Zimmer Holdings (ZMH) reported an EPS of $1.08 during the first quarter of fiscal 2011 compared with $1.01 in the year-ago quarter. However, after considering certain adjustments, the EPS was $1.19, surpassing the Zacks Consensus Estimate of $1.12 and $1.02 in the first quarter of fiscal 2010.
Zimmer reported revenues of $1,116 million during the quarter, 5% higher than the year-ago period (3.3% at constant exchange rates, CER) and beating the Zacks Consensus Estimate of $1,093 million. On a geographic basis, revenue derived from Americas, Europe and Asia-Pacific increased 2% to $630 million, 5% to $299 million and 16% to $187 million, respectively.
Zimmer’s biggest segment, Reconstructive Implant, recorded a 3% increase in revenue to $842 million driven by growth in Asia Pacific (16%), Europe (3%) and Americas (1%). While revenues from Knees (within Reconstructive) remained unchanged at $462 million, Hips and Extremities recorded growth of 7% to $337 million and 12% to $43 million, respectively.
Among the other segments at Zimmer, barring Spine which declined 5% to $57 million, growth was witnessed across all other businesses including Surgical and Other (10% annually to $84 million), Trauma (16% to $70 million) and Dental (21% to $63 million).
Gross margin during the quarter improved 25 basis points (bps) to 75%. Moreover, higher gross margin along with a 10% rise in research and development expenses and a 2% increase in selling, general and administrative expenses led to a 100 bps improvement in operating margin to 28.9%.
While revenues increased by 5%, EPS was up by a higher rate of increase of 16.7% due to better margins, a 25% fall in interest expense and a 5% lower share count.
Zimmer exited the quarter with cash and cash equivalents of $575.6 million compared with $668.9 million as of December 2010. Debt burden of the company remained almost unchanged at $1,140.2 million.
Operating cash flow for the quarter was $182.2 million. The company repurchased 4.2 million shares for $236 million during the quarter and is left with $969.7 million of authorization, which expires at the end of 2013.
Outlook
Zimmer reiterated its outlook for 2011. The company expects to report adjusted EPS of $4.60-$4.80 (reported basis: $4.25-$4.45) on revenue growth of 2%-4% at CER. Currency movement is expected to boost revenues by 3% thereby giving way to reported revenue growth of 5%-7%.
Our 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 is 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. The competitive landscape will become tougher with Johnson & Johnson’s recent decision to acquire Synthes for $21.3 billion.
We have a ‘Neutral’ recommendation on the stock, which also corresponds to the Zacks #3 Rank ('hold') in the short term.
JOHNSON & JOHNS (JNJ): Free Stock Analysis Report
SMITH & NEPHEW (SNN): Free Stock Analysis Report
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