Zimmer Holdings, Inc. Reports Second Quarter 2008 Financial Results

WARSAW, Ind., July 22 /PRNewswire-FirstCall/ --

-- Net Sales of $1.08 billion represents an increase of 11% reported (5%
constant currency)

-- Worldwide Reconstructive Sales increased 14% reported (8% constant
currency)

-- Worldwide Knee Sales increased 15% reported (10% constant currency)

-- Diluted EPS were $0.99 reported and $1.03 adjusted, an increase of 5%
adjusted over the prior year period

-- Zimmer voluntarily suspends U.S. marketing and distribution of Durom(R)
Acetabular Component while it updates labeling and implements surgical
technique training

-- Full-year Sales and EPS guidance revised

Zimmer Holdings, Inc. (NYSE: ZMH; SWX: ZMH) today reported financial
results for the quarter ended June 30, 2008. The Company reported second
quarter net sales of $1.08 billion, an increase of 11% reported and 5%
constant currency over the second quarter of 2007. Diluted earnings per share
for the quarter were $0.99 reported and $1.03 adjusted, an increase of 5%
adjusted over the prior year period.
"During the quarter, our worldwide knee sales grew by 10% constant
currency as we continue to expand our industry-leading knee business by
offering surgeons a comprehensive portfolio of proven designs and innovative
new treatment options," said David Dvorak, Zimmer President and CEO. "We are
making substantial progress on our operating and infrastructure initiatives,
in a manner designed to position Zimmer for sustainable growth in an expanding
health care market. We have also been executing plans under our enhanced
compliance model, including holding numerous productive meetings with surgeons
to discuss how we will continue to collaborate to improve patient care."
The Company resumed Zimmer Institute training activities, which will
support the ongoing launches of several key products, including the Zimmer(R)
NexGen(R) LPS-Flex Mobile Knee, the Gender Solutions(TM) Natural-Knee(R) Flex
and the Gender Solutions(TM) Patello-Femoral Joint System in knees. Hip
products include the VerSys(R) M/L Taper Hip with Kinectiv(TM) Technology and
the Fitmore(TM) Hip stem. Absent any unforeseen events, the Company
anticipates FDA clearance to market the EPOCH(R) Gender Solutions Hip during
the second half of the year.
During the quarter, the Company utilized $276 million of cash and $220
million in borrowings to acquire 6.9 million shares. The Company completed
its $1 billion stock repurchase program, which was scheduled to expire on
December 31, 2008, and initiated the $1.25 billion repurchase program
announced earlier in the year. Since its first repurchase program in 2006,
Zimmer has used nearly $2 billion in internally generated funds to acquire
more than 10% of its shares that were outstanding as of the end of 2005.
Sales Tables
The following tables provide sales results by geographic segment and
product category, as well as the percentage change compared to the prior year
quarter and six months on both a reported and constant currency basis.

NET SALES - THREE MONTHS ENDED JUNE 30, 2008
(in millions, unaudited)
Constant
Net Reported Currency
Sales % Growth % Growth
Geographic Segments
Americas $595 5 % 4 %
Europe 326 22 8
Asia Pacific 159 18 6
Total 1,080 11 5
Product Categories
Reconstructive
Americas 480 7 6
Europe 294 23 9
Asia Pacific 130 21 10
Total 904 14 8

Knees
Americas 280 9 9
Europe 125 24 10
Asia Pacific 62 25 14
Total 467 15 10

Hips
Americas 149 4 3
Europe 138 21 7
Asia Pacific 56 15 3
Total 343 12 4

Extremities 31 18 14

Dental 63 12 6

Trauma 55 9 3

Spine 55 11 9

OSP and other 66 (14) (18)

NET SALES - SIX MONTHS ENDED JUNE 30, 2008
(in millions, unaudited)
Constant
Net Reported Currency
Sales % Growth % Growth
Geographic Segments
Americas $1,202 6 % 5 %
Europe 631 20 7
Asia Pacific 306 18 7
Total 2,139 11 6
Product Categories
Reconstructive
Americas 962 7 6
Europe 569 21 7
Asia Pacific 245 20 9
Total 1,776 13 7

Knees
Americas 560 8 8
Europe 245 21 8
Asia Pacific 116 25 13
Total 921 13 8

Hips
Americas 298 4 3
Europe 266 18 5
Asia Pacific 109 17 4
Total 673 11 4

Extremities 63 25 21

Dental 119 13 8

Trauma 110 10 4

Spine 109 14 11

OSP and other 144 (4) (9)

