible assets subject to amortization:

Gross carrying amount

Accumulated amortization

Intangible assets not subject to amortization:

Gross carrying amount

Total identifiable intangible assets

As of December 31, 2013:

Intangible assets subject to amortization:

Gross carrying amount

Accumulated amortization

Intangible assets not subject to amortization:

Gross carrying amount

Total identifiable intangible assets

Intellectual
Property
Rights

Trademarks
and Trade
Names

Customer
Relationships

Technology

Other

Total

$ 727.2

$ 173.4

$ 74.2

$213.8

$ 93.9

$1,282.5

(458.3)

(157.7)

(34.1)

(99.6)

(58.3)

(808.0)

–

129.0

–

129.0

$ 268.9

$ 15.7

$169.1

$114.2

$ 35.6

$ 603.5

$ 700.4

$ 173.4

$ 43.3

$216.2

$ 95.1

$1,228.4

(401.4)

(142.5)

(33.9)

(76.4)

(43.9)

(698.1)

–

177.4

–

177.4

$ 299.0

$ 30.9

$186.8

$139.8

$ 51.2

$ 707.7

Intangible amortization expense was recorded as follows

10. Other Current and Long-term Liabilities

(in millions):

For the Years Ended December 31,

2014

2013

2012

Other current and long-term liabilities consisted of the

following (in millions):

Cost of products sold

$ 15.2

$18.3

$24.0

Selling, general and administrative

92.0

77.6

73.1

As of December 31,

Total intangible amortization

$107.2

$95.9

$97.1

Estimated annual amortization expense based upon
intangible assets recognized as of December 31, 2014 for the
years ending December 31, 2015 through 2019 is (in millions):

For the Years Ending December 31,

Other current liabilities:

License and service agreements

Certain claims accrual (Note 19)

Litigation settlement accrual (Note 19)

Forward starting interest rate swaps

Salaries, wages and benefits

Accrued liabilities

2014

2013

$100.2

$109.2

50.0

70.0

59.3

167.7

351.3

50.0

–

153.9

351.0

2015

2016

2017

2018

2019

$88.5

81.6

66.2

50.9

36.3

Total other current liabilities

$798.5

$664.1

Other long-term liabilities:

Long-term income tax payable

Certain claims accrual (Note 19)

Other long-term liabilities

Total other long-term liabilities

$181.7

$115.0

307.2

159.7

329.0

132.6

$648.6

$576.6

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Debt

Our debt consisted of the following (in millions):

As of December 31,

Long-term debt

Senior Notes due 2014

Senior Notes due 2019

Senior Notes due 2021

Senior Notes due 2039

Term Loan

Other long-term debt

Debt discount

Adjustment related to interest rate swaps

2014

2013

–

$ 250.0

500.0

300.0

500.0

98.0

4.9

(1.4)

24.0

500.0

300.0

500.0

112.4

2.1

(1.5)

9.3

Total long-term debt

$1,425.5

$1,672.3

In May 2014, we entered into a new credit agreement

(Senior Credit Facility). The Senior Credit Facility contains:
(i) a 5-year unsecured term loan facility in the principal amount
of $3.0 billion (Term Loan), and (ii) a 5-year unsecured
multicurrency revolving facility in the principal amount of $1.35
billion (Multicurrency Revolving Facility). The Senior Credit
Facility replaced a previous agreement that provided for a $1.35
billion revolving credit facility that would have matured in May
2017. The Multicurrency Revolving Facility will mature in May
2019, with two one-year extensions available at our option.
Borrowings under the Multicurrency Revolving Facility may be
used for general corporate purposes. The availability of the
Term Loan is conditioned on, among other things, the
consummation of the Biomet merger. The Term Loan requires
us to reduce unused commitments and prepay the borrowings
under the Term Loan with any net cash proceeds received from
specified asset sales, issuances or sales of equity and
incurrences of borrowed money indebtedness, subject to
certain exceptions. Commitments under the Term Loan
automatically terminate on the earliest to occur of: (i) the
funding and disbursement of the Term Loan funds to us,
(ii) April 24, 2015, as such date may be extended pursuant to
the merger agreement, or (iii) termination of the merger
agreement. The Term Loan will mature five years after the
initial borrowing. Borrowings under the Term Loan may only be
used by us to fund, in part, the Biomet merger, including the
payment of any indebtedness of LVB and its subsidiaries, and to
pay all or a portion of the costs incurred by us in connection
with the Biomet merger. There were no borrowings outstanding
under the Senior Credit Facility at December 31, 2014.

In May 2014, we also entered into a 364-Day Credit
Agreement (Bridge Credit Agreement). The Bridge Credit
Agreement is a 364-day unsecured committed bridge facility in
the principal amount of $7.66 billion. Funding of loans under
the Bridge Credit Agreement is conditioned on, among other
things, the consummation of the Biomet merger. Any loans
under the Bridge Credit Agreement will mature 364 days after
the funding date of the loans. The Bridge Credit Agreement

requires us to reduce unused commitments and prepay the
loans with any net cash proceeds received from specified asset
sales, issuances or sales of equity and incurrences of borrowed
money indebtedness, such as new senior notes we intend to
issue, subject to certain exceptions. Commitments under the
Bridge Credit Agreement automatically terminate on the
earliest to occur of: (i) the funding and disbursement of the
loans, (ii) April 24, 2015, as such date may be extended
pursuant to the merger agreement, or (iii) termination of the
merger agreement. Proceeds of loans under the Bridge Credit
Agreement may only be used to fund, in part, the Biomet
merger, including the payment of any indebtedness of LVB and
its subsidiaries, and to pay all or a portion of the costs incurred
by us in connection with the Biomet merger.

We have a term loan agreement (Japan Term Loan) with

one of the lenders under the Senior Credit Facility for 11.7
billion Japanese Yen that will mature on May 31, 2018.
Borrowings under the Japan Term Loan bear interest at a fixed
rate of 0.61 percent per annum until maturity. The estimated
fair value of the Japan Term Loan as of December 31, 2014,
based upon publicly available market yield curves and the
terms of the debt (Level 2), was $97.6 million.

We and certain of our wholly owned foreign subsidiaries

Commitments under the Senior Credit Facility are subject

Zimmer Holdings is the borrower under the Bridge Credit

Agreement. Borrowings under the Bridge Credit Agreement
bear interest at floating rates based upon LIBOR plus an
applicable margin determined by reference to our senior

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

unsecured long-term credit rating, or at an alternate base rate.
The Bridge Credit Agreement 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 consolidated indebtedness to
consolidated EBITDA ratio of no greater than 5.0 to 1.0. We
were in compliance with all covenants under the Bridge Credit
Agreement as of December 31, 2014. If our credit rating falls
below investment grade, additional restrictions would result,
including restrictions on investments and payment of
dividends.

We will pay a funding fee if we borrow under the Bridge

In association with the Senior Credit Facility and Bridge

Credit Agreement, we incurred debt issuance costs paid to the
lenders. These debt issuance costs, to the extent paid, were
recognized as financing cash flows on our consolidated
statement of cash flows. For the debt issuance costs related to
the Bridge Credit Agreement, we are recognizing expense on a
straight-line basis over the estimated commitment period,
which is one year. If we borrow under the Bridge Credit
Agreement in the future, any remaining unamortized debt
issuance costs will be recognized as interest expense over the
period debt is outstanding under the Bridge Credit Agreement.
The related expense for the Bridge Credit Agreement debt
issuance costs and the Bridge Credit Agreement and Term
Loan unused commitment fees has been presented as “Other
expense” on our consolidated statement of earnings since we
have not borrowed against these agreements. The debt
issuance costs related to the Term Loan portion of the Senior
Credit Facility will be recognized as interest expense under the
effective interest rate method once we borrow on the Term
Loan. The debt issuance costs related to the Multicurrency
Revolving Facility are being recognized as expense on a
straight-line basis over the 5-year commitment period of the
facility.

