Zimmer Biomet (ZBH) 10-Q 2009 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009

Commission File Number001-16407

ZIMMER HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization) 13-4151777
(IRS Employer
Identification No.)

345 East Main Street, Warsaw, IN 46580
(Address of principal executive offices)
Telephone:(574) 267-6131

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 þ     No o

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 ofRegulation 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 o     No o

Indicate by check mark 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 Rule12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).  Yes o     No þ

As of July 21, 2009, 214,303,658, shares of the registrant’s $.01 par value common stock were outstanding.

ZIMMER HOLDINGS, INC.

INDEX TOFORM 10-Q

June 30, 2009

			Page
Part I — Financial Information
	Item 1.	Financial Statements
		Consolidated Statements of Earnings for the Three and Six Months Ended June 30, 2009 and 2008		3
		Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008		4
		Consolidated Statement of Stockholders’ Equity as of June 30, 2009		5
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008		6
		Notes to Interim Consolidated Financial Statements		7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		34
	Item 4.	Controls and Procedures		34
Part II — Other Information
		There is no information required to be reported under any items except those indicated below.
	Item 1.	Legal Proceedings		34
	Item 1A.	Risk Factors		34
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		35
	Item 4.	Submission of Matters to a Vote of Security Holders		35
	Item 5.	Other Information		36
	Item 6.	Exhibits		36
Signatures				37
EX-10.1
EX-31.1
EX-31.2
EX-32

2

Part I — Financial Information

Item 1.   Financial Statements

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except per share amounts, unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Net Sales	$	1,019.9		$	1,079.5		$	2,012.5		$	2,138.7
Cost of products sold		236.8			262.3			467.1			517.0
Gross Profit		783.1			817.2			1,545.4			1,621.7
Research and development		49.9			48.3			101.7			96.1
Selling, general and administrative		432.3			448.0			856.0			865.8
Acquisition, integration, realignment and other		36.5			12.5			43.5			19.8
Net curtailment and settlement (Note 10)		(32.1	)		—			(32.1	)		—
Operating expenses		486.6			508.8			969.1			981.7
Operating Profit		296.5			308.4			576.3			640.0
Interest and other income (expense), net		(4.0	)		6.8			(7.7	)		7.8
Earnings before income taxes		292.5			315.2			568.6			647.8
Provision for income taxes		82.4			87.8			156.3			180.9
Net earnings		210.1			227.4			412.3			466.9
Less: Net earnings attributable to noncontrolling interest		—			(0.3	)		—			(0.5	)
Net Earnings of Zimmer Holdings, Inc.	$	210.1		$	227.1		$	412.3		$	466.4
Earnings Per Common Share
Basic	$	0.98		$	0.99		$	1.89		$	2.02
Diluted	$	0.98		$	0.99		$	1.88		$	2.01
Weighted Average Common Shares Outstanding
Basic		214.7			228.4			218.1			230.5
Diluted		215.5			229.5			218.8			231.7

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

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts, unaudited)

	June 30,				December 31,
	2009				2008
ASSETS
Current Assets:
Cash and cash equivalents	$	277.5			$	212.6
Restricted cash		2.7				2.7
Accounts receivable, less allowance for doubtful accounts		768.7				732.8
Inventories, net		980.9				928.3
Prepaid expenses and other current assets		81.8				103.9
Deferred income taxes		217.1				198.3
				��
Total current assets		2,328.7				2,178.6
Property, plant and equipment, net		1,254.4				1,264.1
Goodwill		2,814.6				2,774.8
Intangible assets, net		874.6				872.1
Other assets		189.8				149.4
Total Assets	$	7,462.1			$	7,239.0
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	144.0			$	186.4
Income taxes payable		16.4				6.6
Other current liabilities		508.8				578.1
Total current liabilities		669.2				771.1
Other long-term liabilities		333.8				353.9
Long-term debt		653.5				460.1
Total Liabilities		1,656.5				1,585.1
Commitments and Contingencies (Note 13)
Stockholders’ Equity:
Zimmer Holdings, Inc. Stockholders’ Equity:
Common stock, $0.01 par value, one billion shares authorized, 253.8 million shares issued in 2009 (253.7 million in 2008)		2.5				2.5
Paid-in capital		3,176.9				3,138.5
Retained earnings		4,797.8				4,385.5
Accumulated other comprehensive income		282.4				240.0
Treasury stock, 39.5 million shares in 2009 (30.1 million in 2008)		(2,454.0	)			(2,116.2	)
Total Zimmer Holdings, Inc. stockholders’ equity		5,805.6				5,650.3
Noncontrolling interest		—				3.6
Total Stockholders’ Equity		5,805.6				5,653.9
Total Liabilities and Stockholders’ Equity	$	7,462.1			$	7,239.0

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

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions, unaudited)

	Zimmer Holdings, Inc. Stockholders
										Accumulated
										Other											Total
	Common Shares				Paid-in			Retained		Comprehensive		Treasury Shares						Noncontrolling			Stockholders’
	Number		Amount		Capital			Earnings		Income		Number			Amount			Interest			Equity
Balance January 1, 2009		253.7	$	2.5	$	3,138.5		$	4,385.5	$	240.0		(30.1	)	$	(2,116.2	)	$	3.6		$	5,653.9
Net earnings		—		—		—			412.3		—		—			—			—			412.3
Other comprehensive income		—		—		—			—		42.4		—			—			—			42.4
Purchase of noncontrolling interest		—		—		(4.2	)		—		—		—			—			(3.6	)		(7.8	)
Stock compensation plans, including tax benefits		0.1		—		42.6			—		—		—			—			—			42.6
Share repurchases		—		—		—			—		—		(9.4	)		(337.8	)		—			(337.8	)
Balance June 30, 2009		253.8	$	2.5	$	3,176.9		$	4,797.8	$	282.4		(39.5	)	$	(2,454.0	)	$	—		$	5,805.6

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

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions, unaudited)

	For the Six Months
	Ended June 30,
	2009			2008
Cash flows provided by (used in) operating activities:
Net earnings of Zimmer Holdings, Inc.	$	412.3		$	466.4
Adjustments to reconcile net earnings to cash provided by operating activities:
Depreciation and amortization		161.4			129.2
Net curtailment and settlement		(32.1	)		—
Gain on sale of investments		—			(8.7	)
Share-based compensation		40.1			39.4
Inventorystep-up		7.0			1.8
Income tax benefit from stock option exercises		0.2			10.0
Excess income tax benefit from stock option exercises		—			(6.0	)
Changes in operating assets and liabilities, net of effect of acquisitions:
Income taxes		4.8			(35.7	)
Receivables		(29.8	)		(81.9	)
Inventories		(51.8	)		(55.6	)
Accounts payable and accrued expenses		(119.4	)		87.6
Other assets and liabilities		(13.0	)		(23.2	)
Net cash provided by operating activities		379.7			523.3
Cash flows provided by (used in) investing activities:
Additions to instruments		(75.9	)		(119.5	)
Additions to other property, plant and equipment		(54.7	)		(121.5	)
Proceeds from sale of investments		—			12.0
Acquisition of intellectual property rights		(25.9	)		—
Investments in other assets		(17.8	)		(7.5	)
Net cash used in investing activities		(174.3	)		(236.5	)
Cash flows provided by (used in) financing activities:
Net borrowing under credit facilities		200.0			220.0
Proceeds from employee stock compensation plans		3.6			45.2
Excess income tax benefit from stock option exercises		—			6.0
Repurchase of common stock		(337.8	)		(640.2	)
Acquisition of noncontrolling interest		(7.8	)		—
Net cash used in financing activities		(142.0	)		(369.0	)
Effect of exchange rates on cash and cash equivalents		1.5			6.4
Increase in cash and cash equivalents		64.9			(75.8	)
Cash and cash equivalents, beginning of year		212.6			463.9
Cash and cash equivalents, end of period	$	277.5		$	388.1

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

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1.   Significant Accounting Policies

Basis of Presentation — The financial data presented herein is unaudited and should be read in conjunction with the consolidated financial statements and accompanying notes included in the 2008 Annual Report onForm 10-K filed by Zimmer Holdings, Inc. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented. The December 31, 2008 condensed balance sheet data was derived from audited financial statements (other than as it relates to the adjustments for the adoption of Statement of Financial Accounting Standards (SFAS) No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment to ARB 51” (SFAS No. 160) as described below), but does not include all disclosures required by accounting principles generally accepted in the United States of America. Results for interim periods should not be considered indicative of results for the full year. Certain amounts in the three and six month periods ended June 30, 2008 have been reclassified to conform to the current year presentation.

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

Noncontrolling Interests — On January 1, 2009, we adopted SFAS No. 160. SFAS No. 160 changes the accounting and reporting for minority interests, which are now recharacterized as noncontrolling interests and classified as a component of equity. SFAS No. 160 requires retroactive adoption of the presentation and disclosure requirements for existing noncontrolling interests. The adoption of SFAS No. 160 did not have a material impact on our consolidated financial statements or results of operations. During the six month period ended June 30, 2009, we acquired 100 percent ownership of our only outstanding noncontrolling interest for approximately $7.8 million. Under SFAS No. 160, this purchase is recorded as an equity transaction and is reflected as a financing activity in our consolidated statement of cash flows. As a result, the carrying balance of the noncontrolling interests of $3.6 million was eliminated and the remaining $4.2 million, representing the difference between the purchase price and carrying balance, was recorded as a reduction in paid-in capital. Transactions with noncontrolling interests had the following effect on equity attributable to Zimmer Holdings, Inc.:

	Three Months				Six Months
	Ended June 30,				Ended June 30,
	2009		2008		2009			2008
	(In millions)				(In millions)
Net earnings of Zimmer Holdings, Inc.	$	210.1	$	227.1	$	412.3		$	466.4
Transfers to noncontrolling interests:
Decrease in equity related to the purchase of noncontrolling interests		—		—		(4.2	)		—
Change from net earnings of Zimmer Holdings, Inc. and transfers to noncontrolling interests	$	210.1	$	227.1	$	408.1		$	466.4

Acquisition, Integration, Realignment and Other — We recognize incremental expenses resulting directly from our business combinations and significant nonrecurring and unusual items as “Acquisition, integration,

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

realignment and other” expenses. Acquisition, integration, realignment and other expenses for the three and six month periods ended June 30, 2009 and 2008 included (in millions):

	Three Months				Six Months
	Ended June 30,				Ended June 30,
	2009		2008		2009		2008
Impairment of assets	$	1.3	$	0.7	$	1.3	$	1.6
Consulting and professional fees		0.8		2.8		2.6		3.4
Employee severance and retention, including share-based compensation acceleration		16.6		—		16.8		—
Information technology integration		0.1		0.3		0.2		0.4
Facility and employee relocation		0.9		2.7		1.8		4.4
Vacated facilities		1.4		—		1.4		—
Distributor acquisitions		1.8		4.0		3.1		6.4
Certain litigation matters		4.8		—		4.8		—
Contract terminations		6.9		—		7.9		—
Other		1.9		2.0		3.6		3.6
Acquisition, Integration, Realignment and Other	$	36.5	$	12.5	$	43.5	$	19.8

During the three month period ended June 30, 2009, we commenced a global realignment initiative to focus on business opportunities that best support our strategic priorities. As part of this realignment, we initiated changes in our work force, including the elimination of positions in some areas and planned increases in others, to balance the requirements necessary to support long-term growth. Approximately 300 employees from across the globe were affected by these actions. As a result of these changes in our work force, we recorded an expense of $16.6 million related to severance and other employee termination-related costs. These termination benefits were provided in accordance with our existing or local government policies and are considered ongoing benefits. These costs were accrued when they became probable and estimable. We expect the majority of these costs to be paid by the end of the third quarter of 2009. Contract termination costs relate to terminated agreements in connection with the integration of acquired companies. Consulting and professional fees relate to third-party integration consulting performed in a variety of areas such as tax, compliance, logistics and human resources and fees related to matters involving severance and termination benefits.