Net earnings for the second quarter were $227 million on a reported basis
and $237 million on an adjusted basis, an increase of 1% adjusted over the
prior year period. Operating cash flow for the second quarter was $281
million. Net earnings for the first six months of 2008 were $466 million on a
reported basis and were $481 million on an adjusted basis, an increase of 2%
adjusted over the prior year period.
Durom Acetabular Component
Zimmer is temporarily suspending marketing and distribution of the
Durom(R) Acetabular Component (Durom Cup) in the U.S. on a voluntary basis,
while the Company updates labeling to provide more detailed surgical technique
instructions to surgeons and implements its surgical training program in the
U.S. The Durom Cup will continue to be marketed without interruption outside
the U.S.
While many surgeons have had success implanting the Durom Cup since it was
launched in the U.S. in 2006, a subset have reported cup loosenings and
revisions of the acetabular component used in total hip replacement
procedures. These results contrast with product experience in Europe, where
post-marketing data continue to show excellent clinical outcomes since the
product launched in 2003. Following a comprehensive review of clinical
experience and product conformance to specifications in the U.S. and Europe,
Zimmer has found no evidence of a defect in the materials, manufacture, or
design of the implant. The Company has identified that surgeons who regularly
achieve the desired outcome with the Durom Cup consistently execute crucial
technique steps and place the cup in a specific manner. Following its review,
Zimmer has determined that revised surgical technique instructions and a
surgical training program are required to more consistently achieve desired
clinical results in the U.S. The Company has shared its review and
conclusions with the U.S. Food and Drug Administration and will continue to
update the Agency.
While the Company believes the likelihood of currently implanted patients
requiring revision is low, Zimmer has sent a letter to U.S. surgeons advising
them to stop implanting the Durom Cup, until the updated labeling is issued
providing more detailed surgical technique instructions and they receive
training. Additional information is being made available at www.zimmer.com .
Guidance
The Company is revising its guidance and expects full-year 2008 sales
growth to be in a range of 8.5% to 9.0% over the prior year, which reflects
constant currency growth of 4.5% to 5.0%. This compares with prior guidance
of 10% to 11% reported and 6% to 7% constant currency growth over prior year.
The adjustment to sales guidance includes a projected loss of $20 to $30
million in hip product sales pertaining to the Durom Cup in the U.S., weakness
in U.S. Dental revenues and slower than anticipated uptake on certain new
products. Adjusted diluted earnings per share for the full year are expected
to be in a range of $4.05 to $4.10, as compared to prior guidance of $4.20 to
$4.25. Revised earnings guidance gives effect to the reduction in sales from
prior guidance as well as an increase in operating expenses associated with
the global implementation of the Company's enhanced compliance program.
Further details regarding the revised guidance will be discussed during
tomorrow's investor conference call.
Conference Call
The Company will conduct its second quarter 2008 investor conference call
tomorrow, July 23, 2008, at 8:00 a.m. Eastern Time. The live audio webcast
can be accessed via Zimmer's Investor Relations website at
http://investor.zimmer.com . It will be archived for replay following the
conference.
Individuals who wish to dial into the conference call may do so at
(888) 881-6248. International callers should dial (706) 634-6422. A digital
recording will be available two hours after the completion of the conference
call from July 23, 2008 to August 6, 2008. To access the recording, US/Canada
callers should dial (800) 642-1687, or for International callers, dial
(706) 645-9291, and enter the Conference ID, 54192735. A copy of this press
release and other financial and statistical information about the periods to
be presented in the conference call will be accessible through the Zimmer
website at http://investor.zimmer.com .
About the Company
Founded in 1927 and headquartered in Warsaw, Indiana, Zimmer is a
worldwide leader in designing, developing, manufacturing and marketing
orthopaedic reconstructive, spinal and trauma devices, dental implants, and
related orthopaedic surgical products. Zimmer has operations in more than 25
countries around the world and sells products in more than 100 countries.
Zimmer's 2007 sales were approximately $3.9 billion. The Company is supported
by the efforts of more than 8,000 employees worldwide.
For more information about Zimmer, visit www.zimmer.com
Note on Non-GAAP Financial Measures
As used in this press release, the term "adjusted" refers to operating
performance measures that exclude inventory step-up and acquisition,
integration and other expenses. The term "constant currency" refers to any
financial measure that excludes the effect of changes in foreign currency
exchange rates. Reconciliations of these non-GAAP measures to the most
directly comparable GAAP measure are included in this press release.
Zimmer Safe Harbor Statement
This press release contains forward-looking statements within the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995
based on current expectations, estimates, forecasts and projections about the
orthopaedics industry, management's beliefs and assumptions made by
management. Forward-looking statements may be identified by the use of
forward-looking terms such as "may," "will," "expects," "believes,"
"anticipates," "plans," "estimates," "projects," "assumes," "guides,"
"targets," "forecasts," and "seeks" or the negative of such terms or other
variations on such terms or comparable terminology. These statements are not
guarantees of future performance and involve risks, uncertainties and
assumptions that could cause actual outcomes and results to differ materially.
These risks and uncertainties include, but are not limited to, our compliance
with the Deferred Prosecution Agreement through March 2009 and the Corporate
Integrity Agreement through 2012, the impact of our enhanced healthcare
compliance global initiatives and business practices on our relationships with
customers and consultants, our market share and our overall financial
performance, the success of our quality initiatives, the outcome of the
informal investigation by the U.S. Securities and Exchange Commission into
Foreign Corrupt Practices Act matters announced in October 2007, price and
product competition, rapid technological development, demographic changes,
dependence on new product development, the mix of our products and services,
supply and prices of raw materials and products, customer demand for our
products and services, control of costs and expenses, our ability to obtain
and maintain adequate intellectual property protection, our ability to
successfully integrate acquired businesses, our ability to form and implement
alliances, international growth, our compliance with governmental laws and
regulations affecting our U.S. and international businesses including
regulations of the U.S. Food and Drug Administration and foreign government
regulators and tax obligations and risks, the impact of suspending U.S.
distribution of one of our key hip replacement products, product liability and
intellectual property litigation losses, reimbursement levels from third-party
payors, cost-containment efforts of healthcare purchasing organizations, our
ability to retain the independent agents and distributors who market our
products, general industry and market conditions and growth rates and general
domestic and international economic conditions including interest rate and
currency exchange rate fluctuations. For a further list and description of
such risks and uncertainties, see our periodic reports filed with the U.S.
Securities and Exchange Commission. We disclaim any intention or obligation
to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as may be set forth in our
periodic reports. Readers of this document are cautioned not to place undue
reliance on these forward-looking statements, since, while we believe the
assumptions on which the forward-looking statements are based are reasonable,
there can be no assurance that these forward-looking statements will prove to
be accurate. This cautionary statement is applicable to all forward-looking
statements contained in this document.

