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| ZMH > SEC Filings for ZMH > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
Overview
We are a global leader in the design, development, manufacture and marketing of orthopaedic reconstructive implants, dental implants, spinal implants, trauma products and related surgical products (sometimes referred to in this report as "OSP"). We also provide other healthcare related services. Reconstructive orthopaedic implants restore joint function lost due to disease or trauma in joints such as knees, hips, shoulders and elbows. Dental implants restore function and aesthetics in patients that have lost teeth due to trauma or disease. Spinal implants are utilized by orthopaedic surgeons and neurosurgeons in the treatment of degenerative diseases, deformities and trauma in all regions of the spine. Trauma products are devices used primarily to reattach or stabilize damaged bone and tissue to support the body's natural healing process. OSP includes supplies and instruments designed to aid in predominantly orthopaedic surgical procedures and post-operation rehabilitation. We have operations in more than 25 countries and market products in more than 100 countries. We manage operations through three reportable geographic segments - the Americas, Europe and Asia Pacific.
Certain percentages presented in Management's Discussion and Analysis are calculated from the underlying whole-dollar amounts and therefore may not recalculate from the rounded numbers used for disclosure purposes. In addition, certain amounts in the 2008 consolidated financial statements have been reclassified to conform to the 2009 presentation. Beginning in 2009, we no longer include our Dental product category sales within our Reconstructive products category. Prior year amounts related to Dental product category sales have been reclassified to conform to the current year presentation.
We believe the following developments or trends are important in understanding our financial condition, results of operations and cash flows for the three and six month periods ended June 30, 2009 and our expected results for the remainder of 2009.
Demand (Volume and Mix) Trends
Volume and mix of products were flat during the three month period ended June 30, 2009, compared to 5 percent of sales growth in the same 2008 period. The sales growth rate declined from the 2008 period due to lower volume as a result of a weaker global economy and the ongoing effects of the disruptive factors experienced during 2008 as discussed below.
We believe the market for orthopaedic procedure volume temporarily decelerated from mid single digit growth rates to low single digit growth rates on a global basis due to the weakened global economy. We believe long-term market growth rates will be driven by an aging global population, obesity, proven clinical benefits, new material technologies, advances in surgical techniques and more active lifestyles, among other factors. In addition, the ongoing shift in demand to premium products, such as Longevity® and Prolong® Highly Crosslinked Polyethylenes, Trabecular MetalTM Technology products, hip stems with Kinectiv® Technology, high-flex knees, knee revision products, porous hip stems and the introduction of gender-based devices continues to positively affect sales growth.
Pricing Trends
Global selling prices decreased 1 percent for the three month period ended June 30, 2009, compared to flat pricing in the same 2008 period. Selling prices in the Americas decreased 1 percent during the three month period ended June 30, 2009, compared to a 1 percent increase in the same 2008 period. In Europe, selling prices for the three month period ended June 30, 2009 were flat, which is similar to the same 2008 period. Asia Pacific selling prices decreased 1 percent for the three month period ended June 30, 2009, compared to a 3 percent decrease in the same 2008 period, as we anniversaried out of scheduled reductions in reimbursement prices in Japan during the quarter. Japan currently represents approximately 8 percent of our sales. With the effect of governmental healthcare cost containment efforts and continuing pressure from local hospitals and health systems, we expect selling prices will be down approximately 1 percent on a global basis for 2009.
Foreign Currency Exchange Rates
For the three month period ended June 30, 2009, foreign currency exchange rates resulted in a 5 percent decline in sales. We estimate that an overall stronger U.S. Dollar versus foreign currency exchange rates will have a negative effect of approximately 3 percent on sales for the year ending December 31, 2009. We address currency risk through regular operating and financing activities, and under appropriate circumstances and subject to proper authorization, through the use of forward contracts and foreign currency options solely for managing foreign currency volatility and risk. Changes to foreign currency exchange rates affect sales growth, but due to offsetting gains/losses on hedge contracts, which are recorded in cost of products sold, the effect on net earnings in the near term is expected to be minimal.
