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 ~~MARCH 31,~~JUNE 30, 2013

Commission File Number001-16407

LOGO

ZIMMER HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware

13-4151777

(State or other jurisdiction of

incorporation or organization)

(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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 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 x No ¨

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 Rule 12b-2 of the Exchange Act.


Large accelerated filer x	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ¨
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of ~~April 30, 2013,168,363,805~~July 26, 2013, 169,548,714 shares of the registrant’s $.01 par value common stock were outstanding.

ZIMMER HOLDINGS, INC.

INDEX TO FORM 10-Q

~~March 31,~~June 30, 2013


		Page
	Part I — Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Statements of Earnings for the Three and Six Months Ended ~~March 31,~~June 30, 2013 and 2012		3
	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended ~~March 31,~~June 30, 2013 and 2012		4
	Condensed Consolidated Balance Sheets as of ~~March 31,~~June 30, 2013 and December 31, 2012		5
	Condensed Consolidated Statements of Cash Flows for the ~~Three~~Six Months Ended ~~March 31,~~June 30, 2013 and 2012		6
	Notes to Interim Condensed Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		2122
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		3133
Item 4.	Controls and Procedures		3133

	Part II — Other Information
	There is no information required to be reported under any items except those indicated below.
Item 1.	Legal Proceedings		3335
Item 1A.	Risk Factors		3335
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		3335
Item 3.	Defaults Upon Senior Securities		3335
Item 4.	Mine Safety Disclosures		3335
Item 5.	Other Information		3335
Item 6.	Exhibits		3436
Signatures			3537

Part I — Financial Information

Item 1.

Financial Statements

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(in millions, except per share amounts, unaudited)


	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012			2013			2012
Net Sales	$	1,138.9		$	1,140.7		$	1,169.5		$	1,125.0		$	2,308.4		$	2,265.7
Cost of products sold		292.9			288.7			323.6			281.9			616.5			570.6

Gross Profit		846.0			852.0			845.9			843.1			1,691.9			1,695.1

Research and development		53.5			59.6			54.9			57.2			108.4			116.8
Selling, general and administrative		460.8			463.3			458.0			453.3			918.8			916.6
Certain claims								47.0			—			47.0			—
Special items (Note 2)		33.5			33.5			75.6			30.7			109.1			64.2

Operating expenses		547.8			556.4			635.5			541.2			1,183.3			1,097.6

Operating Profit		298.2			295.6			210.4			301.9			508.6			597.5
Interest income		3.7			3.1			3.9			3.8			7.6			6.9
Interest expense		(18.2	)		(17.6	)		(18.3	)		(18.1	)		(36.5	)		(35.7	)

Earnings before income taxes		283.7			281.1			196.0			287.6			479.7			568.7
Provision for income taxes		65.7			72.2			44.3			73.6			110.0			145.8

Net earnings		218.0			208.9			151.7			214.0			369.7			422.9
Less: Net loss attributable to noncontrolling interest		(0.6	)		(0.7	)		(0.4	)		(0.5	)		(1.0	)		(1.2	)

Net Earnings of Zimmer Holdings, Inc.	$	218.6		$	209.6		$	152.1		$	214.5		$	370.7		$	424.1

Earnings Per Common Share
Basic	$	1.30		$	1.18		$	0.90		$	1.22		$	2.20		$	2.41
Diluted	$	1.28		$	1.17		$	0.89		$	1.22		$	2.17		$	2.39
Weighted Average Common Shares Outstanding
Basic		168.7			177.4			168.8			175.2			168.8			176.3
Diluted		170.7			178.5			170.7			176.2			170.7			177.3
Cash Dividends Declared Per Common Share	$	0.20		$	—		$	0.20		$	0.18		$	0.40		$	0.18

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

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions, unaudited)


	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012			2013			2012
Net earnings	$	218.0		$	208.9		$	151.7		$	214.0		$	369.7		$	422.9
Other Comprehensive Income:
Foreign currency cumulative translation adjustments		(65.0	)		28.1			(31.8	)		(75.2	)		(96.8	)		(47.1	)
Unrealized cash flow hedge gains, net of tax		29.2			4.1			13.6			20.1			42.8			24.2
Reclassification adjustments on foreign currency hedges, net of tax		3.9			0.9			(2.4	)		1.3			1.5			2.2
Unrealized gains/(losses) on securities, net of tax		(0.1	)		0.2			(0.9	)		0.1			(1.0	)		0.3
Adjustments to prior service cost and unrecognized actuarial assumptions, net of tax		4.2			22.9			2.3			1.6			6.5			24.5

Total Other Comprehensive Gain/(Loss)		(27.8	)		56.2			(19.2	)		(52.1	)		(47.0	)		4.1

Comprehensive Income		190.2			265.1			132.5			161.9			322.7			427.0
Comprehensive loss attributable to the noncontrolling interest		(0.6	)		(0.7	)		(0.4	)		(0.7	)		(1.0	)		(1.4	)

Comprehensive Income attributable to Zimmer Holdings, Inc.	$	190.8		$	265.8		$	132.9		$	162.6		$	323.7		$	428.4

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

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, unaudited)


		March 31, 2013			December 31, 2012				June 30, 2013			December 31, 2012
ASSETS	ASSETS							ASSETS
Current Assets:
Cash and cash equivalents		$	657.0		$	884.3			$	709.9		$	884.3
Short-term investments			544.2			671.6				525.9			671.6
Accounts receivable, less allowance for doubtful accounts			912.5			884.6				942.5			884.6
Inventories			1,039.1			995.3				1,052.9			995.3
Prepaid expenses and other current assets			100.8			76.3				121.3			76.3
Deferred income taxes			210.4			196.6				239.2			196.6

Total Current Assets			3,464.0			3,708.7				3,591.7			3,708.7
Property, plant and equipment, net			1,219.5			1,210.7				1,225.2			1,210.7
Goodwill			2,534.8			2,571.8				2,577.4			2,571.8
Intangible assets, net			722.7			740.7				719.0			740.7
Other assets			803.6			780.5				984.1			780.5

Total Assets		$	8,744.6		$	9,012.4			$	9,097.4		$	9,012.4


LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY							LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	174.3		$	184.1			$	165.2		$	184.1
Income taxes			41.4			22.8				44.1			22.8
Short-term debt			—			100.1				—			100.1
Other current liabilities			547.6			559.0				595.0			559.0

Total Current Liabilities			763.3			866.0				804.3			866.0
Other long-term liabilities			566.1			559.3				715.4			559.3
Long-term debt			1,702.8			1,720.8				1,688.1			1,720.8

Total Liabilities			3,032.2			3,146.1				3,207.8			3,146.1

Commitments and Contingencies (Note 15)
Commitments and Contingencies (Note 14)
Stockholders’ Equity:
Zimmer Holdings, Inc. Stockholders’ Equity:
Common stock, $0.01 par value, one billion shares authorized, 258.4 million shares issued in 2013 (257.1 million in 2012)			2.6			2.6
Common stock, $0.01 par value, one billion shares authorized, 260.8 million shares issued in 2013 (257.1 million in 2012)										2.6			2.6
Paid-in capital			3,582.0			3,500.6				3,728.7			3,500.6
Retained earnings			7,271.0			7,085.9				7,389.2			7,085.9
Accumulated other comprehensive income			316.1			343.9				296.9			343.9
Treasury stock, 90.8 million shares in 2013 (85.5 million shares in 2012)			(5,464.1	)		(5,072.1	)
Treasury stock, 91.7 million shares in 2013 (85.5 million shares in 2012)										(5,531.5	)		(5,072.1	)

Total Zimmer Holdings, Inc. stockholders’ equity			5,707.6			5,860.9				5,885.9			5,860.9
Noncontrolling interest			4.8			5.4				3.7			5.4

Total Stockholders’ Equity			5,712.4			5,866.3				5,889.6			5,866.3

Total Liabilities and Stockholders’ Equity		$	8,744.6		$	9,012.4			$	9,097.4		$	9,012.4

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

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

CONSENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions, unaudited)


	For the Three Months Ended March 31,						For the Six Months Ended June 30,
	2013			2012			2013			2012
Cash flows provided by (used in) operating activities:
Net earnings	$	218.0		$	208.9		$	369.7		$	422.9
Adjustments to reconcile net earnings to cash provided by operating activities:
Depreciation and amortization		85.1			96.8			176.5			190.2
Share-based compensation		14.0			12.8			26.2			27.8
Income tax benefit from stock option exercises		13.6			6.2			21.8			7.3
Excess income tax benefit from stock option exercises		(3.5	)		(1.2	)		(5.1	)		(1.4	)
Inventory step-up		0.8			1.0			2.4			2.0
Changes in operating assets and liabilities, net of effect of acquisitions:
Income taxes		17.6			47.8			(47.8	)		10.6
Receivables		(44.2	)		(54.2	)		(90.0	)		(86.9	)
Inventories		(59.7	)		(6.0	)		(86.2	)		(29.7	)
Accounts payable and accrued expenses		(31.3	)		(29.9	)		8.8			(15.7	)
Other assets and liabilities		(29.9	)		(74.8	)		(6.1	)		(88.2	)

Net cash provided by operating activities		180.5			207.4			370.2			438.9

Cash flows provided by (used in) investing activities:
Additions to instruments		(57.5	)		(28.8	)		(116.3	)		(68.3	)
Additions to other property, plant and equipment		(17.9	)		(19.5	)		(40.3	)		(44.3	)
Purchases of investments		(94.8	)		(255.6	)		(366.0	)		(537.5	)
Sales of investments		232.0			174.6			475.4			422.7
Investments in other assets		(8.8	)		(34.9	)		(74.4	)		(54.7	)

Net cash provided by (used in) investing activities		53.0			(164.2	)
Net cash used in investing activities								(121.6	)		(282.1	)

Cash flows provided by (used in) financing activities:
Net (payments) proceeds under revolving credit facilities		(100.1	)		1.0
Net payments under revolving credit facilities								(100.1	)		(145.7	)
Proceeds from term loans								—			147.3
Dividends paid to stockholders		(30.9	)		—			(64.5	)		(31.7	)
Proceeds from employee stock compensation plans		67.0			10.3			216.7			18.0
Excess income tax benefit from stock option exercises		3.5			1.2			5.1			1.4
Debt issuance costs								—			(3.3	)
Purchase of additional shares from noncontrolling interest								(1.8	)		—
Repurchase of common stock		(392.0	)		(141.6	)		(460.8	)		(248.1	)

Net cash used in financing activities		(452.5	)		(129.1	)		(405.4	)		(262.1	)

Effect of exchange rates on cash and cash equivalents		(8.3	)		(8.4	)		(17.6	)		(12.0	)

Decrease in cash and cash equivalents		(227.3	)		(94.3	)		(174.4	)		(117.3	)
Cash and cash equivalents, beginning of year		884.3			768.3			884.3			768.3

Cash and cash equivalents, end of period	$	657.0		$	674.0		$	709.9		$	651.0

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

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	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 2012 Annual Report on Form 10-K filed by Zimmer Holdings, Inc. The condensed consolidated financial statements for the majority of our international subsidiaries are for periods that ended on ~~March~~June 25, 2013 and 2012. For these international subsidiaries, the three month results included in these condensed consolidated financial statements are for the period of March 26 through June 25 and the six month results included in these condensed consolidated financial statements are for the period of December 26 through ~~March~~June 25 or the period of January 1 to ~~March~~June 25.

In our opinion, the accompanying unaudited condensed 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, 2012 condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP). Results for interim periods should not be considered indicative of results for the full year. Certain amounts in the 2012 condensed consolidated financial statements have been reclassified to conform to the 2013 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.

2.	Significant Accounting Policies

Special Items— We recognize expenses resulting directly from our business combinations, employee termination benefits, certain R&D agreements, certain contract terminations, consulting and professional fees and asset impairment charges connected with global restructurings, operational and ~~operational~~quality excellence initiatives, and other items as “Special items” in our condensed consolidated statement of earnings. “Special items” included (in millions):


	Three Months Ended March 31,						Three Months Ended June 30,				Six Months Ended June 30,
	2013			2012			2013		2012		2013		2012
Impairment/loss on disposal of assets	$	0.3		$	0.4		$	—	$	—	$	0.3	$	0.4
Consulting and professional fees		26.9			18.3			23.4		19.2		50.3		37.5
Employee severance and retention		(0.3	)		3.4			6.5		1.0		6.2		4.4
Dedicated project personnel		5.4			3.3			11.1		3.3		16.5		6.6
Certain R&D agreements								0.8		—		0.8		—
Relocated facilities		1.3			—			1.3		—		2.6		—
Distributor acquisitions								0.3		0.3		0.3		0.4
Certain litigation matters		(3.8	)		6.4			21.7		3.5		17.9		9.9
Contract terminations		0.5			1.5			0.9		1.1		1.4		2.6
Contingent consideration adjustments		0.3			(0.8	)		5.6		—		5.9		(0.8	)
Accelerated software amortization		1.5			—			1.5		1.5		3.0		1.5
Other		1.4			1.0			2.5		0.8		3.9		1.7

Special items	$	33.5		$	33.5		$	75.6	$	30.7	$	109.1	$	64.2

In the second quarter of 2013, we eliminated approximately 120 positions as part of our ongoing operational excellence initiatives.

