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BIOMET INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

Edgar Online, Inc.
We design, manufacture and market a comprehensive range of both surgical and
non-surgical products used primarily by orthopedic surgeons and other
musculoskeletal medical specialists. Our corporate headquarters are located in
Warsaw, Indiana and we have manufacturing and/or office facilities in more than
50 locations worldwide and distribute products in approximately 90 countries.

Executive Overview


Our net sales increased 9% for the three months ended November 30, 2012 to
$790.1 million, compared to $725.1 million for the three months ended
November 30, 2011, driven primarily by our acquisition of DePuy's worldwide
trauma business (the "Trauma Acquisition") as described below. The effect of
foreign currency fluctuations negatively impacted reported net sales for the
three months ended November 30, 2012 by $11.8 million, with Europe reported net
sales negatively impacted by $10.3 million, or 6%, and International reported
net sales negatively impacted by $1.4 million, or 1%. The following represents
key sales growth statistics for the three months ended November 30, 2012
compared to the three months ended November 30, 2011:



     •   Large Joint Reconstructive product sales increased 1% worldwide and
         increased 2% in the U.S.



• Sports, Extremities and Trauma ("S.E.T.") product sales increased 74%

worldwide and 65% in the U.S. Excluding the Trauma Acquisition, S.E.T.

sales increased 14% worldwide and 15% in the U.S. Trauma Acquisition sales

of $52.7 million were excluded in order to provide period-over-period

         comparability.



• Spine & Bone Healing product sales decreased 1% worldwide and were flat in

         the U.S.



• Dental product sales decreased 9% worldwide and increased 4% in the U.S.

• Other product sales increased 6% worldwide and increased 2% in the U.S.



On May 24, 2012, DePuy Orthopaedics, Inc. accepted our binding offer to purchase
certain assets representing substantially all of DePuy's worldwide trauma
business, which involves researching, developing, manufacturing, marketing,
distributing and selling products to treat certain bone fractures or deformities
in the human body. On June 15, 2012, the Company announced the initial closing
of the transaction. During the first and second quarters of fiscal year 2013
subsequent closings in various foreign countries occurred on a staggered basis,
with the final closing occurring on December 7, 2012.

We have been active in the capital markets during the first and second quarters
of fiscal year 2013. Our objectives included reducing market risk by extending
the maturity on the majority of our term loans from March 2015 to July 2017,
reducing the cost of our capital structure and retaining access to liquidity
through the refinancing of our cash flow and asset-based revolvers.

Opportunities and Challenges

New Strategy to avoid RMDs


Our results of operations could be substantially affected not only by global
economic conditions, but also by local operating and economic conditions, which
can vary substantially by market. Unfavorable conditions can depress sales in a
given market and may result in actions that adversely affect our margins,
constrain our operating flexibility or result in charges which are unusual or
non-recurring. Certain macroeconomic events, such as the current adverse
conditions in the global economy, could have a more wide-ranging and prolonged
impact on the general business environment, which could also adversely affect
us.

In the United States, healthcare providers that purchase our products (e.g.,
hospitals, physicians, dentists and other health care providers) generally rely
on payments from third-party payors (principally federal Medicare, state
Medicaid and private health insurance plans) to cover all or a portion of the
cost of our musculoskeletal products. In March 2010, comprehensive health care
reform legislation was enacted through the Patient Protection and Affordable
Health Care Act (H.R. 3590) and the Health Care and Education Reconciliation Act
(H.R. 4872). Among other initiatives, these bills impose a 2.3% excise tax on
domestic sales of medical devices following December 31, 2012, which is
estimated to contribute approximately $20 billion to healthcare reform. Various
healthcare reform proposals have also emerged at the state level. Except for the
excise tax, which will impact results of operations following December 31, 2012,
we cannot predict with certainty what healthcare initiatives, if any, will be
implemented at the state level, or what the ultimate effect of federal health
care reform or any future legislation or regulation will have on us. However, an
expansion in government's role in the U.S. healthcare industry may lower
reimbursements for our products, reduce medical procedure volumes and adversely
affect our business and results of operations, possibly materially.

Outside the United States, reimbursement systems vary significantly from country
to country. If adequate levels of reimbursement from third-party payors outside
the United States are not obtained, international sales of our products may
decline. Many foreign markets, including Canada and some European and Asian
countries, have decreased reimbursement rates. Our ability to continue to sell
certain products profitably in these markets may diminish if the
government-managed healthcare systems continue to reduce reimbursement rates,
which can decrease pricing and procedural volume.