Disruptive Events
We believe that we have suffered customer losses as a result of disruptive factors experienced during 2008, including our temporary suspension of U.S. marketing and distribution of the Durom Cup, our voluntary recall and suspension of production of certain OSP patient care products and the implementation of our enhanced global compliance initiatives. We estimated that these customer losses reduced our global knee market share by approximately 1.5 percent and hip market share by approximately 2.0 percent on a cumulative basis through the end of 2008. We believe these share losses have stabilized during the first half of 2009 and expect this stabilization to continue as we anniversary out of the majority of the 2008 customer and product-related losses and as we launch new products in sufficient quantities to recover some of the product-related losses. However, we expect our sales growth will continue to be at a rate slower than the market in the near term due to these disruptive factors.
Global Economic Conditions
We believe conditions in the broader economy have resulted in a temporary slowdown in elective hospital procedures. Although many of our products are used in elective procedures, we believe our core knee and hip franchises remain more insulated than many medical product categories from swings in the broader economy because the need for these procedures does not diminish, even if the timing is affected. In particular, our dental revenues have experienced pressure due to the weak economic environment as many of those procedures are not reimbursed by third-party payors.
Second Quarter Results of Operations
Net Sales by Operating Segment
The following table presents net sales by operating segment and the components
of the percentage changes (dollars in millions):
Three Months
Ended
June 30, Volume/ Foreign
2009 2008 % (Dec) Mix Price Exchange
Americas $ 589.6 $ 594.5 (1 )% 1 % (1 )% (1 )%
Europe 280.4 325.8 (14 ) (1 ) - (13 )
Asia Pacific 149.9 159.2 (6 ) (1 ) (1 ) (4 )
$ 1,019.9 $ 1,079.5 (6 ) - (1 ) (5 )
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"Foreign Exchange" as used in the tables in this report represents the effect of changes in foreign exchange rates on sales growth.
Net Sales by Product Category
The following table presents net sales by product category and the components of
the percentage changes (dollars in millions):
Three Months
Ended
June 30, Volume/ Foreign
2009 2008 % Inc (Dec) Mix Price Exchange
Reconstructive
Knees $ 438.2 $ 467.3 (6 )% - % (1 )% (5 )%
Hips 308.1 342.7 (10 ) (3 ) (1 ) (6 )
Extremities 33.7 31.1 8 13 - (5 )
Total 780.0 841.1 (7 ) (1 ) (1 ) (5 )
Dental 52.7 63.3 (17 ) (12 ) - (5 )
Trauma 56.7 54.9 3 5 2 (4 )
Spine 64.2 54.3 18 20 3 (5 )
OSP and other 66.3 65.9 1 3 - (2 )
Total $ 1,019.9 $ 1,079.5 (6 ) - (1 ) (5 )
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The NexGen® Complete Knee Solution product line, including Gender SolutionsTM Knee Femoral Implants, the NexGen LPS-Flex Knee, the NexGen CR-Flex Knee and the NexGen LCCK Revision Knee, led knee sales. In addition, the Gender Solutions Natural-Knee Flex System made a strong contribution.
The continued conversion to porous stems, including the Zimmer® M/L Taper Stem, the Zimmer M/L Taper Stem with Kinectiv Technology, the CLS® Spotorno® Stem from the CLS Hip System, and the Alloclassic® Zweymüller® Hip Stem, led hip stem sales, but was partially offset by weaker sales of cemented stems. Trabecular Metal Acetabular Cups and Longevity Highly Crosslinked Polyethylene Liners also made strong contributions. The temporary suspension of marketing and distribution of the Durom Cup in the U.S. announced in the second half of 2008 negatively impacted hip sales growth. Additionally, with the lack of a hip resurfacing product within our U.S. hip portfolio, we face a continuing challenge in hip sales growth with the adoption of hip resurfacing in the U.S. market.
The Bigliani/Flatow® Complete Shoulder Solution and the Zimmer Trabecular Metal Reverse Shoulder System led extremities sales. Negative sales growth for our dental business reflects disruptions caused by the implementation of our enhanced compliance initiatives and overall weakness in the global economy. Zimmer Periarticular Locking Plates and the I.T.S.T. TM Intertrochanteric/Subtrochanteric Fixation System led trauma sales. In the fourth quarter of 2008, we acquired Abbott Spine. As a result of the acquisition, spine sales have increased but reflect sales dis-synergies associated with the integration of the business. OSP sales were led by PALACOS®1 Bone Cement.