We have three tranches of senior notes outstanding: $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. The
estimated fair value of our senior notes as of December 31,
2014, based on quoted prices for the specific securities from
transactions in over-the-counter markets (Level 2), was
$1,460.2 million.

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 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 would also pay the
accrued and unpaid interest on the Senior Notes to the
redemption date.

We have entered into interest rate swap agreements
which we designated as fair value hedges of underlying fixed-
rate obligations on our senior notes due 2019 and 2021. See
Note 13 for additional information regarding the interest rate
swap agreements.

We also have available uncommitted credit facilities

totaling $31.9 million.

At December 31, 2014 and 2013, the weighted average
interest rate for our long-term borrowings was 3.5 percent and
3.3 percent, respectively. We paid $67.5 million, $68.1 million
and $67.8 million in interest during 2014, 2013 and 2012,
respectively.

12. Accumulated Other Comprehensive Income

OCI refers to certain gains and losses that under GAAP

are included in comprehensive income but are excluded from
net earnings as these amounts are initially recorded as an
adjustment to stockholders’ equity. Amounts in OCI may be
reclassified to net earnings upon the occurrence of certain
events.

Our OCI 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 on our defined benefit plans.
Foreign currency translation adjustments are reclassified to
net earnings upon sale or upon a complete or substantially
complete liquidation of an investment in a foreign entity.
Unrealized gains and losses on cash flow hedges are
reclassified to net earnings when the hedged item affects net
earnings. Unrealized gains and losses on available-for-sale
securities are reclassified to net earnings if we sell the security
before maturity or if the unrealized loss is considered to be
other-than-temporary. Amounts related to defined benefit
plans that are in OCI are reclassified over the service periods
of employees in the plan. The reclassification amounts are
allocated to all employees in the plans and, therefore, the
reclassified amounts may become part of inventory to the
extent they are considered direct labor costs. See Note 14 for
more information on our defined benefit plans.

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table shows the changes in the components of OCI, net of tax (in millions):

Balance December 31, 2013
OCI before reclassifications
Reclassifications

Balance December 31, 2014

The following table shows the reclassification adjustments from OCI (in millions):

Foreign
Currency
Translation

Cash
Flow
Hedges

Unrealized
Gains on
Securities

Defined
Benefit
Plan
Items

$ 401.1
(241.5)
–

$ 33.1
55.9
(18.9)

$ 0.5
(0.5)
(0.4)

$ (67.6)
(80.0)
4.2

$ 159.6

$ 70.1

$(0.4) $(143.4)

Component of OCI

Cash flow hedges

Foreign exchange forward contracts
Foreign exchange options
Cross-currency interest rate swaps

Investments

Realized gains on securities

Defined benefit plans
Prior service cost
Unrecognized actuarial (loss)

Total reclassifications

Amount of Gain / (Loss)
Reclassified from OCI

For the Years Ended December 31,

2014

2013

2012

Location on Statement of Earnings

$ 33.3
–
–

33.3
14.4

$ 8.0
(0.2)
–

7.8
3.4

$(12.0)
(0.4)
0.2

(12.2)
(8.9)

$ 18.9

$ 4.4

$ (3.3)

$ 0.4
–

$ 0.4

–
–

–

–
–

–

$ 3.9
(11.1)

$ 3.9
(16.6)

$ 2.9
(13.3)

(7.2)
(3.0)

(12.7)
(4.8)

(10.4)
(3.9)

$ (4.2)

$ (7.9)

$ (6.5)

$ 15.1

$ (3.5)

$ (9.8)

Cost of products sold
Cost of products sold
Interest expense

Total before tax
Provision for income taxes

Net of tax

Interest income
Provision for income taxes

Net of tax

*
*

Total before tax
Provision for income taxes

Net of tax

* These OCI components are included in the computation of net periodic pension expense (see Note 14).

The following table shows the tax effects on each component of OCI recognized in our consolidated statements of

comprehensive income (in millions):

For the Years Ended December 31,

2014

2013

2012

2014

2013

2012

2014

2013

2012

Before Tax

Tax

Net of Tax

Foreign currency cumulative translation adjustments
Unrealized cash flow hedge gains
Reclassification adjustments on foreign currency hedges
Reclassification adjustments on securities
Unrealized gains/(losses) on securities
Adjustments to prior service cost and unrecognized actuarial

$(241.5) $(44.4) $46.1
15.2
12.2
–
0.4

60.5
(33.3)
(0.4)
(0.5)

63.6
(7.8)
–
0.1

–
4.6
(14.4)
–
–

–
30.2
(3.4)
–
–

assumptions

(104.8)

50.3

20.3

(29.0)

11.8

–
4.3
8.9
–
–

8.5

$(241.5) $(44.4) $46.1
10.9
3.3
–
0.4

55.9
(18.9)
(0.4)
(0.5)

33.4
(4.4)
–
0.1

(75.8)

38.5

11.8

Total Other Comprehensive Gain/(Loss)

$(320.0) $ 61.8

$94.2

$(38.8) $38.6

$21.7

$(281.2) $ 23.2

$72.5

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. Derivative Instruments and Hedging Activities

Foreign Currency Exchange Rate Risk

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.

Derivatives Designated as Cash Flow Hedges

In 2014, we entered into forward starting interest rate
swaps that we have designated as cash flow hedges of our
anticipated issuance of senior notes related to the pending
Biomet merger that we anticipate will mature in March 2045.
The forward starting interest rate swaps mitigate the risk of
changes in interest rates prior to completion of the senior
notes offering. The total notional amounts of the forward
starting interest rate swaps are $1 billion and will settle in
March 2015. On the forward starting interest rate swaps, we
receive variable interest equal to three-month LIBOR and pay
a fixed interest weighted average rate of 3.01 percent. We will
defer the effective portion of the forward starting interest rate
swaps over the maturity period of the hedged senior notes,
which is thirty years, and recognize any ineffective portion
immediately in earnings.

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
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 foreign currency exchange forward contracts and
options outstanding at December 31, 2014, 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
obligations to purchase Swiss Francs and sell U.S. Dollars.
These derivatives mature at dates ranging from January 2015
through June 2017. As of December 31, 2014, the notional
amounts of outstanding forward contracts and options entered
into with third parties to purchase U.S. Dollars were $1,289.8
million. As of December 31, 2014, the notional amounts of
outstanding forward contracts and options entered into with
third parties to purchase Swiss Francs were $306.3 million.

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Derivatives Not Designated as Hedging Instruments

Foreign Currency Exchange and Interest Rate Risk

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
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.

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 previous
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
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 was temporarily recorded in other
comprehensive income and then recognized in interest
expense when the hedged item affected net earnings. The
cross-currency interest rate swap agreements matured in 2012
and we paid off the subsidiary’s U.S. Dollar debt with Japanese
Yen debt borrowed under our previous credit facility.