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European Sovereign Debt Crisis


We continue to monitor economic conditions, including the volatility associated
with international sovereign economies, and associated impacts on the financial
markets and our business, especially in light of the global economic downturn
and European sovereign debt crisis. We believe the credit and economic
conditions within Greece, Ireland, Italy, Portugal and Spain, among other
European Union countries, have continued to deteriorate. These conditions have
resulted in, and may continue to result in, an increase in the average length of
time that it takes to collect on our accounts receivable outstanding in these
countries. As of November 30, 2012, our orthopedic net accounts receivable in
these five countries totaled over $70.0 million. We currently hold Greek bonds
that had a fair value of $8.6 million at November 30, 2012. Further, there have
been widely publicized concerns with respect to the overall stability of the
Euro as a single currency, given the economic and political challenges facing
the Eurozone countries described above. The collapse of the Euro as a common
European currency, the withdrawal of one or more member countries from the EU or
continuing deterioration in the creditworthiness of the Eurozone countries could
adversely affect our revenues, financial condition or results of operations.

Seasonality

New Strategy to avoid RMDs

Our business is somewhat seasonal in nature, as many of our products are used in elective procedures, which typically decline during the summer months, particularly in European countries, and the winter holiday season.

Products

Our product portfolio encompasses large joint reconstructive, S.E.T., spine & bone healing, dental and other products.


Large Joint Reconstructive Products - Orthopedic reconstructive implants are
used to replace joints that have deteriorated as a result of disease
(principally osteoarthritis) or injury. Reconstructive joint surgery involves
the modification of the area surrounding the affected joint and the implantation
of one or more manufactured components, and may involve the use of bone cement.
Our large orthopedic reconstructive joints are knees and hips. We also produce
bone cements and cement delivery systems.

S.E.T. - We manufacture and distribute a number of sports medicine products
(used in minimally-invasive orthopedic surgical procedures). Extremity
reconstructive implants are used to replace joints other than hips and knees
that have deteriorated as a result of disease or injury. Our key reconstructive
joint in this product category is the shoulder, but we produce other joints as
well. Trauma devices are used for setting and stabilizing bone fractures to
support and/or augment the body's natural healing process. Trauma products
include plates, screws, nails, pins and wires designed to internally stabilize
fractures; devices utilized to externally stabilize fractures when alternative
methods of fixation are not suitable; and implantable bone growth stimulation
devices for trauma.

Spine & Bone Healing Products - Our spine products include spinal fixation systems for cervical, thoracolumbar, deformity correction and spacer applications; electrical stimulation devices for spinal applications; and osteobiologics, including bone substitute materials, as well as allograft services for spinal applications. Bone healing products include non-invasive bone growth stimulation devices used for trauma indications and orthopedic support products (also referred to as bracing products).


Dental Products - Dental reconstructive devices and associated instrumentation
are used for oral rehabilitation through the replacement of teeth and repair of
hard and soft tissues. We also offer crown and bridge products.

Other Products - We manufacture and distribute a number of other products,
including microfixation products, autologous therapies, operating room supplies,
casting materials, general surgical instruments, wound care products and other
surgical products.



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Results of Operations


For the Three Months Ended November 30, 2012 Compared to the Three Months Ended
November 30, 2011



                                                                                                                                                    Percentage
(in millions, except                 Three Months Ended            Percentage of            Three Months Ended            Percentage of             Increase/
percentages)                          November 30, 2012              Net Sales               November 30, 2011              Net Sales               (Decrease)
Net sales                            $             790.1                      100 %         $             725.1                      100 %                    9 %
Cost of sales                                      236.0                       30                         234.9                       32                     -

Gross profit                                       554.1                       70                         490.2                       68                     13
Selling, general and
administrative expense                             296.8                       38                         270.9                       37                     10
Research and development
expense                                             36.4                        5                          31.1                        4                     17
Amortization                                        77.7                       10                          84.4                       12                     (8 )

Operating income                                   143.2                       18                         103.8                       14                     38
Interest expense                                   104.9                       13                         120.8                       17                    (13 )
Other (income) expense                             124.0                       16                           4.9                        1                  2,431

Other expense, net                                 228.9                       29                         125.7                       17                     82

Loss before income taxes                           (85.7 )                    (11 )                       (21.9 )                     (3 )                  291
Provison (benefit) from income
taxes                                              (19.5 )                     (2 )                        (7.9 )                     (1 )                  147

Net loss                             $             (66.2 )                     (8 )%        $             (14.0 )                     (2 )%                 373 %



Sales

Net sales were $790.1 million for the three months ended November 30, 2012, and
$725.1 million for the three months ended November 30, 2011. The primary driver
for the increase in sales was the Trauma Acquisition. The following tables
provide net sales by geography and product category:

                            Geography Sales Summary



                                                                                                                                            Percentage
(in millions, except             Three Months Ended           Percentage of           Three Months Ended           Percentage of            Increase/
percentages)                      November 30, 2012             Net Sales              November 30, 2011             Net Sales              (Decrease)
United States                    $             470.8                      60 %        $             426.3                      59 %                  10 %
Europe                                         193.9                      25                        195.1                      27                    (1 )
International (1)                              125.4                      15                        103.7                      14                    21

Total                            $             790.1                     100 %        $             725.1                     100 %                   9 %





(1)  International primarily includes Canada, South America, Mexico and the Asia
     Pacific region.