Subsequent Events — In May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” which is effective for interim and annual periods ending after June 15, 2009. SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The statement introduces new terminology but is based on the same principles that previously existed in the auditing standards. SFAS No. 165 requires disclosure of the date through which management has evaluated subsequent events and whether that date represents the date the financial statements were issued or the date the financial statements were available to be issued. For the financial statements related to the three and six month periods ending June 30, 2009 and 2008 contained herein, management has evaluated subsequent events through August 7, 2009 representing the date these financial statements were issued.

Accounting Pronouncements — In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles,” which is effective for interim and annual periods ending after September 15, 2009. SFAS No. 168 defines a new hierarchy for U.S. GAAP and establishes the FASB Accounting Standards Codification as the sole source for authoritative guidance to be applied by nongovernmental entities. SFAS No. 168 replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” which was issued in May 2008. The adoption of SFAS No. 168 will change the manner in

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

which U.S. GAAP guidance is referenced, but it will not have any impact on our financial position or results of operations.

2.   Comprehensive Income

The reconciliation of net earnings to comprehensive income is as follows:

	Three Months						Six Months
	Ended						Ended
	June 30,						June 30,
	2009			2008			2009			2008
	(In millions)						(In millions)
Net Earnings	$	210.1		$	227.4		$	412.3		$	466.9
Other Comprehensive Income:
Foreign currency cumulative translation adjustments		88.9			5.8			47.2			129.9
Unrealized foreign currency hedge losses, net of tax		(34.7	)		(6.9	)		(12.4	)		(54.2	)
Reclassification adjustments on foreign currency hedges, net of tax		(6.2	)		17.5			(12.3	)		35.4
Unrealized gains / (losses) on securities, net of tax		(0.1	)		(7.6	)		(0.5	)		20.1
Prior service cost and unrecognized gains in actuarial assumptions, net of tax		5.8			2.0			20.4			1.7
Total Other Comprehensive Income		53.7			10.8			42.4			132.9
Comprehensive (Loss) Attributable to Noncontrolling Interest		—			(0.3	)		—			(0.5	)
Comprehensive Income Attributable to Zimmer Holdings, Inc.	$	263.8		$	237.9		$	454.7		$	599.3

3.   Abbott Spine Acquisition

In October 2008, we acquired Abbott Spine, a former subsidiary of Abbott Laboratories, for an aggregate value of approximately $363.0 million, including a $358.0 million cash purchase price after certain working capital adjustments and $5.0 million of direct acquisition costs. The acquisition was funded by approximately $253 million of cash on-hand and $110 million from new borrowings under our Senior Credit Facility.

In the three month period ended June 30, 2009, we completed our exit activity plans. This resulted in additional contract termination liabilities and changes to the preliminary fair values assigned to acquired inventory.

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of the Abbott Spine acquisition (in millions):

	As of
	October 16, 2008
Current assets	$	61.4
Property, plant and equipment		6.5
Instruments		17.5
Intangible assets subject to amortization:
Customer relationships (10 year useful life)		8.6
Developed technology (10 year useful life)		64.3
In-process research and development		38.5
Other assets		10.0
Goodwill		205.1
Total assets acquired		411.9
Current liabilities		19.5
Deferred taxes		29.4
Total liabilities assumed		48.9
Net assets acquired	$	363.0

Goodwill of $132.5 million, $69.9 million and $2.7 million was assigned to the Americas, Europe and Asia Pacific reporting segments, respectively. None of the goodwill is deductible for tax purposes.

4.   Inventories

	June 30,		December 31,
	2009		2008
	(In millions)
Finished goods	$	759.0	$	731.2
Work in progress		54.1		52.6
Raw materials		167.8		144.5
Inventories, net	$	980.9	$	928.3

5.   Property, Plant and Equipment

	June 30,			December 31,
	2009			2008
	(In millions)
Land	$	21.5		$	21.7
Buildings and equipment		1,090.9			992.7
Capitalized software costs		152.1			136.7
Instruments		1,188.6			1,161.7
Construction in progress		84.2			149.0
		2,537.3			2,461.8
Accumulated depreciation		(1,282.9	)		(1,197.7	)
Property, plant and equipment, net	$	1,254.4		$	1,264.1

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

6.   Other Current and Long-Term Liabilities

	June 30,		December 31,
	2009		2008
	(In millions)
Other current liabilities:
Certain claims (Note 13)	$	49.9	$	62.8
Accrued liabilities		458.9		515.3
Total other current liabilities	$	508.8	$	578.1
Other long-term liabilities:
Accrued retirement and postretirement benefit plans	$	46.4	$	129.9
Other long-term liabilities		287.4		224.0
Total other long-term liabilities	$	333.8	$	353.9

7.   Fair Value Measurement of Assets and Liabilities

On January 1, 2008, we adopted the provisions of SFAS No. 157 “Fair Value Measurements” (SFAS No. 157) as it relates to financial assets and liabilities recorded at fair value on a recurring basis. On January 1, 2009, we adopted the provisions of SFAS No. 157 as it relates to nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, that were previously delayed under Financial Accounting Standards Board Staff Position (FSP)No. 157-2. For the three and six month periods ended June 30, 2009, there were no nonrecurring fair value measurements made subsequent to initial recognition.

The following assets and liabilities are recorded at fair value on a recurring basis as of June 30, 2009 (in millions):

			Fair Value Measurements at Reporting Date Using:
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Recorded		Assets		Inputs		Inputs
	Balance		(Level 1)		(Level 2)		(Level 3)
Assets
Available-for-sale securities	$	0.6	$	0.6	$	—	$	—
Derivatives, current and long-term		25.2		—		25.2		—
	$	25.8	$	0.6	$	25.2	$	—
Liabilities
Derivatives, current and long-term	$	20.7	$	—	$	20.7	$	—
	$	20.7	$	—	$	20.7	$	—

Available-for-sale securities are valued using a market approach, based on quoted prices for the specific security from transactions in active exchange markets. Derivatives relate to foreign exchange forward contracts and foreign currency options entered into with various third parties. We value these instruments using a market approach based on foreign currency exchange rates obtained from active markets and perform an assessment of counterparty credit risk.

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

8.   Derivative Instruments and Hedging Activities

On January 1, 2009, we adopted SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities (an amendment of SFAS No. 133)” (SFAS No. 161). The adoption of SFAS No. 161 did not have a material impact on our consolidated financial statements or results of operations, but does require increased disclosure of our derivative and hedging activities, including how derivative and hedging activities affect our consolidated financial statements. These disclosures are provided below.

We are exposed to certain market risks relating to our ongoing business operations, including foreign currency 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 risk that we manage through the use of derivative instruments is foreign currency risk.

We operate on a global basis and are exposed to the risk that our financial condition, results of operations and cash flows could be adversely affected by changes in foreign currency exchange rates. To reduce the potential effects of foreign exchange rate movements on net earnings, we enter into derivative financial instruments in the form of foreign 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 and Swedish Krona. We do not use derivative financial instruments for trading or speculative purposes.

We account for derivative instruments in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133), as amended by SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities (an amendment of FASB Statement No. 133),” SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” and SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities (an amendment of FASB statement No. 133).” SFAS No. 133 requires that all derivative instruments be reported as assets or liabilities on the balance sheet and measured at fair value.

Derivatives Designated as Hedging Instruments

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 exchange rates may have different proportional effects on our revenues compared to our cost of products sold. To minimize the effects of foreign exchange rate movements on cash flows, we hedge intercompany sales of inventory expected to occur within the next 30 months with foreign exchange forward contracts and options. We designate these derivative instruments as cash flow hedges. We have not entered into any derivative instruments designated as fair value or net investment in foreign operation 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 reported in cost of products sold immediately. The net amount recognized in earnings during the three and six month periods ended June 30, 2009 and 2008 due to ineffectiveness and amounts excluded from the assessment of hedge effectiveness was not significant.

For forward contracts and options outstanding at June 30, 2009, we have obligations to purchase U.S. Dollars and sell Euros, Japanese Yen, British Pounds, Canadian Dollars, Australian Dollars, Korean Won and Swedish Krona and purchase Swiss Francs and sell U.S. Dollars at set maturity dates ranging from July 2009 through December 2011. The notional amounts of outstanding forward contracts and options entered into with third parties

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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

to purchase U.S. Dollars at June 30, 2009 were $1,123 million. The notional amounts of outstanding forward contracts entered into with third parties to purchase Swiss Francs at June 30, 2009 were $251 million.

As of June 30, 2009 and December 31, 2008, all derivative instruments designated as cash flow hedges are recorded at fair value on the balance sheet. On our consolidated balance sheet, we recognize individual forward contracts and options with the same counterparty on a net asset/liability basis if we have a master netting agreement with the counterparty. The fair value of derivative instruments on a gross basis as of June 30, 2009 and December 31, 2008 is as follows (in millions):

	2009			2008
	Balance			Balance
	Sheet	Fair		Sheet	Fair
	Location	Value		Location	Value
Asset Derivatives
Foreign exchange forward contracts	Other current assets	$	34.9	Other current assets	$53.7
Foreign exchange options	Other current assets		2.2	Other current assets	4.6
Foreign exchange forward contracts	Other assets		10.3	Other assets	30.3
Total asset derivatives		$	47.4		$88.6
Liability Derivatives
Foreign exchange forward contracts	Other current liabilities	$	24.6	Other current liabilities	$34.4
Foreign exchange forward contracts	Other long-term liabilities		18.3	Other long-term liabilities	17.7
Total liability derivatives		$	42.9		$52.1

The fair value of outstanding derivative instruments recorded on the balance sheet at June 30, 2009, together with settled derivatives where the hedged item has not yet affected earnings, was a net unrealized gain of $6.8 million, or $8.3 million net of taxes, which is deferred in other comprehensive income, of which $14.0 million, or $13.2 million net of taxes, is expected to be reclassified to earnings over the next twelve months.