1 Trademark of Heraeus Kulzer GmbH
Americas Net Sales
The following table presents Americas net sales (dollars in millions):
Three Months
Ended
June 30,
2009 2008 % Inc (Dec)
Reconstructive
Knees $ 271.7 $ 279.9 (3 )%
Hips 143.3 149.1 (4 )
Extremities 25.8 21.7 19
Total 440.8 450.7 (2 )
Dental 26.0 29.3 (11 )
Trauma 31.2 30.9 1
Spine 48.5 42.2 15
OSP and other 43.1 41.4 4
Total $ 589.6 $ 594.5 (1 )
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The NexGen Complete Knee Solution product line, including the Gender Solutions Knee Femoral Implants, NexGen LPS-Flex Knee, the NexGen LCCK Revision Knee and the NexGen CR-Flex Knee, led knee sales. The Gender Solutions Natural-Knee Flex System also made a strong contribution.
Porous stems, including the Zimmer M/L Taper Stem and the Zimmer M/L Taper Stem with Kinectiv Technology, led hip stem sales. Trabecular Metal Acetabular Cups and Longevity Highly Crosslinked Polyethylene Liners also made a strong contribution. As noted above, the temporary suspension of marketing and distribution of the Durom Cup in the U.S. has continued to negatively impact hip sales and the adoption of hip resurfacing in the U.S. market will continue to adversely affect our hip sales growth.
As a result of the ongoing effects of the disruptive events discussed above, we suffered customer losses. These customer losses negatively impacted sales growth, primarily in the knee and hip product categories. However, we believe these losses stabilized during the first half of 2009.
The Bigliani/Flatow Shoulder Solution and the Zimmer Trabecular Metal Reverse Shoulder System led extremities sales. Negative sales growth for our dental business reflects disruptions caused by the implementation of our enhanced compliance initiatives and overall weakness in the U.S. economy. Zimmer Periarticular Plates and the I.T.S.T. Intertrochanteric/Subtrochanteric Fixation System led trauma sales. Spine sales increased as a result of the Abbott Spine acquisition completed in the fourth quarter of 2008. OSP sales were led by PALACOS Bone Cement.
Europe Net Sales
The following table presents Europe net sales (dollars in millions):
Three Months
Ended
June 30,
2009 2008 % Inc (Dec)
Reconstructive
Knees $ 108.0 $ 125.1 (14 )%
Hips 111.5 137.7 (19 )
Extremities 6.0 7.4 (19 )
Total 225.5 270.2 (16 )
Dental 20.4 24.4 (17 )
Trauma 12.7 12.7 -
Spine 12.0 9.6 25
OSP and other 9.8 8.9 9
Total $ 280.4 $ 325.8 (14 )
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Changes in foreign exchange rates negatively affected both knee and hip sales by 13 percent. The NexGen Complete Knee Solution product line, including the NexGen LPS-Flex Knee, the NexGen LCCK Revision Knee and the NexGen CR-Flex Knee, led knee sales in our Europe region.
Porous stems, including the CLS Spotorno Stem and Alloclassic Zweymüller Stem, led hip stem sales. Longevity Highly Crosslinked Polyethylene Liners, Trabecular Metal Acetabular Cups and the Allofit® Hip Acetabular System also contributed to hip sales.
As a result of the ongoing effect of the disruptive events discussed above, we suffered customer losses. These customer losses negatively impacted sales growth, primarily in the knee and hip product categories. However, we believe these losses stabilized during the first half of 2009.
The Anatomical Shoulder System and the Coonrad/Morrey Total Elbow led extremities sales. The Tapered Screw-Vent Implant System led dental sales. The Cable-Ready® Cable Grip System and the NCB Plating System led trauma sales. Spine sales increased as a result of the Abbott Spine acquisition completed in the fourth quarter of 2008. Patient care products led OSP sales.