Income Statement Presentation

Derivatives Designated as Fair Value Hedges

Derivative instruments designated as fair value hedges had the following effects on our consolidated statements of earnings (in

millions):

Derivative Instrument

Interest rate swaps

Gain /(Loss) on Instrument

Gain /(Loss) on Hedged Item

Year Ended December 31,

Location on Statement of Earnings

2014

2013

2012

2014

2013

2012

Interest expense

$14.7

$(24.6)

$6.1

$(14.7) $24.6

$(6.1)

We had no ineffective fair value hedging instruments nor any amounts excluded from the assessment of hedge effectiveness

during the years ended December 31, 2014, 2013 and 2012.

Derivatives Designated as Cash Flow Hedges

Derivative instruments designated as cash flow hedges had the following effects, before taxes, on OCI and net earnings on our

consolidated statements of earnings, consolidated statements of comprehensive income and consolidated balance sheets (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

2014

2013

2012

Location on Statement of Earnings

2014

2013

2012

Foreign exchange forward contracts

$119.8

$63.9

$16.3

Cost of products sold

$33.3

$ 8.0

$(12.0)

Foreign exchange options

Forward starting interest rate swaps

Cross-currency interest rate swaps

–

(0.3)

(1.1)

(59.3)

–

$ 60.5

$63.6

$15.2

Cost of products sold

Interest expense

–

(0.2)

(0.4)

–

0.2

$33.3

$ 7.8

$(12.2)

The net amount recognized in earnings during the years ended December 31, 2014, 2013 and 2012 due to ineffectiveness and

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

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The fair value of outstanding derivative instruments designated as cash flow hedges and recorded on the balance sheet at

December 31, 2014, together with settled derivatives where the hedged item has not yet affected earnings, was a net unrealized
gain of $87.9 million, or $70.0 million after taxes, which is deferred in accumulated other comprehensive income. Of the net
unrealized gain, $89.5 million, or $66.0 million after taxes, is expected to be reclassified to earnings in cost of products sold and a
loss of $0.7 million, or $0.5 million after taxes, is expected to be reclassified to earnings in interest expense over the next twelve
months.

Derivatives Not Designated as Hedging Instruments

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

millions):

Derivative Instrument

Foreign exchange forward contracts

Year Ended December 31,

Location on Statement of Earnings

2014

2013

2012

Cost of products sold

$15.3

$–

$(2.0)

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, 2014 and December 31, 2013, 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 sheets, 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. Under these master netting agreements, we are able to settle derivative instrument assets and liabilities with the
same counterparty in a single transaction, instead of settling each derivative instrument separately. We have master netting
agreements with all of our counterparties. The fair value of derivative instruments on a gross basis is as follows (in millions):

Asset Derivatives

Foreign exchange forward contracts

Interest rate swaps

Total asset derivatives

Liability Derivatives

As of December 31, 2014

As of December 31, 2013

Balance Sheet Location

Fair
Value

Balance Sheet Location

Fair
Value

Other current assets

$ 98.7

Other current assets

$ 60.2

Other assets

53.1

24.0

$175.8

Other assets

30.2

16.3

$106.7

Foreign exchange forward contracts

Other current liabilities

$ 16.4

Other current liabilities

$ 26.4

Forward starting interest rate swaps

Foreign exchange forward contracts

Interest rate swaps

Total liability derivatives

Other current liabilities

Other long-term liabilities

59.3

11.6

–

$ 87.3

Other current liabilities

Other long-term liabilities

–

15.9

7.0

$ 49.3

The table below presents the effects of our master netting agreements on our consolidated balance sheets (in millions):

Description

Asset Derivatives

Cash flow hedges

Liability Derivatives

Cash flow hedges

As of December 31, 2014

As of December 31, 2013

Location

Gross
Amount

Offset

Net Amount
in Balance
Sheet

Gross
Amount

Offset

Net Amount
in Balance
Sheet

Other current assets

$98.7

$15.9

Other assets

53.1

10.4

$82.8

42.7

$60.2

$13.5

30.2

8.2

$46.7

22.0

Other current liabilities

Other long-term liabilities

16.4

11.6

15.9

10.4

0.5

1.2

26.4

15.9

13.5

8.2

12.9

7.7

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. Retirement Benefit Plans

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 foreign 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 were as follows (in millions):

For the Years Ended December 31,

Service cost

Interest cost

Expected return on plan assets

Settlement

Amortization of prior service cost

Amortization of unrecognized actuarial loss

Net periodic benefit cost

U.S. and Puerto Rico

Foreign

2014

2013

2012

2014

2013

2012

$ 10.9

$ 11.9

$ 11.4

$ 14.7

$16.1

$15.0

15.5

13.2

13.3

9.2

5.6

6.1

(30.8)

(28.7)

(25.5)

(11.0)

(6.7)

(7.6)

–

(2.6)

10.6

–

(2.6)

14.8

0.7

(2.0)

11.4

–

(1.3)

(0.9)

0.5

1.8

1.9

$ 3.6

$ 8.6

$ 9.3

$ 12.1

$15.5

$14.5

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

Foreign

2014

2013

2012

2014

2013

2012

4.98%

3.29%

7.75%

4.32%

3.29%

7.75%

4.97%

3.81%

7.75%

2.46%

1.48%

2.88%

2.13%

2.29%

2.74%

2.58%

2.77%

3.51%

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.

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

For the Years Ended December 31,

Projected benefit obligation – beginning of year

Service cost

Interest cost

Plan amendments

Employee contributions

Benefits paid

Actuarial (gain) loss

Expenses paid

Translation (gain) loss

Projected benefit obligation – end of year

Plan assets at fair market value – beginning of year

Actual return on plan assets

Employer contributions

Employee contributions

Plan amendments

Benefits paid

Expenses paid

Translation gain (loss)

Plan assets at fair market value – end of year

Funded status

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

U.S. and Puerto Rico

Foreign

2014

2013

2014

2013

$316.7

$314.3

$371.5

$259.4

10.9

15.5

–

11.9

13.2

–

14.7

9.2

16.1

5.6

(7.0)

118.9

18.5

15.9

(10.0)

(10.4)

(22.6)

(29.4)

53.5

(12.3)

77.9

(17.7)

–

(0.2)

(38.3)

2.9

$386.6

$316.7

$423.7

$371.5

$398.6

$363.0

$372.3

$231.6

10.9

2.7

–

25.2

20.8

–

38.0

14.7

18.5

9.7

15.0

15.9

–

126.7

(10.0)

(10.4)

(22.6)

(29.4)

–

(0.2)

(35.3)

3.0

$402.2

$398.6

$385.4

$372.3

$ 15.6

$ 81.9

$(38.3) $ 0.8

$ 29.4

$ 92.7

$ 12.4

$ 12.1

(0.7)

(0.5)

–

(13.1)

(10.1)

(50.2)

(11.3)

$ 15.6

$ 81.9

$(38.3) $ 0.8

$ (9.4) $(12.0) $(12.8) $ (8.3)

176.1

113.3

68.7

15.5

$166.7

$101.3

$ 55.9

$ 7.2

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

our net pension expense during 2015 (in millions):

Unrecognized prior service cost

Unrecognized actuarial loss

U.S. and
Puerto Rico

Foreign

$(2.6)

$(1.9)

18.3

$15.7

2.7

$ 0.8

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

Foreign

2014

2013

2012

2014

2013

2012

4.10% 4.98% 4.32% 1.38% 2.45% 2.15%

3.29% 3.29% 3.29% 1.43% 1.52% 2.75%

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

Foreign

2014

2013

2014

2013

$54.6

40.8

$10.8

$365.2

$318.1

–

315.0

307.4

Total accumulated benefit obligations and plans with accumulated benefit obligations in excess of plan assets were as follows

(in millions):

As of December 31,

Total accumulated benefit obligations

Plans with accumulated benefit obligations in excess of plan assets:

Accumulated benefit obligation

Plan assets at fair market value

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,

2015

2016

2017

2018

2019

2020-2024

U.S. and
Puerto Rico

Foreign

$ 12.3

$17.0

13.3

15.0

16.5

18.4

113.2

16.5

16.9

17.0

17.9

89.1

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 mitigating
risk. We have established target ranges of assets held by the
plans of 40 to 45 percent for equity securities, 30 to 35 percent

U.S. and Puerto Rico

Foreign

2014

2013

2014

2013

$337.5

$273.8

$413.1

$362.1

32.8

22.0

8.8

–

358.6

315.0

308.9

303.7

for debt securities and 20 to 25 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. We regularly review the investments in the plans and
we may rebalance them from time-to-time based upon the
target asset allocation of the plans.