ZIMMER HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED JUNE 30, 2008 and 2007
(in millions, except per share amounts, unaudited)

2008 2007 % Inc/(Dec)
Net Sales $1,079.5 $970.6 11 %
Cost of products sold 262.3 216.4 21
Gross Profit 817.2 754.2 8

Research and development 50.1 53.5 (6)
Selling, general and administrative 446.2 374.3 19
Acquisition, integration and other
expense 12.5 3.9 220
Operating expenses 508.8 431.7 18

Operating Profit 308.4 322.5 (4)
Interest and other 6.8 1.3 433
Earnings before income taxes and
minority interest 315.2 323.8 (3)
Provision for income taxes 87.8 92.2 (5)
Minority interest (0.3) (0.1) 33

Net Earnings $227.1 $231.5 (2)

Earnings Per Common Share
Basic $0.99 $0.98 1
Diluted $0.99 $0.97 2

Weighted Average Common Shares
Outstanding
Basic 228.4 236.9
Diluted 229.5 239.2

ZIMMER HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 and 2007
(in millions, except per share amounts, unaudited)

2008 2007 % Inc/(Dec)
Net Sales $2,138.7 $1,920.8 11 %
Cost of products sold 517.0 422.8 22
Gross Profit 1,621.7 1,498.0 8

Research and development 100.1 105.8 (5)
Selling, general and administrative 861.8 735.9 17
Acquisition, integration and other
expense 19.8 6.6 202
Operating expenses 981.7 848.3 16

Operating Profit 640.0 649.7 (2)
Interest and other 7.8 1.1 642
Earnings before income taxes and
minority interest 647.8 650.8 0
Provision for income taxes 180.9 185.5 (2)
Minority interest (0.5) (0.4) 25