The following gross unrealized losses from derivative instruments were recognized in other comprehensive income on our consolidated balance sheet (in millions):

	Three Months						Six Months
	Ended June 30,						Ended June 30,
Derivative Instrument	2009			2008			2009			2008
Foreign exchange forward contracts	$	(42.8	)	$	(6.7	)	$	(11.7	)	$	(67.1	)
Foreign exchange options		(1.1	)		—			(0.9	)		—
Total	$	(43.9	)	$	(6.7	)	$	(12.6	)	$	(67.1	)

The following gross realized gains / (losses) from derivative instruments were reclassified from other comprehensive income on our consolidated balance sheet to cost of products sold on our consolidated statement of earnings (in millions):

	Three Months					Six Months
	Ended June 30,					Ended June 30,
Derivative Instrument	2009		2008			2009		2008
Foreign exchange forward contracts	$	6.4	$	(22.6	)	$	10.7	$	(42.0	)
Foreign exchange options		0.3		—			0.9		—
Total	$	6.7	$	(22.6	)	$	11.6	$	(42.0	)

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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Derivatives Not Designated as Hedging Instruments

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 under SFAS No. 52, “Foreign Currency Translation” (SFAS No. 52) 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 $900 million to $1,100 million per quarter.

The following losses from these derivative instruments were recognized in cost of products sold on our consolidated statement of earnings (in millions):

	Three Months						Six Months
	Ended June 30,						Ended June 30,
Derivative Instrument	2009			2008			2009			2008
Foreign exchange forward contracts	$	(5.9	)	$	(0.1	)	$	(3.3	)	$	(3.0	)
Total	$	(5.9	)	$	(0.1	)	$	(3.3	)	$	(3.0	)

This impact does not include any offsetting gains/losses recognized in earnings under SFAS No. 52.

9.   Income Taxes

Our U.S. federal returns for years 2003 through 2007 are under examination by the Internal Revenue Service (IRS). Certain issues in the audit covering 2003 and 2004 have been disputed and are currently being evaluated by the IRS Appeals Office. Although ultimate resolution could take several years, we do not anticipate the conclusion of the audit will result in any significant impact on our results of operations, financial position or cash flows.

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

The components of net pension expense for the three and six month periods ended June 30, 2009 and 2008, for our U.S. andnon-U.S. defined benefit retirement plans are as follows (in millions):

	Three Months						Six Months
	Ended						Ended
	June 30,						June 30,
	2009			2008			2009			2008
Service cost	$	5.9		$	6.3		$	12.8		$	12.6
Interest cost		3.7			4.4			8.6			9.0
Expected return on plan assets		(5.3	)		(5.6	)		(12.2	)		(11.6	)
Amortization of unrecognized prior service cost and actuarial loss		1.3			0.8			3.0			1.5
Curtailment		0.4			—			0.4			—
Settlement		—			2.6			—			2.6
Net periodic benefit cost	$	6.0		$	8.5		$	12.6		$	14.1

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We contributed approximately $40 million during the six month period ended June 30, 2009 to our U.S. and Puerto Rico defined benefit plans and do not expect to make any additional contributions to these plans during the remainder of 2009. We contributed approximately $6 million to our foreign-based defined benefit plans in the six month period ended June 30, 2009 and expect to contribute an additional $8 million to these foreign-based plans during the remainder of 2009.

During the three month period ended June 30, 2009, we amended the postretirement healthcare benefit plans for certain U.S. and Puerto Rico employees. Participants in the plan between the ages of 55 and 65 that were previously receiving benefits will continue to receive benefits until reaching the age of 65. For all other participants in the plan, no benefits will be paid after January 1, 2010. Additionally, we funded approximately $7 million to a Voluntary Employees’ Beneficiary Association (“VEBA”) trust to settle any future obligations. We recognized a curtailment gain and settlement loss related to these actions under SFAS No. 88, “Employers’ Accounting for Settlement and Curtailments of Defined Benefit Pension Plans and for Terminated Benefits.”

The components of net periodic benefit expense for the three and six month periods ended June 30, 2009 and 2008, for our U.S. and Puerto Rico postretirement benefit plans are as follows (in millions):

	Three Months						Six Months
	Ended						Ended
	June 30,						June 30,
	2009			2008			2009			2008
Service cost	$	0.4		$	0.4		$	0.8		$	0.8
Interest cost		0.7			0.6			1.3			1.2
Amortization of unrecognized prior service cost		(0.1	)		(0.1	)		(0.2	)		(0.2	)
Amortization of unrecognized actuarial loss		0.1			0.1			0.3			0.2
Settlement		3.2			—			3.2			—
Curtailment		(35.3	)		—			(35.3	)		—
Net periodic benefit cost	$	(31.0	)	$	1.0		$	(29.9	)	$	2.0

11.   Earnings Per Share

The following is a reconciliation of weighted average shares for the basic and diluted shares computations (in millions):

	Three Months				Six Months
	Ended June 30,				Ended June 30,
	2009		2008		2009		2008
Weighted average shares outstanding for basic net earnings per share		214.7		228.4		218.1		230.5
Effect of dilutive stock options and other equity awards		0.8		1.1		0.7		1.2
Weighted average shares outstanding for diluted net earnings per share		215.5		229.5		218.8		231.7

During the three and six month periods ended June 30, 2009, an average of 14.0 million options and 15.2 million options, respectively, to purchase shares of common stock were not included in the computation of diluted earnings per share as the exercise prices of these options were greater than the average market price of the common stock. During the three and six month periods ended June, 2008, an average of 9.6 million options and 9.2 million options, respectively, were not included.

In the three month period ended June 30, 2009, we repurchased approximately 0.8 million shares of our common stock at an average price of $45.24 per share for a total cash outlay of $36.4 million, including

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

commissions. In the six month period ended June 30, 2009, we repurchased approximately 9.4 million shares of our common stock at an average price of $35.82 per share for a total cash outlay of $337.8 million, including commissions. In April 2008, we announced that our Board of Directors authorized a $1.25 billion share repurchase program which expires December 31, 2009. Approximately $796.7 million remains authorized under this plan.

12.   Segment Information

We design, develop, manufacture and market orthopaedic reconstructive implants, dental implants, spinal implants, trauma products and related surgical products which include surgical supplies and instruments designed to aid in surgical procedures and post-operation rehabilitation. We also provide other healthcare related services. Revenue related to these other healthcare related services currently represents less than 1 percent of our total net sales. We manage operations through three major geographic segments — the Americas, which is comprised principally of the United States and includes other North, Central and South American markets; Europe, which is comprised principally of Europe and includes the Middle East and Africa; 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 operating segment performance based upon segment operating profit exclusive of operating expenses pertaining to global operations and corporate expenses, share-based compensation, acquisition, integration, realignment and other, net curtailment and settlement, inventorystep-up and intangible asset amortization expense. Global operations include research, development engineering, medical education, brand management, corporate legal, finance, and human resource functions, and U.S. and Puerto Rico based manufacturing operations and logistics. Intercompany transactions have been eliminated from segment operating profit. Net sales and segment operating profit are as follows (in millions):

	Net Sales				Operating Profit
	Three Months				Three Months
	Ended				Ended
	June 30,				June 30,
	2009		2008		2009			2008
Americas	$	589.6	$	594.5	$	296.0		$	310.8
Europe		280.4		325.8		108.2			127.0
Asia Pacific		149.9		159.2		69.7			69.8
Total	$	1,019.9	$	1,079.5
Share-based compensation						(21.5	)		(24.5	)
Inventorystep-up						(2.8	)		(1.5	)
Acquisition, integration, realignment and other						(36.5	)		(12.5	)
Net curtailment and settlement						32.1			—
Global operations and corporate functions						(148.7	)		(160.7	)
Operating profit					$	296.5		$	308.4

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Net Sales				Operating Profit
	Six Months				Six Months
	Ended				Ended
	June 30,				June 30,
	2009		2008		2009			2008
Americas	$	1,184.2	$	1,201.6	$	585.7		$	623.8
Europe		545.5		631.3		225.1			255.3
Asia Pacific		282.8		305.8		119.5			135.1
Total	$	2,012.5	$	2,138.7
Share-based compensation						(38.6	)		(39.4	)
Inventorystep-up						(7.0	)		(1.8	)
Acquisition, integration, realignment and other						(43.5	)		(19.8	)
Net curtailment and settlement						32.1			—
Global operations and corporate functions						(297.0	)		(313.2	)
Operating profit					$	576.3		$	640.0

Beginning in 2009, we no longer include our Dental product category sales within our Reconstructive products category. Prior year amounts related to Dental product category sales have been reclassified to conform to the current year presentation. Net sales by product category are as follows (in millions):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2009		2008		2009		2008
Reconstructive implants	$	780.0	$	841.1	$	1,541.6	$	1,656.6
Dental		52.7		63.3		100.1		119.1
Trauma		56.7		54.9		113.6		110.6
Spine		64.2		54.3		128.8		108.3
OSP and other		66.3		65.9		128.4		144.1
Total	$	1,019.9	$	1,079.5	$	2,012.5	$	2,138.7

13.   Commitments and Contingencies

Intellectual Property and Product Liability-Related Litigation

In July 2008, we temporarily suspended marketing and distribution of theDurom^® Acetabular Component(DuromCup)in the U.S. Following our announcement, product liability lawsuits and other claims have been asserted against us, some of which we have settled. There are a number of claims still pending and we expect additional claims will be submitted. We recorded a provision of $69.0 million in 2008, representing management’s estimate of theseDuromCup-related claims. The current reserve is $49.9 million. The provision is limited to revisions within two years of an original surgery that occurred prior to July 2008. These parameters are consistent with our data which indicates that cup loosenings associated with surgical technique are most likely to occur within that time period. Any claims received outside of these defined parameters will be managed in the normal course and reflected in our standard product liability accruals.

