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Zimmer Holdings (ZMH - Analyst Report) reported adjusted earnings per share at $1.43, up 6.7% year over year, but a penny lower than the Zacks Consensus Estimate. However, after including one-time items, the company reported net earnings of $370.7 million or 89 cents a share, down 12.6% or 27% year over year, respectively.

Revenue Details

In the second quarter, revenues were $1,169.5 million, up 4.0% (up 5.5% at constant exchange rates or CER) year over year, beating the Zacks Consensus Estimate of $1,152 million. Revenue generated in the Americas was $660 million (up 8% year over year at CER), in Europe was $307 million (flat at CER) and in Asia-Pacific was $202 million (up 7%).

Segments

Zimmer’s biggest segment, reconstructive implant, recorded revenues of $868 million, up 4% year over year at CER. This was due to a 5% increase in Americas combined with a 7% increase in Asia Pacific. Sales in Europe remained flat on a year-over-year basis.

Revenues derived from Knees (within Reconstructive) were up 5% year over year to $481 million, while Hips recorded an increase of 2% (at CER) year over year to $338 million. Revenues from Extremities increased 15% year over year to $49 million.

Among the other segments at Zimmer, after several quarters of drag in spine sales, growth was witnessed. Spine recorded an increase of 4% (at CER) to $54 million in the reported quarter.

Margins

During the quarter, Zimmer’s gross margin contracted 261 basis points (bps) to 72.3%. Selling, general and administrative expenses increased 1.03% to $458 million while research and development expenses were down 4.02% to $54.9 million. Adjusted operating margin during the quarter contracted 109 bps to 28.5%.

Cash Position

Zimmer exited the second-quarter 2013 with cash and cash equivalents and short-term investments of $1,235.8 million compared with $1,555.9 million as of 2012. Long-term debt decreased marginally to $1,688.1 million compared with $1,720.8 million at the end of 2012.

Operating cash flow for the reported quarter was $189.7 million. The company repurchased 0.88 million of shares for $68.8 million during the quarter and is currently left with $553.9 million of share repurchase authorization, under the current program (of up to $1.5 billion of shares) that expires on Dec 31, 2014. The company also declared cash dividends of $33.6 million in the second quarter.

Outlook

Zimmer narrowed its adjusted EPS outlook to $5.70−$5.80 from earlier provided range of $5.65−$5.85. The company increased its revenue outlook to 4.0%−5.0% at CER (earlier was 2.5%−4.5%). The Zacks Consensus EPS Estimate of $5.76 remains within the given range. The Zacks Consensus revenue Estimate for 2013 is $4.56 billion.

The currency movement is expected to lower revenues by 2.0% (previously expected at 1.5%), which in turn would lead to 2%−3% revenue growth on a reported basis (earlier guided range was 1%-3%).

Our Take

Zimmer provided a mixed second quarter with top line beat and bottom line miss. However, we are encouraged to note that the balanced segmental sales growth after several quarters of drag remains a major upside for the company.

Zimmer constantly tries to strengthen its pipeline with the launch of new products. The company currently 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.

Currently, Zimmer retains a Zacks Rank #3 (Hold). Medical products companies such as HealthNet, Inc. (HNT - Analyst Report), WellPoint Inc. (WLP - Analyst Report) and Hospira Inc. (HSP - Analyst Report), which carry a Zacks Rank #1 (Strong Buy) are worth considering.

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