In the first ~~quarter~~six months of 2012, we announced our plans to outsource our Warsaw, Indiana distribution center to a third party service provider at a national transportation hub, among other organizational changes. Approximately ~~140~~160 positions were affected by these actions.

As a result of these actions, we incurred expenses related to severance benefits, share-based compensation acceleration and other employee termination-related costs. The vast majority of these termination benefits were provided in accordance with our existing policies or local government regulations and are considered ongoing benefits. These costs were accrued when they became probable and estimable and were recorded as part of other current liabilities. The majority of these costs have been paid or will be paid in the year they were accrued.

Medical Device Excise Tax — As part of The Patient Protection and Affordable Care Act, in January 2013 we began paying a 2.3 percent medical device excise tax on a majority of our U.S sales. The excise tax is imposed on the first sale in the U.S. by the manufacturer, producer or importer of a medical device to either a third party or an affiliated distribution entity. We distribute a majority of our musculoskeletal products through an affiliated distribution entity. Under GAAP, excise taxes incurred to get inventory to its current location can be included in the cost of the inventory. Accordingly, we capitalize this excise tax as a part of inventory and recognize it as a cost of product sold when the inventory upon which the excise tax was assessed is sold to a third party on a first-in-first-out basis. Therefore, in the three and six month ~~period~~periods ended ~~March 31,~~June 30, 2013, the amount of medical device excise tax recognized in our condensed consolidated statement of earnings was not material.

Recent Accounting Pronouncements — Effective January 1, 2013, we adopted the Financial Accounting Standard Board’s Accounting Standard Updates (ASUs) requiring reporting of amounts reclassified out of accumulated other comprehensive income (OCI) and balance sheet offsetting between derivative assets and liabilities. These ASUs only change financial statement disclosure requirements and therefore do not impact our financial position, results of operations or cash flows. See Note 87 for disclosures relating to OCI. See Note 109 for disclosures relating to balance sheet offsetting.

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

3.	Inventories


	March 31, 2013		December 31, 2012		June 30, 2013		December 31, 2012
	(in millions)				(in millions)
Finished goods	$	827.2	$	786.3	$	819.0	$	786.3
Work in progress		63.7		52.3		69.5		52.3
Raw materials		148.2		156.7		164.4		156.7

Inventories	$	1,039.1	$	995.3	$	1,052.9	$	995.3

4.	Property, Plant and Equipment


	March 31, 2013			December 31, 2012			June 30, 2013			December 31, 2012
	(in millions)						(in millions)
Land	$	21.7		$	22.1		$	21.8		$	22.1
Buildings and equipment		1,227.6			1,232.8			1,279.6			1,232.8
Capitalized software costs		246.8			241.8			254.8			241.8
Instruments		1,605.8			1,579.8			1,630.3			1,579.8
Construction in progress		123.3			117.8			82.8			117.8

		3,225.2			3,194.3			3,269.3			3,194.3
Accumulated depreciation		(2,005.7	)		(1,983.6	)		(2,044.1	)		(1,983.6	)

Property, plant and equipment, net	$	1,219.5		$	1,210.7		$	1,225.2		$	1,210.7

5.
Investments

We invest in short and long-term investments classified as available-for-sale securities. Information regarding our investments is as follows (in millions):


	Amortized Cost		Gross Unrealized					Fair value		Amortized Cost			Gross Unrealized						Fair value
	Amortized Cost		Gains		Losses			Fair value				Gains			Losses				Fair value
As of March 31, 2013
As of June 30, 2013										Amortized Cost
Corporate debt securities	$	401.5	$	0.3	$	(0.2	)	$	401.6	$	392.7		$	0.1		$	(0.8	)	$	392.0
U.S. government and agency debt securities		263.8		0.1		—			263.9		271.6			0.1			(0.1	)		271.6
Foreign government debt securities		5.0		—		—			5.0
Commercial paper		16.0		—		—			16.0		49.0			—			—			49.0
Certificates of deposit		89.2		0.1		—			89.3		87.4			0.1			—			87.5

Total short and long-term investments	$	775.5	$	0.5	$	(0.2	)	$	775.8	$	800.7		$	0.3		$	(0.9	)	$	800.1

As of December 31, 2012
Corporate debt securities	$	383.6	$	0.3	$	(0.1	)	$	383.8	$	383.6		$	0.3		$	(0.1	)	$	383.8
U.S. government and agency debt securities		295.8		0.1		—			295.9		295.8			0.1			—			295.9
Foreign government debt securities		5.0		—		—			5.0		5.0			—			—			5.0
Commercial paper		138.7		—		—			138.7		138.7			—			—			138.7
Certificates of deposit		92.2		0.1		—			92.3		92.2			0.1			—			92.3

Total short and long-term investments	$	915.3	$	0.5	$	(0.1	)	$	915.7	$	915.3		$	0.5		$	(0.1	)	$	915.7

Unrealized gains and losses on these investments are recorded in OCI in our condensed consolidated balance sheet.

The following table shows the fair value and gross unrealized losses for all available-for-sale securities in an unrealized loss position deemed to be temporary (in millions):

   March 31, 2013 December 31, 2012
   Fair Value    Unrealized
Losses Fair value    Unrealized
Losses
Corporate debt securities
   $ 154.0       $ (0.2 ) $ 144.2       $ (0.1 )


	June 30, 2013					December 31, 2012
	Fair Value		Unrealized Losses			Fair value		Unrealized Losses
Corporate debt securities	$	251.6	$	(0.8	)	$	144.2	$	(0.1	)
U.S. government and agency debt securities		161.5		(0.1	)		—		—

Total	$	413.1	$	(0.9	)	$	144.2	$	(0.1	)

All securities in the table above have been in an unrealized loss position for less than twelve months. A total of 83147 securities were in an unrealized loss position as of ~~March 31,~~June 30, 2013.

The unrealized losses on our investments in corporate debt securities were caused by increases in interest yields ~~resulting from adverse conditions~~ in the global credit markets. We believe the unrealized losses associated with our available-for-sale securities as of ~~March 31,~~June 30, 2013 are temporary because we do not intend to sell these investments, and we do not believe we will be required to sell them before recovery of their amortized cost basis.

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


	March 31, 2013				June 30, 2013
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	543.9	$	544.2	$	525.9	$	525.9
Due after one year through two years		231.6		231.6		274.8		274.2

Total	$	775.5	$	775.8	$	800.7	$	800.1

6.
~~Other Current Liabilities~~

   March 31,
2013    December 31,
2012
   (in millions)
Other current liabilities:

Salaries, wages and benefits
   $ 62.7       $ 118.8
Accrued liabilities
   484.9       440.2




Total other current liabilities
   $ 547.6       $ 559.0

Debt

Our debt consisted of the following (in millions):


	March 31, 2013			December 31, 2012			June 30, 2013			December 31, 2012
Short-term debt
Senior Credit Facility	$	—		$	100.0		$	—		$	100.0
Other short-term debt		—			0.1			—			0.1

Total short-term debt	$	—		$	100.1		$	—		$	100.1

Long-term debt
Senior Notes due 2014	$	250.0		$	250.0		$	250.0		$	250.0
Senior Notes due 2019		500.0			500.0			500.0			500.0
Senior Notes due 2021		300.0			300.0			300.0			300.0
Senior Notes due 2039		500.0			500.0			500.0			500.0
Term Loan		123.9			138.6			119.9			138.6
Debt discount		(1.7	)		(1.7	)		(1.6	)		(1.7	)
Adjustment related to interest rate swaps		30.6			33.9			19.8			33.9

Total long-term debt	$	1,702.8		$	1,720.8		$	1,688.1		$	1,720.8

The estimated fair value of our Senior Notes as of ~~March 31,~~June 30, 2013, based on quoted prices for the specific securities from transactions in over-the-counter markets (Level 2), was ~~$1,730.5~~$1,654.6 million. The estimated fair value of the Term Loan as of ~~March 31,~~June 30, 2013, based upon publicly available market yield curves and the terms of the debt (Level 2), was ~~$123.5~~$119.9 million.

8.7.	Accumulated Other Comprehensive Income

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

Our OCI is comprised of foreign currency translation adjustments, unrealized gains and losses on cash flow hedges, unrealized gains and losses on available-for-sale securities, and amortization of prior service costs and unrecognized gains and losses in actuarial assumptions on our defined benefit plans. Foreign currency translation adjustments are reclassified to net earnings upon sale or upon a complete or substantially complete liquidation of an investment in a foreign entity. Unrealized gains and losses on cash flow hedges are reclassified to net earnings when the hedged item affects net earnings. Unrealized gains and losses on available-for-sale securities are reclassified to net earnings if we sell the security before maturity or if the unrealized loss in a security is considered to be other-than-temporary. We typically hold our available-for-sale securities until maturity and are able to realize their amortized cost and therefore we do not have reclassification adjustments to net earnings on these securities. Amounts related to defined benefit plans that are in OCI are reclassified over the service periods of employees in the plan. The reclassification amounts are allocated to all employees in the plans and therefore the reclassified amounts may become part of inventory to the extent they are considered direct labor costs. See Note 1211 for more information on our defined benefit plans.

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


	Foreign Currency Translation			Cash Flow Hedges		Unrealized Gains on Securities			Defined Benefit Plan Items			Foreign Currency Translation			Cash Flow Hedges		Unrealized Gains on Securities			Defined Benefit Plan Items
Balance December 31, 2012	$	445.5		$	4.1	$	0.4		$	(106.1	)	$	445.5		$	4.1	$	0.4		$	(106.1	)
OCI before reclassifications		(65.0	)		29.2		(0.1	)		—			(96.8	)		42.8		(1.0	)		—
Reclassifications		—			3.9		—			4.2			—			1.5		—			6.5

Balance March 31, 2013	$	380.5		$	37.2	$	0.3		$	(101.9	)
Balance June 30, 2013												$	348.7		$	48.4	$	(0.6	)	$	(99.6	)

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


	Amount of Gain /(Loss) Reclassified from OCI							Amount of Gain / (Loss) Reclassified from OCI
	Three Months Ended March 31,						Location on Statement of Earnings	Three Months Ended June 30,						Six Months Ended June 30,						Location on Statement of Earnings
Component of OCI	2013			2012			Location on Statement of Earnings	2013			2012			2013			2012			Location on Statement of Earnings
Cash flow hedges
Foreign exchange forward contracts	$	(5.4	)	$	(4.1	)	Cost of products sold	$	3.7		$	(3.7	)	$	(1.7	)	$	(7.8	)	Cost of products sold
Foreign exchange options		(0.1	)		—		Cost of products sold		(0.1	)		(0.1	)		(0.2	)		(0.1	)	Cost of products sold
Cross-currency interest rate swaps		—			0.2		Interest expense		—			—			—			0.2		Interest expense

		(5.5	)		(3.9	)	Total before tax		3.6			(3.8	)		(1.9	)		(7.7	)	Total before tax
		(1.6	)		(3.0	)	Provision for income taxes		1.2			(2.5	)		(0.4	)		(5.5	)	Provision for income taxes

	$	(3.9	)	$	(0.9	)	Net of tax	$	2.4		$	(1.3	)	$	(1.5	)	$	(2.2	)	Net of tax

Defined benefit plans
Prior service cost	$	1.0		$	0.2		*	$	0.9		$	1.2		$	1.9		$	1.4		*
Unrecognized actuarial loss		(4.7	)		(3.4	)	*
Unrecognized actuarial (loss)									(4.6	)		(3.3	)		(9.3	)		(6.7	)	*

		(3.7	)		(3.2	)	Total before tax		(3.7	)		(2.1	)		(7.4	)		(5.3	)	Total before tax
		0.5			(1.2	)	Provision for income taxes		(1.4	)		(0.5	)		(0.9	)		(1.7	)	Provision for income taxes

	$	(4.2	)	$	(2.0	)	Net of tax	$	(2.3	)	$	(1.6	)	$	(6.5	)	$	(3.6	)	Net of tax

Total reclassifications	$	(8.1	)	$	(2.9	)	Net of tax	$	0.1		$	(2.9	)	$	(8.0	)	$	(5.8	)	Net of tax

*	These OCI components are included in the computation of net periodic pension expense (see Note ~~12)~~11).