On February 15, 2005, Howmedica Osteonics Corp. filed an action against us and an unrelated party in the United States District Court for the District of New Jersey alleging infringement of U.S. Patent Nos. 6,174,934; 6,372,814; 6,664,308; and 6,818,020. On June 13, 2007, the Court granted our motion for summary judgment on the invalidity of the asserted claims of U.S. Patent Nos. 6,174,934; 6,372,814; and 6,664,308 by ruling that all of the asserted claims are invalid for indefiniteness. On August 19, 2008, the Court granted our motion for summary

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

judgment of non-infringement of certain claims of U.S. Patent No. 6,818,020, reducing the number of claims at issue in the suit to five. On April 9, 2009, in response to our earlier petition, the U.S. Patent and Trademark Office instituted re-examination proceedings against U.S. Patent No. 6,818,020. The U.S. Patent and Trademark Office rejected all previously issued claims of U.S. Patent No. 6,818,020 as being unpatentable in light of one or more prior art references. We continue to believe that our defenses against infringement are valid and meritorious, and we intend to continue to defend this lawsuit vigorously.

In addition to certain claims related to theDuromCup within the parameters discussed above, we are also subject to product liability and other claims and lawsuits arising in the ordinary course of business, for which we maintain insurance, subject to self-insured retention limits. We establish accruals for product liability and other claims in conjunction with outside counsel based on current information and historical settlement information for open claims, related fees and claims incurred but not reported. While it is not possible to predict with certainty the outcome of these cases, it is the opinion of management that, upon ultimate resolution, liabilities from these cases in excess of those recorded, if any, will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Government Investigations

In September 2007, we and other orthopaedic companies settled a U.S. government investigation pertaining to consulting contracts, professional service agreements and other agreements by which remuneration is provided to orthopaedic surgeons. As part of the settlement, we entered into a Corporate Integrity Agreement (the “CIA”) with the Office of Inspector General of the Department of Health and Human Services (the “OIG-HHS”). Under the CIA, which has a term expiring in 2012, we agreed, among other provisions, to continue the operation of our enhanced Corporate Compliance Program, designed to promote compliance with federal healthcare program requirements, in accordance with the terms set forth in the CIA. We also agreed to retain an independent review organization to perform annual reviews to assist us in assessing our compliance with the obligations set forth in the CIA to ensure that arrangements we enter into do not violate the Anti-Kickback Statute (42 U.S.C.§ 1320a-7b). A material breach of the CIA may subject us to exclusion by OIG-HHS from participation in all federal healthcare programs, which would have a material adverse effect on our financial position, results of operations and cash flows.

In November 2007, we received a civil investigative demand from the Massachusetts Attorney General’s office seeking additional information regarding our financial relationships with a number of Massachusetts healthcare providers. We received a similar inquiry from the Oregon Attorney General’s office in October 2008. We are cooperating fully with the investigators with regard to these matters.

In September 2007, the Staff of the U.S. Securities and Exchange Commission (“SEC”) informed us that it was conducting an informal investigation regarding potential violations of the Foreign Corrupt Practices Act in the sale of medical devices in a number of foreign countries by companies in the medical device industry. We understand that at least four other medical device companies received similar letters. We are fully cooperating with the SEC and the U.S. Department of Justice with regard to this informal investigation. We are currently conducting our own reviews regarding Foreign Corrupt Practices Act compliance and such reviews are ongoing.

Derivative Actions and Class Actions

On April 24, 2008, a complaint was filed in the U.S. District Court for the Southern District of New York, Thorpe v. Zimmer, Inc., et al., naming us and two of our subsidiaries as defendants. The complaint relates to a putative class action on behalf of certain residents of New York who had hip or knee implant surgery involving Zimmer products during an unspecified period. The complaint alleges that our relationships with orthopaedic surgeons and others violated the New York deceptive practices statute and unjustly enriched us. The plaintiff requests actual damages or $50.00, whichever is greater, on behalf of each class member, a permanent injunction from our engaging in allegedly improper practices in the future and restitution in an unspecified amount. We believe this lawsuit is without merit, and we intend to defend it vigorously.

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On August 5, 2008, a complaint was filed in the U.S. District Court for the Southern District of Indiana, Plumbers and Pipefitters Local Union 719 Pension Fund v. Zimmer Holdings, Inc., et al., naming us and two of our executive officers as defendants. The complaint relates to a putative class action on behalf of persons who purchased our common stock between January 29, 2008 and July 22, 2008. The complaint alleges that the defendants violated the federal securities law by allegedly failing to disclose developments relating to our orthopaedic surgical products manufacturing operations in Dover, Ohio and problems relating to theDuromCup. The plaintiff seeks unspecified damages and interest, attorneys’ fees, costs and other relief. On December 24, 2008, the lead plaintiff filed a consolidated complaint that alleges the same claims and relates to the same time period. The defendants filed a motion to dismiss the consolidated complaint on February 23, 2009. The motion to dismiss is pending with the court. We believe this lawsuit is without merit, and we and the individual defendants intend to defend it vigorously.

On August 15, 2008, a shareholder derivative action, Hays v. Dvorak et al., was filed in the U.S. District Court for the Southern District of Indiana. The plaintiff seeks to maintain the action purportedly on our behalf against certain of our current and former directors and twonon-director executive officers. The plaintiff alleges, among other things, breaches of fiduciary duties, abuse of control, unjust enrichment and gross mismanagement by the named defendants based on substantially the same factual allegations as the putative federal securities class action referenced above brought by the Plumbers and Pipefitters Local Union 719 Pension Fund. The plaintiff does not seek damages from us, but instead requests damages of an unspecified amount on our behalf. The plaintiff also seeks equitable relief to remedy the individual defendants’ alleged misconduct, attorneys’ fees, costs and other relief. On June 9, 2009, the plaintiff requested an extension of time to file an amended complaint until September 8, 2009. The court has not ruled on that request. The defendants will respond to an amended complaint when one is filed.

On November 20, 2008, a complaint was filed in the U.S. District Court for the Northern District of Indiana, Dewald v. Zimmer Holdings, Inc., et al., naming us and certain of our current and former directors and employees as defendants. The complaint relates to a putative class action on behalf of all persons who were participants in or beneficiaries of our U.S. or Puerto Rico Savings and Investment Programs (“plans”) between October 5, 2007 and the date of filing and whose accounts included investments in our common stock. The complaint alleges, among other things, that the defendants breached their fiduciary duties in violation of the Employee Retirement Income Security Act of 1974, as amended, by continuing to offer Zimmer stock as an investment option in the plans when the stock purportedly was no longer a prudent investment and that defendants failed to provide plan participants with complete and accurate information sufficient to advise them of the risks of investing their retirement savings in Zimmer stock. The plaintiff seeks an unspecified monetary payment to the plans, injunctive and equitable relief, attorneys’ fees, costs and other relief. On January 23, 2009, the plaintiff filed an amended complaint that alleges the same claims and clarifies that the class period is October 5, 2007 through September 2, 2008. The defendants filed a motion to dismiss the amended complaint on March 23, 2009. The motion to dismiss is pending with the court. On June 12, 2009, the U.S. Judicial Panel on Multidistrict Litigation entered an order transferring the Dewald case to the U.S. District Court for the Southern District of Indiana for coordinated or consolidated pretrial proceedings with the Plumbers & Pipefitters Local Union 719 Pension Fund case and the Hays case referenced above. We believe this lawsuit is without merit, and we and the individual defendants intend to defend it vigorously.

19

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a global leader in the design, development, manufacture and marketing of orthopaedic reconstructive implants, dental implants, spinal implants, trauma products and related surgical products (sometimes referred to in this report as “OSP”). We also provide other healthcare related services. Reconstructive orthopaedic implants restore joint function lost due to disease or trauma in joints such as knees, hips, shoulders and elbows. Dental implants restore function and aesthetics in patients that have lost teeth due to trauma or disease. Spinal implants 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. OSP includes supplies and instruments designed to aid in predominantly orthopaedic surgical procedures and post-operation rehabilitation. We have operations in more than 25 countries and market products in more than 100 countries. We manage operations through three reportable geographic segments — the Americas, Europe and Asia Pacific.

Certain percentages presented in Management’s Discussion and Analysis are calculated from the underlying whole-dollar amounts and therefore may not recalculate from the rounded numbers used for disclosure purposes. In addition, certain amounts in the 2008 consolidated financial statements have been reclassified to conform to the 2009 presentation. Beginning in 2009, we no longer include our Dental product category sales within our Reconstructive products category. Prior year amounts related to Dental product category sales have been reclassified to conform to the current year presentation.

We believe the following developments or trends are important in understanding our financial condition, results of operations and cash flows for the three and six month periods ended June 30, 2009 and our expected results for the remainder of 2009.

Demand (Volume and Mix) Trends

Volume and mix of products were flat during the three month period ended June 30, 2009, compared to 5 percent of sales growth in the same 2008 period. The sales growth rate declined from the 2008 period due to lower volume as a result of a weaker global economy and the ongoing effects of the disruptive factors experienced during 2008 as discussed below.

We believe the market for orthopaedic procedure volume temporarily decelerated from mid single digit growth rates to low single digit growth rates on a global basis due to the weakened global economy. We believe long-term market growth rates will be driven by an aging global population, obesity, proven clinical benefits, new material technologies, advances in surgical techniques and more active lifestyles, among other factors. In addition, the ongoing shift in demand to premium products, such asLongevity^® andProlong^® Highly Crosslinked Polyethylenes,Trabecular Metal^TM Technology products, hip stems withKinectiv^® Technology, high-flex knees, knee revision products, porous hip stems and the introduction of gender-based devices continues to positively affect sales growth.

Pricing Trends

Global selling prices decreased 1 percent for the three month period ended June 30, 2009, compared to flat pricing in the same 2008 period. Selling prices in the Americas decreased 1 percent during the three month period ended June 30, 2009, compared to a 1 percent increase in the same 2008 period. In Europe, selling prices for the three month period ended June 30, 2009 were flat, which is similar to the same 2008 period. Asia Pacific selling prices decreased 1 percent for the three month period ended June 30, 2009, compared to a 3 percent decrease in the same 2008 period, as we anniversaried out of scheduled reductions in reimbursement prices in Japan during the quarter. Japan currently represents approximately 8 percent of our sales. With the effect of governmental healthcare cost containment efforts and continuing pressure from local hospitals and health systems, we expect selling prices will be down approximately 1 percent on a global basis for 2009.