For the U.S. and Puerto Rico plans, 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.
Our benefits committee, along with our investment advisor,
monitor compliance with and administer the investment policy
statement and the plans’ assets and oversee the general
investment strategy and objectives of the plans. Our benefits
committee generally meets quarterly to review performance
and to ensure that the current investment allocation is within
the parameters of the investment policy statement.

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The investment strategies of foreign based plans vary
according to the plan provisions and local laws. The majority of
the assets in foreign 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.

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

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

As of December 31, 2014

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)

$1.4

–

$–

–
–
–
–

–

83.7
23.0
83.0
49.1

36.0

126.0

–
–
–
–

–

$1.4

$400.8

$–

As of December 31, 2013

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)

$0.8

–

$–

–
–
–
–

–

79.6
22.3
87.7
43.4

42.1

122.7

–
–
–
–

–

$0.8

$397.8

$–

Asset Category

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

1.4

83.7
23.0
83.0
49.1

36.0

126.0

$402.2

Asset Category

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

79.6
22.3
87.7
43.4

42.1

122.7

$398.6

The fair value of our foreign pension plan assets was as

follows (in millions):

As of December 31, 2014

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)

$ 31.0

–

Asset Category

Cash and cash equivalents
Equity securities:

Total

$ 31.0

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

4.7
7.1
7.5
6.5
7.5
6.8
16.3
4.9
2.0
3.4
36.7

72.5
58.9
22.0
1.7

9.2
6.1
12.0
68.6

4.7
7.1
7.5
6.5
7.5
6.8
16.3
4.9
2.0
3.4
34.5

–
–
–
–

–
–
–
–
–
–
–
–
–
–
2.2

72.5
58.9
22.0
1.7

9.2
6.1
12.0
–

$385.4

$132.2

$184.6

$68.6

As of December 31, 2013

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)

$ 13.9

–

Asset Category

Cash and cash equivalents
Equity securities:

Total

$ 13.9

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

4.7
5.7
7.6
5.2
6.8
9.7
15.8
5.8
2.6
3.4
35.7

64.4
65.9
24.0
2.8

9.0
6.4
14.7
68.2

4.7
5.7
7.6
5.2
6.8
9.7
15.8
5.8
2.6
3.4
33.2

–
–
–
–

–
–
–
–
–
–
–
–
–
–
2.5

64.4
65.9
24.0
2.8

9.0
6.4
14.7
–

–

–
–
–
–
–
–
–
–
–
–
–

–
–
–
–

–
–
–
68.6

–

–
–
–
–
–
–
–
–
–
–
–

–
–
–
–

–
–
–
68.2

$372.3

$114.4

$189.7

$68.2

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of December 31, 2014 and 2013, our defined benefit

15.

Income Taxes

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

The components of earnings before income taxes and the

Equity securities are valued using a market approach,

income taxes paid consisted of the following (in millions):

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 foreign pension plan
assets measured at fair value that used significant
unobservable inputs (Level 3) (in millions):

Beginning Balance

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

Ending Balance

December 31, 2014

$68.2
0.3
1.7
4.8
(6.4)

$68.6

We expect that we will have no legally required minimum
funding requirements in 2015 for the qualified U.S. and Puerto
Rico defined benefit retirement plans, nor do we expect to
voluntarily contribute to these plans during 2015.
Contributions to foreign defined benefit plans are estimated to
be approximately $14.0 million in 2015. We do not expect the
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 $32.8 million, $29.6
million and $26.5 million related to these plans for the years
ended December 31, 2014, 2013 and 2012, respectively.

For the Years Ended December 31,

2014

2013

2012

United States operations

$395.6

$400.7

$409.9

Foreign operations

548.3

580.4

580.2

Total

$943.9

$981.1

$990.1

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

Current:

Federal

State

Foreign

Deferred:

Federal

State

Foreign

$177.6

$ 199.0

$179.8

16.3

115.2

309.1

(56.9)

(6.6)

(20.7)

20.6

128.5

348.1

13.8

108.4

302.0

(87.7)

(58.8)

(8.5)

(30.0)

0.7

(6.7)

(84.2)

(126.2)

(64.8)

Provision for income taxes

$224.9

$ 221.9

$237.2

Income taxes paid

$340.1

$ 272.3

$227.6

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

our effective tax rate is as follows:

For the Years Ended December 31,

2014

2013

2012

U.S. statutory income tax rate

35.0%

State taxes, net of federal deduction

0.7

0.8

1.0

Tax impact of foreign operations,
including foreign tax credits

Tax impact of certain significant

(11.3)

(12.2)

(10.4)

transactions

1.4

1.6

(3.5)

Tax benefit relating to U.S.

manufacturer’s deduction and
export sales

R&D credit

Goodwill impairment

Other

(1.9)

(0.2)

–

0.1

(1.8)

(0.6)

–

(0.2)

(1.9)

–

3.4

0.4

Effective income tax rate

23.8%

22.6%

24.0%

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 2015 and 2026.

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

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

Deferred tax liabilities:

Fixed assets

Intangible assets

Other

Total deferred tax liabilities

Total net deferred tax assets

December 31, 2014 and 2013, respectively. The remaining
valuation allowances of $4.9 million and $2.7 million at
December 31, 2014 and 2013, respectively, relate primarily to
potential capital losses.

At December 31, 2014, we had an aggregate of
approximately $3,204.0 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 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 related to remitting these
earnings.

The following is a tabular reconciliation of the total

amounts of unrecognized tax benefits (in millions):

2014

2013

$ 275.1

$ 271.1

116.9

185.5

7.4

106.7

59.9

32.3

50.3

26.4

187.1

7.8

72.0

74.6

25.6

11.2

834.1

675.8

For the Years Ended December 31,

2014

2013

2012

(122.8)

(42.7)

Balance at January 1

$304.3

$285.5

$158.4

$(104.3) $ (97.7)

(95.9)

(106.4)

–

(1.2)

Decreases related to prior periods

Increases related to current period

Decreases related to settlements with

taxing authorities

Decreases related to lapse of statute of

0.9

16.5

118.7

(3.8)

(17.3)

17.3

22.5

(8.9)

19.1

(3.0)

(2.9)

(0.6)

(200.2)

(205.3)

limitations

(1.7)

–

(1.2)

$ 511.1

$ 427.8

Balance at December 31

$314.0

$304.3

$285.5

Total deferred tax assets after valuation

711.3

633.1

Increases related to prior periods

During the first quarter of 2014, we established a $70.5
million deferred tax asset (and offsetting valuation allowance)
for indefinite lived net operating loss carryforwards in a
Luxembourg domiciled holding company. These losses
primarily relate to interest deductions on intercompany debt
and were generated in periods prior to 2014. Previously, we
were unable to realize a tax benefit for the losses due to the
absence of current and future operating income within the
Luxembourg subsidiary.