Asia Pacific Net Sales
The following table presents Asia Pacific net sales (dollars in millions):
Three Months
Ended
June 30,
2009 2008 % Inc (Dec)
Reconstructive
Knees $ 58.5 $ 62.3 (6 )%
Hips 53.3 55.9 (4 )
Extremities 1.9 2.0 (7 )
Total 113.7 120.2 (5 )
Dental 6.3 9.6 (34 )
Trauma 12.8 11.3 13
Spine 3.7 2.5 51
OSP and other 13.4 15.6 (13 )
Total $ 149.9 $ 159.2 (6 )
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Changes in foreign exchange rates negatively affected knee and hip sales by 6 percent and 2 percent, respectively. The NexGen Complete Knee Solution product line, the NexGen CR-Flex Knee and the NexGen LPS-Flex Knee led knee sales. The Gender Solutions Knee Femoral Implant also made a strong contribution to knee sales for the period.
Porous stems, including the Fiber Metal Taper Stem from the VerSys® Hip System and the Alloclassic Zweymüller Hip System, drove hip stem sales. Sales of Longevity Highly Crosslinked Polyethylene Liners, the Trilogy Acetabular System and Trabecular Metal Acetabular Cups also contributed to hip sales.
As a result of the ongoing effects of the disruptive events discussed above, we suffered customer losses. These customer losses negatively impacted sales growth, primarily in the knee and hip product categories. However, we believe these losses stabilized during the first half of 2009.
The Bigliani/Flatow Shoulder Solution and the Coonrad/Morrey Total Elbow led
extremities sales. Negative sales growth for our dental business reflects an
overall weakness in the global economy. The Tapered Screw-Vent Implant System
led dental sales. Trauma sales were led by the I.T.S.T.
Intertrochanteric/Subtrochanteric Fixation System. Spine sales increased as a
result of the Abbott Spine acquisition completed in the fourth quarter of 2008.
OSP sales were negatively affected by the loss of certain distribution
agreements related to various products in the region.
Gross Profit
Gross profit as a percentage of net sales was 76.8 percent in the three month period ended June 30, 2009, compared to 75.7 percent in the same 2008 period. The primary contributor to the increase in gross profit margin was foreign currency hedge gains recognized in 2009 compared to hedge losses recognized in the 2008 period. Under our hedging program, for derivatives which qualify as hedges of future cash flows, the effective portion of changes in fair value is temporarily recorded in other comprehensive income, and then recognized in cost of products sold when the hedged item affects earnings. These hedge gains were partially offset by an increase in excess inventory and obsolescence charges due to increased inventory levels as well as increased inventory step-up as a result of the Abbott Spine acquisition.
Operating Expenses
Research and Development, or R&D, as a percentage of net sales was 4.9 percent for the three month period ended June 30, 2009, compared to 4.5 percent in the same 2008 period. R&D expense increased to $49.9 million for the three month period ended June 30, 2009, from $48.3 million in the same 2008 period, reflecting increased spending on certain development, clinical and external research activities compared to the delay in activities experienced in 2008 as we implemented our enhanced compliance program. We expect R&D spending in 2009 to return to our historical average of 5-6 percent of sales.
Selling, general and administrative, or SG&A, as a percentage of net sales was 42.4 percent for the three month period ended June 30, 2009, compared to 41.5 percent in the same 2008 period. SG&A expense decreased to $432.3 million for the three month period ended June 30, 2009, from $448.0 million in the same 2008 period. SG&A expense for the 2008 period included approximately $20 million of costs such as monitor fees and consulting and legal fees associated with the global roll-out of our enhanced compliance program. In this challenging economic environment, we are carefully managing our SG&A spend, reducing expenses in certain areas in order to fund growth and productivity initiatives. Areas of investment include marketing and promotion and medical education and training. The acquisition of Abbott Spine increased SG&A costs for items such as selling expenses, increased instrument depreciation and amortization of the acquired intangible assets. Additionally, SG&A as a percent of sales is negatively impacted by the significant decrease in revenues caused by changes in foreign currency rates. A majority of our SG&A spend is incurred in the U.S., primarily from our corporate headquarters and similar functions at our various businesses such as Dental, Trauma, Spine and OSP. Therefore, SG&A expense does not respond to changes in foreign currency rates proportionally to our revenue, which has caused SG&A as a percent of sales to increase.