The following table shows the tax effects on each component of OCI recognized in our condensed consolidated statements of comprehensive income (in millions):


	Three Months Ended March 31, 2013									Three Months Ended March 31, 2012						Three Months Ended June 30, 2013									Three Months Ended June 30, 2012
	Before Tax			Tax			Net of Tax			Before Tax		Tax		Net of Tax		Before Tax			Tax			Net of Tax			Before Tax			Tax		Net of Tax
Foreign currency cumulative translation adjustments	$	(65.0	)	$	—		$	(65.0	)	$	28.1	$	—	$	28.1	$	(31.8	)	$	—		$	(31.8	)	$	(75.2	)	$	—	$	(75.2	)
Unrealized cash flow hedge gains		44.8			15.6			29.2			8.0		3.9		4.1		22.9			9.3			13.6			22.7			2.6		20.1
Reclassification adjustments on foreign currency hedges		5.5			1.6			3.9			3.9		3.0		0.9		(3.6	)		(1.2	)		(2.4	)		3.8			2.5		1.3
Unrealized gains on securities		(0.1	)		—			(0.1	)		0.2		—		0.2		(0.9	)		—			(0.9	)		0.1			—		0.1
Adjustments to prior service cost and unrecognized actuarial assumptions		3.7			(0.5	)		4.2			40.9		18.0		22.9		3.7			1.4			2.3			2.1			0.5		1.6

Total Other Comprehensive Gain/(Loss)	$	(11.1	)	$	16.7		$	(27.8	)	$	81.1	$	24.9	$	56.2	$	(9.7	)	$	9.5		$	(19.2	)	$	(46.5	)	$	5.6	$	(52.1	)


																Six Months Ended June 30, 2013									Six Months Ended June 30, 2012
																Before Tax			Tax			Net of Tax			Before Tax			Tax		Net of Tax
Foreign currency cumulative translation adjustments																$	(96.8	)	$	—		$	(96.8	)	$	(47.1	)	$	—	$	(47.1	)
Unrealized cash flow hedge gains																	67.7			24.9			42.8			30.7			6.5		24.2
Reclassification adjustments on foreign currency hedges																	1.9			0.4			1.5			7.7			5.5		2.2
Unrealized gains on securities																	(1.0	)		—			(1.0	)		0.3			—		0.3
Adjustments to prior service cost and unrecognized actuarial assumptions																	7.4			0.9			6.5			43.0			18.5		24.5

Total Other Comprehensive Gain/(Loss)																$	(20.8	)	$	26.2		$	(47.0	)	$	34.6		$	30.5	$	4.1

9.8.
Fair Value Measurement of Assets and Liabilities

The following assets and liabilities are recorded at fair value on a recurring basis (in millions):


	As of March 31, 2013								As of June 30, 2013
			Fair Value Measurements at Reporting Date Using:								Fair Value Measurements at Reporting Date Using:
Description	Recorded Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Recorded Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Available-for-sale securities
Corporate debt securities	$	401.6	$	—	$	401.6	$	—	$	392.0	$	—	$	392.0	$	—
U.S. government and agency debt securities		263.9		—		263.9		—		271.6		—		271.6		—
Foreign government debt securities		5.0		—		5.0		—
Commercial paper		16.0		—		16.0		—		49.0		—		49.0		—
Certificates of deposit		89.3		—		89.3		—		87.5		—		87.5		—

Total available-for-sale securities		775.8		—		775.8		—		800.1		—		800.1		—
Derivatives, current and long-term
Foreign currency forward contracts and options		61.7		—		61.7		—		74.2		—		74.2		—
Interest rate swaps		30.6		—		30.6		—		19.8		—		19.8		—

	$	868.1	$	—	$	868.1	$	—	$	894.1	$	—	$	894.1	$	—

Liabilities
Derivatives, current and long-term
Foreign currency forward contracts and options	$	3.4	$	—	$	3.4	$	—	$	2.2	$	—	$	2.2	$	—


	As of December 31, 2012								As of December 31, 2012
			Fair Value Measurements at Reporting Date Using:								Fair Value Measurements at Reporting Date Using:
Description	Recorded Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Recorded Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Available-for-sale securities
Corporate debt securities	$	383.8	$	—	$	383.8	$	—	$	383.8	$	—	$	383.8	$	—
U.S. government and agency debt securities		295.9		—		295.9		—		295.9		—		295.9		—
Foreign government debt securities		5.0		—		5.0		—		5.0		—		5.0		—
Commercial paper		138.7		—		138.7		—		138.7		—		138.7		—
Certificates of deposit		92.3		—		92.3		—		92.3		—		92.3		—

Total available-for-sale securities		915.7		—		915.7		—		915.7		—		915.7		—
Derivatives, current and long-term
Foreign currency forward contracts and options		28.4		—		28.4		—		28.4		—		28.4		—
Interest rate swaps		33.9		—		33.9		—		33.9		—		33.9		—

	$	978.0		—	$	978.0	$	—	$	978.0	$	—	$	978.0	$	—

Liabilities
Derivatives, current and long-term
Foreign currency forward contracts and options	$	10.8	$	—	$	10.8	$	—	$	10.8	$	—	$	10.8	$	—

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

We value our foreign currency forward contracts and foreign currency options using a market approach based on foreign currency exchange rates obtained from active markets and we perform ongoing assessments of counterparty credit risk.

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

~~10.~~9.

Derivative Instruments and Hedging Activities

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

Interest Rate Risk

Derivatives Designated as Fair Value Hedges

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

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

Foreign Currency Exchange Rate 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 currency exchange rate movements on net earnings, we enter into derivative financial instruments in the form of foreign currency exchange forward contracts and options with major financial institutions. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and net assets denominated in Euros, Swiss Francs, Japanese Yen, British Pounds, Canadian Dollars, Australian Dollars, Korean Won, Swedish Krona, Czech Koruna, Thai Baht, Taiwan Dollars, South African Rand, Russian Rubles and Indian Rupees. We do not use derivative financial instruments for trading or speculative purposes.

Derivatives Designated as Cash Flow Hedges

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

We perform quarterly assessments of hedge effectiveness by verifying and documenting the critical terms of the hedge instrument and that forecasted transactions have not changed significantly. We also assess on a

quarterly basis whether there have been adverse developments regarding the risk of a counterparty default. For derivatives which qualify as hedges of future cash flows, the effective portion of changes in fair value is temporarily recorded in other comprehensive income and then recognized in cost of products sold when the hedged item affects net earnings. The ineffective portion of a derivative’s change in fair value, if any, is immediately reported in cost of products sold.

For forward contracts and options outstanding at ~~March 31,~~June 30, 2013, we had obligations to purchase U.S. Dollars and sell Euros, Japanese Yen, British Pounds, Canadian Dollars, Australian Dollars, Korean Won, Swedish Krona, Czech Koruna, Thai Baht, Taiwan Dollars, South African Rand, Russian Rubles and Indian Rupees and purchase Swiss Francs and sell U.S. Dollars at set maturity dates ranging from ~~April~~July 2013 through ~~September~~December 2015. As of ~~March 31,~~June 30, 2013, the notional amounts of outstanding forward contracts and options entered into with third parties to purchase U.S. Dollars were ~~$1,475.0~~$1,505.1 million. As of ~~March 31,~~June 30, 2013, the notional amounts of outstanding forward contracts and options entered into with third parties to purchase Swiss Francs were ~~$307.5~~$334.3 million.

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

Foreign Currency Exchange and Interest Rate Risk

Derivatives Designated as Cash Flow Hedges

In previous years, we entered into cross-currency interest rate swap agreements that matured in the first quarter of 2012. We designated these swaps as cash flow hedges of the foreign currency exchange and interest rate risks. We have not entered into any other similar swap agreements since the first quarter of 2012.

Income Statement Presentation

Derivatives Designated as Fair Value Hedges

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


	Location on Statement of Earnings		Loss on Instrument							Gain on Hedged Item									Gain / (Loss) on Instrument														Gain / (Loss) on Hedged Item
			Three Months Ended March 31,							Three Months Ended March 31,						Location on Statement of Earnings			Three Months Ended June 30,							Six Months Ended June 30,							Three Months Ended June 30,							Six Months Ended June 30,
Derivative Instrument		2013				2012			2013				2012					2013				2012			2013				2012			2013				2012			2013				2012
Interest rate swaps		Interest expense		$	(3.3	)	$	(3.2	)		$	3.3		$	3.2		Interest expense			$	(10.8	)	$	8.3			$	(14.1	)	$	5.1			$	10.8		$	(8.3	)		$	14.1		$	(5.1	)

We had no ineffective fair value hedging instruments during the three and six month periods ended ~~March 31,~~June 30, 2013 and 2012.

Derivatives Designated as Cash Flow Hedges

Derivative instruments designated as cash flow hedges had the following effects, before taxes, on OCI and net earnings on our condensed consolidated statements of earnings, condensed consolidated statements of comprehensive income and condensed consolidated balance sheets (in millions):


	Amount of Gain /(Loss) Recognized in OCI							Amount of Gain /(Loss) Reclassified from OCI								Amount of Gain / (Loss) Recognized in OCI																	Amount of Gain / (Loss) Reclassified from OCI
	Three Months Ended March 31,					Location on Statement of Earnings		Three Months Ended March 31,								Three Months Ended June 30,								Six Months Ended June 30,							Location on Statement of Earnings		Three Months Ended June 30,								Six Months Ended June 30,
Derivative Instrument	2013			2012			2013				2012				2013				2012				2013				2012				Location on Statement of Earnings	2013				2012				2013				2012
Foreign exchange forward contracts	$	45.3		$	8.0	Location on Statement of Earnings	Cost of products sold		$	(5.4	)		$	(4.1	)		$	22.7			$	23.8			$	68.0			$	31.8		Cost of products sold		$	3.7			$	(3.7	)		$	(1.7	)		$	(7.8	)
Foreign exchange options		(0.5	)		—	Cost of products sold			(0.1	)			—				0.2				(1.1	)			(0.3	)			(1.1	)	Cost of products sold			(0.1	)			(0.1	)			(0.2	)			(0.1	)
Cross-currency interest rate swaps		—			—	Interest expense			—				0.2				—				—				—				—		Interest expense			—				—				—				0.2

	$	44.8		$	8.0			$	(5.5	)		$	(3.9	)		$	22.9			$	22.7			$	67.7			$	30.7				$	3.6			$	(3.8	)		$	(1.9	)		$	(7.7	)

The net amount recognized in earnings during the three and six month periods ended ~~March 31,~~June 30, 2013 and 2012 due to ineffectiveness and amounts excluded from the assessment of hedge effectiveness was not significant.

The fair value of outstanding derivative instruments designated as cash flow hedges and recorded on the balance sheet at ~~March 31,~~June 30, 2013, together with settled derivatives where the hedged item has not yet affected earnings, was a net unrealized gain of ~~$55.3~~$74.7 million, or ~~$37.2~~$48.4 million after taxes, which is deferred in OCI. Of the net unrealized gain, ~~$22.9~~$31.1 million, or ~~$16.0~~$20.0 million after taxes, is expected to be reclassified to earnings over the next twelve months.

Derivatives Not Designated as Hedging Instruments

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


	Location on Statement of Earnings		Three Months Ended March 31,							Location on Statement of Earnings			Three Months Ended June 30,							Six Months Ended June 30,
Derivative Instrument		2013				2012				Location on Statement of Earnings		2013				2012			2013				2012
Foreign exchange forward contracts	Location on Statement of Earnings	Cost of products sold		$	7.9		$	(1.9	)		Cost of products sold			$	(0.3	)	$	10.5			$	7.6		$	8.6

This impact does not include any offsetting gains/losses recognized in earnings as a result of foreign currency remeasurement of monetary assets and liabilities denominated in a currency other than an entity’s functional currency.

