The Daily Magic Formula Stock for 12/18/2008 is Zimmer Holdings Inc. According to the Magic Formula Investing Web Site, the ebit yield is 15% and the EBIT ROIC is 50-75%.
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We are a global leader in the design, development, manufacture and marketing of reconstructive orthopaedic implants, including joint and dental, spinal implants, trauma products and related orthopaedic surgical products. We also provide other healthcare related services. In this report, â€śZimmerâ€ť â€śweâ€ť, â€śusâ€ť, â€śourâ€ť and similar words refer collectively to Zimmer Holdings, Inc. and its subsidiaries. Zimmer Holdings refers to the parent company only.
There were several developments in 2007 that we expect will have a significant impact on our business for the foreseeable future.
In April 2007, we acquired Endius Incorporated, a privately held spinal products company based in Massachusetts. Endius develops and manufactures minimally invasive spine surgery products, implants and techniques to treat spine disease. The acquisition of Endius has expanded our spine product portfolio to include innovative minimally invasive instruments and implants.
In May 2007, the Board of Directors promoted two of our senior executives to the offices of chief executive officer and chief financial officer. This is the first time since we became an independent public company that new persons are holding those offices.
In September 2007, we and other major U.S. orthopaedic manufacturers announced a settlement reached with the U.S. Department of Justice regarding its ongoing investigation of financial relationships with consulting surgeons. As part of that settlement, we paid a $169.5 million civil settlement amount in the third quarter and entered into a Deferred Prosecution Agreement (â€śDPAâ€ť) and a Corporate Integrity Agreement (â€śCIAâ€ť). As part of these agreements, we agreed to oversight by a federal monitor for 18 months and an independent review organization for an additional 42 months. We believe we are in compliance in all material respects with the requirements of the DPA and CIA. As recently announced, we intend to further expand our compliance program beyond the requirements of these agreements to enhance our ability to compete in an increasingly transparent and regulated environment.
In November 2007, we acquired ORTHOsoft Inc., a leader in computer navigation for orthopaedic surgery. The ORTHOsoft acquisition bolsters our Zimmer SmartTools strategic initiative designed to bring innovative tools to the marketplace that will help create better and more reproducible outcomes for surgeons and patients.
We anticipate further applying both minimally invasive and computer navigation concepts across our range of businesses. During 2007, we expanded our Gender Solutions Â® platform to additional knee replacement systems and to hip replacement. We have also announced our intention to make additional investments in the higher growth areas of spine and dental products.
Finally, beginning in 2007, under the direction of our new senior executives, we undertook an extensive review of our operations and identified a number of planned improvements we subsequently announced in 2008. These include developing a new manufacturing facility in Ireland, upgrading our sales and distribution capabilities in the U.S., enhancing our information technology and quality systems and investing in our spine, dental and trauma business units.
Zimmer Holdings was incorporated in Delaware in 2001. Our history dates to 1927, when Zimmer Manufacturing Company, a predecessor, was founded in Warsaw, Indiana. On August 6, 2001, Zimmer Holdings was spun off from its former parent and became an independent public company.
CUSTOMERS, SALES AND MARKETING
Our primary customers include musculoskeletal surgeons, neurosurgeons, oral surgeons, dentists, hospitals, distributors, healthcare dealers and, in their capacity as agents, healthcare purchasing organizations or buying groups. These customers range from large multinational enterprises to independent surgeons.
We have operations in more than 25 countries and market products in more than 100 countries, with corporate headquarters in Warsaw, Indiana, and more than 100 manufacturing, distribution and warehousing and/or office facilities worldwide. We manage our operations through three major geographic segments â€“ the Americas, which is comprised principally of the United States and includes other North, Central and South American markets; Europe, which is comprised principally of Europe and includes the Middle East and Africa; and Asia Pacific, which is comprised primarily of Japan and includes other Asian and Pacific markets.
We market and sell products through three principal channels: 1) direct to healthcare institutions, such as hospitals, or direct channel accounts, 2) through stocking distributors and, in the Asia Pacific region, healthcare dealers, and 3) directly to dental practices and dental laboratories. With direct channel accounts, inventory is generally consigned to sales agents or customers. With sales to stocking distributors, healthcare dealers, dental practices and dental laboratories, title to product passes generally upon shipment. Direct channel accounts represented approximately 80 percent of our net sales in 2007. No individual direct channel account, stocking distributor, healthcare dealer, dental practice or dental laboratory accounted for more than 1 percent of our net sales for 2007.
We stock inventory in our warehouse facilities and retain title to consigned inventory in sufficient quantities so that products are available when needed for surgical procedures. Safety stock levels are determined based on a number of factors, including demand, manufacturing lead times and quantities required to maintain service levels. We also carry trade accounts receivable balances based on credit terms that are generally consistent with local market practices.
We utilize a network of sales associates, sales managers and support personnel, most of whom are employed or contracted by independent distributors and sales agencies. We invest a significant amount of time and expense in training sales associates in how to use specific products and how to best inform surgeons of product features and uses. Sales force representatives must have strong technical selling skills and medical education to provide technical support for surgeons.
In response to the different healthcare systems throughout the world, our sales and marketing strategies and organizational structures differ by region. We utilize a global approach to sales force training, marketing and medical education to provide consistent, high quality service. Additionally, we keep current with key surgical developments and other issues related to musculoskeletal surgeons and the medical procedures they perform.
Americas. The Americas is our largest geographic segment, accounting for $2,277.0 million, or 58 percent, of 2007 net sales, with the United States accounting for 94 percent of net sales in this region. The United States sales force consists primarily of independent sales agents, most of whom sell products exclusively for Zimmer. Sales agents in the United States receive a commission on product sales and are responsible for many operating decisions and costs. Sales commissions are accrued at the time of sale.
In this region, we contract with group purchasing organizations and managed care accounts and have promoted unit growth by offering volume discounts to customer healthcare institutions within a specified group. At negotiated thresholds within a contract buying period, price discounts increase. Generally, we are designated as one of several preferred purchasing sources for specified products, although members are not obligated to purchase our products. Contracts with group purchasing organizations generally have a term of three years with extensions as warranted.
A majority of hospitals in the United States belong to at least one group purchasing organization. In 2007, individual hospital orders purchased through contractual arrangements with our three largest group purchasing organizations accounted for approximately 48 percent of our net sales in the United States. Contractual sales were highest through Novation, LLC, Premier Purchasing Partners, L.P., and Health Trust Purchasing Group, representing 27 percent, 15 percent and 6 percent, respectively, of net sales in the United States. No individual end-user, however, accounted for over 1 percent of our net sales, and the top ten end-users accounted for approximately 4 percent of our aggregate net sales in the United States.
In the Americas, we monitor and rank independent sales agents across a range of performance metrics. We evaluate independent sales agents based on achieving certain sales targets and on maintaining efficient levels of working capital. We set expectations for efficient management of inventory and provide independent sales agents an incentive to aid in the collection of receivables.
Europe. The European geographic segment accounted for $1,081.0 million, or 28 percent, of 2007 net sales, with France, Germany, Italy, Spain, Switzerland and the United Kingdom collectively accounting for over 75 percent of net sales in the region. This segment also includes other key markets, including Benelux, Nordic, Central and Eastern Europe, the Middle East and Africa. Our sales force in this region is comprised of independent distributors, commissioned agents, direct sales associates and sales support personnel. In Europe, we emphasize the advantages of our clinically proven, established designs and innovative solutions, such as minimally invasive surgical procedures and technologies and new and enhanced materials and surfaces.
Asia Pacific. The Asia Pacific geographic segment accounted for $539.5 million, or 14 percent, of 2007 net sales, with Japan being the largest market within this segment, accounting for approximately 54 percent of the regionâ€™s sales. This segment also includes key markets such as Australia, New Zealand, Korea, China, Taiwan, India, Thailand, Singapore, Hong Kong and Malaysia. In Japan and most countries in the Asia Pacific region, we maintain a network of dealers, who act as order agents on behalf of hospitals in the region, and sales associates, who build and maintain relationships with musculoskeletal surgeons in their markets. These sales associates cover over 7,000 hospitals in the region. The knowledge and skills of our sales associates play a critical role in providing service, product information and support to surgeons.
Our business is somewhat seasonal in nature, as many of our products are used in elective procedures, which typically decline during the summer months and holiday seasons.
We operate distribution facilities domestically in Warsaw, Indiana; Dover, Ohio; Statesville, North Carolina; Memphis, Tennessee; Carlsbad, California; and internationally, in Australia, Belgium, Canada, France, Germany, Italy, Japan, Korea, the Netherlands, Singapore, Spain, Switzerland and the United Kingdom. We generally ship our orders via expedited courier. Our operations support local language labeling for shipments to the European Union member countries. Our backlog of firm orders is not considered material to an understanding of our business.
