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Zimmer's Q4 Results Confirm Spine Business Needs Help

“Goodwill impairment”—An ambiguous term for an ambiguous problem. A company’s “goodwill” asset is an intangible—rather than buildings or products, it can refer to things such as a trusted brand name or healthy customer relationships. A goodwill impairment, therefore, is damage to some company intangible, which can, in fact, cost a company very real dollars.

In its 2012 fourth quarter revenue report, Zimmer Holdings Inc. recorded a “non-cash charge for goodwill impairment” of $96 million. The final quarter typically is the time Zimmer conducts impairment tests, and in 2012, it concluded that the “implied value” of its spine unit had declined. In fact, at $54 million in sales, the spine unit slid 5 percent from the corresponding quarter last year, and has, according to the company, been in decline for the past two years.

Hips didn’t do so well either. The quarter saw a 2 percent rise in sales in the Americas, but a significant drop in global sales. This could partly be due to alarm over metal-on-metal hips (not just specific to Zimmer), which are feared to be responsible for depositing metal filings into patients’ bloodstreams.

This January, Zimmer announced the closure of its Austin, Texas, spine facility. Zimmer bought Austin-based Abbott Spine in 2008 for $360 million, and about 100 people were employed at the facility. Zimmer Spine is headquartered in Edina, Minn. (the Twin Cities area), and some of the Austin workers were given the chance to move there. The consolidation is aimed at “streamlining” spine operations, according to company officials; the fat-trimming obviously is intended to give Zimmer a much-needed boost in spine market share. Earlier this year, the company released the V2F anterior fixation system for the treatment of thoracolumbar burst fractures, tumors, disc degeneration and other pathologies of the anterior spine, in an attempt to brighten up the portfolio.

Despite the slump in spine, Zimmer’s Q4 had some successes, with some smaller units posting big gains on the quarter. Surgical devices grew 18 percent, reaching $109.8 million, and extremities reconstruction jumped 7 percent, bringing in $46.8 million.
Overall, the Warsaw, Ind.-based orthopedics giant netted $152.8 million in the final quarter of 2012.

“Throughout 2012, Zimmer 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.”

Zimmer predicts its 2013 revenue to grow between 2.5 and 4 percent over last year, in part because of its restructuring efforts that it hopes will save about $80 million. The Austin shuttering and a plan to cut about 450 more jobs in relation to the medical device excise tax will help the company attain its stated goal.

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