20

Foreign Currency Exchange Rates

For the three month period ended June 30, 2009, foreign currency exchange rates resulted in a 5 percent decline in sales. We estimate that an overall stronger U.S. Dollar versus foreign currency exchange rates will have a negative effect of approximately 3 percent on sales for the year ending December 31, 2009. We address currency risk through regular operating and financing activities, and under appropriate circumstances and subject to proper authorization, through the use of forward contracts and foreign currency options solely for managing foreign currency volatility and risk. Changes to foreign currency exchange rates affect sales growth, but due to offsetting gains/losses on hedge contracts, which are recorded in cost of products sold, the effect on net earnings in the near term is expected to be minimal.

Disruptive Events

We believe that we have suffered customer losses as a result of disruptive factors experienced during 2008, including our temporary suspension of U.S. marketing and distribution of theDurom Cup, our voluntary recall and suspension of production of certain OSP patient care products and the implementation of our enhanced global compliance initiatives. We estimated that these customer losses reduced our global knee market share by approximately 1.5 percent and hip market share by approximately 2.0 percent on a cumulative basis through the end of 2008. We believe these share losses have stabilized during the first half of 2009 and expect this stabilization to continue as we anniversary out of the majority of the 2008 customer and product-related losses and as we launch new products in sufficient quantities to recover some of the product-related losses. However, we expect our sales growth will continue to be at a rate slower than the market in the near term due to these disruptive factors.

Global Economic Conditions

We believe conditions in the broader economy have resulted in a temporary slowdown in elective hospital procedures. Although many of our products are used in elective procedures, we believe our core knee and hip franchises remain more insulated than many medical product categories from swings in the broader economy because the need for these procedures does not diminish, even if the timing is affected. In particular, our dental revenues have experienced pressure due to the weak economic environment as many of those procedures are not reimbursed by third-party payors.

Second Quarter Results of Operations

Net Sales by Operating Segment

The following table presents net sales by operating segment and the components of the percentage changes (dollars in millions):

	Three Months
	Ended
	June 30,							Volume/						Foreign
	2009		2008		% (Dec)			Mix			Price			Exchange
Americas	$	589.6	$	594.5		(1	)%		1	%		(1	)%		(1	)%
Europe		280.4		325.8		(14	)		(1	)		—			(13	)
Asia Pacific		149.9		159.2		(6	)		(1	)		(1	)		(4	)
	$	1,019.9	$	1,079.5		(6	)		—			(1	)		(5	)

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

21

Net Sales by Product Category

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

	Three Months
	Ended
	June 30,							Volume/						Foreign
	2009		2008		% Inc (Dec)			Mix			Price			Exchange
Reconstructive
Knees	$	438.2	$	467.3		(6	)%		—	%		(1	)%		(5	)%
Hips		308.1		342.7		(10	)		(3	)		(1	)		(6	)
Extremities		33.7		31.1		8			13			—			(5	)
Total		780.0		841.1		(7	)		(1	)		(1	)		(5	)
Dental		52.7		63.3		(17	)		(12	)		—			(5	)
Trauma		56.7		54.9		3			5			2			(4	)
Spine		64.2		54.3		18			20			3			(5	)
OSP and other		66.3		65.9		1			3			—			(2	)
Total	$	1,019.9	$	1,079.5		(6	)		—			(1	)		(5	)

TheNexGen^® Complete Knee Solution product line, includingGender Solutions^TM Knee Femoral Implants, theNexGenLPS-Flex Knee, theNexGenCR-Flex Knee and theNexGenLCCK Revision Knee, led knee sales. In addition, theGender Solutions Natural-KneeFlex System made a strong contribution.

The continued conversion to porous stems, including theZimmer^® M/L Taper Stem, theZimmerM/L Taper Stem withKinectivTechnology, theCLS^®Spotorno^® Stem from theCLSHip System,and theAlloclassic^®Zweymüller^® Hip Stem, led hip stem sales, but was partially offset by weaker sales of cemented stems.Trabecular MetalAcetabular Cups andLongevityHighly Crosslinked Polyethylene Liners also made strong contributions. The temporary suspension of marketing and distribution of theDuromCup in the U.S. announced in the second half of 2008 negatively impacted hip sales growth. Additionally, with the lack of a hip resurfacing product within our U.S. hip portfolio, we face a continuing challenge in hip sales growth with the adoption of hip resurfacing in the U.S. market.

TheBigliani/Flatow^® Complete Shoulder Solution and theZimmer Trabecular Metal Reverse Shoulder System led extremities sales. Negative sales growth for our dental business reflects disruptions caused by the implementation of our enhanced compliance initiatives and overall weakness in the global economy.Zimmer Periarticular Locking Plates and theI.T.S.T.^TM Intertrochanteric/Subtrochanteric Fixation System led trauma sales. In the fourth quarter of 2008, we acquired Abbott Spine. As a result of the acquisition, spine sales have increased but reflect sales dis-synergies associated with the integration of the business. OSP sales were led byPALACOS^®1 Bone Cement.

¹ Trademark of Heraeus Kulzer GmbH

22

Americas Net Sales

The following table presents Americas net sales (dollars in millions):

	Three Months
	Ended
	June 30,
	2009		2008		% Inc (Dec)
Reconstructive
Knees	$	271.7	$	279.9		(3	)%
Hips		143.3		149.1		(4	)
Extremities		25.8		21.7		19
Total		440.8		450.7		(2	)
Dental		26.0		29.3		(11	)
Trauma		31.2		30.9		1
Spine		48.5		42.2		15
OSP and other		43.1		41.4		4
Total	$	589.6	$	594.5		(1	)

TheNexGenComplete Knee Solution product line, including theGender SolutionsKnee Femoral Implants,NexGenLPS-Flex Knee, theNexGenLCCK Revision Knee and theNexGenCR-Flex Knee, led knee sales. TheGender Solutions Natural-KneeFlex System also made a strong contribution.

Porous stems, including theZimmerM/L Taper Stem and theZimmerM/L Taper Stem withKinectiv Technology, led hip stem sales.Trabecular MetalAcetabular Cups andLongevityHighly Crosslinked Polyethylene Liners also made a strong contribution. As noted above, the temporary suspension of marketing and distribution of theDuromCup in the U.S. has continued to negatively impact hip sales and the adoption of hip resurfacing in the U.S. market will continue to adversely affect our hip sales growth.

As a result of the ongoing effects of the disruptive events discussed above, we suffered customer losses. These customer losses negatively impacted sales growth, primarily in the knee and hip product categories. However, we believe these losses stabilized during the first half of 2009.

TheBigliani/FlatowShoulder Solution and theZimmer Trabecular MetalReverse Shoulder System led extremities sales. Negative sales growth for our dental business reflects disruptions caused by the implementation of our enhanced compliance initiatives and overall weakness in the U.S. economy.ZimmerPeriarticular Plates and theI.T.S.T.Intertrochanteric/Subtrochanteric Fixation System led trauma sales. Spine sales increased as a result of the Abbott Spine acquisition completed in the fourth quarter of 2008. OSP sales were led byPALACOSBone Cement.

23

Europe Net Sales

The following table presents Europe net sales (dollars in millions):

	Three Months
	Ended
	June 30,
	2009		2008		% Inc (Dec)
Reconstructive
Knees	$	108.0	$	125.1		(14	)%
Hips		111.5		137.7		(19	)
Extremities		6.0		7.4		(19	)
Total		225.5		270.2		(16	)
Dental		20.4		24.4		(17	)
Trauma		12.7		12.7		—
Spine		12.0		9.6		25
OSP and other		9.8		8.9		9
Total	$	280.4	$	325.8		(14	)

Changes in foreign exchange rates negatively affected both knee and hip sales by 13 percent. TheNexGenComplete Knee Solution product line, including theNexGenLPS-Flex Knee, theNexGenLCCK Revision Knee and theNexGenCR-Flex Knee, led knee sales in our Europe region.

Porous stems, including theCLS SpotornoStem andAlloclassic ZweymüllerStem, led hip stem sales.LongevityHighly Crosslinked Polyethylene Liners,Trabecular MetalAcetabular Cups and theAllofit^®Hip Acetabular System also contributed to hip sales.

As a result of the ongoing effect of the disruptive events discussed above, we suffered customer losses. These customer losses negatively impacted sales growth, primarily in the knee and hip product categories. However, we believe these losses stabilized during the first half of 2009.

TheAnatomical ShoulderSystem and the Coonrad/Morrey Total Elbow led extremities sales. TheTapered Screw-VentImplant System led dental sales. TheCable-Ready^®Cable Grip System and theNCB Plating System led trauma sales. Spine sales increased as a result of the Abbott Spine acquisition completed in the fourth quarter of 2008. Patient care products led OSP sales.

Asia Pacific Net Sales

The following table presents Asia Pacific net sales (dollars in millions):

	Three Months
	Ended
	June 30,
	2009		2008		% Inc (Dec)
Reconstructive
Knees	$	58.5	$	62.3		(6	)%
Hips		53.3		55.9		(4	)
Extremities		1.9		2.0		(7	)
Total		113.7		120.2		(5	)
Dental		6.3		9.6		(34	)
Trauma		12.8		11.3		13
Spine		3.7		2.5		51
OSP and other		13.4		15.6		(13	)
Total	$	149.9	$	159.2		(6	)

24

Changes in foreign exchange rates negatively affected knee and hip sales by 6 percent and 2 percent, respectively. TheNexGenComplete Knee Solution product line, theNexGenCR-Flex Knee and theNexGenLPS-Flex Knee led knee sales. TheGender SolutionsKnee Femoral Implant also made a strong contribution to knee sales for the period.

Porous stems, including the Fiber Metal Taper Stem from theVerSys^® Hip System and theAlloclassic ZweymüllerHip System, drove hip stem sales. Sales ofLongevityHighly Crosslinked Polyethylene Liners, theTrilogyAcetabular System andTrabecular MetalAcetabular Cups also contributed to hip sales.

As a result of the ongoing effects of the disruptive events discussed above, we suffered customer losses. These customer losses negatively impacted sales growth, primarily in the knee and hip product categories. However, we believe these losses stabilized during the first half of 2009.

TheBigliani/FlatowShoulder Solution and the Coonrad/Morrey Total Elbow led extremities sales. Negative sales growth for our dental business reflects an overall weakness in the global economy. TheTapered Screw-VentImplant System led dental sales. Trauma sales were led by theI.T.S.T.Intertrochanteric/Subtrochanteric Fixation System. Spine sales increased as a result of the Abbott Spine acquisition completed in the fourth quarter of 2008. OSP sales were negatively affected by the loss of certain distribution agreements related to various products in the region.

