Zimmer Outdoes, Reaffirms Outlook

Zimmer Holdings Inc. (ZMH - Analyst Report) today reported earnings per share of 88 cents in the third quarter of 2009, beating the Zacks Consensus Estimate of 86 cents. However, earnings per share declined by 9.3% year over year in the reported quarter. 

Net Sales 
Net sales in the reported quarter increased 2.4% year over year to $976 million. Excluding an unfavorable foreign currency translation (FX), net sales increased 3.6% year over year. On a geographic basis, U.S. sales represented approximately 60% of total revenues and increased 4% year over year. Europe revenues declined 3% year over year to $242 million. Asia-Pacific contributed $149 million of revenues and increased 8% year over year. 

Excluding Dental, growth in net sales was witnessed across all the product categories. Reconstructive sales represented roughly 76% of total revenues and increased 1% year over year. The Spine segment registered a strong growth of 24% in the quarter. Growth was also seen across the Trauma, and OSP and other segments. Dental revenues declined 8% year over year. 

Margins 
Zimmer reported a contraction in margins in the third quarter. Gross margin declined 70 basis points (bps) year over year to 74.4%. The decline was due to higher cost of goods sold that offset higher sales. Selling, general and administrative expenses as a percentage of sales declined 10 bps year over year to 42.3%. Research and development expenses as a percentage of sales increased 30 bps year over year to 5.3%. 

Lower gross margin coupled with higher operating expenses were responsible for lower operating margin that declined 120 bps year over year to 20.9%. In addition, interest expense and a higher effective tax rate stretched the net margin that declined 710 bps year over year to 15.4%. 

Balance Sheet & Cash Flow 
Zimmer ended the quarter with cash and cash equivalents of $439.7 million, registering an increase of roughly 107% in the first nine months of the year. The company had an outstanding long-term debt of $600.2 million at the end of the quarter. Cash flow from operations was $352.3 million in the reported quarter. 

Guidance 
Zimmer has reaffirmed its sales and earnings guidance for full fiscal 2009. For the year, excluding FX, net sales are estimated to increase between 1% and 3% over that in 2008. At the current level, FX is estimated to negatively impact revenue growth by roughly 1.6%. Earnings per share should be in the range of $3.85 to $4.00. Zimmer is a global leader in the design, development, manufacture, and marketing of reconstructive implants, and trauma and related orthopedic surgical products. The company competes in the orthopedic market with players such as Stryker Corporation (SYK - Analyst Report), Wright Medical (WMGI - Analyst Report) and Smith & Nephew (SNN - Snapshot Report).

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