4. Biomet Merger

On the Closing Date, we completed our merger with LVB, the parent company of Biomet. We paid $12,030.3 million in cash and stock and assumed Biomet’s senior notes. The fair value of the principal amount of the senior notes was $2,740.0 million, which we repaid in full prior to June 30, 2015.

The merger positions us as a leader in the nearly $50 billion musculoskeletal industry. Our product portfolio now includes Biomet’s legacy product lines, including knee and hip reconstructive products; sports medicine, extremities and trauma products; spine, bone healing, craniomaxillofacial and thoracic products; dental reconstructive products; and cement, biologics and other products. Our larger scale provides for increased competitiveness in our core and emerging franchises and a stronger presence in our geographic markets. The merger positions us to accelerate revenue growth through cross-selling opportunities between our legacy product portfolios and sales force specialization. The combination of our research and development (“R&D”) functions will allow us to allocate a greater portion of the combined R&D spending towards innovations designed to address unmet clinical needs and create new-market adjacencies. We also expect to realize operational synergies to enhance value for stockholders.

In order to consummate the merger under applicable antitrust laws and regulations in certain countries, we had to divest certain product line rights and assets. As a result, we recognized a net gain of $12.3 million and $8.9 million in non-operating other expense, net in the three and nine month periods ended September 30, 2015, respectively.

We funded the cash portion of the merger consideration with available cash on hand, as well as proceeds from a $3.0 billion senior unsecured term loan and $7.65 billion in senior unsecured notes issued in March 2015. See Note 9 for further information regarding these debt instruments.

The aggregate merger consideration paid was $12,030.3 million, consisting of $8,307.6 million of cash and 32.7 million shares of our common stock valued at $3,722.7 million. The value of our common stock was based upon a stock price of $113.83 per share using the average of the high and low trading prices on the Closing Date. As discussed in Note 3, $164.1 million of the cash and common stock consideration was allocated to compensation expense due to the acceleration of the vesting of unvested LVB stock options and LVB stock-based awards in connection with the merger. Therefore, the amount of merger consideration utilized for the purchase method of accounting was $11,866.2 million.

The merger was accounted for under the purchase method of accounting. Accordingly, LVB’s results of operations have been included in our consolidated results of operations subsequent to the Closing Date, and LVB’s assets and liabilities were recorded at their estimated fair values in our consolidated statement of financial position as of the Closing Date, with the excess of the purchase price over the estimated fair values being allocated to goodwill. During the three and nine month periods ended September 30, 2015, Biomet contributed net sales of $742.8 million and $802.7 million, respectively. During the three and nine month periods ended September 30, 2015, Biomet contributed net operating losses of $28.3 million and $316.5 million, respectively, to our consolidated results, driven by $164.1 million of merger consideration compensation expense for unvested LVB stock options and LVB stock-based awards, $73.0 million of retention plan expense, severance expense, inventory step-up expense and intangible asset amortization.

The purchase price allocation as of September 30, 2015 is preliminary. The preliminary purchase price allocation is based on publicly available financial information of LVB, our informed insights into the industries in which LVB competed, and discussions with LVB’s management. The estimation of fair values requires a complex series of judgments about future events and uncertainties which will take us some time to compile. Additionally, we have engaged external experts to assist us in the estimation of fair value for certain assets. For these reasons, among others, there may be differences between these preliminary estimates of fair value and the final acquisition accounting, which differences could be material. The final estimates of fair value are expected to be completed as soon as possible, but no later than one year from the Closing Date.