Gross Profit

Gross profit as a percentage of net sales was 76.8 percent in the three month period ended June 30, 2009, compared to 75.7 percent in the same 2008 period. The primary contributor to the increase in gross profit margin was foreign currency hedge gains recognized in 2009 compared to hedge losses recognized in the 2008 period. Under our 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 item affects earnings. These hedge gains were partially offset by an increase in excess inventory and obsolescence charges due to increased inventory levels as well as increased inventorystep-up as a result of the Abbott Spine acquisition.

Operating Expenses

Research and Development, or R&D, as a percentage of net sales was 4.9 percent for the three month period ended June 30, 2009, compared to 4.5 percent in the same 2008 period. R&D expense increased to $49.9 million for the three month period ended June 30, 2009, from $48.3 million in the same 2008 period, reflecting increased spending on certain development, clinical and external research activities compared to the delay in activities experienced in 2008 as we implemented our enhanced compliance program. We expect R&D spending in 2009 to return to our historical average of 5-6 percent of sales.

Selling, general and administrative, or SG&A, as a percentage of net sales was 42.4 percent for the three month period ended June 30, 2009, compared to 41.5 percent in the same 2008 period. SG&A expense decreased to $432.3 million for the three month period ended June 30, 2009, from $448.0 million in the same 2008 period. SG&A expense for the 2008 period included approximately $20 million of costs such as monitor fees and consulting and legal fees associated with the global roll-out of our enhanced compliance program. In this challenging economic environment, we are carefully managing our SG&A spend, reducing expenses in certain areas in order to fund growth and productivity initiatives. Areas of investment include marketing and promotion and medical education and training. The acquisition of Abbott Spine increased SG&A costs for items such as selling expenses, increased instrument depreciation and amortization of the acquired intangible assets. Additionally, SG&A as a percent of sales is negatively impacted by the significant decrease in revenues caused by changes in foreign currency rates. A majority of our SG&A spend is incurred in the U.S., primarily from our corporate headquarters and similar functions at our various businesses such as Dental, Trauma, Spine and OSP. Therefore, SG&A expense does not respond to changes in foreign currency rates proportionally to our revenue, which has caused SG&A as a percent of sales to increase.

25

Acquisition, integration, realignment and other expenses for the three month period ended June 30, 2009 were $36.5 million, compared to $12.5 million in the same 2008 period. During the 2009 period, we initiated a workforce realignment, which included the elimination of positions in some areas and planned increases in others, to balance the requirements necessary to support long-term growth. As a result of this realignment, we incurred approximately $16.6 million of severance and termination-related expenses. Other items contributing to the increase include $6.9 million of expenses related to contract termination costs, $4.8 million of certain litigation matters that were recognized during the period and various costs incurred to integrate the Abbott Spine business acquired in the fourth quarter of 2008.

We recognized a net curtailment and settlement gain of $32.1 million during the three month period ended June 30, 2009 related to amending our U.S. and Puerto Rico postretirement benefit plans. For more information regarding the net curtailment and settlement gain, see Note 10 to the consolidated financial statements.

Operating Profit, Income Taxes and Net Earnings

Operating profit for the three month period ended June 30, 2009 decreased 4 percent to $296.5 million, from $308.4 million in the same 2008 period. The decrease in operating profit is due primarily to lower reported revenues.

Interest and other expense, net for the three month period ended June 30, 2009, increased to $4.0 million, compared to income of $6.8 million in the same 2008 period. Interest and other income in the 2008 period reflects a realized gain of $8.7 million related to the sale of certain marketable securities. Excluding the effect of this gain in 2008, interest expense increased in the 2009 period as the result of increased long-term debt used to partially fund the Abbott Spine acquisition and share repurchases.

The effective tax rate on earnings before income taxes increased to 28.2 percent for the three month period ended June 30, 2009, from 27.8 percent in the same 2008 period. The effective tax rate for the 2008 period was impacted by the favorable resolution of certain tax positions.

Net earnings decreased 7 percent to $210.1 million for the three month period ended June 30, 2009, compared to $227.1 million in the same 2008 period. Basic and diluted earnings per share both decreased 1 percent to $0.98, from $0.99 in the same 2008 period. The disproportional change in earnings per share as compared with net earnings is attributed to the effect of 2009 and 2008 share repurchases.

Six Month Results of Operations

Net Sales by Operating Segment

The following table presents net sales by operating segment and the components of the percentage changes (dollars in millions):

	Six Months
	Ended
	June 30,							Volume/						Foreign
	2009		2008		% (Dec)			Mix			Price			Exchange
Americas	$	1,184.2	$	1,201.6		(1	)%		—	%		(1	)%		—	%
Europe		545.5		631.3		(14	)		—			—			(14	)
Asia Pacific		282.8		305.8		(8	)		(2	)		(2	)		(4	)
	$	2,012.5	$	2,138.7		(6	)		—			(1	)		(5	)

26

Net Sales by Product Category

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

	Six Months Ended June 30,							Volume/						Foreign
	2009		2008		% Inc (Dec)			Mix			Price			Exchange
Reconstructive
Knees	$	867.2	$	920.8		(6	)%		—	%		(1	)%		(5	)%
Hips		607.7		672.9		(10	)		(3	)		(1	)		(6	)
Extremities		66.7		62.9		6			10			—			(4	)
Total		1,541.6		1,656.6		(7	)		(1	)		(1	)		(5	)
Dental		100.1		119.1		(16	)		(12	)		1			(5	)
Trauma		113.6		110.6		3			5			1			(3	)
Spine		128.8		108.3		19			20			3			(4	)
OSP and other		128.4		144.1		(11	)		(9	)		—			(2	)
Total	$	2,012.5	$	2,138.7		(6	)		—			(1	)		(5	)

TheNexGenComplete Knee Solution product line, includingGender SolutionsKnee Femoral Implants, theNexGenLPS-Flex Knee, theNexGenCR-Flex Knee and theNexGenLCCK Revision Knee, led knee sales. In addition, theGender Solutions Natural-KneeFlex System made a strong contribution.

TheZimmerM/L Taper Stem, theZimmerM/L Taper Stem withKinectivTechnology, theCLS SpotornoStem from theCLSHip System,and theAlloclassic ZweymüllerHip Stem, led hip stem sales.Trabecular MetalAcetabular Cups andLongevityHighly Crosslinked Polyethylene Liners also made strong contributions. The temporary suspension of marketing and distribution of theDuromCup in the U.S. announced in the second half of 2008 negatively impacted hip sales growth. Additionally, with the lack of a hip resurfacing product within our U.S. hip portfolio, we face a continuing challenge in hip sales growth with the adoption of hip resurfacing in the U.S. market.

TheBigliani/FlatowComplete Shoulder Solution and theZimmer Trabecular MetalReverse Shoulder System led extremities sales. Negative sales growth for our dental business reflects disruptions caused by the implementation of our enhanced compliance initiatives and overall weakness in the global economy.Zimmer Periarticular Locking Plates and theI.T.S.T. Intertrochanteric/Subtrochanteric Fixation System led trauma sales. In the fourth quarter of 2008, we acquired Abbott Spine. As a result of the acquisition, spine sales have increased but reflect sales dis-synergies associated with the integration of the business. OSP sales in the first quarter of 2009 were negatively affected by the patient care product recalls and related voluntary suspension of production of certain products, but these negative factors were partially offset by strong growth inPALACOSBone Cement.

27

Americas Net Sales

The following table presents Americas net sales (dollars in millions):

	Six Months
	Ended
	June 30,
	2009		2008		% Inc (Dec)
Reconstructive
Knees	$	547.8	$	560.0		(2	)%
Hips		284.9		297.7		(4	)
Extremities		51.4		45.0		14
Total		884.1		902.7		(2	)
Dental		52.1		59.2		(12	)
Trauma		63.6		64.3		(1	)
Spine		100.0		84.6		18
OSP and other		84.4		90.8		(7	)
Total	$	1,184.2	$	1,201.6		(1	)

TheNexGenComplete Knee Solution product line, including theGender SolutionsKnee Femoral Implants,NexGenLPS-Flex Knee, theNexGenLCCK Revision Knee and theNexGenCR-Flex Knee, led knee sales. TheGender Solutions Natural-KneeFlex System also made a strong contribution.

Porous stems, including theZimmerM/L Taper Stem and theZimmerM/L Taper Stem withKinectiv Technology, led hip stem sales, but were partially offset by weaker sales of cemented stems.Trabecular MetalAcetabular Cups andLongevityHighly Crosslinked Polyethylene Liners also made a strong contribution. As noted above, the temporary suspension of marketing and distribution of theDuromCup in the U.S. has continued to negatively impact hip sales and the adoption of hip resurfacing in the U.S. market will continue to adversely affect our hip sales growth.

As a result of the ongoing effects of the disruptive events discussed above, we suffered customer losses. These customer losses negatively impacted sales growth, primarily in the knee and hip product categories. However, we believe these losses stabilized during the first half of 2009.

TheBigliani/FlatowShoulder Solution and theZimmer Trabecular MetalReverse Shoulder System led extremities sales. Negative sales growth for our dental business reflects disruptions caused by the implementation of our enhanced compliance initiatives and overall weakness in the U.S. economy.ZimmerPeriarticular Plates and theI.T.S.T.Intertrochanteric/Subtrochanteric Fixation System led trauma sales. Spine sales increased as a result of the Abbott Spine acquisition completed in the fourth quarter of 2008. OSP sales were negatively affected by the patient care product recalls and related voluntary suspension of production of certain products, but these negative factors were partially offset by strong growth inPALACOSBone Cement.

28

Europe Net Sales

The following table presents Europe net sales (dollars in millions):

	Six Months
	Ended
	June 30,
	2009		2008		% Inc (Dec)
Reconstructive
Knees	$	213.0	$	245.2		(13	)%
Hips		219.4		265.9		(17	)
Extremities		11.7		14.1		(18	)
Total		444.1		525.2		(15	)
Dental		37.1		43.4		(15	)
Trauma		23.3		23.2		1
Spine		22.5		19.3		17
OSP and other		18.5		20.2		(9	)
Total	$	545.5	$	631.3		(14	)

Changes in foreign exchange rates negatively affected knee and hip sales by 14 percent and 12 percent, respectively. TheNexGenComplete Knee Solution product line, including theNexGen LPS-Flex Knee, theNexGenLCCK Revision Knee and theNexGenCR-Flex Knee, led knee sales in our Europe region.

Porous stems, including theCLS SpotornoStem andAlloclassic ZweymüllerStem, led hip stem sales.LongevityHighly Crosslinked Polyethylene Liners,Trabecular MetalAcetabular Cups and theAllofitHip Acetabular System also contributed to hip sales.

