Zimmer Posts Mixed 2Q, Tightens View - Analyst Blog

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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 ), among others.

Segment Analysis

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 $74 million).

Margins         

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 share count.

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.

Outlook

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% (0−2.5%).

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).

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 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 recent past.

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 ( SNN ) and Stryker Corporation ( SYK ), among others.

We have a Neutral recommendation on Zimmer. The stock holds a short-term Zacks #3 Rank (Hold).


 
BOSTON SCIENTIF (BSX): Free Stock Analysis Report
 
JOHNSON & JOHNS (JNJ): Free Stock Analysis Report
 
SMITH & NEPHEW (SNN): Free Stock Analysis Report
 
ST JUDE MEDICAL (STJ): Free Stock Analysis Report
 
STRYKER CORP (SYK): Free Stock Analysis Report
 
ZIMMER HOLDINGS (ZMH): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: BSX , JNJ , SNN , STJ , SYK

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