The net operating loss carryovers are available to reduce

future federal, state and foreign taxable earnings. At
December 31, 2014, $47.8 million of these net operating loss
carryovers generally expire within a period of 1 to 20 years and
$69.1 million have an indefinite life. Valuation allowances for
net operating loss carryovers have been established in the
amount of $99.0 million and $17.3 million at December 31,
2014 and 2013, respectively. The tax credit carryovers are
available to offset future federal, state and foreign tax
liabilities. At December 31, 2014, 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 $11.5 million and $14.9 million at
December 31, 2014 and 2013, respectively. The capital loss
carryover is also available to reduce future federal capital
gains. At December 31, 2014, these capital loss carryovers
generally expire within a period of 2 to 4 years. We have
established valuation allowances for certain capital loss
carryovers in the amount of $7.4 million and $7.8 million at

Amounts impacting effective tax rate, if
recognized balance at December 31

$203.0

$186.3

$159.0

We recognize accrued interest and penalties, related to

unrecognized tax benefits, as income tax expense. During
2014, we accrued interest and penalties of $5.7 million, and as
of December 31, 2014, had recognized a liability for interest
and penalties of $47.8 million.

During 2013, we accrued interest and penalties of $8.2
million, and as of December 31, 2013, had recognized a liability
for interest and penalties of $42.1 million. During 2012, we
accrued interest and penalties of $23.2 million, and as of
December 31, 2012, had recognized a liability for interest and
penalties of $33.9 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. 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, settlements of tax
assessments 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.

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

During the second quarter of 2014, the IRS began the
audit of our U.S. federal returns for the years 2010 through
2012. During the second quarter of 2011, the IRS concluded its
examination of our U.S. federal returns for years 2005 through
2007 and during the fourth quarter of 2013, the IRS concluded
its examination of our U.S. federal returns for years 2008
through 2009. For years 2006 through 2009, the IRS has
proposed adjustments reallocating profits between certain of
our U.S. and foreign subsidiaries. During the second quarter of
2014, the IRS issued a corrected Revenue Agent Report for
years 2008 through 2009, assessing a penalty with respect to a
2008 uncertain tax position. We have disputed these proposed
adjustments and continue to pursue resolution with the IRS.
During the second quarter of 2014, the IRS issued a statutory
notice of deficiency for the years 2005 through 2007. We are
contesting this deficiency notice and we filed a petition with
the U.S. Tax Court during the third quarter of 2014. Although
the ultimate timing for resolution of the disputed tax issues is
uncertain, we may resolve certain tax matters with the IRS
within the next twelve months and pay amounts for other
unresolved tax matters in order to limit the potential impact of
IRS interest charges. Final resolution of these matters could
have a material impact on our income tax expense, results of
operations and cash flows for future periods.

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 (2010 onward), Canada
(2008 onward), France (2011 onward), Germany (2009
onward), Ireland (2010 onward), Italy (2010 onward), Japan
(2010 onward), Korea (2010 onward), Puerto Rico (2008
onward), Switzerland (2013 onward), and the United Kingdom
(2013 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, 2014.

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,

2014

2013

2012

Weighted average shares outstanding
for basic net earnings per share

Effect of dilutive stock options and

other equity awards

Weighted average shares outstanding
for diluted net earnings per share

169.0

169.6

174.9

2.7

2.2

1.1

171.7

171.8

176.0

For the year ended December 31, 2014, all outstanding

options to purchase shares of common stock were included in
the computation of diluted earnings per share as the exercise
prices of all options were less than the average market price of
the common stock. For the years ended December 31, 2013
and 2012, an average of 3.1 million and 11.9 million options,
respectively, were not included.

During 2014, we repurchased 4.2 million shares of our
common stock at an average price of $94.57 per share for a
total cash outlay of $400.5 million, including commissions.

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. 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 inventory
step-up and certain other inventory and manufacturing related
charges, “Certain claims,” goodwill impairment, “Special items,”
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 and share-
based payment expense. 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 HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN 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):

As of and for the Year Ended December 31, 2014

Net sales
Depreciation and amortization
Segment operating profit

Inventory step-up and certain other inventory and manufacturing related

charges
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, 2013

Net sales
Depreciation and amortization
Segment operating profit

Inventory step-up and certain other inventory and manufacturing related

charges
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, 2012

Net sales
Depreciation and amortization
Segment operating profit

Americas

Europe

Asia
Pacific

Global
Operations
and
Corporate
Functions

Total

$2,594.2
79.6
1,288.4

$1,269.5
72.0
398.6

$809.6
31.7
351.0

–
192.5
(604.1)

$4,673.3
375.8
1,433.9

877.6
2,856.9
0.2
9.8

301.4
2,113.1
17.0
14.1

109.8
530.3
6.0
9.1

–
4,134.4
174.2
111.9

(21.2)
(21.5)
(356.5)

1,034.7
1,288.8
9,634.7
197.4
144.9

$2,619.8
70.9
1,302.6

$1,212.6
72.6
359.7

$791.0
30.7
342.3

–
184.3
(634.8)

$4,623.4
358.5
1,369.8

810.8
2,814.9
0.2
9.0

306.3
2,343.8
14.8
10.3

107.6
541.9
6.5
7.6

–
3,880.0
171.4
73.1

(70.5)
(47.0)
(216.7)

1,035.6
1,224.7
9,580.6
192.9
100.0

$2,476.3
73.7
1,256.3

$1,177.4
73.6
369.1

$818.0
36.3
311.1

–
179.5
(617.9)

$4,471.7
363.1
1,318.6

Inventory step-up and certain other inventory and manufacturing related

charges
Certain claims
Goodwill impairment
Special items

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

776.0
2,690.6
–
0.7

326.1
2,308.0
14.0
21.9

108.6
578.3
7.1
6.4

–
3,435.5
127.8
85.7

(4.8)
(15.0)
(96.0)
(155.4)

1,047.4
1,210.7
9,012.4
148.9
114.7

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN 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. $198.7 million of Europe long-lived
tangible assets as of December 31, 2014 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 $2,397.9 million, $2,418.2 million and
$2,280.7 million for the years ended December 31, 2014, 2013
and 2012, 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,

2014

2013

2012

Reconstructive

Knees

Hips

Extremities

Dental

Trauma

Spine

Surgical and other

Total

$1,965.8

$1,909.9

$1,833.8

1,326.4

1,330.5

1,342.0

204.3

193.8

173.8

3,496.5

3,434.2

3,349.6

242.8

316.7

207.2

410.1

239.3

315.6

202.3

432.0

237.7

307.9

208.9

367.6

$4,673.3

$4,623.4

$4,471.7

18. Leases

Total rent expense for the years ended December 31,

2014, 2013 and 2012 aggregated $48.4 million, $49.2 million
and $46.3 million, respectively.