Balance Sheet Presentation

As of ~~March 31,~~June 30, 2013 and December 31, 2012, all derivative instruments designated as fair value hedges and cash flow hedges are recorded at fair value on the balance sheet. On our condensed consolidated balance sheets, we recognize individual forward contracts and options with the same counterparty on a net asset/liability basis if we have a master netting agreement with the counterparty. Under these master netting agreements, we are able to settle derivative instrument assets and liabilities with the same counterparty in a single transaction, instead of settling each derivative instrument separately. We have master netting agreements with almost all of our counterparties. The fair value of derivative instruments on a gross basis is as follows (in millions):


	March 31, 2013			December 31, 2012			June 30, 2013			December 31, 2012
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
*Asset Derivatives*
Foreign exchange forward contracts	Other current assets	$	53.0	Other current assets	$	29.7	Other current assets	$	55.2	Other current assets	$	29.7
Foreign exchange options	Other current assets		0.1	Other current assets		0.6	Other current assets		—	Other current assets		0.6
Foreign exchange forward contracts	Other assets		30.8	Other assets		19.8	Other assets		31.9	Other assets		19.8
Interest rate swaps	Other assets		30.6	Other assets		33.9	Other assets		19.8	Other assets		33.9

Total asset derivatives		$	114.5		$	84.0		$	106.9		$	84.0

*Liability Derivatives*
Foreign exchange forward contracts	Other current liabilities	$	17.8	Other current liabilities	$	20.2	Other current liabilities	$	9.6	Other current liabilities	$	20.2
Foreign exchange forward contracts	Other long-term liabilities		7.8	Other long-term liabilities		12.3	Other long-term liabilities		5.5	Other long-term liabilities		12.3

Total liability derivatives		$	25.6		$	32.5		$	15.1		$	32.5

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


		As of March 31, 2013						As of December 31, 2012							As of June 30, 2013						As of December 31, 2012
Description	Location	Gross Amount		Offset		Net Amount in Balance Sheet		Gross Amount		Offset		Net Amount in Balance Sheet		Location	Gross Amount		Offset		Net Amount in Balance Sheet		Gross Amount		Offset		Net Amount in Balance Sheet
*Asset Derivatives*
Cash flow hedges	Other current assets	$	53.1	$	15.1	$	38.0	$	30.3	$	15.2	$	15.1	Other current assets	$	55.2	$	7.6	$	47.6	$	30.3	$	15.2	$	15.1
Cash flow hedges	Other assets		30.8		7.1		23.7		19.8		6.5		13.3	Other assets		31.9		5.3		26.6		19.8		6.5		13.3
*Liability Derivatives*
Cash flow hedges	Other current liabilities		17.8		15.1		2.7		20.2		15.2		5.0	Other current liabilities		9.6		7.6		2.0		20.2		15.2		5.0
Cash flow hedges	Other long-term liabilities		7.8		7.1		0.7		12.3		6.5		5.8	Other long-term liabilities		5.5		5.3		0.2		12.3		6.5		5.8

~~11.~~10.

Income Taxes

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

During the second quarter of 2011, the IRS concluded their examination of our U.S. federal returns for years 2005 through 2007 and issued income tax assessments reallocating profits between certain of our U.S. and foreign subsidiaries. In July 2013, the IRS examination division issued a Notice of Proposed Adjustment (NOPA) for tax years 2008 and 2009. This NOPA also relates to intercompany pricing between certain of our U.S. and foreign subsidiaries. We ~~believe that we have followed applicable U.S. tax laws and are vigorously defending our income tax positions. The ultimate~~continue to pursue resolution of ~~this matter is uncertain and could have a material impact on our income~~the disputed tax ~~expense, results of operations, and cash flows for future periods.~~

~~U.S. and Europe tax returns~~matters for years ~~2007~~2005 through 2009 ~~are in various stages of review by~~with the relevant tax authorities. During the fourth quarter of 2012, we received indication from taxing jurisdictions that our as-filed tax positions, with regard to profit allocations, are in dispute. Although in each case we believe we have followed applicable tax laws in establishing our filed tax positions, this new information impacted our determination of unrecognized tax benefits resulting in an increase in both the net amount of tax liability for unrecognized tax benefits and income tax expense.IRS. The ultimate resolution of this matter is uncertain and could have a material impact on our income tax expense, results of operations, and cash flows for future periods.

In the three and six month ~~period~~periods ended ~~March 31,~~June 30, 2013, our effective tax rate was ~~23.1 percent.~~22.6 percent and 22.9 percent, respectively. Our effective tax rate was lower than the U.S. statutory income tax rate of 35 percent primarily due to income earned in foreign

locations with lower tax rates. Our 2013 first quarter tax rate also reflects the retroactive extension of the R&D tax credit and other tax benefits resulting from enactment of legislation in the U.S. that became effective in January 2013. Due to the timing of the laws’ enactment, the 2012 tax year benefits were recognized in the first quarter of 2013 for financial reporting purposes.

~~12.~~11.

Retirement Benefit Plans

We have defined benefit pension plans covering certain U.S. and Puerto Rico employees. The employees who are not participating in the defined benefit plans receive additional benefits under our defined contribution

plans. Plan benefits are primarily based on years of credited service and the participant’s compensation. In addition to the U.S. and Puerto Rico defined benefit pension plans, we sponsor various foreign pension arrangements, including retirement and termination benefit plans required by local law or coordinated with government sponsored plans.

The components of net periodic pension expense for our U.S. and foreign defined benefit retirement plans are as follows (in millions):


	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012			2013			2012
Service cost	$	7.1		$	6.8		$	7.0		$	6.1		$	14.1		$	12.9
Interest cost		4.7			5.0			4.7			4.6			9.4			9.6
Expected return on plan assets		(8.9	)		(8.3	)		(8.9	)		(8.2	)		(17.8	)		(16.5	)
Settlement								—			0.7			—			0.7
Amortization of prior service cost		(1.0	)		(0.2	)		(0.9	)		(1.2	)		(1.9	)		(1.4	)
Amortization of unrecognized actuarial loss		4.7			3.4			4.6			3.3			9.3			6.7

Net periodic pension expense	$	6.6		$	6.7		$	6.5		$	5.3		$	13.1		$	12.0

We contributed $20.0 million during the ~~three~~six month period ended ~~March 31,~~June 30, 2013 to our U.S. and Puerto Rico defined benefit plans and do not expect to contribute an additional ~~$15.0 million~~funds to these plans during the remainder of 2013. We contributed ~~$3.9~~$7.8 million to our foreign-based defined benefit plans in the ~~three~~six month period ended ~~March 31,~~June 30, 2013 and expect to contribute ~~$11.7~~$6.9 million to these foreign-based plans during the remainder of 2013.

In March 2012, we amended our U.S. defined benefit pension plan which led us to remeasure our plan assets and obligations. Accordingly, the resulting remeasurement was reflected in our condensed consolidated statements of earnings and condensed consolidated statements of comprehensive income.

~~13.~~12.

Earnings Per Share

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


	Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012		2013		2012
Weighted average shares outstanding for basic net earnings per share		168.7		177.4		168.8		175.2		168.8		176.3
Effect of dilutive stock options and other equity awards		2.0		1.1		1.9		1.0		1.9		1.0

Weighted average shares outstanding for diluted net earnings per share		170.7		178.5		170.7		176.2		170.7		177.3

During the three and six month ~~period~~periods ended ~~March 31,~~June 30, 2013, an average of ~~6.3~~4.9 million options and 5.6 million options, respectively, to purchase shares of common stock were not included in the computation of diluted earnings per share because the exercise prices of these options were greater than the average market price of the common stock. During the three and six month ~~period~~periods ended ~~March 31,~~June 30, 2012, an average of ~~12.3~~12.8 million options and 12.6 million options, respectively, were not included in the computation.

In the three month period ended ~~March 31,~~June 30, 2013, we repurchased ~~5.4~~0.9 million shares of our common stock at an average price of ~~$73.18~~$78.16 per share for a total cash outlay of ~~$392.0~~$68.8 million, including commissions. In the six month period ended June 30, 2013, we repurchased 6.2 million shares of our common stock at an average price of $73.88 per share for a total cash outlay of $460.8 million, including commissions. As of ~~March 31,~~June 30, 2013, ~~$622.7~~$553.9 million remained authorized under a $1.5 billion repurchase program, which will expire on December 31, 2014.

~~14.~~13.

Segment Information

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

Net sales and segment operating profit are as follows (in millions):


	Net Sales				Operating Profit						Net Sales				Operating Profit
	Three Months Ended March 31,				Three Months Ended March 31,						Three Months Ended June 30,				Three Months Ended June 30,
	2013		2012		2013			2012			2013		2012		2013			2012
Americas	$	634.7	$	634.4	$	320.9		$	320.8		$	660.1	$	614.3	$	324.9		$	315.7
Europe		307.5		300.8		87.9			94.7			307.5		305.2		92.5			94.5
Asia Pacific		196.7		205.5		75.6			77.7			201.9		205.5		87.0			79.0

Total	$	1,138.9	$	1,140.7							$	1,169.5	$	1,125.0

Share-based compensation						(14.0	)		(12.8	)						(12.2	)		(15.0	)
Inventory step-up and other inventory charges						(2.2	)		(1.0	)
Inventory step-up and other inventory and manufacturing related charges																(11.7	)		(1.0	)
Certain claims																(47.0	)		—
Special items						(33.5	)		(33.5	)						(75.6	)		(30.7	)
Global operations and corporate functions						(136.5	)		(150.3	)						(147.5	)		(140.6	)

Operating profit					$	298.2		$	295.6						$	210.4		$	301.9


	Net Sales				Operating Profit
	Six Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013			2012
Americas	$	1,294.8	$	1,248.7	$	645.8		$	636.5
Europe		615.0		606.0		180.4			189.2
Asia Pacific		398.6		411.0		162.6			156.7

Total	$	2,308.4	$	2,265.7

Share-based compensation						(26.2	)		(27.8	)
Inventory step-up and other inventory and manufacturing related charges						(13.9	)		(2.0	)
Certain claims						(47.0	)		—
Special items						(109.1	)		(64.2	)
Global operations and corporate functions						(284.0	)		(290.9	)

Operating profit					$	508.6		$	597.5

category. Net sales in the three and six month ~~period~~periods ended ~~March 31,~~June 30, 2012 related to these products have been reclassified to conform to the 2013 presentation. Net sales by product category are as follows (in millions):


	Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012		2013		2012
Reconstructive
Knees	$	471.0	$	474.6	$	481.0	$	464.6	$	952.0	$	939.2
Hips		330.8		344.5		338.4		340.0		669.2		684.5
Extremities		47.8		44.8		48.6		42.5		96.4		87.3

		849.6		863.9		868.0		847.1		1,717.6		1,711.0
Dental		59.7		60.2		61.4		61.5		121.1		121.7
Trauma		82.0		75.5		74.1		73.9		156.1		149.4
Spine		47.7		53.2		54.2		52.4		101.9		105.6
Surgical and other		99.9		87.9		111.8		90.1		211.7		178.0

Total	$	1,138.9	$	1,140.7	$	1,169.5	$	1,125.0	$	2,308.4	$	2,265.7

~~15.~~14.

Commitments and Contingencies

On a quarterly and annual basis, we review relevant information with respect to loss contingencies and update our accruals, disclosures and estimates of reasonably possible losses or ranges of loss based on such reviews. We establish liabilities for loss contingencies when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. For matters where a loss is believed to be reasonably possible, but not probable, no accrual has been made.

Litigation

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

Since 2008, we have ~~accrued estimated losses~~recognized expense of ~~$403.2~~$450.2 million forDurom Cup-related ~~claims. With respect to~~claims, including $47.0 million during the ~~period covered by this report,~~three and six month periods ended June 30, 2013. We did not record any expense forDurom Cup-related claims during the three and six month periods ended June 30, 2012. Based on our review of the most recent claims information available, we increased our estimate of our total liability for these claims as of ~~March 31,~~June 30, 2013.

We maintain insurance for product liability claims, subject to self-insurance retention requirements. In 2008, we notified our insurance carriers of potential claims related to theDurom Cup. Based upon our most recent estimates for liabilities associated with theDurom Cup, we believe we may exhaust our self-insured retention under our insurance program. In this event, we would have a claim for insurance proceeds for ultimate losses which exceed the self-insured retention amount, subject to a 20 percent co-payment requirement and a cap. We believe our contracts with the insurance carriers are enforceable for these claims and, therefore, we believe it is probable that we would recover some amount from our insurance carriers if our ultimate losses exceed our self-insured retention. We have recognized a $218.0 million receivable in “Other assets” on our condensed consolidated balance sheet as of June 30, 2013 ~~remains consistent with~~for estimated insurance recoveries, which reduced “Certain claims” expense. As is customary in this process, our ~~prior~~insurance carriers have reserved all rights under their respective policies and could still ultimately deny coverage for some or all of our insurance claims.

Our estimate ~~and, accordingly, we did not record any expense during~~as of June 30, 2013 of the ~~three month period ended March 31, 2013. With respect to the same prior year period, we also did not record any expense~~remaining liability for allDurom Cup-related ~~claims.~~claims is $400.8 million, of which $50.0 million is classified as short-term in “Other current liabilities” and $350.8 million is classified as long-term in “Other long-term liabilities” on our consolidated balance sheet. We expect to pay the majority of theDurom Cup-related claims within the next five years.

Our understanding of clinical outcomes with theDurom Cup continues to evolve. We rely on significant estimates in determining the provisions forDurom Cup-related claims, including the number of claims that we will receive and the average amount we will pay per claim. The actual number of claims that we receive and the amount we pay per claim may differ from our estimates. Among other factors, since our understanding of the clinical outcomes is still evolving, we cannot reasonably estimate the possible loss or range of loss that may result fromDurom Cup-related claims in excess of the losses we have accrued.

