Zimmer Holdings (ZMH) reported third-quarter 2014 adjusted earnings per share of $1.35, up 8% year over year and 3.8% ahead of the Zacks Consensus Estimate. On a reported basis, the company’s earnings came in at 96 cents a share, an increase of 6.7% year over year.
Revenue Details
In the third quarter, revenues stood at $1.11 billion, up 2.9% (up 3.1% at constant exchange rate or CER) year over year. The top line also exceeded the Zacks Consensus Estimate of $1.10 billion.
Revenues generated in the Americas were $638 million (up 1% year over year at CER). The same in Europe grossed $271 million (up 6% at CER) while in Asia-Pacific the figure was $197 million (up 7%).
Segments
Zimmer’s biggest segment – Reconstructive Implant recorded revenues of $824 million, up 5% year over year at CER. This was due to a 7% increase in Asia Pacific, 6% sales growth in Europe and a nominal 3% growth in Americas.
Revenues derived from Knees (within Reconstructive) were up 6% year over year at CER to $461 million, while Hips recorded sales of $316 million, up 3% compared with the prior-year quarter. Revenues from Extremities increased 2% year over year to $47 million.
Among the other segments at Zimmer, spine recorded increased 6% at CER to $51 million whereas trauma recorded a decline of 1% to $78 million in the reported quarter. Dental disappointed with a decline of 2% to $54 million while Surgical and Other declined by 4% to $99 million.
Margins
Zimmer’s gross margin expanded 363 basis points (bps) to 73.0% in the third quarter. Selling, general and administrative expenses edged up 1.3% to $443.5 million while research and development expenses were down 6.7% to $46.1 million. Adjusted operating margin expanded 474 bps to 28.8%.
Cash Position
Zimmer exited the quarter with cash and cash equivalents and short-term investments of $1,747.1 million compared with $1,807.6 million as of 2013. Long-term debt dropped marginally to $1.43 billion compared with $1.67 billion at the end of 2013.
Year-to-date operating cash flow was $698.6 million compared to $662.9 million in the year-ago period. The company also paid $37.1 million dividend and declared dividends of 22 cents per share during the quarter, an increase of 10% year over year.
2014 Outlook
Zimmer revised its full-year 2014 revenue guidance to the range of 2.25% at CER from earlier range of 2.0% and 3.0%. The currency movement is expected to lower revenues by 0.75%, which in turn would lead to 1.5% revenue growth on a reported basis (1.5% to 2.5% expected earlier). The current Zacks Consensus Estimate for revenues remains at $4.71 billion.
The company narrowed its 2014 adjusted earnings guidance to $6.05 from earlier range of $6.00 to $6.10. This updated guidance takes into estimated charges for inventory and manufacturing related expenses, quality and operational excellence initiatives, certain claims, special items and additional expenses related to the pending Biomet merger. The current Zacks Consensus Estimate of $6.05 remains at par with the guided range.
Our Take
Zimmer reported a better-than-expected third quarter with a top-and-bottom line beat. We are encouraged by the overall sales growth in the all geographies which acted as a major upside for the company.
We believe, with the grand $13.35 billion acquisition of Biomet, Zimmer will be able to create a market leader in the $45 billion musculoskeletal industry thereby improving the merged entity's position in the competitive niche. We are impressed with the company’s strong strategic and financial goals which the combined entity expects to reach after closing of the deal.
According to Zimmer, the successful completion of this acquisition, which is expected in the first quarter of 2015, will be beneficial for healthcare investors as the merged entity will successfully advance innovation and help create a more diversified and predictable revenue mix consistent with the comprehensive portfolio.
However, the intense competition in the orthopedic market and pricing pressure remain areas of concern. Besides, macroeconomic uncertainties, pricing pressure and unfavorable currency adversely impacted sales during the reported quarter.
Currently, Zimmer carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the medical products industry include ICU Medical, Inc. (ICUI), Abaxis, Inc. (ABAX) and Alere Inc. (ALR). All of them sport a Zacks Rank #2 (Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment