Zimmer Holdings Inc.'s (ZMH) second-quarter earnings fell 7.5% behind a slide in sales linked to continued softness in the $11 billion market for replacement hips and knees, where the global economic downturn has slowed procedure growth.

The Warsaw, Ind., company downgraded its forecast for overall market expansion this year as prospective patients continue to defer surgery, but maintained its full-year sales and earnings guidance on signs that a pattern of company market-share losses has stabilized.

"We believe that we've held our global market share in knees and hips during the second quarter," said David C. Dvorak, Zimmer's president and chief executive, during a conference call with analysts.

Zimmer shares moved higher early Thursday and were recently up 3.1% to $43.94. Morgan Stanley analyst David Lewis said Zimmer's results were better-than-feared against the backdrop of low expectations.

Earnings in the recent quarter fell to $210.1 million, or 98 cents a share, from $227.1 million, or 99 cents a share, a year earlier. Excluding acquisition and other charges, earnings fell to $1 from $1.03 a share. Zimmer had fewer shares outstanding due to a share buyback program.

Analysts polled by Thomson Reuters had expected, on average, per share earnings of 96 cents in the quarter.

Second-quarter revenue declined 5.5% to $1.02 billion, with the slide worsened by unfavorable foreign currency rates. Still, Zimmer nearly matched Wall Street's sales forecast.

Gross margin increased to 76.8% from 75.7%. The company trimmed its selling, general and administrative expenses by 4% in the quarter.

Sales of replacement knees declined 6% from a year ago while hip sales fell 10%, hurt by sluggish market conditions and foreign exchange rates.

Results in Europe were weak, and Dvorak noted that the industry slowdown has reached big markets there, such as the U.K., Spain and Italy. He also echoed the sentiment of other orthopedics executives that surgery is being pushed back, rather than called off for good, because people will eventually need repairs for worn-out parts.

"We're very confident it is a deferral as opposed to a permanent loss of those procedures," Dvorak said.

It appears, however, Zimmer and its rivals in the orthopedics market - including Stryker Corp. (SYK) and Johnson & Johnson (JNJ) - may have to endure a sluggish business environment for a while longer. Zimmer on Thursday projected the market will grow by about 4% this year, which is below the company's prior 6% forecast and the industry's typical high single-digit growth rate.

The prospect for declining product prices is another key issue in orthopedics, and it became a topic of heavy interest on earnings calls following J&J's report last week, in which the company noted some pricing pressure.

Dvorak said Zimmer believes its worldwide prices will slip 1% in 2009. He also indicated this is a long-running issue. "It is our view that pricing pressures have been persistent for some time and will continue," he said.

Sales in Zimmer's dental business - which has particular exposure to the sour economy due to the elective nature of procedures there - dropped 17%. Its spine unit, bolstered by an acquisition of Abbott Laboratories' (ABT) former spine business, grew 18%.

Looking ahead, the company said it still expects full-year earnings between $3.85 and $4.00 a share. Sales are seen rising 1% to 3%, excluding the effect of currency rates.

-By Jon Kamp, Dow Jones Newswires; 617-654-6728; jon.kamp@dowjones.com

(By Melissa Korn and Mike Barris contributed to this report.)