                            Product Category Summary



                                                                                                                                                 Percentage
(in millions, except              Three Months Ended           Percentage of             Three Months Ended             Percentage of            

Increase/

New Strategy to avoid RMDs

percentages)                       November 30, 2012             Net Sales              November 30, 2011 (1)             Net Sales             
(Decrease)
Large Joint Reconstructive        $             444.2                      56 %        $                 439.5                      61 %                   1 %
Sports, Extremities, Trauma
(S.E.T.)                                        152.2                      19                             87.3                      12                    74
Spine & Bone Healing                             74.3                       9                             75.4                      11                    (1 )
Dental                                           67.1                       8                             73.6                      10                    (9 )
Other                                            52.3                       8                             49.3                       6                     6

Total                             $             790.1                     100 %        $                 725.1                     100 %                   9 %




(1) Certain amounts have been adjusted to conform to the current presentation.

The current presentation aligns with how we presently manage and market our

    products.


Large Joint Reconstructive

Net sales of large joint reconstructive products for the three months ended
November 30, 2012 was $444.2 million, or 56% of net sales, representing a 1%
increase compared to net sales of $439.5 million, or 61% of net sales, during
the three months ended November 30, 2011. Unfavorable foreign currency
translation impacted our large joint reconstructive sales by $7.6 million during
the quarter.



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Knee product sales increased 1% both worldwide and in the United States during
the three months ended November 30, 2012, compared to the three months ended
November 30, 2011. Unfavorable foreign currency translation impacted our knee
sales during the quarter. Sales growth for our Vanguard ® Complete Knee System,
Vanguard® SSK 360 Revision System, the Signature™ Personalized Patient Care
System, E1® Vitamin E infused bearings and OSS™ (Orthopaedic Salvage System),
contributed to our knee sales during the second quarter of fiscal year 2013.
Procedure volume growth and positive mix during the quarter were partially
offset by price pressures.

Hip product sales increased 1% worldwide and 2% in the United States during the
three months ended November 30, 2012, compared to the three months ended
November 30, 2011. Unfavorable foreign currency translation during the quarter
impacted our hip sales. We continued to see strong market demand for our Arcos®
Modular Femoral Revision System and our new Taperloc ® Complete Hip Stem. In
addition, the Microplasty® version of the Taperloc®Complete Hip Stem and the
(GTS) Global Tissue Sparing short stem received strong market acceptance during
the quarter. Key acetabular products included the Ringloc® + cup, E1® and ArCom
XL ® bearings, as well as our Active Articulation™ Systems that are available
with E1 ® or ArCom XL® liners. In Europe, our Exceed ABT (Advanced Bearing
Technologies) System continued to receive strong market demand. Procedure volume
growth and positive mix during the quarter were partially offset by price
pressures.

Sales of bone cement and other reconstructive products increased 2% worldwide
and 4% in the United States during the three months ended November 30, 2012,
compared to the three months ended November 30, 2011. During the quarter,
unfavorable foreign currency translation impacted sales. Demand for our Cobalt™
HV (High Viscosity) cement with Gentamicin contributed to our sales growth in
this category. The Optipac® Pre-Packed Cement Mixing System continued to be well
received in the Europe market during the quarter. Additional key cement products
during the quarter included the StageOne™ Knee and Modular Hip Cement Spacer
Molds.

S.E.T.

Worldwide net sales of S.E.T. products for the three months ended November 30,
2012 was $152.2 million, or 19% of net sales, representing a 74% increase
compared to net sales of $87.3 million, or 12% of net sales, during the three
months ended November 30, 2011. S.E.T. sales, excluding the Trauma Acquisition,
increased 14% worldwide and 15% in the U.S. Trauma Acquisition sales of $52.7
million were excluded in order to provide period-over-period comparability.
Unfavorable foreign currency translation impacted our S.E.T. sales during the
quarter by $1.8 million.

Sports medicine sales increased 14% worldwide, with a 3% sales increase in the
United States, during the three months ended November 30, 2012, compared to the
three months ended November 30, 2011. The sales increase was driven by strong
demand for our JuggerKnot™ brand, which includes soft anchors to repair the
shoulder, hand and wrist, and foot and ankle. Additional products contributing
to the sales growth were the TunneLoc® Tibial Fixation Device, the ToggleLoc™
Femoral Fixation Device, both with and without ZipLoop™ Technology, as well as
the Repicci II® Resurfacing Knee System.

Extremity product sales increased 22% worldwide, with a 32% sales increase in
the United States, during the three months ended November 30, 2012, compared to
the three months ended November 30, 2011. The increase was driven by strong
market demand for our Comprehensive® product lines including Primary, Reverse
and our S.R.S. (Segmental Revision System) Shoulder Systems.

Trauma product sales increased 268% worldwide and 247% in the United States
during the three months ended November 30, 2012, compared to the three months
ended November 30, 2011, driven by $52.7 million of sales related to the Trauma
Acquisition. Trauma sales, excluding the Trauma Acquisition, were flat worldwide
and decreased 1% in the U.S. Key products acquired as a result of the Trauma
Acquisition include the DVR® Anatomic Volar Plating Systems, the A.L.P.S.
Plating Systems, and the AFFIXUS® Hip Fracture Nails.

Spine & Bone Healing


Worldwide net sales of spine & bone healing products for the three months ended
November 30, 2012 was $74.3 million, or 9% of net sales, representing a 1%
decrease compared to net sales of $75.4 million, or 11% of net sales, for the
three months ended November 30, 2011. Spine & Bone Healing sales decreased
worldwide primarily due to mid-single-digit price erosion, soft volumes due to
the general economy, a challenging reimbursement environment for some fusion
procedures and a trend toward physician-owned distributorships, which were
partially offset by increased royalty revenue.

Spine product sales increased 4% worldwide and 7% in the United States during
the three months ended November 30, 2012, compared to the three months ended
November 30, 2011. The sales increase was primarily due to increased royalty
revenue.

Sales of bone healing products decreased 15% both worldwide and in the United
States during the three months ended November 30, 2012, compared to the three
months ended November 30, 2011. The need for additional clinical and economic
data to support reimbursement continued to challenge the non-invasive
stimulation business and price pressure continued to impact our bracing business
during the quarter.



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Dental


Worldwide net sales of dental products for the three months ended November 30,
2012 was $67.1 million, or 8% of net sales, representing a 9% decrease compared
to net sales of $73.6 million, or 10% of net sales, during the three months
ended November 30, 2011. Unfavorable foreign currency translation impacted our
dental sales during the quarter by $1.5 million. While the U.S. dental market
has been stronger than the market in Europe, there was continued softness
worldwide as challenging economic conditions persisted. Dental sales were
negatively impacted by unfavorable media reports in Japan related to the dental
implant industry.

Other

Worldwide net sales of other products for the three months ended November 30,
2012 was $52.3 million, or 8% of net sales, representing a 6% increase compared
to net sales of $49.3 million, or 6% of net sales, during the three months ended
November 30, 2011. Our microfixation product sales were strong during the
quarter, driven by continued market demand for the TraumaOne™ Plating System and
the SternaLock ® Blu Primary Closure System, as well as the Pectus Bar product
line. Our microfixation sales growth was partially offset by a decrease in sales
of autologous therapies.

Gross Profit

Gross profit for the three months ended November 30, 2012 increased to $554.1
million, compared to gross profit for the three months ended November 30, 2011
of $490.2 million, or 70% and 68% of net sales, respectively. Gross profit as a
percentage of net sales was slightly favorable for the three months ended
November 30, 2012 due to lower manufacturing costs related to operational
improvement initiatives, royalty costs related to expired contracts and country
mix, partially offset by decreased selling prices.

Selling, General and Administrative Expense


Selling, general and administrative expense during the three months ended
November 30, 2012 was $296.8 million, compared to $270.9 million for the three
months ended November 30, 2011, or 38% and 37% of net sales, respectively. The
expense was slightly up as a percentage of net sales due to increased sales
force expense related to the Trauma Acquisition.

Research and Development Expense


Research and development expense during the three months ended November 30, 2012
was $36.4 million, compared to $31.1 million for the three months ended
November 30, 2011, or 5% and 4% of net sales, respectively. Our principal
research and development efforts relate to primary and revision orthopedic
reconstructive devices, spinal fixation products, dental reconstructive devices,
sports medicine products, trauma products, resorbable technology, biomaterial
products and autologous therapies.

Amortization


Amortization expense for the three months ended November 30, 2012 was $77.7
million, or 10% of net sales, compared to $84.4 million for the three months
ended November 30, 2011, or 12% of net sales. This decrease is primarily due to
the intangible asset impairment charge taken in the fourth quarter of fiscal
year 2012 related to our Dental and Spine & Bone Healing reporting units.

