Zimmer Holdings (ZMH) reported adjusted earnings at $1.41, up 8.5% year over year, as well as a penny ahead of the Zacks Consensus Estimate. However, after including one-time items, the company reported net earnings of $218.6 million or $1.28 a share, up 4.3% or 9.4% year over year, respectively.
In 1Q13, revenues were $1,139 million, down 0.2% (up 1.0% at constant exchange rates or CER) year over year, missing the Zacks Consensus Estimate of $1,143 million. Revenue generated in the Americas was $635 million (flat at CER), in Europe was $307 million (up 2% at CER) and in Asia-Pacific was $197 million (up 3%).
Zimmer’s biggest segment, reconstructive implant, recorded revenues of $850 million, down 1% year over year at CER. This was due to a 1% decline in Americas, offset by a 1% increase in Europe. Sales in Asia Pacific remained flat on a year-over-year basis.
Revenues derived from Knees (within Reconstructive) remained flat year over year to $471 million, while Hips recorded a decline of 2% (at CER) year over year to $331 million. Revenues from Extremities increased 7% year over year to $48 million.
Among the other segments at Zimmer, sales from Spine recorded a decline of 10% (at CER) to $47 million and Dental revenues declined 1% to $60 million. Growth was witnessed in the other two segments – Surgical and Other (17% annually to $100 million) and Trauma (11% to $82 million).
During the quarter, Zimmer’s gross margin contracted 40 basis points (bps) to 74.3%. Moreover, with selling, general and administrative, and research and development expenses decreasing by a respective, 0.5% to $460.8 million and 10.2% to $53.5 million, operating margin improved 30 bps to 26.2%.
Zimmer exited first-quarter 2013 with cash and cash equivalents and short-term investments of $1,201.2 million compared with $1,555.9 million as of 2012. Long-term debt decreased marginally to $1,702.8 million compared with $1,720.8 million at the end of 2012.
Operating cash flow for the reported quarter was $180.5million in comparison with $207.4 million in first-quarter 2012. The company repurchased 5.36 million shares for $392 million during the quarter and is currently left with $622.7 million of share repurchase authorization, under the current program (of up to $1.5 billion of shares) that expires on Dec 31, 2014.
Zimmer reiterated adjusted EPS outlook of $5.65−$5.85 and also reaffirmed its revenue outlook of 2.5% and 4.5% at CER. The Zacks Consensus EPS Estimate of $5.75 remains within the given range. The Zacks Consensus revenue Estimate for 2013 is $4.6 billion.
The currency movement is expected to lower revenues by 1.5% (previously expected at 0.5%), which in turn would lead to 1%−3% revenue growth on a reported basis (earlier guided range was 2%-4%).
Zimmer is in constant effort to strengthen its pipeline with the launch of new products. The company currently offers a broad line of reconstructive implant and trauma products as well as orthopedic surgical instruments and supplies. We believe that the company has embarked on its growth trajectory with new product launches, employment of new technologies and expansion into the emerging markets.
However, the intense competition in the orthopedic market and pricing pressure remain areas of concern. The company faces tough competition from well-capitalized players such as Smith & Nephew (SNN) among others. Other stocks worth considering are NuVasive, Inc. (NUVA), which carries a Zacks Rank #1 (Strong Buy), and Exactech Inc. (EXAC), which carries a Zacks Rank #2 (Buy).
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