Leading orthopedic medical devices company, Zimmer Holdings (ZMH) has decided to sell $550 million of senior notes through an underwritten public offering. The offer, consisting of $250 million of 1.40% notes due 2014 and $300 million of 3.375% notes due 2021, will close on November 10, 2011.
Apart from general corporate purposes, Zimmer plans to use the net proceeds of the offering to repay a substantial portion of the outstanding borrowings under its credit facility. The company exited the most recent quarter with $553 million in cash and cash equivalents, down from $668.9 million at the end of December 2010 with long-term debt of $1.5 billion ($1.1 billion at the end of fiscal 2010). Debt as a percentage of total capital stood at 21.6% during the reported quarter compared with 16.5% at the end of 2010.
Net interest expense declined 17.6% year over year to $11.7 million on the back of swapping a portion of fixed-rate debt to floating rates. Meanwhile operating cash flow increased 9.5% to $350.6 million as restructuring and transformation programs improved efficiency in inventory deployment.
With a strong cash balance, Zimmer intends to return 1/2 of its net income to stock holders through annual share repurchase programs and target suitable acquisitions in the musculoskeletal space. The company repurchased 10.1 million shares for $549 million during the quarter and is left with $299 million of authorization (expires at the end of 2013). Due to this ongoing share repurchases, Zimmer reduced its share count by 8.6% over the last 12 months, thereby supporting the bottom line.
Our Take
Zimmer offers a broad line of reconstructive implant and trauma products, as well as orthopedic surgical instruments and supplies. We believe that the company is on its growth trajectory through 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. The company expects the fourth quarter of the current fiscal to be challenging and as such reduced the revenue growth guidance for 2011. Moreover, the presence of players such as Smith & Nephew (SNN) and Stryker (SYK) makes the competitive landscape tough.
We have a Neutral recommendation on Zimmer corresponding to a Zacks #3 Rank (Hold) in the short term.
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