Net Earnings $466.4 $464.9 0

Earnings Per Common Share
Basic $2.02 $1.96 3
Diluted $2.01 $1.94 3

Weighted Average Common Shares Outstanding
Basic 230.5 236.9
Diluted 231.7 239.2

ZIMMER HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)

June 30, December 31,
2008 2007
(unaudited)
Assets
Current Assets:
Cash and equivalents $388.1 $463.9
Restricted cash 2.8 2.5
Receivables, net 782.5 674.3
Inventories, net 800.7 727.8
Other current assets 234.0 214.2
Total current assets 2,208.1 2,082.7

Property, plant and equipment, net 1,113.7 971.9
Goodwill 2,721.3 2,621.4
Intangible assets, net 721.9 743.8
Other assets 177.4 213.9
Total Assets $6,942.4 $6,633.7

Liabilities and Shareholders' Equity

Current liabilities $807.9 $748.6
Other long-term liabilities 296.9 328.4
Long-term debt 329.3 104.3
Minority interest 3.3 2.8
Shareholders' equity 5,505.0 5,449.6
Total Liabilities and Shareholders' Equity $6,942.4 $6,633.7

ZIMMER HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 and 2007
(in millions, unaudited)

2008 2007

Cash flows provided by (used in)
operating activities
Net earnings $466.4 $464.9
Depreciation and amortization 129.2 109.4
Non-cash gain on sale of assets (8.7) -
Share-based compensation 39.4 41.1
Income tax benefits from stock
option exercises 10.0 37.9
Excess income tax benefits from
stock option exercises (6.0) (25.6)
Changes in operating assets and liabilities
Income taxes (35.7) 4.1
Receivables (81.9) (54.2)
Inventories (53.8) (36.8)
Accounts payable and accrued expenses 87.6 2.4
Other assets and liabilities (23.2) (47.5)
Net cash provided by operating activities 523.3 495.7

Cash flows provided by (used in)
investing activities
Additions to instruments (119.5) (72.9)
Additions to other property, plant
and equipment (121.5) (70.3)
Proceeds from sale of assets 12.0 -
Acquisitions, net of acquired cash (7.5) (112.1)
Net cash used in investing activities (236.5) (255.3)

Cash flows provided by (used in)
financing activities
Net borrowings under credit
facilities 220.0 -
Proceeds from employee stock
compensation plans 45.2 132.1
Excess income tax benefits from
stock option exercises 6.0 25.6
Repurchase of common stock (640.2) (305.2)
Net cash used in financing activities (369.0) (147.5)

Effect of exchange rates on cash and
equivalents 6.4 0.1

Increase (decrease) in cash and equivalents (75.8) 93.0
Cash and equivalents, beginning of period 463.9 265.7
Cash and equivalents, end of period $388.1 $358.7

ZIMMER HOLDINGS, INC.
NET SALES BY GEOGRAPHIC SEGMENT
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 and 2007
(in millions, unaudited)

Three Months Ended June 30, Six Months Ended June 30,
% %
2008 2007 Inc/(Dec) 2008 2007 Inc/(Dec)

Americas $594.5 $568.1 5 % $1,201.6 $1,135.9 6 %
Europe $325.8 267.2 22 631.3 526.0 20
Asia Pacific $159.2 135.3 18 305.8 258.9 18

Total $1,079.5 $970.6 11 $2,138.7 $1,920.8 11

ZIMMER HOLDINGS, INC.
NET SALES BY PRODUCT CATEGORY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 and 2007
(in millions, unaudited)

Three Months Ended June 30, Six Months Ended June 30,

% %
2008 2007 Inc/(Dec) 2008 2007 Inc/(Dec)

Reconstructive $904.1 $794.7 14 % $1,775.6 $1,574.2 13 %
Trauma 54.7 50.3 9 110.2 100.4 10
Spine 54.5 49.0 11 108.8 95.7 14
OSP and other 66.2 76.6 (14) 144.1 150.5 (4)
Total $1,079.5 $970.6 11 $2,138.7 $1,920.8 11

ZIMMER HOLDINGS, INC.
RECONCILIATION OF REPORTED % GROWTH TO
CONSTANT CURRENCY % GROWTH
(unaudited)

