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Zimmer Beats the Street by $0.03 in EPS and $4 Million in Revenues; Stock Sells Off 13% in Intraday Trading BY JOHN CHOPACK, AUGUST 16, 2004

It is like a broken record; another solid orthopedic earnings report and investors dump shares, again. In similar fashion to Stryker, Exactech and Wright Medical, Zimmer (NYSE: ZMH) beat analysts earnings expectations and investors reacted by selling shares. The difference is that once ZMH shares dropped 13% in intraday trading on Thursday, the smart investors recognized the good buy, stepped in, and drove the price back to close down less than 1%. We believe Ray Elliott and his ability to manage the street supported the significant rebound in ZMH shares. Zimmer's conference call on Thursday morning clearly highlighted this.

Unlike most CEOs in the orthopedic sector, we believe Elliott was anticipating a potential sell-off and gave the analyst committee enough ammo to thwart a larger dip of Zimmer's market capitalization. Elliott opened up the conference call by explaining that the fundamentals of Zimmer (and by association, the rest of the orthopedic sector) are strong. The only thing that has changed is the strengthening of the dollar causing lower revenue growth rates.

Elliott was quick to point out:

• ZMH global reconstructive volume and mix increased by 11% during the 2Q:04, which was 1% greater than the 10% increase during the 1Q:04.
• Worldwide pricing increased 2% which is in range with the guidance Zimmer has been providing for the last several quarters.
• US price increases totaled 4.2% which is 20 basis points higher than it has been on average the last four quarters

Product & Revenue Highlights:

• Hips
  • Zimmer legacy hip sales grew by 23% and Centerpulse legacy sales increased by 4%
  • Primary hip stems grew by 19%, Cups by 28% and Liners by 23%
  • Porous stems increased by 22%
  • Cross-linked polyethylene liners increased by 35% and are annualizing at $100 million
  • Cross-linked polyethylene now represent 85% of all hip liner sales
  • Competitive ceramic-on-ceramic products represent approximately 6-7% of the market
• Knees
  • Zimmer legacy growth was 20% and Centerpulse was 6%
  • Femoral components increased by 19%, articulating surfaces by 18%, tibia's by 16% and patella by 20%
  • CR Flex Mobile Bearing Knee is now in full development
  • LPS Flex Mobile Knee completed full U.S. IDE patient enrollment
  • Prolong highly cross-linked poly inserts increased by 89% and represent 50% of all cruciate retaining inserts
  • Release of Prolong Posterior Stabilized version expected late this year
  • Unicompartmental knees increased by 9% and annualized sales are over $50 million
  • Unispacer sales declined by 50%
  • LPS-Flex knee is the design of choice for Quad-Sparing MIS Total Knee
• Spine
  • Spine sales essentially flat with prior year
  • Cage sales totaled approximately $10 million for the quarter
  • Dynesyis increased 38% and is annualizing at $15 million
  • Expect spine sales to remain flat until company combines trabecular metal into spine pipeline, and/or until a few small distribution or technology acquisitions are made.

Guidance

• Revenues
  
  • 3Q:04 - $685-695 million
    
  • 4Q:04 - $775-790 million
  
  
• Diluted Earnings Per Share
  
  • 3Q:04 - $0.51-0.53 on an adjusted basis
    
  • 4Q:04 - $0.61-0.63 on an adjusted basis