The following table summarizes our estimate of the preliminary fair values of the assets acquired and liabilities assumed at the Closing Date (in millions):


	Closing Date (as revised)		Adjustments			Closing Date (as adjusted)
Cash	$	494.8	$	—		$	494.8
Accounts receivable, net		544.7		10.3			555.0
Inventory		1,161.7		6.2			1,167.9
Other current assets		202.3		(35.3	)		167.0
Property, plant and equipment		699.4		(1.0	)		698.4
Intangible assets not subject to amortization:				—			—
Trademarks and trade names		515.0		—			515.0
Intangible assets subject to amortization:				—			—
Technology		3,075.3		15.8			3,091.1
Customer relationships		5,829.0		—			5,829.0
Other assets		29.5		(9.4	)		20.1
Goodwill		5,270.2		(16.3	)		5,253.9

Total assets acquired		17,821.9		(29.7	)		17,792.2

Current liabilities		588.9		10.7			599.6
Long-term debt		2,740.0		—			2,740.0
Deferred taxes		2,568.6		(41.1	)		2,527.5
Other long-term liabilities		58.2		0.7			58.9

Total liabilities assumed		5,955.7		(29.7	)		5,926.0

Net assets acquired	$	11,866.2	$	—		$	11,866.2

Adjustments to the preliminary fair values of the assets acquired and liabilities assumed during the three month period ended September 30, 2015 related to refinement of deferred tax balances, adjustments to contingent liabilities and contingent gains based upon additional evidence obtained, and a change in the fair value of certain intangible assets acquired. There may be additional adjustments to these preliminary estimates of fair value which could be material.

The weighted-average amortization period selected for technology and customer relationship intangible assets was 20 years and 24 years, respectively. The weighted-average amortization period may change in the future based upon our final estimates of fair value.

The goodwill is generated from the operational synergies we expect to achieve from our combined operations. Based upon the preliminary nature of the fair value estimates, we have not been able to compile the necessary information to allocate the goodwill to our operating segments. None of the goodwill is expected to be deductible for tax purposes.

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


	Americas			EMEA			Asia Pacific			Unallocated		Total
Balance at December 31, 2014
Goodwill	$	1,666.2		$	1,067.7		$	153.3		$	—	$	2,887.2
Accumulated impairment losses		(373.0	)		—			—			—		(373.0	)

		1,293.2			1,067.7			153.3			—		2,514.2
Biomet merger		—			—			—			5,253.9		5,253.9
Currency translation		(8.9	)		(72.2	)		(7.5	)		—		(88.6	)

Balance at September 30, 2015
Goodwill		1,657.3			995.5			145.8			5,253.9		8,052.5
Accumulated impairment losses		(373.0	)		—			—			—		(373.0	)

	$	1,284.3		$	995.5		$	145.8		$	5,253.9	$	7,679.5

The following sets forth unaudited pro forma financial information derived from (i) the unaudited financial statements of Zimmer for the three and nine month periods ended September 30, 2015 and 2014; and (ii) the unaudited financial statements of LVB for the periods January 1, 2015 to June 23, 2015 and for the three and nine month periods ended September 30, 2014. The pro forma financial information has been adjusted to give effect to the merger as if it had occurred on January 1, 2014.

Pro Forma Financial Information

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
	(in millions)
Net Sales	$	1,762.2	$	1,888.4	$	5,584.1	$	5,906.2
Net Earnings	$	22.2	$	106.6	$	267.3	$	221.5

These unaudited pro forma results have been prepared for comparative purposes only and include adjustments such as inventory step-up, amortization of acquired intangible assets and interest expense on debt incurred to finance the merger. Material, nonrecurring pro forma adjustments directly attributable to the Biomet merger include:

•

The $164.1 million of merger consideration compensation expense for unvested LVB stock options and LVB stock-based awards was removed from net earnings for the nine month period ended September 30, 2015 and recognized as an expense in the nine month period ended September 30, 2014.

•

The $73.0 million of retention plan expense was removed from net earnings for the nine month period ended September 30, 2015 and recognized as an expense in the nine month period ended September 30, 2014.

•

Transaction costs of $17.7 million was removed from net earnings for the nine month period ended September 30, 2015 and recognized as an expense in the nine month period ended September 30, 2014.