) reported net earnings of $178.1 million or $1.02 per share in
the third quarter of 2012 compared with $191.5 million or $1.01
in the year-ago quarter. However, after taking into account
certain one-time items, adjusted earnings came in at $1.15,
surpassing the Zacks Consensus Estimate of $1.13 and the previous
Revenues were $1.026 billion, down 0.6% on a reported basis
and up 2.5% at constant exchange rates ("CER"), almost in line
with the Zacks Consensus Estimate of $1.029 billion. Revenue
generated in the Americas was $584 million (flat), in Europe was
$246 million (up 8% at CER) and in Asia-Pacific was $196 million
Zimmer's biggest segment, Reconstructive Implant, recorded a
2% increase in revenue (at CER) to $756 million, driven by growth
in Europe (6% to $191 million), Asia-Pacific (1% to $145 million)
while Americas dropped 1% (to $420 million). Revenues from Knees
(within Reconstructive) increased 1% to $407 million while Hips
and Extremities recorded a respective growth of 2% (at CER) to
$309 million and 12% to $40 million.
Among the other segments at Zimmer, sales from Spine recorded
a decline of 7% (at CER) to $50 million. Growth was witnessed in
the other three segments - Surgical and Other (11% annually to
$91 million), Dental (up 3% to $55 million) and Trauma (11% to
During the quarter, Zimmer's gross margin declined 50 basis
points (bps) to 75.1%. Moreover, with selling, general and
administrative, and research and development expenses dropping by
a respective, 3.1% to $430 million and 12% to $53.5 million,
operating margin improved 130 bps to 27.9%.
We believe that better operating margin along with a 7.2%
year-over-year drop in outstanding share count due to the
continuous share repurchase program led to an improvement in
earnings per share.
Balance Sheet and Cash Flow
Zimmer exited the third quarter of 2012 with cash and cash
equivalents of $801.5 million compared with $768.3 million as of
December 2011. Long-term debt increased marginally to $1,734.1
million compared with $1,576 million at the end of 2011.
Operating cash flow for the reported quarter was $345 million.
The company repurchased 1.56 million shares for $97.6 million
during the quarter and was left with $1.15 billion of share
repurchase authorization under the current program that expires
on December 31, 2014
Zimmer updated its outlook for 2012. The company now expects
to report revenue growth of 2% at CER, lower than the previous
outlook of 2.5%−3.5% growth. Currency movement is now expected to
lower revenues by 2% (the previous guidance had pegged the effect
at negative 2−2.5%), which in turn would lead to flat revenue
growth on a reported basis.
The 2012 guidance for both adjusted EPS and on reported basis
were narrowed to $5.25−$5.30 (previous guidance was $5.25−$5.35)
and $4.75−$4.80 ($4.75−$4.85), respectively.
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 well-capitalized players such as
Smith & Nephew
ohnson & Johnson
), among others.
We have a Neutral recommendation on Zimmer. The stock holds a
short-term Zacks #3 Rank (Hold).
JOHNSON & JOHNS (JNJ): Free Stock Analysis
SMITH & NEPHEW (SNN): Free Stock Analysis
ZIMMER HOLDINGS (ZMH): Free Stock Analysis
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