Our products include joint and dental reconstructive orthopaedic implants, spinal implants, trauma products, and related orthopaedic surgical products. Reconstructive orthopaedic implants restore joint function lost due to disease or trauma in joints such as knees, hips, shoulders and elbows. Dental reconstructive implants restore function and aesthetics in patients that have lost teeth due to trauma or disease. Orthopaedic surgeons and neurosurgeons use spinal implants in the treatment of degenerative diseases, deformities and trauma. Trauma products are used primarily to reattach or stabilize damaged bone and tissue to support the bodyâ€™s natural healing process. Our related orthopaedic surgical products include supplies and instruments designed to aid in orthopaedic surgical procedures and post-operation rehabilitation.
Orthopaedic Reconstructive Implants
Minimally Invasive Solutions Procedures and Technologies and The Zimmer Institute
In 2007, we continued to expand our efforts to apply minimally invasive surgical techniques to orthopaedic surgery, which we refer to as Minimally Invasive Solutions tm (MIS) Procedures and Technologies. The principal goals of these MIS Technology efforts are to reduce the hardships of having a total joint replacement, such as the time a patient must spend in recovery, pain reduction and lost time from work. We have used The Zimmer Institute to facilitate the training of over 7,900 surgeons on several MIS Procedures. In 2007, we trained nearly 1,700 surgeons through The Zimmer Institute. We intend to continue to conduct validated objective-based medical education that is designed to ensure surgical skill development in the safe and effective use of Zimmer products and procedures.
We continue to work with surgeons to evaluate and refine our MIS procedures. As refinements occur, they are incorporated into our course curriculum. We are focused on commercializing existing MIS Technique approaches and investigating new ways to apply MIS Technology principles to additional procedures and products.
Total knee replacement surgeries typically include a femoral component, a patella (knee cap), a tibial tray and an articular surface (placed on the tibial tray). Knee replacement surgeries include first-time, or primary, joint replacement procedures and revision procedures for the replacement, repair or enhancement of an implant or component from a previous procedure. Knee implants are designed to accommodate different levels of ligament stabilization of the joint. While some knee implant designs, called cruciate retaining (CR) designs, require the retention of the posterior cruciate ligament, other designs, called posterior stabilized (PS) and ultracongruent (UC) designs, provide joint stability without the posterior cruciate ligament. There are also procedures for partial reconstruction of the knee, which treat limited knee degeneration and involve the replacement of only one side, or compartment, of the knee with a unicompartmental knee prosthesis.
Our portfolio of MIS Techniques includes the MIS Mini-Incision Total Knee Procedure. The MIS Mini-Incision Total Knee Instruments feature smaller instruments which accommodate a smaller incision and less disruption of the surrounding soft tissues.
We offer a wide range of products for specialized knee procedures, including the following:
NexGen Â® Complete Knee Solution . The NexGen Knee product line is a comprehensive system for knee replacement surgery which has had significant application in PS, CR and revision procedures. The NexGen Knee System offers joint stability and sizing that can be tailored to individual patient needs while providing surgeons with a unified system of interchangeable components. The NexGen Knee System provides surgeons with complete and versatile knee instrument options, including MIS Mini-Incision Instruments, milling and multiple traditional saw blade cutting instrument systems. The breadth and versatility of the NexGen Knee System allows surgeons to change from one type of implant to another during surgery, according to the needs of the patient, and to support current surgical philosophies.
The NexGen Complete Knee Solution Legacy Â® Knee-Posterior Stabilized product line provides stability in the absence of the posterior cruciate ligament. The PS capabilities were augmented through the introduction of the NexGen Legacy Posterior Stabilized Flex Knee (the â€śLPS-Flex Kneeâ€ť), a high-flexion implant that has the potential to accommodate knee flexion up to a 155-degree range of motion in some patients.
The NexGen CR product line is designed to be used in conjunction with a functioning posterior cruciate ligament. The NexGen CR-Flex Fixed Bearing Knee is designed with components to provide a greater range of motion for patients who require deep bending in their daily activities. The NexGen CR-Flex Femoral Components allow the surgeon to adjust component sizing without removing additional bone.
The NexGen Revision Knee product line consists of several different products that are designed to provide clinical solutions to surgeons for various revision situations, including a bone augmentation implant system made from our Trabecular Metal tm Technology material. These augments are designed to address significant bone loss in revision surgery.
NexGen Knee Gender Solutions Â® femorals represent the first knee implants specifically shaped to offer fit and function optimized for anatomic features that are more commonly seen in female patients. Gender implants are an important strategic focus, as more than half of total knee arthroplasty patients are female. Gender Solutions femorals are available in both NexGen CR-Flex and LPS-Flex configurations.
We offer improved polyethylene performance in the NexGen Knee System with our conventional polyethylene and Prolong Â® Highly Crosslinked Polyethylene, which offers reduced wear, resistance to oxidation, pitting and cracking. Prolong Highly Crosslinked Polyethylene is available in both NexGen CR-Flex and LPS-Flex designs.
The Natural-Knee Â® II System . The Natural-Knee II System consists of a range of interchangeable, anatomically designed implants which include a proprietary Cancellous-Structured Titanium tm ( CSTi tm ) Porous Coating option for stable fixation in active patients and Durasul Â® Highly Crosslinked Polyethylene.
Gender Solutions Â® Natural-Knee Â® Flex System. The Gender Solutions Natural-Knee Flex System was released on a limited basis in late 2007. This system adds Zimmerâ€™s unique High Flex and Gender Solutions design concepts to the Natural-Knee Â® System. The Gender Solutions Natural-Knee Flex System recognizes that two distinct populations exist in total knee arthroplasty (female and male) and offers two distinct implant shapes for enhanced fit. The system is compatible with muscle sparing Zimmer Minimally Invasive Solutions procedures and offers high flexion capacity up to 155 degrees. The system features the proven clinical success of Zimmerâ€™s asymmetric tibial plate, CSTi tm porous coating and the ultracongruent articular surface.
The Innex Â® Total Knee System. The Innex Knee System offers fixed bearing and mobile bearing knee components all designed within the same system philosophy. While the Innex Knee System is best known for its mobile bearing knee offering, the availability of differing levels of articular constraint and the Innex Revision Knee components provide for a comprehensive mobile and fixed bearing knee system. The Innex Knee System is distributed in Europe and Asia Pacific, and is not available for commercial distribution in the United States.
The Zimmer Â® Unicompartmental Knee System. The Zimmer Unicompartmental Knee System offers a high flexion design to unicompartmental knee surgery. The high flexion product was designed specifically for MIS Procedures and Technologies. The system offers the surgeon the ability to conserve bone by replacing only the compartment of the knee that has had degenerative changes.
Total hip replacement surgeries replace both the head of the femur and the socket portion of the pelvis (acetabulum) of the natural hip. Hip procedures include first time, or primary, joint replacement as well as revision procedures. Approximately 30 percent of hip implant procedures involve the use of bone cement to attach or affix the prosthetic components to the surrounding bone. The remaining are press-fit into bone, which means that they have a surface that bone affixes to through either ongrowth or ingrowth technologies.
Our portfolio of MIS Techniques includes the Zimmer MIS 2-Incision tm Hip Replacement Procedure, the MIS Posterior Procedure, and the Zimmer MIS Anterolateral Techniques. The incision for a traditional open hip primary replacement may be approximately 12 inches long. Other less invasive approaches, such as a â€śminiâ€ť incision for hips, have been in existence for some time. Our key hip replacement products include:
VerSys Â® Hip System. The VerSys Hip System is supported by a common instrumentation set and is an integrated family of hip products with design-specific options to meet varying surgical philosophies and patient needs. The VerSys Hip System includes the following features: a variety of stem designs and fixation options for both primary and revision situations, a modular design that allows for a variety of femoral heads, optimal sizing selections, and a common instrumentation set for use with virtually all VerSys Stems.
Trabecular Metal Primary Hip Prosthesis. The Trabecular Metal Primary Hip Prosthesis product was our first utilization of Trabecular Metal technology on a hip prosthesis. The prosthesis utilizes an innovative proximal design to aggressively lock the prosthesis in the bone and provide for an optimized environment for biological ingrowth to occur into the highly porous Trabecular Metal material.
Zimmer Â® M/L Taper Hip Prosthesis with Kinectiv tm Technology. The Zimmer M/L Taper Hip Prosthesis offers a wedge design and proximally porous coated design that was based on long term clinically proven concepts. The M/L Taper has become widely used in MIS Procedures due to its overall design and ease of use. Specific instruments have been developed to facilitate the insertion of the Zimmer M/L Taper Hip Prosthesis through the MIS Anterolateral Technique. The addition of Kinectiv Technology provides the surgeon with a wide range of options to address variations in the patientâ€™s anatomy. The M/L Taper hip product family is our fastest growing hip stem family.
Alloclassic Â® ( ZweymĂĽller Â® ) Hip System. The Alloclassic (ZweymĂĽller) Hip System has become the most used, primary, cementless hip in the world. This is one of the few stems available today that is practically unchanged since its introduction in 1979. A new offset design was added in 2004 and offers the surgeon increased capability to restore the patientâ€™s anatomical joint movement.