For the Three Months Ended
June 30, 2008

Foreign Constant
Reported Exchange Currency
% Growth Impact % Growth
Geographic Segments
Americas 5 % 1 % 4 %
Europe 22 14 8
Asia Pacific 18 12 6
Total 11 6 5
Product Categories
Reconstructive
Americas 7 1 6
Europe 23 14 9
Asia Pacific 21 11 10
Total 14 6 8

Knees
Americas 9 0 9
Europe 24 14 10
Asia Pacific 25 11 14
Total 15 5 10

Hips
Americas 4 1 3
Europe 21 14 7
Asia Pacific 15 12 3
Total 12 8 4

Extremities 18 4 14

Dental 12 6 6

Trauma 9 6 3

Spine 11 2 9

OSP and other (14) 4 (18)

ZIMMER HOLDINGS, INC.
RECONCILIATION OF REPORTED % GROWTH TO
CONSTANT CURRENCY % GROWTH
(unaudited)

For the Six Months Ended
June 30, 2008

Foreign Constant
Reported Exchange Currency
% Growth Impact % Growth
Geographic Segments
Americas 6 % 1 % 5 %
Europe 20 13 7
Asia Pacific 18 11 7
Total 11 5 6
Product Categories
Reconstructive
Americas 7 1 6
Europe 21 14 7
Asia Pacific 20 11 9
Total 13 6 7

Knees
Americas 8 0 8
Europe 21 13 8
Asia Pacific 25 12 13
Total 13 5 8

Hips
Americas 4 1 3
Europe 18 13 5
Asia Pacific 17 13 4
Total 11 7 4

Extremities 25 4 21

Dental 13 5 8

Trauma 10 6 4

Spine 14 3 11

OSP and other (4) 5 (9)

ZIMMER HOLDINGS, INC.
Reconciliation of Net Earnings and Adjusted Net Earnings
For the Three Months Ended June 30, 2008 and 2007
(in millions, unaudited)

Three Months
Ended June 30,
2008 2007

Net Earnings $227.1 $231.5
Inventory step-up 1.5 0.3
Acquisition, integration and other 12.5 3.9
Taxes on acquisition, integration
and other and inventory step-up (4.2) (1.0)
Adjusted Net Earnings $236.9 $234.7

ZIMMER HOLDINGS, INC.
Reconciliation of Net Earnings and Adjusted Net Earnings
For the Six Months Ended June 30, 2008 and 2007
(in millions, unaudited)

Six Months
Ended June 30,
2008 2007

Net Earnings $466.4 $464.9
Inventory step-up 1.8 0.3
Acquisition, integration and other 19.8 6.6
Taxes on acquisition, integration
and other and inventory step-up (6.8) (1.7)
Adjusted Net Earnings $481.2 $470.1

ZIMMER HOLDINGS, INC.
Reconciliation of Diluted EPS and Adjusted Diluted EPS
For the Three Months Ended June 30, 2008 and 2007
(unaudited)

Three Months
Ended June 30,
2008 2007

Diluted EPS $0.99 $0.97
Inventory step-up 0.01 -
Acquisition, integration and other 0.05 0.02
Taxes on acquisition, integration
and other and inventory step-up (0.02) (0.01)
Adjusted Diluted EPS $1.03 $0.98

ZIMMER HOLDINGS, INC.
Reconciliation of Diluted EPS and Adjusted Diluted EPS
For the Six Months Ended June 30, 2008 and 2007
(unaudited)

Six Months
Ended June 30,
2008 2007

Diluted EPS $2.01 $1.94
Inventory step-up 0.01 -
Acquisition, integration and other 0.09 0.03
Taxes on acquisition, integration
and other and inventory step-up (0.03) -
Adjusted Diluted EPS $2.08 $1.97

ZIMMER HOLDINGS, INC.
Reconciliation of 2008 Projected Diluted EPS
and Projected Adjusted Diluted EPS
(unaudited)

Projected Twelve Months Ended
December 31, 2008: Low High

Diluted EPS $3.97 $4.02
Inventory step-up 0.01 0.01
Acquisition, integration and other,
net of tax 0.07 0.07
Adjusted Diluted EPS $4.05 $4.10

SOURCE Zimmer Holdings, Inc.

Media: Brad Bishop, +1-574-372-4291, bradley.bishop@zimmer.com, Investors:
Paul Blair, +1-574-371-8042, paul.blair@zimmer.com, or James T. Crines,
+1-574-372-4264, james.crines@zimmer.com