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Zimmer Holdings (ZMH - Analyst Report) reported third quarter 2013 adjusted earnings per share of $1.25, up 8.7% year over year, and a penny higher than the Zacks Consensus Estimate. After including one-time items, the company reported net earnings of $154.4 million or 90 cents a share, down 13.3% or 11.8% year over year, respectively.

Revenue Details

In the third quarter, revenues stood at $1,074.3 million, up 4.8% (up 6.7% at constant exchange rates or CER) year over year, beating the Zacks Consensus Estimate of $1,063 million. Revenues generated in the Americas were $633 million (up 9% year over year at CER). The figure in Europe stood at $255 million (up 1% at CER) and in Asia-Pacific at $186 million (up 8%).

Segments

Zimmer’s biggest segment, reconstructive implant, recorded revenues of $788 million, up 6% year over year at CER. This was due to an increase of 8% in the 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 7% year over year at CER to $435 million, while Hips recorded an increase of 2% year over year to $308 million. Revenues from Extremities increased 15% year over year to $45 million.

Among the other segments at Zimmer, spine recorded a decline of 3% at CER to $48 million in the reported quarter.

Margins

Zimmer’s gross margin contracted 567 basis points (bps) to 69.4% in the third quarter. Selling, general and administrative expenses increased 1.9% to $438 million while research and development expenses were down 7.7% to $49.4 million. Adjusted operating margin contracted 389 bps to 24.0%.

Cash Position

Zimmer exited the third-quarter 2013 with cash and cash equivalents and short-term investments of $1,505.8 million compared with $1,555.9 million as of 2012. Long-term debt decreased marginally to $1,686.0 million compared with $1,720.8 million at the end of 2012.

Year-to-date operating cash flow for the reported quarter was $662.9 million compared to $783.9 million in the year-ago period. The company repurchased 0.2 million shares for $17.5 million during the quarter and is currently left with $536.4 million of share repurchase authorization, under the current program that expires on Dec 31, 2014. The company also declared cash dividends of $33.9 million in the second quarter.

2013 Outlook

Zimmer narrowed its adjusted EPS outlook to $5.70, the lower end of its earlier provided range of $5.70−$5.80. The company reaffirmed its revenue outlook at 4.5% at CER. The Zacks Consensus Estimate for EPS of $5.74 falls within the given range. The Zacks Consensus Estimate for revenues stands at $4.59 billion.

The currency movement is expected to lower revenues by 1.5% to 2.0% (previously expected at 2.0%), which in turn would lead to 2.5% to 3% revenue growth on a reported basis (earlier guided range was 2% to 3%).

Our Take

Zimmer provided a decent third quarter with both top-line and bottom-line beats. Barring spine revenue, which continues to remain as a key disappointment, we are encouraged with the balanced segmental sales growth which acted as 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 carries a Zacks Rank #3 (Hold). Medical products companies such as Align Technologies Inc. (ALGN - Analyst Report), Mindray Medical International Ltd (MR - Analyst Report) and Bio-Rad Laboratories, Inc. (BIO - Snapshot Report), with a Zacks Rank #1 (Strong Buy), are worth considering.

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