CLS Â® Spotorno Â® Hip System . The CLS Spotorno Stem is one of our largest selling hip prostheses, especially in the European markets. Additions to the product line in 2004 provided the capability for restoration of the physiological center of rotation. The CLS Spotorno Stem has excellent clinical results, confirmed by the 2004 Swedish Hip Registry with a 100 percent implant survivorship after 11 years.
Trilogy Â® Acetabular System. The Trilogy Acetabular System, including titanium alloy shells, polyethylene liners, screws and instruments, is our primary acetabular cup system. The Trilogy family of products offers versatile component designs and instrumentation. One option, the Longevity Â® Highly Crosslinked Polyethylene Liner, is designed to address the issue of wear and reduce the generation of debris in total hip arthroplasty. Polyethylene debris may cause the degeneration of bone surrounding reconstructive implants, a painful condition called osteolysis. We began offering the Trabecular Metal Modular Primary Acetabular System in 2004. This particular product incorporates design features from the Trilogy family of acetabular shells augmented with the advanced fixation surface of Trabecular Metal Material. In addition to the Trabecular Metal Acetabular System, we also offer a Trabecular Metal Revision Acetabular Shell for advanced fixation in acetabulae with insufficient bone.
Alternative Bearing Technology. We have a broad portfolio of alternative bearing technologies which include Longevity and Durasul Highly Crosslinked Polyethylenes, Metasul Â® Metal-on-Metal Tribological Solution, Cerasul Â® Ceramic-on-Ceramic Tribological Solutions and the Trilogy AB Â® Acetabular System. Alternative bearings are designed to minimize wear over time, potentially increasing the longevity of the implant.
Durom Â® Hip Resurfacing System. This product is particularly suited to patients who are at risk of requiring multiple hip replacements over their lifetimes since it preserves more of the patientâ€™s healthy bone stock. A primary objective of this system is to allow the patient to return to an active lifestyle. The Durom System uses the highly wear resistant Metasul Metal-on-Metal Technology as the bearing surface for the implant design. Since 1988, Metasul Technology has been used successfully for total hip replacement. Todayâ€™s metal-on-metal technology is the result of nearly two decades of development, research and clinical evaluation, which formed the foundation for the Durom Hip Resurfacing System. The option of the large diameter heads offers the advantage of a low-wear solution while providing greater joint stability and high range of motion in combination with the wide range of cemented and uncemented femoral implants. The components of the Durom Hip Resurfacing System are commercially distributed outside the U.S. for use in Total Hip Arthroplasty (THA), Hemi Arthroplasty (HA), and/or Total Surface Replacement Arthroplasty (SRA). In the U.S., Durom components are commercially available for use in THA ( Durom Acetabular component + Metasul LDH Â® Large Diameter Heads) or HA, but are not approved for use together in total SRA.
PALACOS Â® 1 Bone Cement. We have exclusive United States distribution rights for the PALACOS line of bone cement products manufactured by Heraeus Kulzer GmbH, a world leader in the development and production of orthopaedic bone cement products and other healthcare technologies. We also have non-exclusive distribution rights in specific geographies outside of the United States. Included in these brands are PALACOS R and PALACOS R+G Bone Cements, as well as PALACOS LV and PALACOS LV+G Bone Cements. The PALACOS R+G and PALACOS LV+G products are bone cements with the antibiotic gentamiacin pre-mixed in the formulation, which is used by the orthopaedic surgeon to reduce the risk of postoperative infection. The productâ€™s handling characteristics make it well-suited for minimally invasive procedures.
Our extremity portfolio, primarily shoulder and elbow products, are designed to treat arthritic conditions, soft tissue injuries and fractures, as well as to enhance the outcome of primary or revision surgery.
Our key products include:
Bigliani/Flatow Â® Complete Shoulder Solution Family. The Bigliani/Flatow product line combined with the Trabecular Metal Humeral Stem gives us a significant presence in the global shoulder implant market.
Trabecular Metal Reverse Shoulder System. The Trabecular Metal Reverse Shoulder System incorporates advanced materials and design to offer improved orthobiological ingrowth potential through the utilization of Trabecular Metal technology, while addressing significant loss of rotator cuff function. The reverse shoulder system is designed to restore function to patients, who because of debilitating rotator cuff tears, are not candidates for traditional shoulder surgery and have exhausted other means of repair.
Anatomical Shoulder tm System. The Anatomical Shoulder System can be adjusted to each patientâ€™s individual anatomy. This portfolio of products was further expanded to include the Anatomical Shoulder Inverse/Reverse System, designed to address significant loss of rotator cuff function, and the fracture stem. Both the primary and fracture shoulder implants can be converted to a reverse shoulder without removal of the initial implant.
Coonrad/Morrey Total Elbow. The Coonrad/Morrey Total Elbow product line is a family of elbow replacement implant products to address patients with conditions of severe arthritis or trauma. It remains the largest elbow franchise in the world.
David C. Dvorak, Director Since 2007
President and Chief Executive Officer of the company since May 1, 2007. Prior to that, Mr. Dvorak served as Group President, Global Businesses and Chief Legal Officer of Zimmer from December 2005. From October 2003 to December 2005, Mr. Dvorak served as Executive Vice President, Corporate Services, Chief Counsel and Secretary, as well as Chief Compliance Officer. Mr. Dvorak was appointed Corporate Secretary in February 2003. He joined Zimmer in December 2001 as Senior Vice President, Corporate Affairs and General Counsel. Mr. Dvorak is a director of the Advanced Medical Technology Association, or AdvaMed, the medical device industryâ€™s trade association. Age 44.
Robert A. Hagemann, Director Since 2008
Senior Vice President and Chief Financial Officer of Quest Diagnostics Incorporated, or Quest, since November 2003. Prior to that, Mr. Hagemann served as Vice President and Chief Financial Officer of Quest from August 1998. Mr. Hagemann joined a predecessor company, Corning Life Sciences, Inc., a subsidiary of Questâ€™s former parent, Corning Incorporated, in 1992, and held a variety of senior financial positions before being named Vice President and Corporate Controller of Quest in 1996. Prior to joining Corning, Mr. Hagemann was employed by Prime Hospitality, Inc. and Crompton & Knowles, Inc. in senior financial positions. He was also previously employed by Arthur Young & Co., a predecessor company to Ernst & Young. Mr. Hagemann holds a B.S. in Accounting from Rider University and an M.B.A. from Seton Hall University. Mr. Hagemann has not yet been assigned to any Board committees. Age 51.
Arthur J. Higgins, Director Since 2007
Chairman of the Board of Management of Bayer HealthCare AG since January 2006 and Chairman of the Bayer HealthCare Executive Committee since July 2004. Prior to joining Bayer Healthcare, Mr. Higgins served as Chairman, President and Chief Executive Officer of Enzon Pharmaceuticals, Inc. from 2001 to 2004. Prior to joining Enzon Pharmaceuticals, Mr. Higgins spent 14 years with Abbott Laboratories, most recently as President of the Pharmaceutical Products Division from 1998 to 2001. He is a member of the Board of Directors of the Pharmaceutical Research and Manufacturers of America (PhRMA), a member of the Council of the International Federation of Pharmaceutical Manufacturers and Associations (IFPMA) and President of the European Federation of Pharmaceutical Industries and Associations (EFPIA). Mr. Higgins graduated from Strathclyde University, Scotland and holds a B.S. in biochemistry. Board Committees: Audit Committee, Compensation and Management Development Committee and Corporate Governance Committee. Age 52.
MANAGEMENT DISCUSSION FROM LATEST 10K
We are a global leader in the design, development, manufacture and marketing of reconstructive orthopaedic implants, including joint and dental, spinal implants, trauma products and related orthopaedic surgical products (sometimes referred to in this report as â€śOSPâ€ť). 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 reconstructive 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 bodyâ€™s natural healing process. OSP include supplies and instruments designed to aid in 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 â€” the Americas, Europe and Asia Pacific.
Certain percentages presented in this discussion and analysis are calculated from the underlying whole-dollar amounts and therefore may not recalculate from the rounded numbers used for disclosure purposes. Certain amounts in the 2006 consolidated financial statements have been reclassified to conform to the 2007 presentation.
We believe the following developments or trends are important in understanding our financial condition, results of operations and cash flows for the year ended December 31, 2007.
Demand (Volume and Mix) Trends
Increased volume and changes in the mix of product sales contributed 9 percentage points of 2007 sales growth, which is 2 percentage points above the rate of growth from 2006 compared to 2005. We believe orthopaedic procedure volume on a global basis will continue to rise at mid single digit rates driven by an aging global population, obesity and more active lifestyles, among other factors. In addition, the continued shift in demand to premium products, such as Longevity , Durasul and Prolong Highly Crosslinked Polyethylenes, Trabecular Metal Technology products, high-flex knees, knee revision products and porous hip stems, continue to positively affect sales growth. For example, during 2007, sales of products incorporating Trabecular Metal Technology were over $210 million, a year-over-year increase of over 26 percent.