Margo and Daniel Polett v. Zimmer, Inc. et al.: On August 20, 2008, the Poletts filed an action against us and an unrelated third party, Public Communications, Inc. (PCI), in the Court of Common Pleas, Philadelphia, Pennsylvania seeking an unspecified amount of damages for injuries and loss of consortium allegedly suffered by Mrs. Polett and her spouse, respectively. The complaint alleged that defendants were negligent in connection with Mrs. Polett’s participation in a promotional video featuring one of our knee products. The case was tried in November 2010 and the jury returned a verdict in favor of plaintiffs. The jury awarded $27.6 million in compensatory damages and apportioned fault 30 percent to plaintiffs, 34 percent to us and 36 percent to PCI. Under applicable law, we may be liable for any portion of the damages apportioned to PCI that it does not pay. On December 2, 2010, we and PCI filed a Motion for Post-Trial Relief seeking a judgment notwithstanding the verdict, a new trial or a remittitur. On June 10, 2011, the trial court entered an order denying our Motion for ~~Post-~~

~~Trial~~Post-Trial Relief and affirming the jury verdict in full and entered judgment for $20.3 million against us and PCI. On June 29, 2011, we filed a Notice of Appeal to the Superior Court of Pennsylvania and posted a bond for the verdict amount plus interest. Oral argument before the appellate court in Philadelphia, Pennsylvania was held as scheduled on March 13, 2012. On March 1, 2013, the Superior Court of Pennsylvania vacated the $27.6 million judgment and remanded the case for a new trial. On March 15, 2013, ~~Plaintiffs~~plaintiffs filed a motion for re-argumenten banc, and on March 28, 2013, we filed our response in opposition.~~Plaintiffs’~~On May 9, 2013, the Superior Court of Pennsylvania granted plaintiffs’ motion for re-argument ~~is pending before~~en banc. The parties have filed their respective briefs to the ~~court.~~en banc panel. No date for the re-argument has been set. Although we are defending this lawsuit vigorously, its ultimate resolution is uncertain.

NexGen^® Knee System claims: Following a wide-spread advertising campaign conducted by certain law firms beginning in 2010, a number of product liability lawsuits have been filed against us in various jurisdictions. The majority of the cases are currently pending in a federal Multidistrict Litigation in the Northern District of Illinois. Other cases are pending in other state and federal courts, and additional lawsuits may be filed. As of ~~March, 31,~~June 30, 2013, discovery in these lawsuits was underway and no trial dates had been set. We have not accrued an estimated loss relating to these lawsuits because we believe the plaintiffs’ allegations are not consistent with the record of clinical success for these products. As a result, we do not believe that it is probable that we have incurred a liability, and we cannot reasonably estimate any loss that might eventually be incurred. Although we are vigorously defending these lawsuits, their ultimate resolution is uncertain.

Intellectual Property-Related Claims

Royalty arrangements: ~~We are involved in certain ongoing~~As previously disclosed, we have been party to contractual and other disputes pertaining to certain royalty arrangements. ~~We are defending ourselves vigorously against these claims.~~ These matters, ~~are~~which were in varying stages of dispute resolution ~~processes.~~processes, were resolved through a settlement agreement reached in June 2013 and memorialized in July 2013. We accrued losses related to one of these matters in the year ended December 31, 2012. Our estimate of our total liability for this matter as of March 31, 2013 remains consistent with our prior estimate, and, accordingly, we did not record any expenserecorded $21.7 million during the three month period ended ~~March 31, 2013. With respect to~~June 30, 2013 for the ~~other matters,~~liability incurred in excess of amounts we cannot reasonably estimate the possible loss, if any, we may incur or predict the likely outcome of the matters. An adverse result in any of these matters could have an adverse effect on our results of operations in any particular period.had previously accrued.

Patent infringement lawsuit: On December 10, 2010, Stryker Corporation and related entities (Stryker) filed suit against us in the U.S. District Court for the Western District of Michigan, alleging that certain of ourPulsavacPlus ~~wound debridement products~~Wound Debridement Products infringe three U.S. patents assigned to Stryker. The case was tried beginning on January 15, 2013, and on February 5, 2013, the jury found that we infringed certain claims of the subject patents. The jury awarded $70.0 million in monetary damages for lost profits. The jury also found that we

willfully infringed the subject patents. Final judgment has not yet been entered. We ~~are currently preparing~~filed post-trial motions challenging the verdict. Following the trial court’s rulings on these post-trial motions and entry of final judgment, we intend to appeal the unfavorable verdict. We have not accrued an estimated loss related to this matter in our consolidated statement of earnings for the quarter ended ~~March 31,~~June 30, 2013 or any prior period because we do not believe that it is probable that we have incurred a liability. Although we believe we have strong grounds to reverse the jury’s verdict, the ultimate resolution of this matter is uncertain. In the future we could be required to record a charge of up to $70.0 million that could have a material adverse effect on our results of operations.

Regulatory ~~Matter~~Matters

In September 2012, we received a warning letter from the U.S. Food and Drug Administration (FDA) citing concerns relating to certain manufacturing and validation processes pertaining toTrilogy^®Acetabular System products manufactured at our Ponce, Puerto Rico manufacturing facility. We have provided detailed responses to the FDA as to our corrective actions and will continue to work expeditiously to address the issues identified by the ~~FDA.~~FDA during recent inspections in Ponce. As of ~~March 31,~~June 30, 2013, the warning letter remains pending. Until the violations are corrected, we may be subject to additional regulatory action by the FDA, including seizure, injunction and/or civil monetary penalties. Additionally, requests for Certificates to Foreign Governments related to products manufactured at the Ponce facility may not be granted and premarket approval applications for Class III devices to which the ~~Quality System~~quality system regulation deviations are reasonably related will not be approved until the violations have been corrected. In addition to responding to the warning letter described above, we are in the process of addressing various FDA Form 483 inspectional observations at certain of our manufacturing facilities. The ultimate outcome of these matters is presently uncertain.

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

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and corresponding notes included elsewhere in this Form 10-Q. Certain percentages presented in this discussion and analysis are calculated from the underlying whole-dollar amounts and therefore may not recalculate from the rounded numbers used for disclosure purposes. In addition, certain amounts in the 2012 condensed consolidated financial statements have been reclassified to conform to the 2013 presentation.

Executive Level Overview

~~First Quarter~~Results for the Three and Six Month Periods ended June 30, 2013 ~~Results~~(Current Periods)

Our sales results for the ~~first quarter of 2013 were in line~~Current Periods reflect increased growth as compared with ~~our expectations.~~recent trends. Sales ~~growth was essentially flat~~from new product introductions as well as a stable or slightly improved joint replacement market drove sales growth. Sales compared to the same prior year periods increased more as a percentage of year-over-year growth in the second quarter compared to the first quarter, due in part to new product penetration and improved pricing dynamics. For the six month period ~~as expected, due to modest~~ended June 30, 2013, sales growth from increased volume and changes in the mix of product sales was partially offset by continued pricing pressure and unfavorable foreign currency exchange rates. ~~We believe~~

Despite increased sales, our net earnings for the ~~global market~~Current Periods were lower than the prior year periods primarily due to lower gross margins, a $47.0 million charge for “Certain claims” and a $21.7 million charge for a legal settlement. Additionally, we continue to incur expenses related to our ~~musculoskeletal products was stable, considering there~~operational excellence initiatives and such charges were ~~two fewer billing days in most of our key markets~~higher in the ~~first quarter of 2013~~Current Periods compared to the same prior year ~~period.~~

~~We were able~~periods. Our operational excellence initiatives are intended to ~~achieve leveraged earnings~~improve our future operating results and ~~diluted earnings per share growth through lower operating expenses, a favorable effective tax rate (ETR),~~include centralizing or outsourcing certain functions and ~~repurchases of~~improving quality, distribution, sourcing, manufacturing and our ~~common stock. Operating expenses were lower as certain significant research~~information technology systems. Research and development (R&D) expenses decreased in the Current Periods due to the completion of certain projects in 2012, such as ~~our~~Persona^TM, The Personalized Knee ~~System,~~System. Selling, general and administrative expenses (SG&A) were ~~completed~~slightly higher in ~~2012. Additionally, we experienced lower legal expenses and~~the Current Periods compared to the prior year periods due to sales growth. However, SG&A as a percentage of sales decreased in the Current Periods as a result of savings from our operational excellence initiatives. Our ~~ETR~~effective tax rate (ETR) benefited from ~~U.S. tax law~~ changes ~~that were implemented in January 2013, but will be effective for our 2012 tax returns. Under GAAP, the 2012 tax benefits were recognized~~ in the ~~first quarter~~mix of ~~2013.~~income between taxing jurisdictions, as the significant expenses for “Certain claims” and “Special items” were primarily incurred in jurisdictions with higher rates of tax, which lowers taxable income in those jurisdictions.

2013 Outlook

We estimate our net sales will grow between 12 and 3 percent in 2013. This assumes the market for knee and hip procedures will remain stable and grow in low single digits. We expect pricing to have a negative effect on sales growth of approximately 2 percent, and foreign currency exchange rates to have a negative effect on sales growth of approximately ~~1.5~~2 percent based upon ~~March 31,~~June 30, 2013 rates.

Assuming currency rates remain at ~~March 31,~~June 30, 2013 levels, we expect our gross margin to be ~~between 74.8 and 75.3~~approximately 73.5 percent of sales in 2013, which includes inventory step-up and other inventory and manufacturing charges related to acquisitions and operational excellence initiatives. This range assumes that foreign currency hedge losses will be lower in 2013 than in 2012. The range also takes into consideration the impact of the new 2.3 percent medical device excise tax on a majority of our U.S. sales. While we started paying the excise tax in January 2013, it will not significantly increase our cost of products sold expense in our consolidated statement of earnings until ~~later in~~ the ~~year.~~second half of 2013. Once our cost of products sold starts reflecting this excise tax, we estimate the cost to be $10 million to $15 million on a quarterly basis.

We do not expect to be able to offset the full impact of the U.S. medical device excise tax on net earnings through higher pricing on our products or through higher sales volumes resulting from the expansion of health insurance coverage. However, we do expect to offset the tax with cost savings from our operational excellence initiatives.

We expect ~~to continue making investments in~~ R&D ~~of approximately 5 percent~~as a percentage of sales in ~~2013. Selling, general and administrative (SG&A)~~2013 will be approximately 4.5 percent. SG&A expenses as a percent of sales isare expected to be ~~between~~approximately 39.5 ~~and 40.0~~ percent in 2013 as we realize efficiencies from our operational excellence initiatives and further leverage revenue growth.

For the year, we expect to incur ~~$120 million to $130~~approximately $250 million of expenses related to inventory step-up and other inventory and manufacturing related charges, “Certain claims” and “Special items.” We have already recognized $47 million as “Certain claims” in the six month period ended June 30, 2013, and do not anticipate recognizing any more “Certain claims” expense in 2013 ~~related to~~unless our ~~operational excellence initiatives. These programs are targeted at streamlining~~estimated liability forDurom Cup-related claims changes as discussed in Note 14. Of the ~~organization and business processes. They are expected to be mostly completed in 2013. We also expect to incur $5~~remaining $203 million ~~to $15 million for certain acquisition and integration costs connected with recent acquisitions. We expect to recognize~~of expense, the majority ~~of these~~

~~expenses in~~will be recognized as “Special items” on our statement of earnings, but some will be related to inventory and will be reflected in costs of products sold.

Assuming variable interest rates remain at ~~March 31,~~June 30, 2013 levels, we expect interest ~~income and~~ expense, net of interest income, to be approximately ~~$60~~$56 million in 2013, which is similar to 2012.