Future minimum rental commitments under non-

cancelable operating leases in effect as of December 31, 2014
were (in millions):

For the Years Ending December 31,

2015

2016

2017

2018

2019

Thereafter

$46.5

36.1

27.0

21.4

19.6

32.3

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 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 were filed against us in
various U.S. and foreign jurisdictions. The plaintiffs seek
damages for personal injury, and they generally allege that the
Durom Cup contains defects that result in complications and
premature revision of the device. We have settled some of
these claims and others are still pending. The majority of the
pending U.S. lawsuits are currently in a federal Multidistrict
Litigation (MDL) in the District of New Jersey (In Re: Zimmer
Durom Hip Cup Products Liability Litigation). Multi-
plaintiff state court cases are pending in St. Clair County,
Illinois (Santas, et al. v. Zimmer, Inc., et al.) and Los Angeles
County, California (McAllister, et al. v. Zimmer, Inc., et al.).
As of December 31, 2014, case specific discovery in these
lawsuits was on-going. The initial trial in Santas took place in
November 2014 and initial trials in McAllister and the MDL are
expected to commence in the second quarter of 2015. Other
lawsuits are pending in various jurisdictions, and additional
claims may be asserted in the future.

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Since 2008, we have recognized expense of $471.7 million

for Durom Cup-related claims, including $21.5 million, $47.0
million and $15.0 million during the years ended December 31,
2014, 2013 and 2012, respectively.

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. As of December 31, 2014, we have exhausted our self-
insured retention under our insurance program and 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, it is probable that we will recover some amount from
our insurance carriers. We have received an initial amount of
the insurance proceeds we estimate to recover and expect to
receive more in the near future. We have a $170.3 million
receivable in “Other assets” remaining on our consolidated
balance sheet as of December 31, 2014 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, 2014 of the remaining

liability for all Durom Cup-related claims is $357.2 million, of
which $50.0 million is classified as short-term in “Other current
liabilities” and $307.2 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 few years.

Our understanding of clinical outcomes with

the Durom Cup and other large diameter hip cups continues
to evolve. We rely on significant estimates in determining the
provisions for Durom Cup-related claims, including our
estimate of the number of claims that we will receive and the
average amount we will pay per claim. The actual number of
claims and the actual amount we pay per claim may differ from
our estimates. Among other factors, 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 the appellate court in Philadelphia,
Pennsylvania was held on March 13, 2012. On March 1, 2013,
the Superior Court of Pennsylvania vacated the $27.6 million
judgment and remanded the case for a new trial. On March 15,
2013, plaintiffs filed a motion for re-argument en banc, and on
March 28, 2013, we filed our response in opposition. On May 9,
2013, the Superior Court of Pennsylvania granted plaintiffs’
motion for re-argument en banc. Oral argument (re-
argument en banc) before the Superior Court of Pennsylvania
was held on October 16, 2013. On December 20, 2013, the
Court issued its opinion again vacating the trial court judgment
and remanding the case for a new trial. On January 21, 2014,
plaintiffs filed a petition for allowance of appeal in the
Supreme Court of Pennsylvania, which was granted on May 21,
2014. Oral argument before the Supreme Court of
Pennsylvania took place on October 8, 2014. Although we are
defending this lawsuit vigorously, its ultimate resolution is
uncertain.

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 (In
Re: Zimmer NexGen Knee Implant Products Liability
Litigation). Other cases are pending in other state and federal
courts, and additional lawsuits may be filed. As of
December 31, 2014, discovery in these lawsuits was on-going.
Bellwether trials are expected to commence in the third
quarter of 2015. We have not accrued an estimated loss
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 are vigorously defending these lawsuits, their
ultimate resolution is uncertain.

Intellectual Property-Related Claims

On December 10, 2010, Stryker Corporation and related

entities (Stryker) filed suit against us in the U.S. District Court
for the Western District of Michigan, alleging that certain of
our Pulsavac Plus Wound Debridement Products infringe three
U.S. patents assigned to Stryker. The case was tried beginning

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

on January 15, 2013, and on February 5, 2013, the jury found
that we infringed certain claims of the subject patents. The jury
awarded $70.0 million in monetary damages for lost profits.
The jury also found that we willfully infringed the subject
patents. We filed multiple post-trial motions, including a motion
seeking a new trial. On August 7, 2013, the trial court issued a
ruling denying all of our motions and awarded treble damages
and attorneys’ fees to Stryker. We filed a notice of appeal to the
Court of Appeals for the Federal Circuit to seek reversal of
both the jury’s verdict and the trial court’s rulings on our post-
trial motions. Oral argument before the Federal Circuit took
place on September 8, 2014. On December 19, 2014, the
Federal Circuit issued a decision affirming the $70.0 million lost
profits award but reversed the willfulness finding, vacating the
treble damages award and vacating and remanding the
attorneys’ fees award. We accrued an estimated loss of $70.0
million related to this matter in the year ended December 31,
2014. On January 20, 2015, Stryker filed a motion with the
Federal Circuit for a rehearing en banc. Although we are
defending this lawsuit vigorously, its ultimate resolution is
uncertain.

Shareholder Derivative Action

On June 16, 2014, a shareholder derivative action, Hays

v. Dvorak et al., was filed in the Court of Chancery of the
State of Delaware. The plaintiff sought to maintain the action
purportedly on our behalf against certain of our current and
former directors and two non-director executive officers. The
plaintiff alleged, among other things, breaches of fiduciary
duties, abuse of control, unjust enrichment and gross
mismanagement by the named defendants based on the trial
court’s ruling in the patent infringement lawsuit brought by
Stryker described above relating to certain of our Pulsavac
Plus Wound Debridement Products. The plaintiff did not seek
damages from us, but instead requested damages of an
unspecified amount on our behalf. The plaintiff also sought

20. Quarterly Financial Information (Unaudited)

(in millions, except per share data)

equitable relief to remedy the individual defendants’ alleged
misconduct, attorneys’ fees, costs and other relief. On
August 18, 2014, we filed a motion to stay or dismiss the
complaint, and the individual defendants filed a joinder
motion. On December 15, 2014, the Delaware Court of
Chancery granted our motion to stay pending a ruling from the
Federal Circuit on the appeal in the Stryker patent
infringement case. The Federal Circuit issued a ruling on
December 19, 2014, as described above. On February 6, 2015,
all claims pending in this shareholder derivative action were
dismissed without prejudice pursuant to a stipulation of
dismissal.

Regulatory Matters

In September 2012, we received a warning letter from the

FDA citing concerns relating to certain manufacturing and
validation processes pertaining to Trilogy Acetabular System
products manufactured at our Ponce, Puerto Rico
manufacturing facility. We have provided detailed responses to
the FDA as to our corrective actions and will continue to work
expeditiously to address the issues identified by the FDA
during inspections in Ponce. As of December 31, 2014, the
warning letter remains pending. Until the violations are
corrected, we may be subject to additional regulatory action
by the FDA, including seizure, injunction and/or civil monetary
penalties. Additionally, requests for Certificates to Foreign
Governments related to products manufactured at the Ponce
facility may not be granted and premarket approval
applications for Class III devices to which the quality system
regulation deviations are reasonably related will not be
approved until the violations have been corrected. In addition
to responding to the warning letter described above, we are in
the process of addressing various FDA Form 483 inspectional
observations at certain of our manufacturing facilities. The
ultimate outcome of these matters is presently uncertain.

2014 Quarter Ended

2013 Quarter Ended

Mar

Jun

Sep

Dec

Mar

Jun

Sep

Dec

$1,161.5

$1,182.9

$1,106.0

$1,222.9

$1,138.9

$1,169.5

$1,074.3

$1,240.7

856.1

221.5

849.7

176.5

807.7

165.5

910.0

156.6

846.0

218.6

845.9

152.1

745.5

154.4

899.9

235.9

1.31

1.29

1.05

1.03

0.98

0.96

0.92

0.91

1.30

1.28

0.90

0.89

0.91

0.90

1.38

1.36

Net sales

Gross profit

Net earnings of Zimmer Holdings, Inc.