We believe innovative surgical approaches will continue to significantly affect the orthopaedics industry. In 2007, we acquired ORTHOsoft Inc., a market leader in surgical navigation in orthopaedics. Combined with our SmartTools strategic initiative, we are focused on becoming a leader in operating room efficiency and enhancing surgical outcomes through the use of innovative navigation devices and cutting tools. We continued our significant progress in the development and introduction of MIS Implants, Procedures and Technologies. During the year ended December 31, 2007, The Zimmer Institute trained nearly 1,700 surgeons on advanced techniques, including approximately 850 surgeons on MIS Procedures.
We believe innovative products will continue to affect the orthopaedics industry. In the second half of 2006, we launched the Zimmer Gender Solutions High-Flex Knee Femoral Implant. High Flex Knees now make up approximately 44 percent of our total femoral unit sales on a global basis, having grown from approximately 28 percent prior to the launch of the Zimmer Gender Solutions Knee.
Selling prices were flat during 2007 compared to a modest increase during 2006 when compared to 2005. Asia Pacific selling prices decreased 1 percentage point for the year ended December 31, 2007, compared to a 2 percent decrease in 2006 when compared to 2005. As anticipated, the Japanese government reduced reimbursement rates during 2007. This action affected sales in Japan negatively by approximately 5 percent for 2007, while other Asia Pacific markets were flat to positive. Japan represents approximately 7 percent of our sales. The Americas experienced a 1 percent increase in selling prices during 2007, compared to a 2 percent increase in 2006. In Europe, selling prices for 2007 decreased 1 percent, the same decrease we saw in 2006 as compared to 2005. Within Europe, Germany and Italy reported decreases in average selling prices of 4 percent and 2 percent, respectively, in 2007, as a result of reductions in government implant reimbursement rates and group purchasing arrangements while most other European markets were positive to flat. Germany and Italy combined represent approximately 11 percent of our sales. With the effect of governmental healthcare cost containment efforts and pressure from group purchasing organizations, global selling prices are expected to remain flat in 2008.
Foreign Currency Exchange Rates
For 2007, foreign currency exchange rates had a positive 3 percent effect on global sales growth. If foreign currency exchange rates remain consistent with the year end rates, we estimate that the weaker dollar versus foreign currency exchange rates will have a positive effect in 2008 of approximately 2 percent on sales. 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 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.
New Product Sales
New products, which we define as products or stock keeping units (â€śSKUâ€™sâ€ť) introduced within the prior 36-month period to a particular market, accounted for 25 percent, or $961 million, of 2007 sales. Adoption rates for new technologies are a key indicator of performance in our industry. Our sales have grown with the introduction of new products, such as Trabecular Metal Modular Acetabular Cups, certain SKUâ€™s of the NexGen Complete Knee Solution including the Gender Solutions Knee Femoral Implant for the LPS-Flex and CR-Flex Knees, the Dynesys 4 Dynamic Stabilization System, the Zimmer M/L Taper Hip Prosthesis and PALACOS 5 Bone Cement.
We believe new products in our current pipeline should continue to favorably affect our operating performance. Products we expect to contribute to new product sales in 2008 include the Gender Solutions Knee Femoral Implant; Gender Solutions Natural-Knee Flex System; products incorporating Trabecular Metal Technology, including the Trabecular Metal Primary Hip Prosthesis, Trabecular Metal Acetabular Revision System and Trabecular Metal Spine Implants; Zimmer M/L Taper Hip Prosthesis with Kinectiv Technology, Durom Acetabular Cups with Metasul LDH Large Diameter Heads; Versys Epoch Composite Hip Prosthesis; Zimmer Trabecular Metal Reverse Shoulder System; Anatomical Shoulder Inverse/Reverse System; Zimmer MIS Femoral Nailing Solutions; NCB Locking Plate System; and CopiOs Bone Void Filler 6 .
In April 2007, we acquired Endius Incorporated, a privately held spinal products company for an aggregate value of approximately $80 million in cash, before adjustments for debt repayment and other items.
In November 2007, we acquired ORTHOsoft Inc., a leader in computer navigation for orthopaedic surgery, in a cash transaction for an aggregate value of approximately $50 million.
Settlement of Department of Justice Investigation
On September 27, 2007, we and other major U.S. Orthopaedic manufacturers reached a settlement with the United States government to resolve all claims related to an ongoing investigation into financial relationships between the industry and consulting orthopaedic surgeons. As part of the settlement, we entered into a Deferred Prosecution Agreement with the United States Attorneyâ€™s Office for the District of New Jersey. Under the provisions of the Deferred Prosecution Agreement, we are subject to oversight by a federal monitor selected by the U.S. Attorney for a period of 18 months. We expect to continue to incur costs of approximately $6-9 million per quarter, to comply with the Deferred Prosecution Agreement through the remainder of the 18 month period.
We settled civil and administrative claims related to the federal investigation for a cash payment to the United States government of $169.5 million. We recorded a $169.5 million expense during the third quarter in connection with the settlement.
We also entered into a Corporate Integrity Agreement with the Office of the Inspector General of the U.S. Department of Health and Human Services, which has a term of 5 years. For more information regarding the settlement, see Note 15 to the consolidated financial statements included elsewhere in this Form 10-K.
New Accounting Pronouncements
On January 1, 2007, we adopted FIN 48, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the tax benefits from an uncertain tax position may be recognized only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.
Prior to the adoption of FIN 48, we had a long term tax liability for expected settlement of various federal, state and foreign income tax liabilities that was reflected net of the corollary tax impacts of these expected settlements of $102.1 million, as well as a separate accrued interest liability of $1.7 million. As a result of the adoption of FIN 48, we are required to present the different components of such liability gross versus the historical net presentation. The adoption resulted in the tax liability for unrecognized tax benefits decreasing by $6.4 million as of January 1, 2007.
This decrease in the tax liability resulted in a reduction to retained earnings of $4.8 million, a reduction in goodwill of $61.4 million, the establishment of a tax receivable of $58.2 million, and the addition of an interest/penalty payable of $7.9 million, all as of January 1, 2007.
Our operating profit for 2008 will be affected by the costs we will incur to implement a number of recently announced initiatives that we believe will position us to respond better to the changing needs of the healthcare market. Additionally, during 2008 we expect to incur costs of approximately $6-9 million per quarter to comply with the Deferred Prosecution
4 The Dynesys Dynamic Stabilization Spinal System is indicated for use as an adjunct to fusion in the U.S.
5 PALACOS Â® is a trademark of Heraeus Kulzer GmbH
6 Manufactured by Kensey Nash Corporation
Agreement. The infrastructure and operating initiatives we plan to implement in 2008 include:
â€˘ Continuing to enhance our Corporate Compliance Program and to apply these enhancements to all business segments;
â€˘ Opening a new manufacturing facility in Ireland that will add an additional 100,000 square feet of international manufacturing capacity;
â€˘ Improving our quality system infrastructure;
â€˘ Investing in our global information technology systems, including improving our field-based U.S. inventory and instrument tracking systems;
â€˘ Increasing instrument deployments to permit our sales and distribution networks to respond more rapidly to changes in surgical demand patterns and capitalize on new business opportunities; and
â€˘ Investing in our sales force, instrumentation and selling-related activities in our spine, dental and trauma business segments.
We estimate that these initiatives will add up to approximately $100 million in operating expenses in 2008, including the monitoring fees and expenses.
RESULTS OF OPERATIONS
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
The NexGen Complete Knee Solution product line including the Gender Solutions Knee Femoral Implants, the NexGen LPS-Flex Knee, the NexGen CR-Flex Knee, the NexGen Rotating Hinge Knee and the NexGen LCCK Revision Knee led knee sales. In addition, the Zimmer Unicompartmental High-Flex Knee and the Inne x Total Knee System exhibited strong growth.
Growth in porous stems, including the Zimmer M/L Taper Stem, the CLS Spotorno Stem from the CLS Hip System , and the Alloclassic ZweymĂĽller Hip Stem led hip stem sales, but were partially offset by weaker sales of cemented and revision stems. Sales of bone cement improved significantly, led by PALACOS Bone Cement. In total, bone cement sales growth accounted for 1 percent of the 2007 hip sales growth over prior year. Trabecular Metal Acetabular Cups, Trabecular Metal Primary Hip Prosthesis , Durom Acetabular Cups with Metasul LDH Large Diameter Heads, and Longevity and Durasul Highly Crosslinked Polyethylene Liners also had strong growth. We expect to face a near term challenge in hip sales growth with the adoption of hip resurfacing in the U.S. market. New products are expected to contribute to sales growth in the near term but not entirely offset the lack of a hip resurfacing product within our U.S. hip portfolio.
The Bigliani/Flatow Complete Shoulder Solution and the Coonrad/Morrey Total Elbow led extremities sales. Orthobiologicals and prosthetic implants, including strong growth of the Tapered Screw-Vent Implant System, led dental sales. Zimmer Periarticular Locking Plates and Zimmer Plates and Screws led trauma sales. The Dynesys Dynamic Stabilization System, the TiTLE 2 lumbar pedicle screw system, the Trinica Select Anterior Cerival Plate System and Trabecular Metal Implants led spine sales. Extremity surgical products led OSP sales.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
We are a global leader in the design, development, manufacture and marketing of reconstructive orthopaedic implants, including joint and dental, spinal implants, trauma products and related orthopaedic surgical products (sometimes referred to in this report as â€śOSPâ€ť). 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 reconstructive 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 bodyâ€™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 â€” the Americas, Europe and Asia Pacific.
