Zimmer Holdings Inc.'s (ZMH) fourth-quarter profit slid 78% on a goodwill impairment charge tied to its spinal-products business, but sales grew as the company's big replacement joint business showed signs of improvement.
The Warsaw, Ind., medical-device maker forecast an improved sales-growth pace for the new year. It also said it is planning restructuring efforts this year aimed at yearly pretax savings of more than $100 million, although costs from implementing that program will weigh on earnings in the near term.
The market for replacement hips and knees has been under pressure as patients defer surgery due to worries about out-of-pocket costs or long stretches away from work for recovery. While that pressure continues, Zimmer's hip and knee sales performance improved following a soft third quarter. The company cited some modest signs of market improvement while indicating it made some market-share gains.
"In the fourth quarter we saw some stabilization of procedure volumes and expect further recovery" as the global economy improves, Chief Executive David Dvorak said on a conference call.
He also indicated pressure on product prices--a key industry concern--lessened from the third quarter and remains stable. New and improved products can still fetch premium prices, and this factor helped the hip business in recent months, Dvorak said.
He said Zimmer doesn't expect accelerating erosion in prices. The company forecasted low single-digit growth in replacement hip and knee procedures for 2011, but said the market could expand faster if employment levels significantly improve.
Susquehanna analyst David Turkaly said Zimmer's outlook "should assuage fears of further deterioration" in the market this year. Zimmer shares recently traded up 7.2% to $59.27. Competitor Stryker Corp. (SYK) gained 1.3% to $58.09.
Zimmer posted a profit of $34.9 million, or 18 cents a share, compared with $155.2 million, or 74 cents a share, a year earlier. Earnings were hit by a $204 million goodwill impairment charge related to the company's spinal unit; Zimmer cited a change in outlook for the U.S. spinal market, which is under pressure from sliding product prices and reimbursement issues, and also cited decreased expectations for its "Dynesys" product.
Excluding the goodwill charges for its spine business and other items, Zimmer said earnings were $1.27 a share. Analysts surveyed by Thomson Reuters had forecast, on average, earnings of $1.19 per share.
Sales rose 2.5% to $1.13 billion, topping the company's growth projections and analysts' $1.11 billion forecast. The company's replacement-joint business grew by 1%, or 2% excluding the impact of currency rates, which is an improvement from a 1% slide in the third quarter. Knee sales were about flat following a 3% slide, excluding currency, in the third quarter. Hip sales grew 3%, also improving from prior months.
For the new year, the company predicted earnings of $4.25 to $4.45 and revenue growth of 3% to 5%, helped a bit by currency rates. The earnings projection takes into account ongoing restructuring moves such as reducing management layers. Zimmer projected earnings of $4.60 to $4.80 per share excluding items.
Analysts were looking for $4.66 per share and 4% growth to $4.38 billion, respectively.
The company expects a pretax charge of $75 million to $80 million this year related to its restructuring efforts, which it expects to deliver benefits of $40 million to $50 million on the year. Eventually the company expects annual savings topping $100 million.
--Lauren Pollock and Lee Roberts contributed to this article.
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