Zimmer Holdings (ZMH) reported earnings per share (“EPS”) of $1.17 in the first quarter of fiscal 2012 compared with $1.08 in the year-ago quarter. After taking into account certain one-time items, adjusted EPS came in at $1.30, in line with the Zacks Consensus Estimate and surpassing the previous year’s $1.19.
Revenues were $1.141 billion, up 2.2% on a reported basis and 2.7% at constant exchange rates (“CER”), beating the Zacks Consensus Estimate of $1.135 billion. Revenues generated in the Americas, Europe and Asia-Pacific were $634 million (up 1% at CER), $301 million (up 4%) and $206 million (up 7%), respectively.
Segments
Zimmer’s biggest segment, Reconstructive Implant, recorded a 3% increase in revenue (at CER) to $860 million, driven by growth in Asia-Pacific (7% to $153 million), Europe (4% to $239 million) and a 1% rise in the Americas (to $468 million). Revenues from Knees (within Reconstructive) increased 2% to $471 million while Hips and Extremities recorded a respective growth of 2% (at CER) to $344 million and 5% to $45 million.
Among the other segments at Zimmer, sales from Spine and Dental recorded a decline of 6% (at CER) to $53 million and 2% to $60 million, respectively. Growth was witnessed in the other two segments – Surgical and Other (9% annually to $92 million) and Trauma (8% to $76 million).
While gross profit increased 2% year over year to $852 million during the quarter, gross margin declined 30 basis points (bps) to 74.7%. Moreover, with selling, general and administrative expenses increasing by 1% to $463.3 million and research and development expenses scaling up 7% to $59.6 million, operating margin remained almost static at 28.9%.
Zimmer also benefited from a 7.9% decline in the outstanding share count.
Balance Sheet and Cash Flow
Zimmer exited the first quarter of fiscal 2012 with cash and cash equivalents of $674 million compared with $768.3 million as of December 2011. Long-term debt remained almost unchanged at $1,572.8 million.
Operating cash flow for the reported quarter was $207.4 million, higher than $182.2 million in the corresponding period of last year. The company repurchased 2.3 million shares for $141.6 million during the quarter and was left with $1.36 billion of share repurchase authorization under the current program that expires on December 31, 2014.
Outlook
Zimmer updated its outlook for 2012. The company expects to report revenue growth of 2-4% at CER. However, currency movement is now expected to lower revenues by 1.5-2% (the previous guidance had pegged the effect at negative 1%), which in turn would lead to reported revenue growth of 0-2.5% (1-3%).
While the adjusted EPS guidance for 2012 remained unchanged at $5.20-$5.40, on a reported basis the EPS outlook was lowered by 5 cents at both ends to $4.70-$4.90.
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 first quarter performance, especially in the US. Particularly, the Knees business recorded growth after struggling for the past few quarters.
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 (SNN) and Johnson & Johnson (JNJ), among others.
We have a Neutral recommendation on Zimmer. The stock holds a short-term Zacks #3 Rank (Hold).
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