Certain percentages presented in Managementâ€™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. Certain amounts in the 2007 consolidated financial statements have been reclassified to conform to the 2008 presentation.
Beginning in 2008, our Hips product category sales no longer include bone cement and accessory sales, which have been reclassified to our OSP and Other product category. Amounts in the three and nine month periods ended September 30, 2007 related to sales of bone cement and accessory products have been reclassified to conform to the 2008 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 nine month periods ended September 30, 2008 and our expected results for the remainder of 2008.
Demand (Volume and Mix) Trends
Increased volume and changes in the mix of product sales contributed 3 percentage points of sales growth during the three month period ended September 30, 2008, compared to 8 percentage points in the same 2007 period. The ongoing shift in demand to premium products, such as Longevity Â® and Durasul Â® Highly Crosslinked Polyethylenes, Trabecular Metal TM Technology products, high-flex knees, knee revision products, porous hip stems and the introduction of gender based devices continues to positively affect sales growth.
We believe the market for orthopaedic procedure volume on a global basis continues to rise at mid single digit rates driven by an aging global population, obesity, proven clinical benefits, new material technologies, advances in surgical techniques and more active lifestyles, among other factors.
Global selling prices were flat for the three month period ended September 30, 2008, which is similar to the same 2007 period. Selling prices in the Americas were flat during the three month period ended September 30, 2008, compared to a 1 percent increase in the same 2007 period. In Europe, selling prices for the three month period ended September 30, 2008 were flat, which is similar to the same 2007 period. Asia Pacific selling prices decreased 4 percent for the three month period ended September 30, 2008, compared to flat selling prices in the same 2007 period. Japan and Australia each reported a 5 percent decrease in average selling prices as a result of scheduled reductions in government controlled reimbursement prices. Japan and Australia combined currently represent approximately 10 percent of our sales. With the effect of governmental healthcare cost containment efforts and pressure from group purchasing organizations, we expect global selling prices will remain flat in 2008.
Foreign Currency Exchange Rates
For the three month period ended September 30, 2008, foreign currency exchange rates had a positive 2 percent effect on sales. We estimate that an overall weaker U.S. Dollar will have a positive effect of approximately 3 percent on sales for the year ending December 31, 2008 using average exchange rates in effect at the end of September 2008. 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.
On September 27, 2007, we and other major U.S. orthopaedic manufacturers reached a settlement with the United States government to resolve all claims related to an investigation into financial relationships between the industry and consulting orthopaedic surgeons. We paid a $169.5 million settlement amount and entered into a Deferred Prosecution Agreement (DPA) with the United States Attorneyâ€™s Office for the District of New Jersey. Under the DPA, we expect to remain subject to oversight by a federally appointed monitor through March, 2009.
We also entered into a Corporate Integrity Agreement (CIA) with the Office of the Inspector General of the U.S. Department of Health and Human Services, which has a term of 5 years. For more information regarding the settlement, see Note 12 to the consolidated financial statements included elsewhere in this Form 10-Q.
No tax benefit was recorded related the $169.5 million settlement expense when it was recorded in the three month period ended September 30, 2007. In the third quarter of 2008, we reached an agreement with the U.S. Internal Revenue Service confirming the deductibility of a portion of the settlement and recorded an estimated tax benefit of approximately $30.8 million, resulting in a decrease to the current period effective tax rate. For more information regarding the tax treatment of the settlement expense, see Note 7 to the consolidated financial statements included elsewhere in this Form 10-Q.
We are in the process of implementing an enhanced global compliance program which addresses areas such as product development, marketing, surgeon training and educational and charitable funding. The principles of this program meet or exceed the requirements of the DPA and CIA as they apply in most respects to all product segments and reach all worldwide operations. We currently estimate that the costs for complying with the DPA and CIA and implementing the enhanced compliance program in 2008 will be in a range of $50-$60 million, including the fees incurred for the federally appointed monitor.
Durom Acetabular Cup
In July 2008, we announced a temporary suspension of marketing and distribution of the Durom Â® Acetabular Component ( Durom Cup) in the U.S. to permit us to update product labeling to provide more detailed surgical technique instructions and implement a surgical training program in the U.S. We resumed marketing and distribution of the Durom Cup in the U.S. in August 2008. To date, we believe that approximately one-half of the U.S. surgeons who were actively using the Durom Cup prior to the suspension have completed the requisite training program.
Following our announcement, we received claims from a number of Durom Cup patients seeking reimbursement for costs and payments for pain and suffering and we expect to receive additional similar claims. We recorded a provision for certain claims of $47.5 million in the three month period ended September 30, 2008, which represents managementâ€™s estimate of liability to patients undergoing revision surgeries related to the Durom Cup. The estimate is limited to revisions associated with surgeries occurring before July 2008 and within two years of the original surgery date. Any claims received outside of these defined parameters will be managed in the normal course and reflected in our standard quarterly product liability accruals.
We estimate that we will lose approximately $20-$30 million in hip product sales during 2008, in large part, as a consequence of the events involving the Durom Cup. In addition, we expect that our entry into the growing U.S. hip resurfacing market may be hindered or delayed as the Durom Cup has been integral to our plans for entry into that market.
Orthopaedic Surgical Products (OSP) Actions
In April 2008, we initiated voluntary product recalls of certain OSP patient care products manufactured at the Dover, Ohio facility that we determined did not meet internal quality standards. We do not expect these recalls to affect our core hip and knee implants business. Additionally, we voluntarily and temporarily suspended production and sales of certain OSP products manufactured at the Dover facility. We expect to have a significant portion of these products back in production by the end of 2008, with the remainder of the products coming back into production in the first quarter of 2009. We expect these actions will adversely impact 2008 OSP revenues by $70-$80 million and 2008 diluted earnings per share by $0.18-$0.20, including $0.07 related to inventory charges, idle plant costs and other non-recurring charges.
As a result of the disruptive factors discussed above, 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 program, we believe we suffered customer losses during the three month period ended September 30, 2008. We estimate, based on information currently available to us, that these customer losses reduced our base of knee and hip revenues by approximately 3 percent. We expect our sales growth to be at a rate slower than the market in the near term due to these disruptive factors.
Third Quarter Results of Operations
The NexGen Â® Complete Knee Solution product line, including Gender Solutions tm 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 Zimmer Â® Unicompartmental High-Flex Knee, the NexGen Rotating Hinge Knee and the Natural-Knee Â® exhibited strong growth.
The continued conversion to porous stems, including the Zimmer M/L Taper Stem, the CLS Â® Spotorno Â® Stem from the CLS Hip System , and the Alloclassic Â® ZweymĂĽller Â® Hip Stem, led hip stem sales, but were partially offset by weaker sales of cemented stems. Trabecular Metal Acetabular Cups and Longevity and Durasul Highly Crosslinked Polyethylene Liners also had strong growth. The temporary suspension of marketing and distribution of the Durom Cup in the U.S. negatively impacted hip sales growth in the quarter and we expect this trend to continue for the remainder of 2008. Additionally, with the lack of a hip resurfacing product within our U.S. hip portfolio, we expect to face a continuing challenge in hip sales growth with the adoption of hip resurfacing in the U.S. market.
The Bigliani/Flatow Â® Complete Shoulder Solution and the Zimmer Trabecular Metal Reverse Shoulder System led extremities sales. Orthobiologicals and prosthetic implants, including the Tapered Screw-Vent Â® Implant System, led dental sales. Zimmer Periarticular Locking Plates and the I.T.S.T. tm Intertrochanteric/Subtroc hanteric Fixation System led trauma sales. The Dynesys Â® Dynamic Stabilization System and the Trinica Â® Select Anterior Cervical Plate System led spine sales. OSP sales were negatively affected by the patient care product recalls and related voluntary suspension of production of certain products, but these negative factors were partially offset by strong growth in PALACOS Â® 1 Bone Cement.
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 Zimmer Unicompartmental High-Flex Knee also made a strong contribution.
Growth in porous stems, including growth of the Zimmer M/L Taper Stem and the Zimmer M/L Taper Stem with Kinectiv Â® Technology, led hip stem sales, but were partially offset by weaker sales of cemented stems. 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. negatively impacted hip sales and we also expect that the adoption of hip resurfacing in the U.S. market will continue to adversely affect our hip sales growth.
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 model and overall weakness in the U.S. economy. Zimmer Periarticular Plates and the I.T.S.T. Intertrochanteric/Subtroc hanteric Fixation System led trauma sales. The Dynesys Dynamic Stabilization System and the Trinica Select Anterior Cervical Plate System led spine sales. OSP sales were negatively affected by the patient care product recalls and related voluntary suspension of production of certain products, but these negative factors were partially offset by strong growth in PALACOS Bone Cement.
