Zimmer Holdings ( ZMH )
reported earnings per share ("EPS") of $1.22 in the second quarter
of fiscal 2012 compared with $1.06 in the year-ago quarter. After
taking into account certain one-time items, adjusted EPS came in at
$1.34, a couple of cents higher than the Zacks Consensus Estimate
and surpassing the previous year's $1.21.
Revenues were $1.125 billion, down 1.1% on a reported basis and
up 1.8% at constant exchange rates ("CER"), trailing the Zacks
Consensus Estimate of $1.144 billion. Revenues generated in the
Americas, Europe and Asia-Pacific were $614 million (up 1% at CER),
$305 million (down 6% or up 3% at CER) and $206 million (up 1% or
2% at CER), respectively.
Unfavorable currency movement has been a major dampener during
the quarter, which reflects in the earnings of other MedTech
players like Johnson & Johnson ( JNJ ),
Boston Scientific ( BSX )
and St Jude Medical ( STJ ),
Zimmer's biggest segment, Reconstructive Implant, recorded a 2%
increase in revenue (at CER) to $843 million, driven by growth in
Asia-Pacific (3% to $154 million) and Europe (3% to $240 million)
while sales in the Americas remained flat at $449 million. Revenues
from Knees (within Reconstructive) increased 1% to $461 million
while Hips and Extremities recorded a respective growth of 2% (at
CER) to $340 million and 6% to $42 million.
Among the other segments at Zimmer, sales from Spine and Dental
recorded a decline of 4% (at CER) to $52 million and 5% to $62
million, respectively. While Spine has been recording lower sales
over the past few quarters, Dental is on a downhill from the first
quarter. Growth was nonetheless witnessed in the other two segments
- Surgical and Other (8% annually to $94 million) and Trauma (9% to
While gross profit dropped 1% year over year to $843.1 million
during the quarter, gross margin increased 30 basis points (bps) to
74.9%. Moreover, with selling, general and administrative expenses
declining by 3.5% to $453.3 million and research and development
expenses inching up 1% to $57.2 million, adjusted operating margin
improved by 120 bps to 29.6%.
Zimmer also benefited from an 8.5% decline in the outstanding
Balance Sheet and Cash Flow
Zimmer exited the second quarter of fiscal 2012 with cash and
cash equivalents of $651 million compared with $768.3 million as of
December 2011. Long-term debt increased 9.5% from 2011 to $1,726.5
million. As a result, interest expense increased 38% year over year
to $18.1 million.
Operating cash flow for the six-month period was $438.9 million,
nominally higher than $433.2 million in the corresponding period of
last year. The company repurchased 1.67 million shares for $106.5
million during the quarter and was left with $1.25 billion of share
repurchase authorization under the current program that expires on
December 31, 2014. The company returned $31.7 million as cash
dividends to its shareholders during the quarter.
Zimmer updated its outlook for 2012. The company expects to
report revenue growth of 2.5−3.5% at CER (previous guidance 2−4%).
Currency movement is now expected to lower revenues by 2−2.5% (the
previous guidance had pegged the effect at negative 1.5−2%), which
in turn would lead to reported revenue growth of 0−1.5%
The company narrowed its EPS guidance for the fiscal. The
adjusted and reported EPS guidance for 2012 stands at $5.25−$5.35
($5.20−$5.40) and $4.75−$4.85 ($4.70−$4.90), respectively. This is
in line with the Zacks Consensus Estimate of $5.27 on revenues of
$4.526 billion (unchanged from 2011).
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.
Zimmer plans to continue with its global restructuring and
transformation initiatives in 2012 that are designed to streamline
business operations and support functions. We are impressed
with Zimmer's second quarter performance though currency has been a
prevailing headwind. Particularly, the Knees business recorded
growth for the second straight quarter after struggling over the
However, Zimmer continues to witness challenges in the form of
pricing pressure and lower procedure volumes resulting from
economic uncertainty. The competitive landscape is tough with the
presence of players such as Smith & Nephew (
and Stryker Corporation ( SYK ),
We have a Neutral recommendation on Zimmer. The stock holds a
short-term Zacks #3 Rank (Hold).
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ZIMMER HOLDINGS (ZMH): Free Stock Analysis
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