ZIMMER HOLDINGS INC

We own most of our manufacturing facilities, but lease various office space, vehicles and other less significant assets throughout the world.  Our contracts contain a lease if they convey a right to control the use of an identified asset, either explicitly or implicitly, in

exchange for consideration.  Our lease contracts are a necessary part of our business, but we do not believe they are significant to our overall operations.  We do not have any significant finance leases.  Additionally, we do not have significant leases: where we are considered a lessor; where we sublease our assets; with an initial term of twelve months or less; with related parties; with residual value guarantees; that impose restrictions or covenants on us; or that have not yet commenced, but create significant rights and obligations against us.

  Our real estate leases generally have terms of between 5 to 10 years and contain lease extension options that can vary from month-to-month extensions to up to 5 year extensions.  We include extension options in our lease term if we are reasonably certain to exercise that option.  In determining whether an extension is reasonably certain, we consider the uniqueness of the property for our needs, the availability of similar properties, whether the extension period payments remain the same or may change due to market rates or fixed price increases in the contract, and other economic factors.  Our vehicle leases generally have terms of between 3 to 5 years and contain lease extension options on a month-to-month basis.  Our vehicle leases are generally not reasonably certain to be extended.

Under GAAP, we are required to discount our lease liabilities to present value using the rate implicit in the lease, or our incremental borrowing rate for a similar term as the lease term if the implicit rate is not readily available.  We generally do not have adequate information to know the implicit rate in a lease and therefore use our incremental borrowing rate.  Under GAAP, the incremental borrowing rate must be on a collateralized basis, but our debt arrangements are unsecured.  We have determined our incremental borrowing rate by using our credit rating to estimate our unsecured borrowing rate and applying reasonable assumptions to reduce the unsecured rate for a risk adjustment effect from collateral.

U.S. International Trade Commission Investigation: On March 5, 2019, Heraeus filed a complaint with the U.S. International Trade Commission (“ITC”) against us and certain of our subsidiaries.  The complaint alleges that Biomet misappropriated Heraeus’ trade secrets in the formulation and manufacture of two bone cement products now sold by Zimmer Biomet, both of which are imported from our Valence, France facility.  Heraeus requested that the ITC institute an investigation and, after the investigation, issue a limited exclusion order and cease and desist orders.  On April 5, 2019, the ITC ordered an investigation be instituted.  We cannot currently predict the outcome of this investigation.

On April 1, 2019, we entered into an agreement and paid $192.5 million to buy out certain licensing arrangements from an unrelated third party.  This new agreement and the related payment replace the variable royalty payments that otherwise would have been due under the terms of previous licensing arrangements through 2029.  Under the new agreement, we maintain the rights to the counterparty’s intellectual property provided under the previous licensing arrangements.  The $192.5 million payment will be recognized as an intangible asset and amortized through 2029, which represents the useful life of the intellectual property.