Gross profit as a percentage of net sales was 75.1 percent in the three month period ended September 30, 2008, compared to 77.9 percent in the same 2007 period and 75.7 percent in the three month period ended June 30, 2008. The primary contributors to the decrease in gross profit margin were the increase in period over period hedge losses, idle plant costs at our Dover facility and an increase in excess inventory and obsolescence charges due to increased inventory levels. 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.
R&D as a percentage of net sales was 4.9 percent for the three month period ended September 30, 2008, compared to 5.9 percent in the same 2007 period. R&D expense decreased to $46.7 million for the three month period ended September 30, 2008, from $53.0 million in the same 2007 period, reflecting decreased spending on certain development, clinical and external research activities due to delays connected with our operational compliance with the DPA and CIA and implementation of our enhanced compliance program. Many of the delayed development and research activities have now resumed and we expect R&D spending to return to our historical average of 5-6 percent of sales.
SG&A as a percentage of net sales was 42.5 percent for the three month period ended September 30, 2008, compared to 39.0 percent in the same 2007 period. SG&A expense increased to $404.9 million for the three month period ended September 30, 2008, from $352.6 million in the same 2007 period. Increased SG&A costs include monitor fees as well as consulting and legal fees associated with the implementation of our enhanced compliance program globally. Such costs resulted in an approximate $17 million increase over the same prior year period. Expenses related to other operating initiatives also caused an increase in SG&A as a percentage of net sales. Such operating initiatives include the planned implementation of a global IT system, improving quality systems at our Dover facility, and a new manufacturing facility in Ireland. Additionally, selling costs increased by 100 basis points in the three month period ended September 30, 2008 compared to the same 2007 period. This increase was caused by increased selling costs as a result of the ORTHOsoft acquisition, an increase in the headcount of our sales force in certain locations, increased commission incentives to sell certain key products and a change in the mix of commissions earned as a result of lower OSP sales. In a partial offset to these unfavorable items, SG&A expense related to share-based compensation was favorable by 20 basis points relative to the same prior year period due to a favorable adjustment as we recalculated estimated payouts on our three year performance-based equity incentive program taking into account recent operating performance.
Certain claims expense of $47.5 million is a provision for estimated claims of Durom Cup patients undergoing revision surgeries within specified times. Acquisition, integration and other expenses for the three month period ended September 30, 2008 were $5.6 million, compared to $2.9 million in the same 2007 period. These expenses pertain to current and prior period acquisitions, including facility consolidation costs, legal fees and retention and termination payments.
Operating Profit, Income Taxes and Net Earnings
Operating profit for the three month period ended September 30, 2008 increased 67 percent to $210.3 million, from $126.0 million in the same 2007 period. The significant increase in operating profit is due to the non-recurring settlement expense of $169.5 million that was recorded in the 2007 period. Excluding the impact of the settlement expense in the prior year, operating profit for the three month period ended September 30, 2008 would have been unfavorable compared to the same 2007 period as a result of lower gross margins, significant but temporary increases in SG&A costs attributable to the implementation of our enhanced compliance program and certain claims expense of $47.5 million.
Interest and other income for the three month period ended September 30, 2008 increased to $28.2 million, from $1.8 million in the same 2007 period. Interest and other income for the three month period ended September 30, 2008 includes a realized gain of $30.1 million related to the sale of certain marketable securities, partially offset by increased interest expense as a result of an increase in outstanding long-term debt.
The effective tax rate on earnings before income taxes and minority interest decreased to 9.8 percent for the three month period ended September 30, 2008, from 65.2 percent in the same 2007 period. The effective tax rate for the 2007 period reflects the effect of the $169.5 million settlement expense, for which no tax benefit had previously been recognized. In the third quarter of 2008, we recorded an estimated tax benefit of approximately $30.8 million, resulting in a decrease of 12.9 percent in the current period effective tax rate. The effective tax rate for the three month period ended September 30, 2008 was further reduced as a result of increased profits in lower tax jurisdictions.
Net earnings increased to $214.7 million for the three month period ended September 30, 2008, compared to $44.5 million in the same 2007 period. The increase is primarily due to the impact of the $169.5 million settlement expense recorded in the 2007 period. Excluding the effect of the settlement expense, net earnings would have increased slightly from the 2007 period, reflecting increased sales, realized gains on the sale of certain assets during the current period and a lower effective tax rate, partially offset by lower gross margins, planned increases in SG&A costs and certain claims expense. Basic earnings per share increased to $0.96, from $0.19 in the same 2007 period. Diluted earnings per share increased to $0.95, from $0.19 in the same 2007 period. The positive growth rate in earnings per share as compared with net earnings is attributed to the effect of 2007 and 2008 share repurchases.
Good morning, I'm Paul Blair, Vice President of Investor Relations for Zimmer. I'd like to welcome you to the Zimmer third quarter 2008 Earnings Call. Joining me today to host this call are Dave Dvorak, President and Chief Executive Officer and Jim Crines, Executive Vice President, Finance and Chief Financial Officer.
This morning we'll review our performance for the third quarter, provide you with an update on certain key matters, present an update to our outlook for 2008 and conclude our discussion with a question-and-answer session.
Before we get started, I would like to point out that this presentation contains forward-looking statements within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, based on current expectations, estimates, forecast, and projections about the orthopedics industry, management management's beliefs, and assumptions made by management.
These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that could cause actual outcomes and results to differ materially from those in the forward-looking statements.
For a list and description of the risks and uncertainties, see the disclosure materials filed by Zimmer with the Securities and Exchange Commission. Zimmer disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
This presentation also contains certain non-GAAP financial measures. A reconciliation of such information to the most directly comparable GAAP financial measures, along with other financial and statistical information for the periods to be presented on this conference call was included in the press release announcing our earnings, which may be accessed from the Zimmer website at www.zimmer.com under the section entitled Investor Relations.
A rebroadcast of this call will be available from approximately two hours following the conclusion of today's call through the end of the day on November 6, 2008 and can also be accessed from the Investor Relations section of the Zimmer website.
At this time, I would like to introduce David Dvorak, President and Chief Executive Officer of Zimmer.
Thank you, Paul, and good morning everyone. You probably had time to review at a high level our third quarter results and our news release. Now, we would like to provide you with some additional detail and context.
Consolidated sales for the quarter of $952 million were up 5.4% over the prior year third quarter and 2.7% in constant currency. Adjusted diluted earnings per share for the third quarter were $0.97, inclusive of a one-time gain of $18 million after tax, or $0.08 per share.
Our sales results were lead by growth in knee revenues at 7% constant currency. Hip sales with the interruption of the Durom Cup sales increased 1% in constant currency during the third quarter. Our remaining business categories for the quarter on a constant currency basis, extremities was up 13% over the prior year period, trauma was up 7%, spine increased by 8% and dental was up 1%.
Finally, our orthopedic surgical products business was down 19% for the quarter due to the previously announced voluntary suspension of production of certain products in our in Dover, Ohio facility.
Some strengthening in the US dollar lead to lower than anticipated currency translation benefits in the third quarter. As we've discussed before, the top line impact of currency fluctuation is essentially neutralized on the bottom line due to our hedging program.
During the quarter, we generated operating cash flow of $308 million. Jim will provide more specific details of our financial results and other finance activities in a few minutes. Reflecting on our performance for the third quarter, we delivered bottom line results that exceeded Wall Street expectations, albeit with a one-time gain that offset certain of the one-time costs that are adversely impacting our performance this year.
While our earnings came in above expectations, our sales results were disappointing relative to the estimated market growth. Over the past year, we set in motion a number of initiatives designed to prepare us for greater success in the future. Our infrastructure and operating initiatives continue to progress well, and we believe these will make us more efficient and effective.
However, a few factors are adversely impacting our sales results, and likely will continue to impact our performance through the first half of 2009. Let me describe some of the primary factors that are negatively affecting our current performance as well as the aggressive actions that we're taking to improve our future performance.
First, after we entered in to the resolution agreements with the Department of Justice and Office of Inspector General last year, we took steps to enhance our compliance model. We chose to implement broad changes now rather than incrementalize the efforts. We believe that it's essential that we continue to collaborate with surgeons and other healthcare professionals and everything we have done from a compliance standpoint is for the purpose of preserving our ability to collaborate in the future.
For instance, no matter how talented our workforce, we simply cannot design and development first rate products to address unmet clinical needs without partnering closely with surgeons and other healthcare professionals. Similarly, in order to meet our obligation to ensure that surgeons are properly trained on the safe and effective use of our products, it's essentially that we solicit the help of surgeon collaborators who are highly skilled and experienced in performing the complex procedures.
As we previously disclosed, the transition over the past year has been disruptive to our relationships with consultants. For instance, we were unable to communicate when development meetings would resume, when educational courses would occur and when suspended consulting payments would be made.
In other words, we weren't able to provide visibility as to how and when these matters would be resolved, and quite understandably that was frustrating to our consultants. We've been extremely focused on taking steps that we believe will restore these important relationships. We have conducted development meetings for a number of projects, resumed our Zimmer institute educational course, begun making overdue consulting payments and made substantial headway on resolving our past due royalty obligation.