Interest Expense


Interest expense was $104.9 million for the three months ended November 30,
2012, compared to interest expense of $120.8 million for the three months ended
November 30, 2011. The decrease in interest expense was primarily due to lower
average interest rates on our term loans and lower bond interest as a result of
refinancing activities in fiscal year 2013.

Other (Income) Expense


Other (income) expense was expense of $124.0 million for the three months ended
November 30, 2012, compared to expense of $4.9 million for the three months
ended November 30, 2011. The expense for the three months ended November 30,
2012 is primarily composed of the loss on retirement of bonds of $117.2 million
and the write-off of deferred financing fees related to the tender/retirement of
the senior notes due 2017 of $9.6 million, while the three months ended
November 30, 2011 included an other-than-temporary impairment loss of $7.3
million related to the Greek bonds.



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Provision (Benefit) from Income Taxes


The effective income tax rate was 22.8% for the three months ended November 30,
2012 compared to 36.1% for the three months ended November 30, 2011. The primary
factor in determining the effective tax rate is the mix of various jurisdictions
in which profits are projected to be earned and taxed. The effective income tax
rate for the three months ended November 30, 2012 is lower than the effective
income tax rate for the three months ended November 30, 2011 primarily due to
differences in assertions regarding the expected repatriation of earnings of our
foreign operations. Fluctuations in effective tax rates between comparable
periods also reflect the discrete tax benefit or expense of items in continuing
operations that represent tax affects not attributable to current-year ordinary
income. Discrete items, consisting primarily of the tax benefit associated with
the reduction of net deferred tax liabilities due to the prospective reduction
of corporate tax rates in Japan, had the effect of increasing the income tax
benefit by $7.0 million in the three months ended November 30, 2011.

For the Six Months Ended November 30, 2012 Compared to the Six Months Ended
November 30, 2011



                                                                                                                                                 Percentage
(in millions, except                   Six Months Ended            Percentage of            Six Months Ended            Percentage of            Increase/
percentages)                           November 30, 2012             Net Sales              November 30, 2011             Net Sales              (Decrease)
Net sales                             $           1,497.5                     100 %        $           1,389.7                     100 %                   8 %
Cost of sales                                       464.1                      31                        450.2                      32                     3

Gross profit                                      1,033.4                      69                        939.5                      68                    10
Selling, general and
administrative expense                              592.9                      40                        532.5                      38                  

11

Research and development expense                     72.2                       5                         63.1                       5                    14
Amortization                                        156.1                      10                        167.4                      12                    (7 )

Operating income                                    212.2                      14                        176.5                      13                    20
Interest expense                                    222.0                      15                        246.2                      18                   (10 )
Other (income) expense                              161.5                      11                         12.1                       1                 1,235

Other expense, net                                  383.5                      26                        258.3                      19                    48

Loss before income taxes                           (171.3 )                   (11 )                      (81.8 )                    (6 )                 109
Provison (benefit) from income
taxes                                               (73.6 )                    (5 )                      (28.6 )                    (2 )                 157

Net loss                              $             (97.7 )                    (7 )%       $             (53.2 )                    (4 )%                 84 %



Sales

Net sales were $1,497.5 million for the six months ended November 30, 2012, and
$1,389.7 million for the six months ended November 30, 2011. The primary driver
for the increase in sales was the Trauma Acquisition. The following tables
provide net sales by geography and product category:

                            Geography Sales Summary



                                                                                                                                                   Percentage
                                         Six Months Ended            Percentage of            Six Months Ended            Percentage of            Increase/
(in millions, except percentages)        November 30, 2012             Net Sales              November 30, 2011             Net Sales              (Decrease)
United States                           $             923.0                      62 %        $             841.0                      61 %                  10 %
Europe                                                336.8                      22                        343.6                      25                    (2 )
International (1)                                     237.7                      16                        205.1                      14                    16

Total                                   $           1,497.5                     100 %        $           1,389.7                     100 %                   8 %




(1) International primarily includes Canada, South America, Mexico and the Asia

     Pacific region.




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                            Product Category Summary



                                                                                                                                                    Percentage
(in millions, except                  Six Months Ended            Percentage of              Six Months Ended              Percentage of            Increase/
percentages)                          November 30, 2012             Net Sales              November 30, 2011 (1)             Net Sales              

(Decrease)

Large Joint Reconstructive           $             837.2                      56 %        $                 836.5                      60 %                  -  %
Sports, Extremities, Trauma
(S.E.T.)                                           279.5                      19                            169.1                      12                    65
Spine & Bone Healing                               152.2                      10                            150.0                      11                     1
Dental                                             124.1                       8                            132.9                      10                    (7 )
Other                                              104.5                       7                            101.2                       7                     3

Total                                $           1,497.5                     100 %        $               1,389.7                     100 %                   8 %




(1) Certain amounts have been adjusted to conform to the current presentation.

The current presentation aligns with how we presently manage and market our

products.

We were affected by large unfavorable currency fluctuations during the first quarter of fiscal year 2013 as compared to the first quarter of fiscal year 2012.

Large Joint Reconstructive


Net sales of large joint reconstructive products for the six months ended
November 30, 2012 was $837.2 million, or 56% of net sales, compared to net sales
of $836.5 million, or 60% of net sales, during the six months ended November 30,
2011. Unfavorable foreign currency translation impacted our large joint
reconstructive product sales during the six month period by $21.1 million.

Knee product sales were flat worldwide and increased 1% in the United States
during the six months ended November 30, 2012, compared to the six months ended
November 30, 2011. Unfavorable foreign currency translation impacted our knee
sales. Sales growth for our Vanguard® SSK 360 Revision System, the Signature™
Personalized Patient Care System, E1® Vitamin E infused bearings and the OSS™
(Orthopaedic Salvage System) contributed to our knee sales during the first and
second quarters of fiscal year 2013. Procedure volume growth and positive mix
were partially offset by price pressures.

Hip product sales were flat worldwide and increased 2% in the United States
during the six months ended November 30, 2012, compared to the six months ended
November 30, 2011. Unfavorable foreign currency translation impacted our hip
sales. We continued to see strong market demand for our Arcos® Modular Femoral
Revision System and our new Taperloc ® Complete Hip Stem. In addition, the
Microplasty® version of the Taperloc®Complete Hip Stem and the GTS (Global
Tissue Sparing) short stem received strong market acceptance during the first
and second quarters. Key acetabular products included the Ringloc®+ cup, E1® and
ArCom XL ® bearings, as well as our Active Articulation™ Systems that are
available with E1 ® or ArCom XL® liners. In Europe, our Exceed ABT (Advanced
Bearing Technologies) System continued to receive strong market demand during
the first and second quarter of fiscal year 2013. Procedure volume growth and
positive mix were partially offset by price pressures.

Sales of bone cement and other reconstructive products were flat worldwide and
increased 5% in the United States during the six months ended November 30, 2012,
compared to the six months ended November 30, 2011. Demand for our Cobalt™ MV
(Medium Viscosity) and HV (High Viscosity) cements with Gentamicin contributed
to our sales in this category. The Optipac® Pre-Packed Cement Mixing System
continued to be well received in the European market during the first and second
quarter of fiscal year 2013. Demand for our StageOne™ Knee and Modular Hip
Cement Spacer Molds continued to increase.

S.E.T.


Worldwide net sales of S.E.T. products for the six months ended November 30,
2012 was $279.5 million, or 19% of net sales, representing a 65% increase
compared to net sales of $169.1 million, or 12% of net sales, during the six
months ended November 30, 2011. S.E.T. sales, excluding the Trauma Acquisition,
increased 11% worldwide and 13% in the U.S. Trauma Acquisition sales of $91.5
million were excluded in order to provide period-over-period comparability.
Unfavorable foreign currency translation impacted our S.E.T. sales by $4.6
million.

Sports medicine sales increased 12% worldwide, with a 5% sales increase in the
United States, during the six months ended November 30, 2012, compared to the
six months ended November 30, 2011. The sales increase was primarily driven by
strong demand for our JuggerKnot™ brand, which includes soft anchors to repair
the shoulder, hand and wrist, and foot and ankle. Additional key products
contributing to the sales growth were the TunneLoc® Tibial Fixation Device and
the ToggleLoc™ Femoral Fixation Device, both with and without ZipLoop™
Technology and the Repicci II® Resurfacing Knee System.

Extremity product sales increased 18% worldwide, with a 26% sales increase in
the United States, during the six months ended November 30, 2012, compared to
the six months ended November 30, 2011. The increase was driven by strong market
demand for our Comprehensive® product lines including Primary, Reverse and our
S.R.S. (Segmental Revision System) Shoulder Systems.



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Trauma product sales increased 230% worldwide and 218% in the United States,
during the six months ended November 30, 2012, compared to the six months ended
November 30, 2011, driven by $91.5 million of sales related to the Trauma
Acquisition. Trauma sales, excluding the Trauma Acquisition, decreased 1%
worldwide and were flat in the U.S. Key products acquired as a result of the
Trauma Acquisition include the DVR®Anatomic Volar Plating Systems, the A.L.P.S.
Plating Systems, and the AFFIXUS® Hip Fracture Nails.