Earnings per common share

Basic

Diluted

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN 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 Rule 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
Securities and Exchange Commission’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

Item 9B. Other Information

During the fourth quarter of 2014, the Audit Committee of

our Board of Directors approved the engagement of
PricewaterhouseCoopers LLP, our independent registered
public accounting firm, to perform certain non-audit services
related to certain tax matters. This disclosure is made
pursuant to Section 10A(i)(2) of the Exchange Act.

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.

Z I M M E R HOL D I NG S , I NC .

PART III

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

Item 10. Directors, Executive Officers and Corporate Governance

Information required by this item is incorporated by reference from our definitive Proxy Statement for the annual meeting of

stockholders to be held on May 5, 2015 (the “2015 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 senior 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 our 2015 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 our 2015 Proxy Statement.

Item 13. Certain Relationships and Related Transactions and Director Independence

Information required by this item is incorporated by reference from our 2015 Proxy Statement.

Item 14. Principal Accounting Fees and Services

Information required by this item is incorporated by reference from of our 2015 Proxy Statement.

Z I M M E R HOL D I NG S , I NC .

PART IV

Item 15. Exhibits, Financial Statement Schedules

(a) 1.

Financial Statements

2 0 1 4 F O R M 1 0 - K AN 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, 2014, 2013 and 2012

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013 and 2012

Consolidated Balance Sheets as of December 31, 2014 and 2013

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2014, 2013 and 2012

Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012

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 HOL D I NG S , I NC .

SIGNATURES

2 0 1 4 F O R M 1 0 - K AN 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 23, 2015

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

President, Chief Executive Officer and Director (Principal
Executive Officer)

February 23, 2015

Executive Vice President, Finance and Chief Financial Officer
(Principal Financial Officer)

February 23, 2015

Vice President, Finance, and Corporate Controller and Chief
Accounting Officer (Principal Accounting Officer)

February 23, 2015

/S/ CHRISTOPHER B. BEGLEY

Director

February 23, 2015

Christopher B. Begley

/S/ BETSY J. BERNARD

Betsy J. Bernard

/S/ PAUL M. BISARO

Paul M. Bisaro

Gail K. Boudreaux

Michael J. Farrell

/S/ LARRY C. GLASSCOCK

Larry C. Glasscock

/S/ ROBERT A. HAGEMANN

Robert A. Hagemann

/S/ ARTHUR J. HIGGINS

Arthur J. Higgins

Director

February 23, 2015

/S/ CECIL B. PICKETT, PH.D.

Director

February 23, 2015

Cecil B. Pickett, Ph.D.

Z I M M E R HOL D I NG S , I NC .

INDEX TO EXHIBITS

Exhibit No

Description

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

2.1

3.1

3.2

4.1

4.2

4.3

4.4

4.5

4.6

4.7

4.8

4.9

10.1*

10.2*

10.3*

10.4*

10.5*

10.6*

10.7*

10.8*

10.9*

10.10*

10.11*

10.12*

Agreement and Plan of Merger, dated as of April 24, 2014, by and among Zimmer Holdings, Inc., Owl Merger Sub, Inc.
and LVB Acquisition, Inc. (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed April 30, 2014)

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 December 13, 2013 (incorporated by reference to Exhibit 3.1 to
the Registrant’s Current Report on Form 8-K filed December 19, 2013)

Specimen Common Stock certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on
Form 10-Q filed November 6, 2012)

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)

Stockholders Agreement, dated as of April 24, 2014, by and among Zimmer Holdings, Inc., LVB Acquisition Holding,
LLC, and the other signatories thereto (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on
Form 8-K filed April 30, 2014)

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 May 7, 2013 (incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed May 13, 2013)

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 28, 2009)

Change in Control Severance Agreement with Katarzyna Mazur-Hofsaess (incorporated by reference to Exhibit 10.3 to
the Registrant’s Quarterly Report on Form 10-Q filed August 7, 2013)

Form of Change in Control Severance Agreement with James T. Crines (incorporated by reference to Exhibit 10.12 to
the Registrant’s Annual Report on Form 10-K filed February 28, 2009)

Form of Change in Control Severance Agreement with Chad F. Phipps (incorporated by reference to Exhibit 10.13 to
the Registrant’s Annual Report on Form 10-K filed February 28, 2009)

Form of Change in Control Severance Agreement with Joseph A. Cucolo (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 28, 2009)

Z I M M E R HOL D I NG S , I NC .

Exhibit No

Description

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

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 28, 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 28, 2009)

Form of Confidentiality, Non-Competition and Non-Solicitation Agreement with U.S.-Based Executive Officers
(incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed November 6, 2012)

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 Katarzyna Mazur-Hofsaess (incorporated by
reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q filed August 7, 2013)

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)

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)

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, as amended May 7, 2013 (incorporated by reference to Exhibit 10.2
to the Registrant’s Current Report on Form 8-K filed May 13, 2013)

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 (two-year vesting) under the Zimmer Holdings, Inc. 2009 Stock Incentive
Plan

Form of Performance-Based Restricted Stock Unit Award Letter (three-year performance period) under the Zimmer
Holdings, Inc. 2009 Stock Incentive Plan

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)

$1,350,000,000 Credit Agreement dated as of May 9, 2012 (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed May 15, 2012)

Amendment No. 1 dated as of December 13, 2013 to the Credit Agreement dated as of May 9, 2012 (incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on December 19, 2013)

10.13*

10.14*

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

10.34

Z I M M E R HOL D I NG S , I NC .

Exhibit No

Description

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

10.35

10.36

10.37

10.38

10.39

10.40

10.41

31.1

31.2

Term Loan Agreement ¥11,700,000,000 dated as of May 24, 2012 (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed May 31, 2012)

Letter of Guarantee dated as of May 24, 2012 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current
Report on Form 8-K filed May 31, 2012)

First Amendment, dated October 31, 2014, to the ¥11,700,000,000 Term Loan Agreement dated as of May 24, 2012
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed November 5, 2014)

Voting Agreement, dated as of April 24, 2014, by and among Zimmer Holdings, Inc., LVB Acquisition Holding, LLC
and the other signatories thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on
Form 8-K filed April 30, 2014)

Commitment Letter, dated as of April 24, 2014, by and among Credit Suisse Securities (USA) LLC, Credit Suisse AG
and Zimmer Holdings, Inc. (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K
filed April 30, 2014)

364-Day Credit Agreement, dated as of May 29, 2014, among Zimmer Holdings, Inc., Credit Suisse AG, Cayman
Islands Branch, as Administrative Agent, and the lenders named therein (incorporated by reference to Exhibit 10.1 to
the Registrant’s Current Report on Form 8-K filed June 4, 2014)

Credit Agreement, dated as of May 29, 2014, among Zimmer Holdings, Inc., Zimmer K.K., Zimmer Investment
Luxembourg SARL, the borrowing subsidiaries referred to therein, JPMorgan Chase Bank, N.A., as General
Administrative Agent, JPMorgan Chase Bank, N.A., Tokyo Branch, as Japanese Administrative Agent, J. P. Morgan
Europe Limited, as European Administrative Agent, and the lenders named therein (incorporated by reference to
Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed June 4, 2014)

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

Z I M M E R HOL D I NG S , I NC .