Importantly, we have finalized the new royalty payment structure that will be employed for the future development projects. We continue to believe that royalty payments are the most logical and fair manner, which to compensate healthcare professionals for their valuable intellectual property contributions.
Over the past six months, I have met in person with more than 150 of our consultants all around the world in order to explain what Zimmer is doing and why. Based upon these discussions we're confident that our direction is the right one to assure that we have the ability to capture the best of the collaborations between surgeons and industry, those that provide real solutions to unmet clinical needs while inspiring trust and confidence.
We regret the turmoil created by these circumstances, but we're proud of the efforts our people have made to abide by the resolution agreements and our enhanced compliance programs.
I also want to take this opportunity to express my appreciation to our surgeon consultants for their contribution and commitment. While this transition has been very disruptive, the vast majority of surgeons have exhibited extraordinary patients and expressed a continued interest in collaborating with Zimmer going forward. These individuals put the patient's interest first and they share our belief to conducting business in a compliant and ethical manner is consistent with those interests.
The second set of actions I want to discuss are related to the Durom Cup. I want to thank the team of Zimmer employees and very importantly the products developers and other surgeon collaborators who created a comprehensive training program that enabled us to resume marketing of the product in August within one month of the announcement of a voluntary suspension in the United States.
To date, more than 230 surgeons have completed the requisite training. As an aside, I want to know that the Durom Cup situation led us to further develop and refine our thinking regarding delivery of surgeon training on the safe and effective use of Zimmer products.
In our April 17th press release announcing key enhancements that we're making to our compliance model, we indicated that we'll [cease] be using physicians to train and educate on products for which they may receive royalty-based compensation connected with the company's sale of the products, however, the Durom experience led us to conclude that there are instances in which it is necessary and [advisable] to use the product designers to train other surgeons on the safe and effective use.
At Zimmer, we're now managing these potential conflicts of interest through other important enhancements we've made to our compliance program. While the Durom matter presented one situation where we needed to use royalty-bearing surgeons to facilitate effective training, there will be other instances where we will continue this practice based on our training needs.
The third set of actions, I want to highlight involved our OSP business, where we're upgrading quality systems to enable us to fully return the affected OSP products to market. The remediation efforts are continuing and we now expect to have a significant portion of the suspended OSP products back in production by the end of this year with the balance of the affected products back in production by the end of the first quarter of next year.
Forth, our other infrastructure and operating investments continue on track. Our new plant in Shannon, Ireland will be ready to commence operations toward the end of this year. We're making significant expansions in our Winterthur, Switzerland operations. We're installing a new state-of-the-art foundry in Warsaw, and very importantly we're continuing the expansion and strengthening of our corporate-wide quality systems.
Finally, as one contemplates our business prospects within the core reconstructive market, it's important to note that our knee franchise remains among the strongest and most comprehensive portfolios of clinical solutions in the industry. That offering begins with our new patella femoral joint for partial knee replacement for patients with early stage of the arthritis, and advances through our primary knee systems to our new segmental system fo complex revision arthroplasty for those patients with significant bone loss.
Our knee systems, including NexGen, Natural and Innex, offer multiple options for [a field of] various and discriminating preferences. Our NexGen system with approximately 2 million implantations globally, since its introduction is reported to have the lowest rate of revision among many knee systems, followed within the certain national registries.
On the hip side, we already possess an extremely comprehensive line of stems with track records of outstanding clinical performance. We have recently added the bone conserving -- connective system and M/L Taper with connective system. We're working diligently to complete development and introduce new technologically advanced Acetabular systems during the second half of 2009.
Although these systems will not address our hip resurfacing gap in the market, our product position in the US should be significantly enhanced.
I'll conclude by briefly commenting on our near-term prospects. While we have made substantial progress on many important initiatives in 2008, and have responded to additional challenges along the way, the factors I have described collectively led to the loss of some customers across our geographic sales channels in the third quarter.
We believe the knee and hip market on a global basis continues to grow at mid-single digits and units, and when combined with mix-benefit opportunities in high single digits on a dollar basis, our knee and hip results lag show market growth in the quarter. As a result, we have adjusted our full year 2008 sales guidance as outlined in our press release, and as Jim will discuss in more detail.
We also anticipate that the factors I have discussed will create headwinds for us going into 2009 and that our overall revenues are likely to grow below market at low to mid-single-digits in the first half of 2009. We expect improvement in the second half of 2009, as we launch new products, and as the disruptive events of 2008 anniversary out of our results.
We're working through the 2009 planning process, and intend to provide 2009 earnings guidance on our fourth quarter investor call, but on a preliminary basis, given the headwinds we face on our top-line and the dilution associated with the Abbott Spine transaction, we're now anticipating more modest leverage in earnings, most likely resulting in high single-digit growth in adjusted diluted earnings per share for 2009.
Jim will now provide further details on the quarter and our guidance. Jim?
Thanks, David. I will review our performance in the quarter in more detail and then provide some additional information related to our guidance. Sales of $952 million for the quarter represent an increase of 5.4% reported, and 2.7% constant currency. These results include the effect of one extra billing day in the US in the quarter and reflect lower than anticipated benefit from foreign currency as well as lower reconstructive sales relative to expectations.
The US dollar strengthened as compare to many foreign currencies during the quarter and while the impact was lower than [leasing] quarters, foreign currency still increased revenue by 2.7% or $25 million in the quarter.
Consolidated pricing was down, 1.5 of a percentage point for the quarter, in both, the Americas and Europe price was flat for the quarter, while Asia Pacific results include negative price of 3.9% driven by negative 4.8% in Japan and negative 4.7% in Australia, with changes to certain implant prices took effect as of the beginning of the quarter.
Turning to our revenue growth by major product category, worldwide reconstructive sales 7.3% reported, 4.4% constant currency. Knee sales in the third quarter improved 6.9% constant currency, reflecting slower unit growth in certain segments combined with slightly lower net pricing on a global basis. Knee pricing on a global basis was down 1.2 percentage points in the quarter compared with negative 0.6% in the second quarter, principally as a result of the lower prices now in effect in Australia.
Flex Knees accounted for 54% of our knee unit sales on a global basis in the third quarter, showing modest but continuing increases in levels of penetration relative to prior quarters. Against the backdrop of the disruptive factors that David described, our geographic operating segments reported certain customer losses in the quarter which in the aggregate reduce our base of global knee revenues by approximately 3%.
Countering the effect of those losses, our Natural-Knee sales increased over 40% in the quarter on a dollar basis following a recent introduction of the Gender Solutions femoral components for that system. With the launch of our new Segmental Knee, sales of Hinge Knees increased over 15% on a small base. With the introduction of the Mobile Bearing Knee in the US, our LPS- Mobile Bearing Knee units increased over 25% on a global basis.
In the third quarter, knee sales in constant currency increased 6.8% in the Americas, 9.3% in Europe, and 3.6% in Asia Pacific, respectively. The Asia Pacific results reflect a 5.9% reduction in average selling prices. Hip sales increased just under 1% in the quarter reflecting interruption in Durom Cup sales as well, and some customer losses which similar to knees, lower our global base of Hip revenue by approximately 3%.
While we are working through final stages of development on projects that will strengthen our Acetabular Cup portfolio, we have significantly enhanced our Stem offerings this year with the launch of the M/L Taper with connective technology, our (inaudible 12th 0:24) Stem for the European market, and the recently released Fitmore bone conserving stem. The M/L Taper, (inaudible) and the Fitmore, all experienced solid growth in the quarter offset in part by lower sales by VerSys Fiber Metal MidCoat, Beaded 6-inch FullCoat, and other cemented stems.
On a geographic basis and in constant currency, hip sales increased 2.4% in the Americas, 0.7% in Europe, and decreased 3% in Asia Pacific, which includes negative pricing of 4.6%. Extremity sales for the quarter in constant currency increased 13.4% on a challenging comp with 33% in the third quarter of 2007. Extremity sales increased 19.3% in the Americas, 3.6% in Europe, and decreased 15.1% in Asia Pacific on a small base.
Dental sales on a constant currency basis were flat for the quarter, on a challenging prior year comp with 17%. Dental sales decreased 1.8% in the Americas. As indicated in our second quarter call, compliance related disruption, as well as economic conditions were expected to have a negative impact on dental revenues through the second half of this year.
The results in dental are inline with what we had expected for the quarter. In addition, we recently have worked through many of the issues in applying [art hands] compliance model to our dental business, and activities are back, up, and running. We remain committed to our strategy to seek to expand our presence in the dental market as we believe the commercial opportunities remain very attractive longer term. Dental sales increased 3.7% and 4.4% in Europe and Asia Pacific respectively.
Trauma sales in the quarter were up over the prior year periods 6.6% constant currency, our plate and screw lines, as well as bone graft substitutes continue to lead our growth in trauma. We look forward to the 2009 release of an upgraded Nile line in order to fill a current gap in our growth potential. On a constant currency basis trauma sales in the quarter increased 3.3% in the Americas, increased 5.3% in Asia Pacific, and increased a very strong 18.1% in Europe.
