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## Notes to Consolidated Financial Statements 

The provision for income taxes consists of (in millions): 

<img src='content_image/19026.jpg'>

For periods prior to the Distribution, the income tax provision was calculated on a separate return basis while actual tax payments were made on a combined return basis by the Company’s former parent. Income taxes paid by the Company during 2003, 2002 and 2001 (for the period after the Distribution) were $116.1 million, $114.2 million and $43.4 million, respectively. 

A reconciliation of the U.S. statutory income tax rate to the Company’s effective tax rate is as follows: 

<img src='content_image/19027.jpg'>

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. 

The components of deferred income taxes consisted of the following (in millions): 

<img src='content_image/19028.jpg'>

The significant changes in the deferred tax assets primarily relate to the acquisition of Centerpulse. 

At December 31, 2003, approximately $336.6 million of federal, state and foreign tax effected losses and $8.2 million of federal credits were available for carryover. The state 

(Continued) 

losses and federal credits are subject to valuation allowances and certain restrictions. The losses and credits generally expire within a period of 1 to 19 years. At December 31, 2003, $11.5 million of tax effected capital losses were available for carryover. The carryover is subject to a valuation allowance and expires in 2005 and 2006. 

The Company’s former parent received a ruling from the Internal Revenue Service (‘‘IRS’’), that the Distribution would qualify as a tax-free transaction. Such a ruling, while generally binding upon the IRS, is subject to certain factual representations and assumptions. The Company has agreed to certain restrictions on its future actions to provide further assurances that the Distribution will qualify as tax-free. If the Company fails to abide by such restrictions and, as a result, the Distribution fails to qualify as a tax-free transaction, the Company will be obligated to indemnify its former parent for any resulting tax liability. 

Under the Tax Sharing Agreement (the ‘‘Agreement’’) executed in conjunction with the Distribution, the Company’s former parent retains control and discretion with regard to any federal, foreign, combined, consolidated and certain separate state tax filings or tax audits for periods through the Distribution and retains all refunds for such periods. The Agreement was amended to clarify the Company is responsible for 25 percent of tax audit assessments in foreign jurisdictions for periods prior to the Distribution up to a cumulative maximum of $5 million. 

The Company has a long-term liability of $128.9 million at December 31, 2003 for expected settlement of various U.S. and foreign income tax liabilities. 

At December 31, 2003, the Company had an aggregate of approximately $145 million of unremitted earnings of foreign subsidiaries that have been, or are intended to be, permanently reinvested for continued use in foreign operations. If the total undistributed earnings of foreign subsidiaries were remitted, a significant amount of the additional tax would be offset by the allowable foreign tax credits. It is impractical for the Company to determine the additional tax of remitting these earnings. 

## 15. CAPITAL STOCK AND EARNINGS PER SHARE 

As discussed in Note 18, 193.6 million shares of Company common stock were distributed at the Distribution by the former parent to its stockholders in the form of a dividend of one share of Company common stock, and the associated preferred stock purchase right, for every ten shares of common stock of the former parent. In July 2001 the board of directors of the Company adopted a rights agreement intended to have anti-takeover effects. Under this agreement one right attaches to each share of Company common stock. The rights will not become exercisable until the earlier of: a) the Company learns that a person or group acquired, or obtained the right to acquire, beneficial ownership of securities representing more than 20 percent of the shares of Company common stock then outstanding, or 

