Zimmer Holdings (ZMH) reported an adjusted EPS of $1.04 during the third quarter of fiscal 2011, a penny ahead of the Zacks Consensus Estimate and up from 96 cents in the corresponding quarter of fiscal 2010.
The company reported a 6.9% year-over-year growth (2.4% at constant exchange rates, CER) in revenues to $1,031 million during the quarter, in line with the Zacks Consensus Estimate. While revenues generated in the Americas remained unchanged at $582 million, revenues from Europe and Asia-Pacific increased 17% to $252 million and 19% to $197 million, respectively.
Zimmer’s biggest segment, Reconstructive Implant, recorded a 6% increase in revenue to $768 million driven by growth in Asia Pacific (21% to $147 million), Europe (17% to $199 million), partially offset by a 2% decline in the Americas to $422 million. Revenues from Knees (within Reconstructive), Hips and Extremities recorded a respective growth of 3% to $417 million, 10% to $315 million and 7% to $36 million. Several products introduced over the past few quarters gained traction in the international markets, leading to superior growth.
Among the other segments at Zimmer, barring Spine that declined 2% to $55 million, growth was witnessed across the board including Surgical and Other (8% annually to $84 million), Trauma (19% to $69 million) and Dental (12% to $55 million).
A 7% increase in revenues coupled with a 15% rise in cost of products sold resulted in a 170 basis point (bps) decline in gross margin during the quarter to 75.6%. Moreover, lower gross margin along with a 7% rise in research and development expenses and a 8% increase in selling, general and administrative expenses perpetrated a 200 bps decline in operating margin to 26.6%. Zimmer nevertheless benefited from a 17% decline in interest expense and a 5.5% lower share count.
Zimmer exited the quarter with cash and cash equivalents of $553 million compared with $668.9 million as of December 2010. Long-term debt increased to $1543.5 million compared with $1,142.1 million at the end of fiscal 2010. Consequently, long-term debt as a percentage of total capital increased to 21.6% in the reported quarter from 16.5% at the end of fiscal 2010.
Operating cash flow for the first nine months was $783.8 million, down from $852.5 million in the year-ago period. The company repurchased 10.1 million shares for $549 million during the quarter and is left with $299 million of authorization, which expires at the end of 2013.
Outlook
Zimmer updated its outlook for 2011. The company now expects to report adjusted EPS of $4.75−$4.80 (previous guidance of $4.70−$4.80) and revenue growth of 2.3−2.7% (2.5−3.5%) at CER. Currency movement is expected to boost revenues by 2.5% (3%), which in turn would lead to reported revenue growth of 4.8−5.2% (5.5−6.5%).
Recommendation
Zimmer 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, Zimmer continues to witness challenges in the form of pricing pressure and lower procedure volumes resulting from economic uncertainty. Moreover, the company faces tough competition from players such as Smith & Nephew (SNN), Johnson & Johnson (JNJ) among others.
We have a ‘Neutral’ recommendation on Zimmer, in line with its peers. The stocks, mentioned above, retain short-term Zacks #3 ranks ('Hold').
JOHNSON & JOHNS (JNJ): Free Stock Analysis Report
SMITH & NEPHEW (SNN): Free Stock Analysis Report
ZIMMER HOLDINGS (ZMH): Free Stock Analysis Report
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment