Zimmer fourth quarter net sales increase to $1.18 billion

Zimmer Holdings, Inc. (NYSE and SIX: ZMH) today reported financial results for the quarter and year ended December 31, 2012.  The Company reported fourth quarter net sales of $1.18 billion, an increase of 1.1% reported and 2.1% constant currency over the fourth quarter of 2011.  Diluted earnings per share for the quarter were $0.88 reported and $1.51 adjusted, an increase of 11.0% adjusted over the prior year period.  Full-year net sales were $4.47 billion, an increase of 0.4% reported and 2.3% constant currency over the prior year.  Diluted earnings per share for the year were $4.29 reported and $5.30 adjusted, an increase of 10.4% adjusted over the prior year. 

"Throughout 2012, Zimmer successfully executed our value creation agenda, including innovation and growth initiatives, global transformation programs and capital allocation strategies," said David Dvorak, Zimmer President and CEO.  "For the fourth quarter and full year, Zimmer delivered on our financial commitments, generating double-digit growth in adjusted earnings per share and significant operating margin improvements.  We also achieved key regulatory and commercialization milestones for a number of innovative products and technologies, both in our core franchises and in new, adjacent musculoskeletal markets.  These clinically-differentiated offerings will drive accelerated top-line growth in 2013 and beyond." 

Net earnings for the fourth quarter were $152.8 million on a reported basis and $263.5 million on an adjusted basis, an increase of 7.6% adjusted over the prior year period.  Operating cash flow for the fourth quarter was $368.0 million.  Net earnings for the full year 2012 were $755.0 million on a reported basis and $932.5 million on an adjusted basis, an increase of 3.0% adjusted over the prior year.  Operating cash flow for the full year was $1,151.9 million.

During the quarter, the Company utilized $140 million of cash to acquire 2.1 million shares.  Consequently, for the full year 2012, the Company utilized $485 million of cash to acquire 7.7 million shares.  As previously announced, the Company has a share repurchase program that authorizes purchases of up to $1.5 billion of the Company's common stock through December 31, 2014.  The Company also paid $94 million in cash dividends to stockholders during 2012.

The Company recorded a non-cash charge for goodwill impairment of $96 million net of tax or $0.55 per diluted share related to the Company's U.S. Spine reporting unit during the fourth quarter.  The Company conducts annual impairment tests during the fourth quarter.  A number of factors have resulted in a change in the outlook for the spine market in the U.S., including pressure from payers on utilization of certain types of procedures and on reimbursement rates and prices generally.  The change in outlook for the market, together with ongoing Company-specific challenges related to the U.S. Spine reporting unit, contributed to the decrease in the implied fair value of the unit compared with prior year.

The Company also recently completed a legal entity restructuring of certain international operations that led to recognition of deferred tax assets related to foreign tax credits.  This resulted in a credit to income taxes in the quarter, net of other unrelated tax charges, of $34 million.  This credit, together with the goodwill impairment charge, certain claims and special items, are excluded from the Company's non-GAAP adjusted earnings measure, as further described herein.

Guidance

The Company expects full-year revenues for 2013 to increase between 2.5% and 4.5% on a constant currency basis.  The Company estimates that foreign currency translation will decrease revenues by approximately 0.5% for the full year 2013, resulting in reported revenue growth between 2% and 4%.  Full-year 2013 diluted earnings per share are projected to be in a range of $5.05 to $5.25 on a reported basis and $5.65 to $5.85 on an adjusted basis.

In 2013, the Company expects to continue global restructuring and transformation initiatives designed to streamline business operations and support functions.  Savings from these initiatives will enable the Company to absorb the medical device excise tax, continue to support investments in innovation and commercialization of new products and technologies, expand global sales channels and drive sustained growth in earnings and cash flow.  The programs to be completed in 2013 are expected to generate annualized pre-tax savings of more than $80 million, including $30 million to $40 million to be realized in 2013.  

The Company expects to record 2013 pre-tax charges of $120 million to $130 million as details of the various programs are finalized and implemented.  The Company also expects to incur an additional $5 million to $15 million for certain acquisition and integration costs connected with the acquisitions of Dornoch Medical Systems, Inc., Exopro and third party distributors around the world.