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 March 31,				% Inc (Dec)			Volume/ Mix			Price				Foreign Exchange			Three Months Ended June 30,						% Inc (Dec)			Volume/ Mix		Price			Foreign Exchange
	2013		2012		% Inc (Dec)						Price			2013					2012					% Inc (Dec)			Volume/ Mix		Price			Foreign Exchange
Americas	$	634.7	$	634.4		—	%	Volume/ Mix		2	%			(2	Foreign Exchange	)%		—	%	$	660.1		$	614.3			7	%	10	%		(2	)%		(1	)%
Europe		307.5		300.8		2			3			(1	)			—			307.5			305.2			1			1		(1	)		1
Asia Pacific		196.7		205.5		(4	)		6			(3	)			(7	)		201.9			205.5			(2	)		7		—			(9	)

Total	$	1,138.9	$	1,140.7		—			3			(2	)			(1	)	$	1,169.5		$	1,125.0			4			7		(1	)		(2	)


	Six Months Ended June 30,				% Inc (Dec)			Volume/ Mix			Price			Foreign Exchange
	2013		2012		% Inc (Dec)			Volume/ Mix			Price			Foreign Exchange
Americas	$	1,294.8	$	1,248.7		4	%		6	%		(2	)%		—	%
Europe		615.0		606.0		1			2			(1	)		—
Asia Pacific		398.6		411.0		(3	)		6			(1	)		(8	)

Total	$	2,308.4	$	2,265.7		2			5			(2	)		(1	)

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

Net Sales by Product Category

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


	Three Months Ended March 31,				% Inc (Dec)			Volume/ Mix			Price				Foreign Exchange				Three Months Ended June 30,						% Inc (Dec)				Volume/ Mix				Price				Foreign Exchange
	2013		2012		% Inc (Dec)						Price			2013						2012					% Inc (Dec)				Volume/ Mix				Price				Foreign Exchange
Reconstructive								Volume/ Mix
Knees	$	471.0	$	474.6		(1	)%		2	%		(2	)%		Foreign Exchange		(1	)%		$	481.0		$	464.6			4	%			6	%			(1	)%			(1	)%
Hips		330.8		344.5		(4	)		1			(3	)			(2	)			338.4			340.0			—				4				(2	)			(2	)
Extremities		47.8		44.8		7			9			(2	)			—				48.6			42.5			14				16				(1	)			(1	)

		849.6		863.9		(2	)		2			(3	)			(1	)			868.0			847.1			2				6				(2	)			(2	)
Dental		59.7		60.2		(1	)		(2	)		1				—				61.4			61.5			—				(1	)			—				1
Trauma		82.0		75.5		9			12			(1	)			(2	)			74.1			73.9			—				3				—				(3	)
Spine		47.7		53.2		(10	)		(7	)		(3	)			—				54.2			52.4			3				6				(2	)			(1	)
Surgical and other		99.9		87.9		14			16			1				(3	)			111.8			90.1			24				28				—				(4	)

Total	$	1,138.9	$	1,140.7		—			3			(2	)			(1	)		$	1,169.5		$	1,125.0			4				7				(1	)			(2	)

   Six Months Ended
June 30,    % Inc (Dec) Volume/
Mix Price Foreign
Exchange
   2013    2012
Reconstructive

Knees
   $ 952.0       $ 939.2       1 % 4 % (2 )% (1 )%
Hips
   669.2       684.5       (2 ) 2    (2 ) (2 )
Extremities
   96.4       87.3       10    13    (2 ) (1 )





   1,717.6       1,711.0       —    4    (2 ) (2 )
Dental
   121.1       121.7       —    (1 ) —    1
Trauma
   156.1       149.4       4    7    —    (3 )
Spine
   101.9       105.6       (3 ) (1 ) (2 ) —
Surgical and other
   211.7       178.0       19    22    —    (3 )





Total
   $ 2,308.4       $ 2,265.7       2    5    (2 ) (1 )

Beginning in 2013, our Knees product category net sales include certain early intervention products that are primarily used in knee procedures. In 2012, these products were included in the Surgical and other product category. Net sales in the three and six month ~~period~~periods ended ~~March 31,~~June 30, 2012 related to these products have been

reclassified to conform to the 2013 presentation. The following table presents net sales by product category by region (dollars in millions):


	Three Months Ended March 31,							Three Months Ended June 30,							Six Months Ended June 30,
	2013		2012		% Inc (Dec)			2013		2012		% Inc (Dec)			2013		2012		% Inc (Dec)
Reconstructive
Knees
Americas	$	275.5	$	282.5		(2	)%	$	281.8	$	268.5		5	%	$	557.3	$	551.0		1	%
Europe		122.5		118.1		4			117.6		116.9		1			240.1		235.0		2
Asia Pacific		73.0		74.0		(1	)		81.6		79.2		3			154.6		153.2		1
Hips
Americas		151.9		153.9		(1	)		156.7		151.8		3			308.6		305.7		1
Europe		111.8		114.0		(2	)		113.7		115.9		(2	)		225.5		229.9		(2	)
Asia Pacific		67.1		76.6		(12	)		68.0		72.3		(6	)		135.1		148.9		(9	)
Extremities
Americas		37.3		35.2		6			37.4		32.3		16			74.7		67.5		11
Europe		7.8		7.0		11			8.4		7.6		11			16.2		14.6		11
Asia Pacific		2.7		2.6		1			2.8		2.6		9			5.5		5.2		5

		849.6		863.9		(2	)		868.0		847.1		2			1,717.6		1,711.0		—
Dental
Americas		35.5		35.3		—			35.3		34.8		2			70.8		70.1		1
Europe		19.6		20.1		(3	)		21.4		21.1		2			41.0		41.2		—
Asia Pacific		4.6		4.8		(1	)		4.7		5.6		(18	)		9.3		10.4		(10	)
Trauma
Americas		41.2		37.2		11			37.0		37.5		(1	)		78.2		74.7		5
Europe		18.8		16.0		18			18.2		17.0		6			37.0		33.0		12
Asia Pacific		22.0		22.3		(2	)		18.9		19.4		(2	)		40.9		41.7		(2	)
Spine
Americas		30.7		36.6		(16	)		35.0		35.4		(1	)		65.7		72.0		(9	)
Europe		12.2		12.4		(1	)		13.7		12.7		8			25.9		25.1		3
Asia Pacific		4.8		4.2		15			5.5		4.3		25			10.3		8.5		20
Surgical and other
Americas		62.6		53.7		17			76.9		54.0		43			139.5		107.7		30
Europe		14.8		13.2		12			14.5		14.0		3			29.3		27.2		8
Asia Pacific		22.5		21.0		7			20.4		22.1		(8	)		42.9		43.1		(1	)

Total	$	1,138.9	$	1,140.7		—		$	1,169.5	$	1,125.0		4		$	2,308.4	$	2,265.7		2

Demand (Volume and Mix) Trends

Increased volume and changes in the mix of product sales contributed 37 percentage points of year-over-year sales growth during the three month period ended ~~March 31,~~June 30, 2013, which is 23 percentage points ~~worse~~better than the three month period ended June 30, 2012, and 4 percentage points better than the three month period ended March 31, ~~2012, and 1 percentage point worse than~~2013. Sales in the three month period ended ~~December 31, 2012. Sales~~June 30, 2013 benefited mostly from new products as well as an additional billing day in our largest operating segment compared to the ~~first quarter of 2013 were negatively impacted by two fewer billings days, which we define as non-holiday weekdays.~~prior year.

~~Absent the effect of billing days,~~We believe procedure volumes in the broader musculoskeletal market remained stable or slightly improved in the ~~first~~second quarter of 2013 relative to the ~~fourth~~first quarter of ~~2012,~~2013, consistent with our expectations. We believe long-term indicators point toward sustained growth driven by an aging global population, growth in emerging markets, obesity, proven clinical benefits, new material technologies, advances in surgical techniques and more active lifestyles, among other factors. In addition, the ongoing shift in demand to premium products and the introduction of patient specific devices is expected to continue to positively affect sales growth.

Pricing Trends

Global selling prices had a negative effect of 21 percent on year-over-year sales during the three month period ended ~~March 31,~~June 30, 2013, which is ~~consistent with~~1 percentage point better than the three month period ended June 30, 2012, and the three month period ended March 31, ~~2012,~~2013. Our Americas and ~~the three month period ended December 31, 2012. In all~~Europe reporting segments weand certain countries of our Asia Pacific reporting segment continued to experience pricing pressure from governmental healthcare cost containment efforts and from local hospitals and health systems. ~~For the remainder of the year, we expect this pressure will alleviate slightly~~Pricing in our Asia Pacific reporting segment improved as we reached the anniversary ~~out~~ of a biennial negative price adjustment in Japan that went into effect in April 2012. ~~However, for~~For the entire year, we expect lower prices will continue to have a negative effect on sales of approximately 2 percent.

Foreign Currency Exchange Rates

For the three month period ended ~~March 31,~~June 30, 2013, foreign currency exchange rates resulted in a 12 percent decrease in ~~sales.~~sales, primarily from the strengthening of the U.S. Dollar versus the Japanese Yen in the period. If foreign currency exchange rates remain consistent with ~~March 31,~~June 30, 2013 rates, we estimate that a stronger dollar versus foreign currency exchange rates will have a negative effect on sales in 2013 of approximately ~~1.5~~2 percent. We address currency risk through regular operating and financing activities and through the use of forward contracts and foreign currency options solely to manage foreign currency volatility and risk. Changes to foreign currency exchange rates affect sales growth, but due to offsetting gains/losses on hedge contracts and options, which are recorded in cost of products sold, the effect on net earnings in the near term is expected to be minimal.

Sales by Product Category

Knees

Knee sales ~~decreased~~increased 4 percent and 1 percent in the three and six month ~~period~~periods ended ~~March 31,~~June 30, 2013, respectively, when compared to the same prior year period, which is 1 percentage point worse than the three month period ended December 31, 2012. Positive procedure volume/mix in the three month period ended March 31, 2013 was offset by negative price and foreign currency exchange rate effects in the period.periods. Our Knee product category has benefited from new product introductions.

In the first ~~quarter~~half of 2013, we continued a broader launch of our new knee system,Persona, The Personalized Knee System. We intend to continue to deploy implant and instrument sets to all geographic regions in 2013 and beyond. In the meantime, ourNexGen^® Complete Knee Solution product line is still our leading knee ~~system.~~system in sales. Products ~~experiencing~~driving growth in this category in addition toPersona The Personalized Knee System, includedZimmer^® Patient Specific Instruments, theZimmer^®Unicompartmental High Flex Knee and our early intervention products.

~~The 1 percent decline from~~In Europe, changes in foreign currency exchange rates positively affected knee sales in ~~this product category was primarily attributable to our~~the three month period ended June 30, 2013 by 1 percent and had a minimal effect in the six month period ended June 30, 2013. In Asia Pacific, ~~reporting segment, which experienced a 5~~changes in foreign currency exchange rates negatively affected knee sales in the three and six month periods ended June 30, 2013 by 7 percent ~~decline.~~and 6 percent, respectively.

Hips

Hip sales were flat and decreased 42 percent in the three and six month ~~period~~periods ended ~~March 31,~~June 30, 2013, respectively, when compared to the same prior year ~~period.~~periods. The ~~decrease was~~decreases in the 2013 periods compared to the prior year periods were primarily from ~~lower sales of our primary stems, but was partially offset by growth~~changes in ~~revision stems.~~foreign currency exchange rates.

Leading hip stem sales were theZimmer^® M/L Taper Hip Prosthesis, theZimmer^® M/L Taper Hip Prosthesis withKinectiv^® Technology, theCLS^® Spotorno^® Stem from theCLS Hip System and theAlloclassic^® Zweymüller^®Hip ~~Stem.Products~~Stem. Products experiencing growth in this category included theWagner SL Revision^®Hip Stem, theContinuum^®Acetabular System, theTrilogy^® IT Acetabular System, theAllofit^® ITAlloclassic^®Acetabular System, ~~and~~Vivacit-E^® Highly Crosslinked Polyethylene ~~Liners.~~Liners andBIOLOX^®¹ delta Heads.

~~The 2 percent decline from~~In Europe, changes in foreign currency exchange rates had a minimal effect on hip sales in ~~this product category was primarily attributable to our~~the three and six month periods ended June 30, 2013. In Asia Pacific, ~~reporting segment, which experienced a 7~~changes in foreign currency exchange rates negatively affected hip sales in the three and six month periods ended June 30, 2013 by 10 percent ~~decline.~~and 8 percent, respectively.

Extremities

Extremities sales increased by 714 and 10 percent in the three and six month ~~period~~periods ended ~~March 31,~~June 30, 2013, respectively, when compared to the same prior year periods. TheZimmer Trabecular Metal^TM Reverse Shoulder System, theSidus^® Stem-Free Shoulder and theZimmer Trabecular Metal Total Ankle drove sales growth.Trabecular Metal Technology continues to be an effective way to address clinical needs in the extremities market.

Dental

Dental sales were flat in the three and six month periods ended June 30, 2013 when compared to the same prior year ~~period. The~~~~Zimmer Trabecular Metal~~^™ ~~Reverse Shoulder System and~~periods. This was the~~Sidus~~^® ~~Stem-Free Shoulder drove sales growth. Reverse shoulder procedures continue to gain popularity as a solution for patients with rotator cuff damage.~~

~~Dental~~

~~Dental sales declined by 1 percent in the three month period ended March 31, 2013 when compared to the same prior year period. The decrease was driven by lower~~ result of improved sales of dental reconstructive implants and digital solutions, offset by decreases in restorative products and regenerative ~~products, partially offset by sales growth in digital solutions.~~products. We believe ~~this~~the dental market continues to be ~~weak~~challenged both in the U.S. and internationally. Sales were led by theTapered Screw-Vent^® Implant System.

Trauma

Trauma sales were flat and increased 94 percent in the three and six month ~~period~~periods ended ~~March 31,~~June 30, 2013, respectively, when compared to the same prior year ~~period.~~periods. TheZimmer Natural Nail^® System continued to increase sales significantly. In addition to theZimmer Natural Nail System, theZimmer^® Periarticular Locking Plates System led Trauma sales. Sales in this product category ~~benefited~~in the three month period ended June 30, 2013 reflected less benefits from certain competitive product issues ~~especially~~when compared to the three month periods ended March 31, 2013 and December 31, 2012. Additionally, we encountered internal supply delays in the ~~U.S.~~June period that we hope to resolve in the second half of 2013.