Spine & Bone Healing


Worldwide net sales of spine & bone healing products for the six months ended
November 30, 2012 was $152.2 million, or 10% of net sales, representing a 1%
increase compared to net sales of $150.0 million, or 11% of net sales, for the
six months ended November 30, 2011. Spine & Bone Healing sales increased
primarily due to increased royalty revenue, which was partially offset by
mid-single-digit price erosion, soft volumes due to the general economy, a
challenging reimbursement environment for some fusion procedures and a trend
toward physician-owned distributorships.

Spine product sales increased 7% worldwide and 9% in the United States during
the six months ended November 30, 2012, compared to the six months ended
November 30, 2011. Price declines in spine hardware continue to be in the
mid-single digit range. Spine product sales increased during the six month
period, primarily due to increased royalty revenue. New products and services
that contributed to growth during the first and second quarter of fiscal year
2013 included the PlatFORM™ CM, an all natural, osteoconductive material; and
Cellentra™ VCBM (Viable Cell Bone Matrix), an allogenic stem cell offering.

Sales of bone healing products decreased 12% both worldwide and in the United
States during the six months ended November 30, 2012, compared to the six months
ended November 30, 2011. The need for additional clinical and economic data to
support reimbursement continued to challenge the non-invasive stimulation
business and price pressure continued to impact our bracing business.

Dental


Worldwide net sales of dental products for the six months ended November 30,
2012 was $124.1 million, or 8% of net sales, representing a 7% decrease compared
to net sales of $132.9 million, or 10% of net sales, during the six months ended
November 30, 2011. Unfavorable foreign currency translation impacted our dental
sales by $4.4 million. While the U.S. dental market has been stronger than the
market in Europe, there was continued softness worldwide as challenging economic
conditions persisted. Dental sales were negatively impacted by unfavorable media
reports in Japan related to the dental implant industry.

Other


Worldwide net sales of other products for the six months ended November 30, 2012
was $104.5 million, or 7% of net sales, representing a 3% increase compared to
net sales of $101.2 million, also 7% of net sales, during the six months ended
November 30, 2011. Our microfixation product sales continued to be strong,
driven by continued market acceptance of the iQ® Intelligent Delivery System,
the TraumaOne™ Plating System and the SternaLock ® Blu Primary Closure System,
as well as the Pectus Bar product line. Our microfixation sales growth was
partially offset by a decrease in sales of autologous therapies.

Gross Profit


Gross profit for the six months ended November 30, 2012 increased to $1,033.4
million, compared to gross profit for the six months ended November 30, 2011 of
$939.5 million, or 69% and 68% of net sales, respectively. Gross profit as a
percentage of net sales was slightly favorable for the six months ended
November 30, 2012 due to lower manufacturing costs related to operational
improvement initiatives, royalty costs related to expired contracts and country
mix, partially offset by decreased selling prices.

Selling, General and Administrative Expense


Selling, general and administrative expense during the six months ended
November 30, 2012 was $592.9 million, compared to $532.5 million for the six
months ended November 30, 2011, or 40% and 38% of net sales, respectively. The
expense was slightly up as a percentage of net sales due to a $9.5 million
catch-up expense of stock based compensation expense related to the modification
of our existing stock based compensation plan and increased sales force expense
related to the Trauma Acquisition.

Research and Development Expense


Research and development expense during the six months ended November 30, 2012
was $72.2 million, compared to $63.1 million for the six months ended
November 30, 2011, or 5% of net sales for both periods. Our principal research
and development efforts relate to primary and revision orthopedic reconstructive
devices, spinal fixation products, dental reconstructive devices, sports
medicine products, resorbable technology, biomaterial products and autologous
therapies.



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Amortization


Amortization expense for the six months ended November 30, 2012 was $156.1
million or 10% of net sales, compared to $167.4 million for the six months ended
November 30, 2011, or 12% of net sales. This decrease is primarily due to the
intangible asset impairment charge taken in the fourth quarter of fiscal 2012
related to our Dental and Spine & Bone Healing reporting units.

Interest Expense


Interest expense was $222.0 million for the six months ended November 30, 2012,
compared to interest expense of $246.2 million for the six months ended
November 30, 2011. The decrease in interest expense was primarily due to lower
average interest rates on our term loans and lower bond interest as a result of
refinancing activities in fiscal year 2013.

Other (Income) Expense


Other (income) expense was expense of $161.5 million for the six months ended
November 30, 2012, compared to expense of $12.1 million for the six months ended
November 30, 2011. The expense for the six months ended November 30, 2012 is
primarily composed of the loss on retirement of bonds of $155.2 million and the
write off of deferred financing fees related to the tender/retirement of the
senior notes due 2017 of $13.7 million, while the six months ended November 30,
2011 included an other-than-temporary impairment loss of $16.5 million related
to the Greek bonds.

Provision (Benefit) from Income Taxes


The effective income tax rate was 43.0% for the six months ended November 30,
2012 compared to 35.0% for the six months ended November 30, 2011. The primary
factor in determining the effective tax rate is the mix of various jurisdictions
in which profits are projected to be earned and taxed. The effective income tax
rate for the six months ended November 30, 2012 is higher than the effective
income tax rate for the six months ended November 30, 2011 primarily due to
differences in assertions regarding the expected repatriation of earnings of our
foreign operations. Fluctuations in effective tax rates between comparable
periods also reflect the discrete tax benefit or expense of items in continuing
operations that represent tax affects not attributable to current-year ordinary
income. Discrete items, consisting primarily of the tax benefit associated with
the reduction of net deferred tax liabilities due to the prospective reduction
of the United Kingdom statutory corporate tax rate enacted in July 2012 had the
effect of increasing the income tax benefit by $3.6 million in the six months
ended November 30, 2012. The tax benefit for the six months ended November 30,
2011 was increased by $11.1 million due to discrete items consisting primarily
of the tax benefit associated with the reduction of net deferred tax liabilities
due to the prospective reduction of corporate tax rates in Japan and the United
Kingdom.

Liquidity and Capital Resources

Cash Flows

The following is a summary of the cash flows by activity for the six months ended November 30, 2012 and 2011:



                                                Six Months Ended              Six Months Ended
(in millions)                                   November 30, 2012             November 30, 2011
Net cash from (used in):
Operating activities                           $             128.6           $             133.8
Investing activities                                        (409.3 )                       (49.0 )
Financing activities                                         (51.3 )                       (19.9 )
Effect of exchange rate changes on cash                        7.1                          (8.8 )

Change in cash and cash equivalents            $            (324.9 )         $              56.1



For the Six Months Ended November 30, 2012 Compared to the Six Months Ended November 30, 2011


Our cash and cash equivalents were $167.5 million as of November 30, 2012
compared to $383.9 million as of November 30, 2011. We generally maintain our
cash and cash equivalents and investments in money market funds, corporate bonds
and debt instruments. Cash and cash equivalents held outside of the United
States were $112.5 million as of November 30, 2012. If we were to repatriate
this cash back to the United States, additional tax of up to 35%, the maximum
federal tax rate, could be incurred. In addition, we require a certain amount of
cash to support on-going operations outside the United States.

Operating Cash Flows


Net cash provided by operating activities was $128.6 million for the six months
ended November 30, 2012, compared to $133.8 million for the six months ended
November 30, 2011. Operating cash flows for the six months ended November 30,
2012 were unfavorably impacted by increased inventory levels due to additional
inventory needs to the support new product introductions and the Trauma
Acquisition and increased accounts receivable due to increased sales and
seasonality, partially offset by lower cash paid for interest. Cash generated by
operating activities continued to be a source of funds for deleveraging and
investing in our growth.



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Investing Cash Flows


Net cash used in investing activities was $409.3 million for the six months
ended November 30, 2012 and $49.0 million for the six months ended November 30,
2011. The investing cash flow decrease period-over-period when comparing the six
months ended November 30, 2012 to the six months ended November 30, 2011 was
primarily due to the Trauma Acquisition purchase price of $280.0 million and
capital expenditures increased by $25.7 million during the six months ended
November 30, 2012. Additionally, during the six months ended November 30, 2011
we received proceeds from the sales/maturities of investments of $33.7 million
primarily related to the sale of a time deposit and proceeds from the sale of
property and equipment of $13.1 million.

Financing Cash Flows


Net cash used in financing activities was $51.3 million for the six months ended
November 30, 2012, compared to cash used in financing activities of $19.9
million for the six months ended November 30, 2011. The difference was primarily
related to the refinancing activities during the first and second quarters of
fiscal year 2013. We received proceeds of $2,666.2 million related to the new
6.500% senior notes due 2020 and 6.500% senior subordinated notes due 2020 bond
offerings and tendered or retired $2,702.2 million of senior notes due 2017.
Additionally, related to the refinancing activities we incurred $67.8 million of
fees. We drew down on our asset-based revolver during the second quarter of
fiscal year 2013 in order to partially fund the refinancing activities which
provided cash of $80.0 million, which partially offset the use of cash due to
the refinancing activities. The refinancing activities were explained in Note 7,
Debt, to the condensed consolidated financial statements contained in Item 1 of
this report.
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