2003 FORM 10-K ZIMMER HOLDINGS, INC. AND SUBSIDIARIES to foreign exchange rate fluctuations. Knee sales increased 27 percent (increased 22 percent constant currency) driven by strong sales of the  NexGen Legacy  system of knee prostheses, including the LPS-Flex Knee, the  M/G Unicompartmental Knee system with  MIS  Instrumentation, and the recently launched  NexGen  Rotating Hinge Knee. Hip sales increased 33 percent (increased 28 percent constant currency) driven by strong sales of  Trilogy  Acetabular System cups incorporating  Longevity  Highly Crosslinked Polyethylene Liners,  VerSys  porous stems, supported by the ZMR Revision Hip System and  Trabecular Metal  acetabular cups. Overall, worldwide reconstructive implant sales increased 20 percent (increased 20 percent constant currency) to $1,061.7 million. Knee sales increased by 22 percent (increased 21 percent constant currency) to $586.1 million, led by the  NexGen Legacy  Knee Posterior Stabilized product line including the LPS-Flex Knee,  NexGen Trabecular Metal tibial components, the  NexGen  CR Knee with  Prolong Crosslinked Polyethylene, and the  M/G  Unicompartmental Knee system with  MIS  Instrumentation. Hip sales increased 17 percent (increased 17 percent constant currency) to $441.1 million driven by continued conversion to porous stems,  Trabecular Metal  acetabular cups, and increased sales of  Trilogy  Acetabular System cups incorporating  Longevity Highly Crosslinked Polyethylene Liners.  Longevity  Liner sales comprised 85 percent of primary hip liner sales in 2002. Trauma sales increased 4 percent (increased 5 percent constant currency) to $133.8 million, led by sales of the Zimmer  Periarticular Plating System. Orthopaedic surgical product sales increased by 8 percent (increased 9 percent constant currency) to $176.9 million, led by the continued growth of the  OrthoPAT  Orthopedic Perioperative Autotransfusion System. Gross profit as a percentage of net sales was 74.9 percent in 2002 compared to 72.7 percent in 2001, which included separation costs of $11.9 million, or 1.2 percent of sales. The increase was attributable to increased average selling prices realized in all segments, the continued conversion from cemented hip implants to higher margin porous products, increased penetration of  Longevity  Highly Crosslinked Polyethylene Liners, higher sales of revision implants and various manufacturing improvements. The Company upgraded its automated foundry process for casting knee femorals, hip stems and cups. An increased number of products were moved to robotic polishing, as well as, additional porous knee femorals converted to the fiber metal laser welding process. Several products previously purchased from outside suppliers were moved in house for production. Investments in high speed machining and new tooling technologies made improvements in reducing both product cycle times and scrap. Lastly, standardization of the Company’s manufacturing processes resulted in improvement in efficiency. Research and development as a percentage of net sales was 5.9 percent in 2002 compared to 6.1 percent in 2001, which included separation costs of $3.2 million. Increases in research and development costs outpaced sales growth, Company management evaluates operating segment performance based upon segment operating profit exclusive of operating expenses pertaining to global operations and corporate expenses, acquisition and integration expenses, inventory step-up, in-process research and development write-offs and separation costs from the Company’s former parent. For more information regarding the Company’s segments, see Note 17 to the consolidated financial statements included elsewhere in this Form 10-K. 25 OPERATING PROFIT BY SEGMENT reflecting investments in active and new projects, and is consistent with the Company’s stated target to be at the higher end of the industry average, or approximately 6 percent of sales. The Company has many active projects underway focused on areas of strategic significance, including MIS  Technologies and the establishment of the Zimmer Institute, innovative materials such as  Trabecular Metal  and Highly Crosslinked Polyethylene, lifestyle designs, revision implants and biotechnology. Selling, general and administrative expenses as a percentage of net sales were 39.8 percent in 2002 compared to 45.6 percent in 2001, which included separation costs of $54.9 million. Selling, general and administrative expenses increased 1.7 percent to $546.0 million in 2002 from $537.1 million, including separation costs of $54.9 million, or 4.7 percent of sales, in 2001. The expense ratio reflects lower selling expenses as a result of lower costs associated with the Company’s U.S. distributor network, sales force and dealer reorganization in Japan, and improved efficiency in the utilization of instruments (more frequent use of instruments resulted in fewer placements and less expense). This was partially offset by approximately $2 million of consulting costs associated with tax services and analysis of various external development opportunities, continued investments in various strategic initiatives including  MIS  Technologies, DTC advertising, training and medical education, and higher insurance premiums. Operating profit increased 62 percent in 2002 to $400.9 million from $248.3 million in 2001 due to strong sales growth and controlled increases in operating expenses at rates below sales growth. The effective tax rate on earnings before taxes decreased to 33.7 percent in 2002 compared to 37.8 percent in 2001. The decrease was due to expanded operations in Puerto Rico, increased R&D credits, higher foreign tax credits and the implementation of certain business strategies in 2002 which resulted in reducing taxes in certain jurisdictions and increased credits. Net earnings increased 72 percent to $257.8 million from $149.8 million in 2001, due to strong sales growth and improved gross profit, lower rate of increase in selling, general and administrative expenses than sales and the incurrence of $70.0 million ($49.9 million, net of tax) of separation costs in 2001. Basic and diluted earnings per share increased 73 percent and 70 percent to $1.33 and $1.31, respectively, from $0.77 in 2001.