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

SCHEDULE II

ZIMMER HOLDINGS, INC.
VALUATION AND QUALIFYING ACCOUNTS

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)

–

0.3

17.2

22.8

22.7

40.3

41.3

42.7

7.1

1.9

2.0

(0.9)

1.5

74.7

(1.8)

(1.5)

(1.4)

(0.3)

(0.1)

(9.2)

(0.5)

(1.0)

–

22.8

22.7

22.3

41.3

42.7

–

2.2

–

14.6

122.8

Description

Allowance for Doubtful Accounts:

Year Ended December 31, 2012

Year Ended December 31, 2013

Year Ended December 31, 2014

Deferred Tax Asset Valuation Allowances:

Year End December 31, 2012

Year End December 31, 2013

Year End December 31, 2014

Z I M M E R HOL D I NG S , I NC .

Reconciliations

2 0 1 4 F O R M 1 0 - K AN N U A L R E P O R T

Reconciliation of Operating Profit to Adjusted Operating Profit for the Years Ended December 31, 2014, 2013, 2012, 2011 and 2010 (in millions, unaudited)

For the Years Ended December 31,

2014

2013

2012

2011

2010

Operating Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,034.7

$1,035.6

$1,047.4

$1,024.1

$ 916.7

Inventory step-up and other inventory and manufacturing related charges . . . . . . . . . . . . .

Certain claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21.2

21.5

—

70.5

47.0

—

4.8

15.0

96.0

Special items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

356.5

216.7

155.4

11.4

157.8

—

75.2

1.4

75.0

204.0

34.7

Adjusted Operating Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,433.9

$1,369.8

$1,318.6

$1,268.5

$1,231.8

Reconciliation of Diluted EPS to Adjusted Diluted EPS for the Years Ended December 31, 2014, 2013, 2012, 2011 and 2010 (unaudited)

For the Years Ended December 31,

2014

2013

2012

2011

2010

Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4.19

$ 4.43

$ 4.29

$ 4.03

$ 2.97

Inventory step-up and other inventory and manufacturing related charges . . . . . . . . . . .

Certain claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Special items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other expense on Biomet merger financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.12

0.13

—

2.08

0.23

0.41

0.27

—

1.26

—

0.03

0.09

0.54

0.88

—

0.06

0.84

—

0.40

—

0.01

0.37

1.01

0.17

—

Taxes on above items and other certain tax adjustments* . . . . . . . . . . . . . . . . . . . . . . . . . .

(0.69)

(0.62)

(0.53)

(0.20)

Adjusted Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 6.06

$ 5.75

$ 5.30

$ 4.80

$ 4.33

* 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, 2014 (unaudited)

Geographic Segment

Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1)%

—%

(1)%

For the Year Ended December 31, 2014

Reported
% Growth

Foreign
Exchange
Impact

Constant
Currency
% Growth

Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Product Category

Reconstructive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Knees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Hips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Extremities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Dental

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Trauma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Spine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Surgical and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

(5)

—

(6)

(1)

(2)

(1)

(2)

(1)

(3)

[THIS PAGE INTENTIONALLY LEFT BLANK]

Corporate Information (As of March 1, 2015)

Board of Directors

Larry C. Glasscock
Chairman of the Board,
Zimmer Holdings, Inc.
Retired Chairman,
President and Chief Executive Ofﬁcer,
Anthem, Inc.

Betsy J. Bernard
Retired President,
AT&T Corp.

Paul M. Bisaro
Executive Chairman,
Actavis plc

Christopher B. Begley
Retired Executive Chairman
and Chief Executive Ofﬁcer,
Hospira, Inc.

Gail K. Boudreaux
Former Chief Executive Ofﬁcer,
UnitedHealthcare

Management Team

David C. Dvorak
President and
Chief Executive Ofﬁcer

Audrey M. Beckman
Senior Vice President,
Strategic Quality Initiatives

James T. Crines
Executive Vice President,
Finance and Chief Financial Ofﬁcer

Joseph A. Cucolo
President,
Americas

Derek M. Davis
Vice President, Finance
and Corporate Controller
and Chief Accounting Ofﬁcer

William P. Fisher
Senior Vice President,
Global Human Resources

David C. Dvorak
President and
Chief Executive Ofﬁcer,
Zimmer Holdings, Inc.

Michael J. Farrell
Chief Executive Ofﬁcer,
ResMed Inc.

Robert A. Hagemann
Retired Senior Vice President
and Chief Financial Ofﬁcer,
Quest Diagnostics Incorporated

Arthur J. Higgins
Consultant,
Blackstone Healthcare Partners

Cecil B. Pickett, Ph.D.
Retired President,
Research and Development,
Biogen Idec Inc.

Katarzyna Mazur-Hofsaess, M.D., Ph.D.
President,
Europe, Middle East and Africa

Stephen H. L. Ooi
President,
Asia Paciﬁc

Matt E. Monaghan
Senior Vice President, Global Hips
and Reconstructive Research

Chad F. Phipps
Senior Vice President,
General Counsel and Secretary

David J. Kunz
Vice President, Global Quality,
Clinical and Regulatory Affairs

Richard C. Stair
Senior Vice President,
Global Operations and Logistics

Stephen E. White
Senior Vice President and
General Manager, Knees

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.

Transfer Agent
Communications concerning
stock transfer requirements,
loss of certiﬁcates and change
of address should be directed to
Zimmer’s Transfer Agent:

American Stock Transfer
& Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
+1-888-552-8493 (domestic)
+1-718-921-8124 (international)
Email: zimmer@amstock.com
Website: http://www.amstock.com

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 Ofﬁcer
+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 ﬁnancial
calendar, access SEC ﬁlings, listen
to earnings calls, or to look up
Zimmer stock quotes, please
visit http://investor.zimmer.com
or call +1-866-688-7656.

Independent Auditors
PricewaterhouseCoopers LLP
Chicago, IL, U.S.A.

Dividend Reinvestment and Stock Purchase Plan

American Stock Transfer & Trust Company, LLC administers the Investors Choice Dividend Reinvestment and Stock Purchase Plan, which allows registered
stockholders to purchase additional shares of Zimmer common stock through the automatic investment of dividends. The plan also allows registered
stockholders to purchase shares with optional cash investments of at least $25, either by check or by automatic deductions from checking or savings accounts.
The maximum optional cash investment is $10,000 per transaction. Please direct inquiries concerning the plan to: Zimmer Holdings, Inc., c/o American Stock
Transfer & Trust Company, LLC, P.O. Box 922, Wall Street Station, New York, NY 10269-0560, +1-888-552-8493 (domestic), +1-718-921-8124 (international)

Stock Performance Graph

Comparison of Cumulative Total Return for years ended December 31

Assumes $100 was invested on
December 31, 2009 in Zimmer common
stock and each index and that dividends
were reinvested. Returns over the indicated
period should not be considered indicative
of future returns.

$250

$200

$150

$100

This annual report is printed on paper
that contains 10% post-consumer waste.

baseline

Zimmer Holdings, Inc.

S&P 500 Stock Index

S&P 500 Health Care Equipment Index

$100

2010

$100

$115

$104

2011

$90

$118

$96

2012

$114

$136

$112

2013

$160

$180

$144

2014

$197

$205

$181

Zimmer Holdings, Inc., 345 East Main Street, P.O. Box 708, Warsaw, IN 46580, U.S.A.