As a result of the ongoing effect of the disruptive events discussed above, we suffered customer losses. These customer losses negatively impacted sales growth, primarily in the knee and hip product categories. However, we believe these losses stabilized during the first half of 2009.

TheAnatomical ShoulderSystem and the Coonrad/Morrey Total Elbow led extremities sales. TheTapered Screw-VentImplant System led dental sales. TheCable-ReadyCable Grip System and theNCB Plating System led trauma sales, which were offset by weaker sales of our intramedullary fixation systems. Spine sales increased as a result of the Abbott Spine acquisition completed in the fourth quarter of 2008. OSP sales were negatively affected by the patient care product recalls and related voluntary suspension of production of certain products.

Asia Pacific Net Sales

The following table presents Asia Pacific net sales (dollars in millions):

	Six Months
	Ended
	June 30,
	2009		2008		% Inc (Dec)
Reconstructive
Knees	$	106.4	$	115.6		(8	)%
Hips		103.4		109.3		(5	)
Extremities		3.6		3.8		(5	)
Total		213.4		228.7		(7	)
Dental		10.9		16.5		(34	)
Trauma		26.7		23.1		15
Spine		6.3		4.4		44
OSP and other		25.5		33.1		(23	)
Total	$	282.8	$	305.8		(8	)

29

Changes in foreign exchange rates negatively affected knee sales by 7 percent and had a minimal impact on hip sales. Reported decreases in average selling prices negatively affected knee sales by 4 percent and hip sales by 2 percent. TheNexGenComplete Knee Solution product line, theNexGenCR-Flex Knee and theNexGenLPS-Flex Knee led knee sales. TheGender SolutionsKnee Femoral Implant also made strong contributions to knee sales for the period.

Porous stems, including the Fiber Metal Taper Stem from theVerSysHip System and theAlloclassic ZweymüllerHip System, drove hip stem sales. Sales ofLongevityHighly Crosslinked Polyethylene Liners, theTrilogyAcetabular System andTrabecular MetalAcetabular Cups also contributed to hip sales.

As a result of the ongoing effects of the disruptive events discussed above, we suffered customer losses. These customer losses negatively impacted sales growth, primarily in the knee and hip product categories. However, we believe these losses stabilized during the first half of 2009.

TheBigliani/FlatowShoulder Solution and the Coonrad/Morrey Total Elbow led extremities sales. Negative sales growth for our dental business reflects an overall weakness in the global economy. TheTapered Screw-VentImplant System led dental sales. Trauma sales were led by theI.T.S.T.Intertrochanteric/Subtrochanteric Fixation System. Spine sales increased as a result of the Abbott Spine acquisition completed in the fourth quarter of 2008. OSP sales were negatively affected by the patient care product recalls and related voluntary suspension of production of certain products and the loss of certain distribution agreements related to various products in the region.

Gross Profit

Gross profit as a percentage of net sales was 76.8 percent in the six month period ended June 30, 2009, compared to 75.8 percent in the same 2008 period. The primary contributor to the increase in gross profit margin was foreign currency hedge gains recognized in 2009 compared to hedge losses recognized in the 2008 period. Under our 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 item affects earnings. These hedge gains were partially offset by an increase in excess inventory and obsolescence charges due to increased inventory levels and certain product-specific matters as well as increased inventorystep-up as a result of the Abbott Spine acquisition.

Operating Expenses

R&D, as a percentage of net sales, was 5.1 percent for the six month period ended June 30, 2009, compared to 4.5 percent in the same 2008 period. R&D expense increased to $101.7 million for the six month period ended June 30, 2009, from $96.1 million in the same 2008 period, reflecting increased spending on certain development, clinical and external research activities compared to the delay in activities experienced in 2008 as we implemented our enhanced compliance program. We expect to maintain R&D spending in 2009 at our historical average of5-6 percent of sales.

SG&A, as a percentage of net sales, was 42.5 percent for the six month period ended June 30, 2009, compared to 40.5 percent in the same 2008 period. SG&A expense decreased to $856.0 million for the six month period ended June 30, 2009, from $865.8 million in the same 2008 period. SG&A expense for the 2008 period included approximately $30 million of costs such as monitor fees and consulting and legal fees associated with the global roll-out of our enhanced compliance program. In this challenging economic environment, we are carefully managing our SG&A spend, reducing expenses in certain areas in order to fund growth and productivity initiatives. Areas of investment include marketing and promotion and medical education and training. The acquisition of Abbott Spine increased SG&A costs for items such as selling expenses, increased instrument depreciation and amortization of the acquired intangible assets. Additionally, SG&A as a percent of sales is negatively impacted by the significant decrease in revenues caused by changes in foreign currency rates. A majority of our SG&A spend is incurred in the U.S., primarily from our corporate headquarters and similar functions at our various businesses such as Dental, Trauma, Spine and OSP. Therefore, SG&A expense does not respond to changes in foreign currency rates proportionally to our revenue, which has caused SG&A as a percent of sales to increase.

30

Acquisition, integration, realignment and other expenses for the six month period ended June 30, 2009 were $43.5 million, compared to $19.8 million in the same 2008 period. During the 2009 period, we initiated a workforce realignment, which included the elimination of positions in some areas and planned increases in others, to balance the requirements necessary to support long-term growth. As a result of this realignment, we incurred approximately $16.6 million of severance and termination-related expenses. Other items contributing to the increase include $7.9 million of expenses related to contract termination costs, $4.8 million of certain litigation matters that were recognized during the period and various costs incurred to integrate the Abbott Spine business acquired in the fourth quarter of 2008.

We recognized a net curtailment and settlement gain of $32.1 million during the six month period ended June 30, 2009 related to amending our U.S. and Puerto Rico postretirement benefit plans. For more information regarding the net curtailment and settlement gain, see Note 10 to the consolidated financial statements.

Operating Profit, Income Taxes and Net Earnings

Operating profit for the six month period ended June 30, 2009 decreased 10 percent to $576.3 million, from $640.0 million in the same 2008 period. The decrease in operating profit is due primarily to lower reported revenues.

Interest and other expense, net for the six month period ended June 30, 2009, increased to $7.7 million, compared to income of $7.8 million in the same 2008 period. Interest and other income in the 2008 period reflects a realized gain of $8.7 million related to the sale of certain marketable securities. Excluding the effect of this gain in 2008, interest expense increased in the 2009 period as the result of increased long-term debt used to partially fund the Abbott Spine acquisition and share repurchases.

The effective tax rate on earnings before income taxes decreased to 27.5 percent for the six month period ended June 30, 2009, from 27.9 percent in the same 2008 period. This decrease is due primarily to increased U.S. tax incentives as well as increased profits in lower tax jurisdictions.

Net earnings decreased 12 percent to $412.3 million for the six month period ended June 30, 2009, compared to $466.4 million in the same 2008 period. Basic earnings per share decreased 6 percent to $1.89, from $2.02 in the same 2008 period. Diluted earnings per share decreased 6 percent to $1.88, from $2.01 in the same 2008 period. The disproportional change in earnings per share as compared with net earnings is attributed to the effect of 2009 and 2008 share repurchases.

Liquidity and Capital Resources

Cash flows provided by operating activities were $379.7 million for the six month period ended June 30, 2009, compared to $523.3 million in the same 2008 period. The principal source of cash was net earnings of $412.3 million. Non-cash items included in net earnings accounted for another $176.4 million of operating cash. All other items of operating cash flows reflect a use of $209.0 million of cash. The continued resolution of outstanding payments to healthcare professionals and institutions resulted in increased cash outflows during the 2009 period compared to a delay in payments during the 2008 period as we implemented our enhanced global compliance program. The resolution of these outstanding payments, along with a change in the timing of employee bonus payments compared to the 2008 period, contributed to a decrease in accrued expenses for the six month period ended June 30, 2009.

At June 30, 2009, we had 63 days of sales outstanding in trade accounts receivable, an increase of 2 days and 4 days compared to March 31, 2009 and the same 2008 period, respectively. At June 30, 2009, we had 375 days of inventory on hand, an increase of 2 days compared to March 31, 2009. Over the past two years we have made significant investments in inventory, including investments in response to growing demand for systems that provide more versatility and better fit for patients. This trend has and will continue to put pressure on inventory days. We intend to rationalize the investment over time through reductions in field-based consignments and through the use of new inventory management tools to speed returns and redeployments. The continued build out of pipeline inventory for planned product launches will partially offset these reductions in field consignments.

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Cash flows used in investing activities were $174.3 million for the six month period ended June 30, 2009, compared to $236.5 million used in investing in the same 2008 period. Additions to instruments decreased during the six month period ended June 30, 2009 compared to the 2008 period asyear-over-year spending on instruments is expected to decrease compared to the significant investments made in 2008. Spending on other property, plant and equipment decreased to $54.7 million during the six month period ended June 30, 2009 compared to $121.5 million in the same 2008 period. We expect decreased spending on property, plant and equipment compared to 2008 levels, as certain planned infrastructure initiatives from 2008 are completed. Acquired intellectual property rights of $25.9 million relate to lump-sum payments made to certain healthcare professionals and institutions in place of future royalty payments that otherwise would have been due under the terms of an existing contractual arrangement. Investments in other assets primarily relates to payments to acquire certain foreign-based distributors.

Cash flows used in financing activities were $142.0 million for the six month period ended June 30, 2009, compared to $369.0 million used in financing activities in the same 2008 period. Our borrowings from our credit facilities increased $200.0 million during the six month period ended June 30, 2009 to repurchase shares of our common stock. For the six months ended June 30, 2009, we purchased 9.4 million common shares for a total of $337.8 million, including commissions, under our stock repurchase program authorized by our Board of Directors, compared to $640.2 million in the same 2008 period. Proceeds from our stock compensation plans have decreased in the six month period ended June 30, 2009, compared to the same 2008 period, due to a decrease in employee stock option exercises.

We have a five year $1,350 million revolving, multi-currency, senior unsecured credit facility maturing November 30, 2012 (the “Senior Credit Facility”). We had $653.5 million outstanding under the Senior Credit Facility at June 30, 2009, and, therefore, our available borrowings were $696.5 million. The Senior Credit Facility contains provisions whereby borrowings may be increased to $1,750 million and we may request that the maturity date be extended for two additional one-year periods.

We and certain of our wholly-owned foreign subsidiaries are the borrowers under the Senior Credit Facility. Borrowings under the Senior Credit Facility are used for general corporate purposes and bear interest at a LIBOR-based rate plus an applicable margin determined by reference to our senior unsecured long-term credit rating and the amounts drawn under the Senior Credit Facility, at an alternate base rate, or at a fixed rate determined through a competitive bid process. The Senior Credit Facility contains customary affirmative and negative covenants and events of default for an unsecured financing arrangement, including, among other things, limitations on consolidations, mergers and sales of assets. Financial covenants include a maximum leverage ratio of 3.0 to 1.0 and a minimum interest coverage ratio of 3.5 to 1.0. If we fall below an investment grade credit rating, additional restrictions would result, including restrictions on investments, payment of dividends and stock repurchases. We were in compliance with all covenants under the Senior Credit Facility as of June 30, 2009. Commitments under the Senior Credit Facility are subject to certain fees, including a facility fee and a utilization fee. The Senior Credit Facility is rated A- by Standard & Poor’s Ratings Services and is not rated by Moody’s Investors’ Service, Inc. Notwithstanding recent interruptions in global credit markets, as of the date of this report, we believe our access to our Senior Credit Facility has not been impaired.

We also have available uncommitted credit facilities totaling $106.4 million.

We may use excess cash or further borrow against our Senior Credit Facility, subject to limits set by our Board of Directors, to repurchase additional common stock under the $1.25 billion program which expires December 31, 2009.

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

Recent Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (SFAS No. 168), which is effective for interim and annual periods ending after September 15, 2009. SFAS No. 168 defines a new hierarchy for U.S. GAAP and establishes the

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FASB Accounting Standards Codification as the sole source for authoritative guidance to be applied by nongovernmental entities. SFAS No. 168 replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” which was issued in May 2008. The adoption of SFAS No. 168 will change the manner in which U.S. GAAP guidance is referenced, but will not have any impact on our financial position or results of operations.

Critical Accounting Policies

There were no changes in the six month period ended June 30, 2009 to the application of critical accounting estimates as described in our Annual Report onForm 10-K for the year ended December 31, 2008.

Forward-Looking Statements

This quarterly report contains certain statements that are forward-looking statements within the meaning of federal securities laws. When used in this report, the words “may,” “will,” “should,” “anticipate,” “estimate,” “expect,” “plan,” “believe,” “predict,” “potential,” “project,” “target,” “forecast,” “intend,” “assume,” “guide,” “seek” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to:

•  competition;

•  pricing pressures;

•  dependence on new product development, technological advances and innovation;

•  healthcare reform measures in the U.S. and elsewhere, reductions in reimbursement levels by third-party payors and cost containment efforts of government programs and healthcare purchasing organizations;

•  the costs of defending or resolving putative class action litigation and lawsuits, investigations or other proceedings resulting from our September 2007 settlement with the U.S. government and other matters;

•  our compliance through 2012 with the Corporate Integrity Agreement we entered into as part of the September 2007 settlement;

•  the impact of our enhanced healthcare compliance global initiatives and business practices on our relationships with customers and consultants, our market share and our overall financial performance;

•  the success of our quality initiatives;

•  the outcome of the informal investigation by the U.S. Securities and Exchange Commission into Foreign Corrupt Practices Act matters announced in October 2007;

•  challenges relating to changes in and compliance with governmental laws and regulations affecting our U.S. and international businesses, including regulations of the U.S. Food and Drug Administration and foreign government regulators, such as more stringent requirements for regulatory clearance of our products;

•  Tax reform measures, tax authority examinations and associated tax risks and potential obligations;

•  retention of our independent agents and distributors;

•  changes in customer demand for our products and services caused by demographic changes or other factors;

•  changes in general domestic and international economic conditions, including interest rate and currency exchange rate fluctuations;

•  our ability to protect proprietary technology and other intellectual property and claims for infringement of the intellectual property rights of third parties;

•  product liability claims;

•  the impact of temporarily suspending U.S. marketing and distribution of theDuromCup on our revenues, our customer relationships, our entry into the U.S. hip resurfacing market and product liability claims;

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•  the possible disruptive effect of additional strategic acquisitions and our ability to successfully integrate acquired companies;

•  our ability to form strategic alliances;

•  changes in prices of raw materials and products and our ability to control costs and expenses;

•  changes in general industry and market conditions, including domestic and international growth rates;

•  our dependence on a limited number of suppliers for key raw materials and outsourced activities; and

•  shifts in our product category sales mix or our regional sales mix away from products or geographic regions that generate higher operating margins.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes from the information provided in our Annual Report onForm 10-K for the year ended December 31, 2008.

Item 4.   Controls and Procedures

We have established disclosure controls and procedures and internal controls over financial reporting to provide reasonable assurance that material information relating to us, including our consolidated subsidiaries, is made known on a timely basis to management and the Board of Directors. However, no control system, no matter how well designed and operated, can provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

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 (as defined inRule 13a-15(e) of the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are effective.

There was no change in our internal control over financial reporting (as defined inRule 13a-15(f) of the Securities Exchange Act of 1934) that occurred during the quarter ended June 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II — Other Information

Item 1.   Legal Proceedings

Information pertaining to legal proceedings can be found in Note 13 to the interim consolidated financial statements included in Part I of this report.

Item 1A.   Risk Factors

Except as set forth below and in our Quarterly Report onForm 10-Q for the quarter ended March 31, 2009, there have been no material changes from the risk factors disclosed in Part I — Item 1A of our Annual Report onForm 10-K for the year ended December 31, 2008.

The following risk factor should be added under “RISKS RELATED TO OUR INDUSTRY”:

The impact of healthcare reform in the U.S. on us is uncertain.

There is increasing emphasis within the federal government to reform healthcare in the U.S. Although various proposals have received support in the House of Representatives or Senate committees, there still is no consensus on key issues such as whether there will be an employer mandate for healthcare insurance or a public healthcare insurance program and how to pay for increased costs. To the extent that the number of uninsured or

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underinsured patients is reduced, demand for our products could increase. However, efforts to contain healthcare costs, directly through pricing or reimbursement controls or indirectly by government-sponsored healthcare insurance, could have a material adverse effect on our sales and results of operations. Accordingly, the impact of healthcare reform on the medical device industry in general or us in particular remains uncertain.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

The following table summarizes repurchases of common stock settled during the three month period ended June 30, 2009:

					Total Number of		Approximate
					Shares Purchased		Dollar Value of
					as Part of		Shares that May
	Total Number				Publicly		Yet Be Purchased
	of Shares		Average Price		Announced Plans		Under Plans
	Purchased		Paid per Share		or Programs*		or Programs
April 2009		—	$	—		38,685,867	$	833,148,263
May 2009		805,000		45.24		39,490,867		796,726,122
June 2009		—		—		39,490,867		796,726,122
Total		805,000	$	45.24		39,490,867	$	796,726,122

* Includes repurchases made under expired programs as well as the program announced in April 2008 authorizing $1.25 billion of repurchases through December 31, 2009.

Item 4.   Submission of Matters to a Vote of Security Holders

On May 4, 2009, we held our annual meeting of stockholders. The independent inspector of election for the meeting has certified that our stockholders took the following actions:

•  Our stockholders elected Betsy J. Bernard, Marc N. Casper, David C. Dvorak, Robert A. Hagemann, Arthur J. Higgins, Cecil B. Pickett, Ph.D. and Augustus A. White, III, M.D., Ph.D. as directors to serve a one-year term ending at the 2010 annual meeting of stockholders and until their successors are duly elected and qualified. The votes cast with respect to each nominee are set forth below:

	Number of Votes		Number of Votes		Number of
Zimmer Holdings, Inc. Nominee	FOR		AGAINST		ABSTENTIONS
Betsy J. Bernard		178,310,546		4,155,903		563,260
Marc N. Casper		178,613,124		3,846,172		570,413
David C. Dvorak		174,735,034		7,734,650		560,025
Robert A. Hagemann		174,562,597		7,893,801		573,311
Arthur J. Higgins		172,948,898		9,516,303		564,508
Cecil B. Pickett, Ph.D.		172,936,497		9,526,287		566,925
Augustus A. White, III, M.D., Ph.D.		174,734,714		7,717,031		577,964

In addition, the terms of office of the following directors continued after the meeting: Larry C. Glasscock and John L. McGoldrick.

•  Our stockholders ratified the selection of PricewaterhouseCoopers LLP (“PwC”) as our independent registered public accounting firm for 2009, with 180,612,173 votes for, 2,081,276 votes against and 336,260 abstentions.

•  Our stockholders approved the Zimmer Holdings, Inc. 2009 Stock Incentive Plan, with 128,344,984 votes for, 22,648,441 votes against, 486,199 abstentions and 31,550,085 broker non-votes.

•  Our stockholders approved an extension of the Zimmer Holdings, Inc. Stock Plan for Non-Employee Directors, with 131,595,317 votes for, 19,232,257 votes against, 652,050 abstentions and 31,550,085 broker non-votes.

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•  Our stockholders approved an extension of the Restated Zimmer Holdings, Inc. Deferred Compensation Plan for Non-Employee Directors, with 137,726,155 votes for, 13,182,491 votes against, 570,978 abstentions and 31,550,085 broker non-votes.

Item 5.   Other Information

During the period covered by this report, the Audit Committee of our Board of Directors approved the engagement of PwC, to perform certain non-audit services related to certain accounting and tax matters. This disclosure is made pursuant to Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002.

Item 6.   Exhibits

The following exhibits are filed or furnished as part of this report:

10.1	*	Form of Confidentiality, Non-Competition and Non-Solicitation Employment Agreement withU.S.-Based Executive Officers
10.2	*	Zimmer Holdings, Inc. 2009 Stock Incentive Plan (incorporated by reference to Appendix B to the Registrant’s Definitive Proxy Statement filed on March 20, 2009)
10.3	*	Zimmer Holdings, Inc. Stock Plan for Non-Employee Directors (incorporated by reference to Appendix C to the Registrant’s Definitive Proxy Statement filed on March 20, 2009)
10.4	*	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 on March 20, 2009)
31.1		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
31.2		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
32		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	**	The following materials from Zimmer Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, formatted in XBRL (Extensible Business Reporting Language): (1) the Consolidated Statements of Income, (2) the Consolidated Balance Sheets, (3) the Consolidated Statements of Cash Flows, and (4) Notes to Consolidated Financial Statements, tagged as blocks of text.

*	Indicates management contract or compensatory plan or arrangement
**	To be filed within 30 days following this filing.

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SIGNATURES

Pursuant to the requirements 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.

(Registrant)

By:  /s/  James T. Crines

James T. Crines

Executive Vice President, Finance and

Chief Financial Officer

Date: August 7, 2009

By:  /s/  Derek M. Davis

Derek M. Davis

Vice President, Finance and Corporate
Controller and Chief Accounting Officer

Date: August 7, 2009

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