Zimmer Spine reported 7.6% constant currency growth in the quarter. With the consummation of the Abbott Spine acquisition, we look forward to realizing the full market potential of a combined Abbott Spine and Zimmer Spine business. Spine sales in the Americas were up 2.2%, Europe increased 19.1%, and Asia Pacific was up over 100% on a small base.
Finally, orthopedic surgical products and other sales declined 18.6% constant currency in the quarter, as a result of the voluntary suspension in sales of certain patient care products, partially offset by bone, cement, and accessory sales, which grew over prior year.
The OSP and other category was down 16.6% in the Americas, declined 34.7% in Europe, and was down 12.9% in Asia Pacific compared with the prior year period. We are encouraged that remediation efforts at our Dover facility are progressing. And as we move in to 2009, we look forward to stocking shelves and putting the OSP products back in the sales bag.
Now I'll focus on the rest of the income statement. Our adjusted gross profit margin of 75.2% for the quarter is down 270 basis points from the prior year third quarter. Foreign currency hedge losses accounted for the majority of the decline in gross margin with idle plant cost, inventory, and excess and obsolete inventory charges making up the balance.
Compared to last year, R&D expense decreased 11.9% to $47 million for the quarter as a result of lower spending on consulting services, and delays in new product development activities. At 4.9% of sales, R&D spending is just below our targeted and historical range of 5% to 6%. Collaborative development activities are expected to ramp back up and we anticipate spending will return to that stated 5% to 6% range in the near term.
Selling, general and administrative expenses increased to $405 million, up 14.8% over prior year, and include monitor fees, as well as consulting and legal fees associated with the global implementation of the enhanced compliance model as we discussed during last quarter's call.
Also included in SG&A for the quarter is a favorable adjustment to reduce performance-based share compensation accruals by approximately $7 million. At 42.5% of sales, SG&A expenses are 350 basis points above prior year, inclusive of the significant one-time fees and expenses associated with compliance.
Acquisition, integration, and other amounted to $5.6 million in the quarter, comprised of cost pertaining to current and prior period acquisitions, including facility consolidation costs, legal fees and retention and termination payments.
On July 22nd, we announced the voluntary, temporary suspension of marketing and distribution of the Durom Acetabular Component in the US. That announcement filed the reports of cup losing instant revision of the Acetabular component used in Total Hip Arthroplasty. During the third quarter, the company recorded a provision of $47.5 million for known and anticipated claims related to the Durom Cup.
Our estimate for these claims is limited to revisions associated with surgeries that predate our voluntary suspension, and which also occur within two years of the original surgery date. This is consistent with our data which indicates that cup loosenings associated with technique are most likely to occur within that timeframe.
This provision is classified as a non-recurring item and is therefore excluded from our non-GAAP earnings measure. Alternatively, any claims received outside of the defined parameters will be managed in the normal course and reflected in our standard quarterly product liability accruals.
Adjusted operating profit in the quarter decreased 11.2% to $264.8 million, at 27.8% our adjusted operating to sales ratio decreased by 520 basis points from prior year as a result of the lower gross margin and the significant and temporary step-up in SG&A costs.
Interest, and other income for the quarter amounted to $28.2 million, including a one-time pre-tax gain of $29.8 million on the sale of 5.2 million shares of RTI Biologics, which shares the company had originally obtained for the acquisition of Centerpulse.
Adjusted net earnings increased 1.4% compared to prior year at $218.5 million and adjusted diluted earnings per share increased 6.6% to $0.97 on $225.6 million average outstanding diluted shares. These adjusted earnings per share are inclusive of approximately $0.04 of share-based compensation. A $0.95, reported diluted earnings per share increased over 400% on prior-year third quarter reported EPS of $0.19, which included a $169.5 million settlement charge.
Our reported earnings for the third quarter include the provision for certain claims, as well as one-time tax benefit associated with the DOJ civil settlement paid in 2007. This previously disclosed in our periodic filings, no tax benefit was recorded related to the settlement expense due to uncertainties to the tax treatment. We submitted a pre-filing agreement to the IRS in order to make a final determination of the deductibility of the settlement payment. As a result of reaching agreement with the tax authority during the third quarter we have recorded an estimated current tax benefit of $31 million. Consistent with the treatment of the 2007 settlement charge, this tax benefit is classified as a nonrecurring item, and is therefore excluded from our non-GAAP earnings measure.
A 25.3% adjusted for the quarter, our effective tax rate reflects a favorable year-to-date adjustment to bring the effective tax-rate for the nine month period ended September 30 to 27.2%. This is below our first half estimates and 30 basis points below our full-year 2007 ETR due to favorable geographic mix of earnings and profits.
During the quarter, we repurchased 720,000 shares at a total purchase price of $48.6 million, at an average price per share of $67.50. We used cash to acquire the shares under a $1.25 billion repurchase authorization which expires at the end of 2009. Our decision to pursue and ultimately acquire Abbott Spine business for $360 million resulted in our share repurchases in the quarter doing well within the first two quarters of the year. Approximately $1.18 billion remains under this program, the company had approximately 225 million shares of common stock outstanding as of September 30, 2008, down from 226 million as of June 30, 2008.
Turning to cash flow, operating cash flow for the quarter amounted to $308 million, up from $167 million in the third quarter of 2007, which included the civil settlement with the US Department of Justice. Inventory days on hand, finished the quarter at 321 days, a decrease of 9 days from prior year third quarter reflecting higher cost of goods in the quarter. Our trade accounts receivable days sales outstanding finished the quarter at 59 days an increase of one day over the prior year third quarter.
Depreciation and amortization expense for the quarter amounted to $67.4 million. Capital expenditures for the quarter totaled $135 million, including $67 million for instruments and $68 million for property plant and equipment, which includes $25 million related to infrastructure initiatives. Finally, free cash flow was $173 million for the quarter.
Now I'll turn to our update on guidance for 2008. Our press release this morning stated that we have adjusted our top-line sales growth and adjusted diluted earnings per share guidance for the full-year 2008. For 2008, we expect to deliver top-line sales growth of 7% to 7.5% compared to the previous guidance range of 8.5% to 9% and adjusted diluted earnings per share including $0.02 of dilution related to the Abbott Spine acquisition of $4.03 to $4.08. The adjustment to our sales guidance now includes an estimated $20 million of revenue from Abbott Spine and anticipates approximately 3.3 points of growth to come from foreign currency versus the previous 4 points.
Our revised sales guidance now assumes a constant currency growth rate of 3.7% to 4.2% as compared to previous constant currency growth of 4.5% to 5%. Adjusted estimates also exclude one-time charges related to the Abbott Spine purchase price allocation for acquired inventory restructuring and integration charges, as well as an in-process research and development charge anticipated in connection with the transaction. The definitive purchase price allocation will be completed during the fourth quarter.
To arrive at our projected GAAP earnings per share for the full-year, you should assume subtracting an estimated in-process research and development charge of $50 million, the certain claims provision of $47.5 million, the tax benefit on the 2007 civil settlement of $31 million, amortization of step-ups in inventory value of $8 million, and acquisition, integration and other expenses of approximately $37 million, for an estimated total of $0.37 per share. As always, our guidance and assumptions exclude the effect of potential future acquisitions or other unforeseen material business events for litigation matters.
Turning to cash flow, we anticipate capital expenditures to be around $500 million for the full-year, reflecting the capital components of many of our 2008 infrastructure and operating initiatives. Also for some time now we've discussed that we will use our free cash flow to fund strategic acquisitions and/or share repurchases. Earlier in the year we also explained our intentions to draw up to $500 million on our credit facility to fund share repurchases under approved repurchase programs. Year to date, we have used $469 million in available cash and have borrowed $220 million to fund the repurchase of 9.5 million shares.
David, I'll turn the call back over to you.
Well, thank you, Jim. We've recently completed our strategic plan and such an exercise provides for the opportunity to review and appreciate the potential our industry promises. As we move beyond the issues of defining surgeon collaboration and the format of ongoing surgeon relationships, we're now able to focus our attention on working with surgeon collaborators to develop the best products for patients. We're excited about the underlying fundamentals of our business, and what is on the horizon for us in the area of new products and technologies.
We're in an enviable position as a $4 billion global corporation generating over $500 million of free cash flow annually. Even in a year when we're making significant investments, overcoming extraordinary events, and implementing a more sustainable business model, we believe Zimmer's business is on track for a bright future.
Finally, we're delighted to welcome Abbott Spine into the Zimmer family of businesses. Abbott Spine will allow us to continue to build toward critical mass in the spine market. We're gaining access to new products and talented employees and are increasing our sales coverage as a result of this combination. We announced last week that we have closed the transaction and teams from both organizations are working very diligently to assure that we can equip the expanded Zimmer Spine organization to serve our collective customers.
As we entered 2008, we indicated this would be a year of transition and investment for us. The Abbott Spine acquisition is an example of our continued financial strength and willingness to invest for future growth.