Acquisition, integration, realignment and other expenses for the three month period ended June 30, 2009 were $36.5 million, compared to $12.5 million in the same 2008 period. During the 2009 period, we initiated a workforce realignment, which included the elimination of positions in some areas and planned increases in others, to balance the requirements necessary to support long-term growth. As a result of this realignment, we incurred approximately $16.6 million of severance and termination-related expenses. Other items contributing to the increase include $6.9 million of expenses related to contract termination costs, $4.8 million of certain litigation matters that were recognized during the period and various costs incurred to integrate the Abbott Spine business acquired in the fourth quarter of 2008.
We recognized a net curtailment and settlement gain of $32.1 million during the three month period ended June 30, 2009 related to amending our U.S. and Puerto Rico postretirement benefit plans. For more information regarding the net curtailment and settlement gain, see Note 10 to the consolidated financial statements.
Operating Profit, Income Taxes and Net Earnings
Operating profit for the three month period ended June 30, 2009 decreased 4 percent to $296.5 million, from $308.4 million in the same 2008 period. The decrease in operating profit is due primarily to lower reported revenues.
Interest and other expense, net for the three month period ended June 30, 2009, increased to $4.0 million, compared to income of $6.8 million in the same 2008 period. Interest and other income in the 2008 period reflects a realized gain of $8.7 million related to the sale of certain marketable securities. Excluding the effect of this gain in 2008, interest expense increased in the 2009 period as the result of increased long-term debt used to partially fund the Abbott Spine acquisition and share repurchases.
The effective tax rate on earnings before income taxes increased to 28.2 percent for the three month period ended June 30, 2009, from 27.8 percent in the same 2008 period. The effective tax rate for the 2008 period was impacted by the favorable resolution of certain tax positions.
Net earnings decreased 7 percent to $210.1 million for the three month period ended June 30, 2009, compared to $227.1 million in the same 2008 period. Basic and diluted earnings per share both decreased 1 percent to $0.98, from $0.99 in the same 2008 period. The disproportional change in earnings per share as compared with net earnings is attributed to the effect of 2009 and 2008 share repurchases.
Six Month Results of Operations
Net Sales by Operating Segment
The following table presents net sales by operating segment and the components
of the percentage changes (dollars in millions):
Six Months
Ended
June 30, Volume/ Foreign
2009 2008 % (Dec) Mix Price Exchange
Americas $ 1,184.2 $ 1,201.6 (1 )% - % (1 )% - %
Europe 545.5 631.3 (14 ) - - (14 )
Asia Pacific 282.8 305.8 (8 ) (2 ) (2 ) (4 )
$ 2,012.5 $ 2,138.7 (6 ) - (1 ) (5 )
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Net Sales by Product Category
The following table presents net sales by product category and the components of
the percentage changes (dollars in millions):
Six Months Ended June 30, Volume/ Foreign
2009 2008 % Inc (Dec) Mix Price Exchange
Reconstructive
Knees $ 867.2 $ 920.8 (6 )% - % (1 )% (5 )%
Hips 607.7 672.9 (10 ) (3 ) (1 ) (6 )
Extremities 66.7 62.9 6 10 - (4 )
Total 1,541.6 1,656.6 (7 ) (1 ) (1 ) (5 )
Dental 100.1 119.1 (16 ) (12 ) 1 (5 )
Trauma 113.6 110.6 3 5 1 (3 )
Spine 128.8 108.3 19 20 3 (4 )
OSP and other 128.4 144.1 (11 ) (9 ) - (2 )
Total $ 2,012.5 $ 2,138.7 (6 ) - (1 ) (5 )
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The NexGen Complete Knee Solution product line, including Gender Solutions Knee Femoral Implants, the NexGen LPS-Flex Knee, the NexGen CR-Flex Knee and the NexGen LCCK Revision Knee, led knee sales. In addition, the Gender Solutions Natural-Knee Flex System made a strong contribution.
The Zimmer M/L Taper Stem, the Zimmer M/L Taper Stem with Kinectiv Technology, the CLS Spotorno Stem from the CLS Hip System, and the Alloclassic Zweymüller Hip Stem, led hip stem sales. Trabecular Metal Acetabular Cups and Longevity Highly Crosslinked Polyethylene Liners also made strong contributions. The temporary suspension of marketing and distribution of the Durom Cup in the . . .
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