Spine

Spine sales increased by 3 percent and decreased 10by 3 percent in the three and six month ~~period~~periods ended ~~March 31,~~June 30, 2013, respectively, when compared to the same prior year ~~period. This product category continues~~periods. The return to ~~face challenges related to pricing pressure and payor approvals. Additionally, we faced some disruption~~sales growth in the three month period ~~stemming from~~ended June 30, 2013 was led by our ~~fourth quarter 2012 actions related to~~focus on core fusion solutions, such as the ~~Inserter instrument for our PEEK~~~~Ardis~~Trinica^® ~~Interbody Spacer. Solid sales of the~~~~PathFinder NXT~~^® ~~Minimally Invasive Pedicle Screw~~Select Anterior Cervical Plate System, ~~and~~~~Trabecular Metal~~ ~~Technology products partly offset a decline~~as well as growth in ~~sales of~~ theDynesys^® Dynamic Stabilization System ~~PEEK~~and~~Ardis~~Trabecular Metal~~Interbody Spacer and other~~ Technology products.

¹ Registered trademark of CeramTec GmbH

Surgical and other

Surgical and other sales increased 1424 percent and 19 percent in the three and six month ~~period~~periods ended ~~March 31,~~June 30, 2013, respectively, when compared to the same prior year ~~period.~~periods. The primary driver of sales growth in this product category was ~~fluid waste management systems,~~theTransposal^® Fluid Waste Management System, which we acquired in October 2012 through our Dornoch Medical Systems, Inc. acquisition. ~~Surgical and other sales~~Other contributing products were ~~led by~~PALACOS^®¹² Bone Cement, ~~and tourniquet~~tourniquets and wound debridement ~~products.~~devices.

Expenses as a Percent of Net Sales


	Three Months Ended March 31,						Inc (Dec)			Three Months Ended June 30,									Six Months Ended June 30,
	2013			2012			Inc (Dec)			2013			2012			Inc (Dec)			2013			2012			Inc (Dec)
Cost of products sold		25.7	%		25.3	%		0.4			27.7	%		25.1	%		2.6			26.7	%		25.2	%		1.5
Research and development		4.7			5.2			(0.5	)		4.7			5.1			(0.4	)		4.7			5.2			(0.5	)
Selling, general and administrative		40.5			40.6			(0.1	)	��	39.2			40.3			(1.1	)		39.8			40.5			(0.7	)
Certain claims											4.0			—			4.0			2.0			—			2.0
Special items		2.9			2.9			0.0			6.5			2.7			3.8			4.7			2.8			1.9
Operating profit		26.2			25.9			0.3			18.0			26.8			(8.8	)		22.0			26.4			(4.4	)

Cost of Products Sold

The increase in cost of products sold as a percentage of net sales for the three month period ended ~~March 31,~~June 30, 2013 compared to the same prior year period was ~~primarily~~ due to higher average costs per unit sold as a result of changes in product and geographic mix and lower average selling ~~prices. Additionally,~~

¹ ~~Registered trademark of Heraeus Kulzer GmbH~~

prices, increased excess and ~~obsolete~~obsolescence charges from product rationalization initiatives as well as other factors, and certain inventory and manufacturing related charges connected to quality enhancement and ~~foreign currency~~remediation efforts. These negative effects were partially offset by hedge gains recorded in the 2013 period versus hedge losses ~~were unfavorable~~recorded in the 2012 period.

The increase in cost of products sold as a percentage of net sales for the six month period ended June 30, 2013 ~~when~~ compared to ~~2012. These unfavorable items were slightly offset by lower unit costs, lower royalties and certain other favorable items.~~the same prior year period was due to similar reasons as the three month period.

Operating Expenses

R&D expenses and R&D as a ~~percent~~percentage of sales decreased in both the three and six month periods ended June 30, 2013 when compared to the same prior year ~~period.~~periods. Lower spending reflected the effects of our operational excellence initiatives, as well as a natural decline from certain large projects that achieved full commercialization, includingPersona, The Personalized Knee System. We expect R&D spending in 2013 to be approximately 54.5 percent of sales for the full year.

SG&A expenses ~~and~~increased, but SG&A as a ~~percent~~percentage of sales decreased ~~slightly~~in the three and six month periods ended June 30, 2013 when compared to the same prior year ~~period.~~periods. The dollar ~~decrease~~increase in both periods was primarily due to higher selling and distribution expenses from higher sales and increased intangible amortization from acquisitions. This was partially offset by lower bad debt expense in both periods as well as savings from our operational excellence initiatives. The six month period ended June 30, 2013 also included lower legal ~~and bad debt expenses. Legal~~ expenses ~~were lower~~ due to the conclusion of certain matters in ~~2012~~the same prior year period for which we are no longer incurring outside counsel fees, as well as normal variations in the phases of litigation, including product liability litigation. ~~These favorable items~~As a percent of sales, SG&A has improved in the Current Periods as our operational excellence initiatives have produced lower variable and fixed costs in SG&A.

² Registered trademark of Heraeus Kulzer GmbH

“Certain claims” expense is for estimated liabilities toDurom Cup patients undergoing revision surgeries. We recorded expense of $15.0 million, $157.8 million, $75.0 million, $35.0 million and $69.0 million during 2012, 2011, 2010, 2009 and 2008, respectively. We recorded additional expense of $47.0 million during the three and six month periods ended June 30, 2013, bringing the total expense to $398.8 million for these claims, excluding a subset ofDurom Cup claims that were ~~partially offset~~recorded in SG&A. The additional expense in 2013 was driven primarily by higher ~~marketing costs in~~estimated claims than were previously expected. For more information regarding these claims, see Note 14 to the ~~U.S., primarily for~~~~Persona~~~~, The Personalized Knee System.~~condensed consolidated financial statements.

“Special items” for the three and six month ~~period~~periods ended ~~March 31,~~June 30, 2013 ~~were~~increased significantly compared to the same ~~as the~~ prior year ~~period.~~periods. We continue to implement our operational excellence initiatives, which are intended to improve our future operating results by centralizing or outsourcing certain functions and improving quality, distribution, sourcing, manufacturing and our information technology systems. “Special items” expenses include consulting and professional fees, ~~and~~ dedicated personnel costs, ~~for those programs,~~severance benefits as well as other ~~costs.~~costs for those programs. In addition to expenses for our operational excellence programs, ~~and~~we recognize expenses related to integration of ~~business acquisitions, we recognize~~acquired businesses, impairment of assets, certain ~~amounts related to~~R&D agreements, certain litigation insettlements and other items as “Special ~~items”. In the first quarter of 2013, we settled certain matters and recognized income, whereas in the same prior year period we recognized expense related to settlements of other matters.~~items.” See Note 2 to the condensed consolidated financial statements for more information regarding “Special items” charges.

Interest Income, Interest Expense, Income Taxes and Net Earnings

Interest income and expense, net, ~~was the same~~were similar in the three and six month ~~period~~periods ended ~~March 31,~~June 30, 2013 when compared to the same prior year ~~period.~~periods.

The ETR on earnings before income taxes for the three and six month ~~period~~periods ended ~~March 31,~~June 30, 2013 decreased to ~~23.1~~22.6 percent and 22.9 percent, respectively, from ~~25.7~~25.6 percent in ~~the same~~both prior year ~~period.~~periods. The decrease was primarily due to ~~the retroactive extension~~“Certain claims” and “Special items.” Since most of the ~~R&D~~“Special items” and “Certain claims” expense is recorded in jurisdictions with higher rates of tax, ~~credit and other tax benefits resulting from implementation of legislation~~this favorably affects our ETR because it lowers the income in ~~the U.S. in January 2013. Due to the timing of the laws’ enactment, the 2012 tax year benefits were recognized in the first quarter of 2013 for financial reporting purposes.~~those jurisdictions. We anticipate that the outcome of various federal, state and foreign audits, as well as expiration of certain statutes of limitations, could potentially impact our 2013 ~~effective tax rate~~ETR in future quarters. Currently, we cannot reasonably estimate the impact of these items on our financial results.

Net earnings of Zimmer Holdings, Inc. of ~~$218.6~~$152.1 million and $370.7 million for the three and six month ~~period~~periods ended ~~March 31,~~June 30, 2013, ~~increased 4~~respectively, decreased 29 percent ~~over~~and 13 percent compared to the same prior year ~~period~~periods, respectively, as a result of the changes in revenues and expenses discussed above. ~~The~~In the three month period ended June 30, 2013, ~~period~~ basic and diluted earnings per share ~~increased 10~~decreased 26 percent and 27 percent, respectively, compared to the same prior year period. In the six month period ended June 30, 2013, basic and diluted earnings per share both decreased 9 percent ~~respectively, over~~compared to the same prior year period. The disproportional change in earnings per share as compared with net earnings is attributed to the effect of share repurchases.

Non-GAAP operating performance measures

We use non-GAAP financial measures to evaluate our operating performance that differ from financial measures determined in accordance with GAAP. Our non-GAAP financial measures exclude the impact of inventory step-up, ~~and other~~ certain inventory and manufacturing related charges connected to quality enhancement and remediation efforts, inventory obsolescence charges associated with product rationalization initiatives, “Certain claims,” “Special items,” and ~~the taxes~~any related effects on ~~those~~our income tax provision associated with these items. We use this information internally and believe it is helpful to investors because it allows more meaningful period-to-period comparisons of our ongoing operating results, it helps to perform trend analysis and to better identify operating trends that may otherwise be masked or distorted by these types of items, and it provides a higher degree of

transparency of certain items. Certain of these non-GAAP financial measures are used as metrics for our incentive compensation programs.

Our non-GAAP adjusted net earnings used for internal management purposes for the three and six month periods ended ~~March 31,~~June 30, 2013 ~~and 2012~~ were ~~$240.8~~$243.4 million and ~~$231.3~~$484.2 million, respectively, compared to $235.6 million and ~~our~~$466.9 million in the same prior year periods, respectively. Our non-GAAP adjusted diluted earnings per

share for ~~those~~the three and six month periods ended June 30, 2013 were ~~$1.41~~$1.43 and ~~$1.30,~~$2.84, respectively, compared to $1.34 and $2.63 in the same prior year periods, respectively.

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


	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
(In millions)	2013			2012			2013			2012			2013			2012
Net Earnings of Zimmer Holdings, Inc.	$	218.6		$	209.6		$	152.1		$	214.5		$	370.7		$	424.1
Inventory step-up and other inventory charges		2.2			1.0
Inventory step-up and other inventory and manufacturing related charges								11.7			1.0			13.9			2.0
Certain claims								47.0			—			47.0			—
Special items		33.5			33.5			75.6			30.7			109.1			64.2
Taxes on above items*		(13.5	)		(12.8	)		(43.0	)		(10.6	)		(56.5	)		(23.4	)

Adjusted Net Earnings	$	240.8		$	231.3		$	243.4		$	235.6		$	484.2		$	466.9

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


	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012			2013			2012
Diluted EPS	$	1.28		$	1.17		$	0.89		$	1.22		$	2.17		$	2.39
Inventory step-up and other inventory charges		0.01			0.01
Inventory step-up and other inventory and manufacturing related charges								0.07			0.01			0.08			0.01
Certain claims								0.28			—			0.28			—
Special items		0.20			0.19			0.44			0.17			0.64			0.36
Taxes on above items*		(0.08	)		(0.07	)		(0.25	)		(0.06	)		(0.33	)		(0.13	)

Adjusted Diluted EPS	$	1.41		$	1.30		$	1.43		$	1.34		$	2.84		$	2.63

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

Liquidity and Capital Resources

Cash flows provided by operating activities were ~~$180.5~~$370.2 million for the ~~three~~six month period ended ~~March 31,~~June 30, 2013, compared to ~~$207.4~~$438.9 million in the same prior year period. The principal source of cash from operating activities was net earnings. Non-cash items included in net earnings accounted for another ~~$99.9~~$205.1 million of operating cash. All other items of operating cash flows reflect a use of ~~$137.4~~$204.6 million of cash in the six month period ended June 30, 2013, compared to a use of ~~$112.1~~$204.0 million in the same 2012 period. The lower cash flows provided by operating activities in the 2013 period were primarily due to increases in inventory value for our U.S. inventory caused by the medical device excise tax and inventory to support new product launches.

At ~~March 31,~~June 30, 2013, we had 7069 days of sales outstanding in trade accounts receivable, which represents an increase of ~~6 days~~1 day compared to ~~December 31, 2012 and is the same as March 31, 2012. The increase from December 31, 2012 reflects some seasonality in our business. At~~ March 31, 2013 and is a decrease of 3 days from June 30, 2012. At June 30, 2013, we had ~~319~~293 days of inventory on hand. This is ~~an increase~~a decrease of 1826 days compared to December 31, 2012 and an increase of 26 days from March 31, 2012. This increase reflects a higher 2013 inventory balance due to the U.S. medical device excise tax (increased days on hand by 8 days) and new product launches.

