Zimmer Holdings ZMH reported first-quarter 2015 adjusted earnings per share (EPS) of $1.58, down 1.3% year over year. However, the quarter’s earnings topped the Zacks Consensus Estimate by 4 cents or 2.6%.
The year-over-year decline came on the back of a sluggish top-line performance by Zimmer owing to a severe currency headwind and an increase in the company’s outstanding share count in the reported quarter.
On a reported basis, the company’s earnings came in at $1.02 a share, a huge 20.9% slash year over year.
Revenue Details
In the first quarter of 2015, revenues stood at $1.13 billion, down 2.3% (up 4.5% at constant exchange rate or CER) year over year. The top line also missed the Zacks Consensus Estimate of $1.14 billion.
Revenues generated in the Americas during the quarter reached $645 million (up 1% year over year on reported basis or up 2% at CER). On the other hand, the same in Europe grossed $299 million (down 9% on reported basis or up 9% at CER) while in Asia-Pacific, the figure was $190 million (down 3% or up 7%).
Segments
Zimmer’s biggest segment – Reconstructive Implant – recorded revenues of $852 million, up 5% year over year at CER. This was due to a 2% increase in Americas, 7% increase in Asia Pacific and 9% sales growth in Europe.
Revenues derived from Knees (within Reconstructive) were up 6% year over year at CER to $488 million, while Hips recorded sales of $312 million, up 3% compared with the prior-year quarter. Revenues from Extremities increased 5% year over year to $52 million.
Among the other segments at Zimmer, spine recorded an increase of 7% at CER to $49 million while Trauma was up 7% to $79 million in the reported quarter. Surgical and Other increased 3% to $98 million while Dental declined 3% to $56 million.
Margins
Zimmer’s gross margin expanded 158 basis points (bps) to 75.4% in the first quarter. Selling, general and administrative expenses edged down 4.4% to $425 million while research and development expenses were up 2.1% to $48.4 million. Adjusted operating margin expanded 220 bps to 33.7%.
Cash Position
Zimmer exited the first quarter with cash and cash equivalents and short-term investments of $9,281.9 million, a substantial increase compared with $1,695.8 million as of 2014. Long-term debt, however, remained at $9,061.2 million, from $1,425.5 million at the end of 2014.
For the quarter, operating cash flow was $91.5 million compared to $188.8 million in the year-ago period. The company also paid $37.3 million in dividends and declared a dividend of 22 cents per share during the quarter.
2015 Outlook
On the eve of completion of the Biomet merger (now expected to close any time in May 2015), Zimmer has provided an update on its fiscal 2015 guidance. Considering thecontinued strengthening of the U.S. dollar, the company has reduced its adjusted earnings per share on a standalone basis to a range of $6.30 to $6.40 (a substantial fall from the earlier provided range of $6.50 to $6.60). The current Zacks Consensus Estimate for 2015 earnings is pegged at $6.42, ahead of the company’s expectation.
According to Zimmer, the currency headwind is expected to negatively impact Biomet’s earnings. However, Zimmer expects this to be partially offset by greater synergies from the pending merger.
Net annual operating earnings synergies from the pending merger are now anticipated to reach $350 million by the third year post the closing of the transaction. This is an improvement from the prior guidance of net annual synergies of $270 million for the same period. However, the company expects accretion from the pending merger with Biomet to contribute in the range of $0.95 to $1.05 to adjusted earnings per share in the first one year of the acquisition (down from earlier projection of $1.05 to $1.15).
Our Take
Zimmer reported an unimpressive first quarter with a bottom-line beat and a top-line miss. As expected, the currency headwind continued to pose a major threat to the company’s sales performance. The reduced guidance for 2015 also indicates the fact that the company does not expect any turnaround in the scenario over the near term.
However, sales were impressive at CER in the U.S., Asia Pacific, Europe, Middle East and Africa sales regions.
Currently, we look forward to the expected closing of the grand $13.35 billion acquisition of Biomet. With this acquisition, 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 encouraged by the company’s strong strategic and financial goals which the combined entity expects to reach after closure of the deal.
On the flip side, the intense competition in the orthopedic market and pricing pressure remain key areas of concern. Also, macroeconomic uncertainties adversely impacted sales during the reported quarter.
Currently, Zimmer carries a Zacks Rank #3 (Hold). Better-ranked stocks in the medical products industry include Hospira Inc. HSP, SurModics, Inc. SRDX and Vascular Solutions Inc. VASC. All of them sport a Zacks Rank #1 (Strong Buy).
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