(Updates with analyst and CEO comments on replacement joint markets, outlook. Adds share price.)
By Jon Kamp
Of DOW JONES NEWSWIRES
Zimmer Holdings Inc.'s (ZMH) third-quarter earnings dropped 30%, weighed down by legal costs and other items, but its sales edged higher and the company said it is stabilizing its main replacement hip and knee businesses.
The Warsaw, Ind., maker of replacement joints also affirmed on Thursday its 2009 sales and earnings guidance. Zimmer, which leads the $11 billion market for replacement knees and hips, is seeing signs of improvement in this field following a slowdown in orthopedic procedures brought on by the recession.
Zimmer has also said it's stemmed the tide of market share losses that had dogged the company in recent quarters.
"We are pleased that our sales momentum continued to build in the third quarter as we achieved year-over-year constant currency growth in revenues in each of our three geographic segments," said David Dvorak, the company's president and chief executive, in a release.
"Further, we believe we are stabilizing our core knee and hip franchises and establishing a solid foundation for future growth," Dvorak said.
Zimmer shares recently traded up 3.1% to $53.86. They have risen about 33% this year.
Third-quarter earnings of $149.9 million, or 70 cents a share, declined from $214.7 million, or 95 cents a share, a year earlier. Special items in the recent quarter include a $35 million provision Zimmer recorded for known and anticipated legal claims related to the temporary sales suspension last year of "Durom" replacement hip components.
Excluding items this year and last, Zimmer said earnings were 88 cents a share in the third quarter compared with 97 cents a share a year earlier, when adjusted results included an 8-cent gain associated with the sale of certain equity holdings.
Analysts surveyed by Thomson Reuters had forecast, on average, earnings of 86 cents a share in the recent quarter.
Zimmer's sales rose 2.5% to $975.6 million, or 3.6%, excluding the effects of foreign currency. Analysts had projected $953.8 million.
Sales of replacement knees rose 2%, or 3% excluding currency, while replacement hip sales declined 1%, but were flat when currency is excluded.
Morgan Stanley analyst David Lewis said domestic gains for hips and knees spurred better-than-expected sales of these products.
Coming on the heels of reports from rivals Stryker Corp. (SYK) and Johnson & Johnson (JNJ), Zimmer's report suggests the orthopedics market is starting to recover from a months-long funk in which growth has been restrained by patients deferring elective procedures. The recovery may not be fast, but the market seems headed in a positive direction.
"Over time you're going to see a continued progression toward a more normalized procedure rate," Dvorak said on a call with analysts. This quarter represents a step in that direction, he said.
Looking ahead, Zimmer continues to target full-year revenue growth of 1% and 3% excluding the effects of foreign currency, although it now sees a smaller currency impact than it projected in July. It also continues to expect full-year adjusted earnings of $3.85 to $4.00 a share.
Dvorak said adjusted fourth-quarter earnings should be in-line with Wall Street's $1.07 per share projection. Asked why Zimmer didn't boost its earnings outlook after adjusted results beat the consensus estimate by 2 cents in the recent quarter, Dvorak said the company will accelerate its strategic investments.
-By Jon Kamp, Dow Jones Newswires; 617-654-6728; jon.kamp@dowjones.com