~~Cash flows provided by investing activities were $53.0 million for the three month period ended~~ March 31, 2013 ~~compared to cash~~and a decrease of 13 days from June 30, 2012.

Cash flows used in investing activities ~~of $164.2~~were $121.6 million for the six month period ended June 30, 2013, compared to $282.1 million in the same prior year period. Additions to instruments increased in the 2013 period compared to the 2012 period due to purchases related to some significant product launches, such asPersona, The Personalized Knee System. Spending on other property, plant and equipment was relatively consistent between the 2013 period and the 2012 period, reflecting cash outlays necessary to complete new product-related investments and replace older machinery and equipment. We

invest some of our cash and cash equivalents in highly-rated debt securities. The purchases and any sales or maturities of these investments are reflected as cash

flows from investing activities. The timing of these investments can vary from quarter to quarter depending on the maturity of the debt securities and other cash and cash equivalent needs. Investments in other assets in the 2013 period related primarily to ~~certain distribution agreements~~small business acquisitions we ~~entered into with third parties.~~have executed.

Cash flows used in financing activities were ~~$452.5~~$405.4 million for the ~~three~~six month period ended ~~March 31,~~June 30, 2013, compared to ~~$129.1~~$262.1 million in the same 2012 period. In the 2013 period, we returned cash to our stockholders in the form of cash dividends of ~~$30.9~~$64.5 million and share repurchases of ~~$392.0~~$460.8 million. In the 2013 period, we paid off ~~debt on~~the amount we had borrowed under our senior credit facility ~~that was borrowed~~ in the fourth quarter of 2012. Additionally, an increase in our stock price in ~~the first quarter of~~ 2013 resulted in many employees exercising stock options, which provided us with additional cash.

In February and May of 2013, our Board of Directors declared a cash ~~dividend~~dividends of $0.20 per share that ~~was~~were paid in April ~~2013.~~and July of 2013, respectively. We expect to continue paying cash dividends on a quarterly basis; however, future dividends are subject to approval of the Board of Directors and may be adjusted as business needs or market conditions change. The 2013 dividend ~~declaration equates~~declarations equate to an annual rate of $0.80 per share, which represents an 11 percent increase over the 2012 annualized rate.

We have four tranches of senior notes outstanding: $250 million aggregate principal amount of 1.4 percent notes due November 30, 2014, $500 million aggregate principal amount of 4.625 percent notes due November 30, 2019, $300 million aggregate principal amount of 3.375 percent notes due November 30, 2021 and $500 million aggregate principal amount of 5.75 percent notes due November 30, 2039. Interest on each series is payable on May 30 and November 30 of each year until maturity.

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

We have a five year $1,350 million revolving, multi-currency, senior unsecured credit facility maturing May 9, 2017 (Senior Credit Facility). There were no borrowings outstanding under the Senior Credit Facility at ~~March 31,~~June 30, 2013.

We and certain of our wholly owned foreign subsidiaries are the borrowers under the Senior Credit Facility. Borrowings under the Senior Credit Facility bear interest at 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 or transfers of assets. Financial covenants include a maximum leverage ratio of 3.0 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 ~~March 31,~~June 30, 2013. Commitments under the Senior Credit Facility are subject to certain fees, including a facility fee and a utilization fee.

We have a term loan agreement (Term Loan) with one of the lenders under the Senior Credit Facility for 11.7 billion Japanese Yen that will mature on May 31, 2016. Borrowings under the Term Loan bear interest at a fixed rate of 0.61 percent per annum until maturity.

We also have available uncommitted credit facilities totaling ~~$74.0~~$74.3 million.

We place our cash and cash equivalents in highly-rated financial institutions and limit the amount of credit exposure to any one entity. We invest only in high-quality financial instruments in accordance with our internal investment policy.

As of ~~March 31,~~June 30, 2013, we had short-term and long-term investments in debt securities with a fair value of ~~$775.8~~$800.1 million. These investments are in debt securities of many different issuers and therefore we have no significant concentration of risk with a single issuer. All of these debt securities remain highly-rated and we believe the risk of default by the issuers is low.

As of ~~March 31,~~June 30, 2013, ~~$1,171.5~~$1,237.9 million of our cash and cash equivalents and short-term and long-term investments were held in jurisdictions outside of the U.S. and are expected to be indefinitely reinvested for continued use in foreign operations. Repatriation of these assets to the U.S. may have tax consequences. ~~$916.2~~$966.6 million of this amount is denominated in U.S. Dollars and therefore bears no foreign currency translation risk. The balance of these assets is denominated in currencies of the various countries where we operate.

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

Our ability to collect accounts receivable in some countries depends in part upon the financial stability of these hospital and healthcare sectors and the respective countries’ national economic and healthcare systems. Most notably, in Europe healthcare is typically sponsored by the government. Since we sell products to public hospitals in those countries, we are indirectly exposed to government budget constraints. The ongoing financial crisis in the Euro zone impacts the indirect credit exposure we have to those governments through their public hospitals. We have experienced an increasing number of days sales outstanding in some European countries compared to levels in 2010. As of ~~March 31,~~June 30, 2013, in Greece, Italy, Portugal and Spain, countries that have been widely recognized as presenting the highest risk, our gross short-term and long-term trade accounts receivable combined were ~~$219.2~~$233.4 million. With allowances for doubtful accounts of ~~$8.1~~$9.0 million recorded in those countries, the net balance was ~~$211.1~~$224.4 million, representing 25 percent of our total consolidated short-term and long-term trade accounts receivable balance, net. Italy and Spain accounted for ~~$204.5~~$215.3 million of that net amount. We are actively monitoring the situations in these countries. We maintain contact with customers in these ~~customers~~countries on a regular basis. We continue to receive payments, albeit at a slower rate than in the past. We believe our allowance for doubtful accounts is adequate in these countries, as ultimately we believe the governments in these countries will be able to pay. To the extent the respective governments’ ability to fund their public hospital programs deteriorates, we may have to record significant bad debt expenses in the future.

We may use excess cash to repurchase common stock under our share repurchase program. As of ~~March 31,~~June 30, 2013, ~~$622.7~~$553.9 million remained authorized under a $1.5 billion repurchase program, which will expire on December 31, 2014.

Management believes that cash flows from operations and available borrowings under the Senior Credit Facility are sufficient to meet our working capital, capital expenditure and debt service needs, as well as return cash to stockholders in the form of dividends and share repurchases. 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

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

Critical Accounting Estimates

There were no changes in the three month period ended ~~March 31,~~June 30, 2013 to the application of critical accounting policies as described in our Annual Report on Form 10-K for the year ended December 31, 2012. As discussed in ~~the prior year~~that Annual Report on Form 10-K, our annual impairment test of goodwill occurs in the fourth quarter every year. In 2012, the annual impairment test resulted in an impairment charge related to our

U.S. Spine reporting unit, resulting in a remaining balance of goodwill in that reporting unit of $41.0 million. Accordingly, the estimated fair value of that reporting unit does not substantially exceed its carrying value. If the U.S. Spine reporting unit is not able to achieve its operating plans or if that market ~~continues to deteriorate~~deteriorates beyond our expectations, we may have to record another goodwill impairment charge in the future. We have other reporting units with goodwill assigned to them. As of the annual impairment test in 2012, the estimated fair values for those reporting units substantially exceeded their carrying values.

Forward-Looking Statements

This quarterly report contains certain statements that are forward-looking statements within the meaning of federal securities laws. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. When used in this report, the words “may,” “will,” “should,” “would,” “could,” “anticipate,” “expect,” “plan,” “seek,” “believe,” “predict,” “estimate,” “potential,” “project,” “target,” “forecast,” “intend,” “strategy,” “future,” “opportunity,” “assume,” “guide” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. These risks and uncertainties include, but are not limited to:

competition;

pricing pressures;

the impact of the federal healthcare reform legislation, including the impact of the excise tax on medical devices;

reductions in reimbursement levels by third-party payors and cost containment efforts of healthcare purchasing organizations;

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 (FDA) and foreign government regulators, such as more stringent requirements for regulatory clearance of our products;

our ability to remediate matters identified in any inspectional observations or warning letters issued by the FDA;

the success of our quality and operational improvement initiatives;

changes in tax obligations arising from tax reform measures or examinations by tax authorities;

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

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

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

dependence on new product development, technological advances and innovation;

product liability claims;

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

retention of our independent agents and distributors;

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

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

our ability to form and implement strategic alliances;

the impact of the ongoing financial crisis on countries in the Euro zone on our ability to collect accounts receivable in affected countries;

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

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

Our Annual Report on Form 10-K for the year ended December 31, 2012 contains a detailed discussion of these and other important factors under the heading “Risk Factors” in Part I, Item 1A of that report. You should understand that it is not possible to predict or identify all factors that could cause actual results to differ materially from forward-looking statements. Consequently, you should not consider any list or discussion of such factors to be a complete set of all potential risks or uncertainties.

Readers of this report are cautioned not to place undue reliance on these forward-looking statements. While we believe the assumptions on which the forward-looking statements are based are reasonable, there can be no assurance that these forward-looking statements will prove to be accurate. This cautionary statement is applicable to all forward-looking statements contained in this report.

We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Q, 8-K and 10-K reports and our other filings with the Securities and Exchange Commission.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes from the information provided in our Annual Report on Form 10-K for the year ended December 31, 2012.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting

During the quarter ended ~~March 31,~~June 30, 2013, we continued transitioning work to a third-party service provider to outsource certain finance functions that historically have been performed internally in multiple countries throughout Europe and in the U.S. We also continued centralizing other finance functions that historically have been performed in a decentralized manner. This outsourcing and centralization are part of our ongoing operational excellence initiatives, and we plan to continue transitioning work to the service provider and the centralized finance departments over the course of 2013.

Also during the quarter ended March 31, 2013, we began using a new software platform to consolidate our worldwide financial information. This software implementation is part of our operational excellence initiatives in order to improve the overall efficiency and effectiveness of our financial reporting process.

In connection with the outsourcing and centralization of finance functions ~~and software implementation~~ and the resulting business process changes, we continue to enhance the design and documentation of our internal control processes to ensure suitable controls over our financial reporting. There were no other changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended ~~March 31,~~June 30, 2013 that have materially affected, or are 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 1514 to the interim condensed consolidated financial statements included in Part I, Item 1 of this report.

Item 1A.

Risk Factors

There have been no material changes from the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012.

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 ~~March 31,~~June 30, 2013:

   Total Number
of Shares
Purchased    Average Price
Paid per Share    Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs*    Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under Plans
or Programs
January 2013
   2,680,132       $ 71.24       2,680,132       $ 823,652,660
February 2013
   2,675,431       75.12       2,675,431       622,684,428
March 2013
   —       —       —       622,684,428








Total
   5,355,563       $ 73.18       5,355,563       $ 622,684,428


	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs*		Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs
April 2013		—	$	—		—	$	622,684,428
May 2013		192,700		78.46		192,700		607,565,095
June 2013		687,200		78.07		687,200		553,912,488

Total		879,900	$	78.16		879,900	$	553,912,488

*	Includes repurchases made under the current program authorizing $1.5 billion of repurchases through December 31, 2014.

Item 3.

Defaults Upon Senior Securities

None

Item 4.

Mine Safety Disclosures

Not applicable

Item 5.

Other Information

During the three month period ~~covered by this report,~~ended June 30, 2013, the Audit Committee of our Board of Directors approved the engagement of PricewaterhouseCoopers LLP, our independent registered public accounting firm, to perform certain non-audit services related to certain ~~accounting and~~ tax matters. This disclosure is made pursuant to Section 10A(i)(2) of the Exchange Act, 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*		~~Separation agreement~~Zimmer Holdings, Inc. Executive Performance Incentive Plan (as Amended May 7, 2013) (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed May 13, 2013)

10.2*		Zimmer Holdings, Inc. 2009 Stock Incentive Plan (as Amended May 7, 2013) (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed May 13, 2013)

10.3*		Change in Control Severance Agreement by and between Zimmer ~~Inc.~~GmbH and ~~Jeffrey B. Paulsen dated March 20, 2013~~Katarzyna Mazur-Hofsaess

10.4*		Confidentiality, Non-Competition and Non-Solicitation Agreement by and between Zimmer GmbH and Katarzyna Mazur-Hofsaess

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.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

*	Management contract or compensatory plan or arrangement

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)

Date: ~~May 8,~~August 7, 2013	By:	/s/ James T. Crines
		James T. Crines
		Executive Vice President, Finance and
		Chief Financial Officer

Date: ~~May 8,~~August 7, 2013	By:	/s/ Derek M. Davis
		Derek M. Davis
		Vice President, Finance and Corporate
		Controller and Chief Accounting Officer

3537