Zimmer Holdings reported an adjusted EPS of $1.36 during the fourth quarter of fiscal 2011, up 7.1% year over year and a couple of cents ahead of the Zacks Consensus Estimate. During the reported quarter, the company recorded $108.0 million provision for claims related to the Durom Acetabular component, which has been taken into account in the adjusted figure. For the full year, the adjusted EPS increased 10.9% to $4.80, surpassing the Zacks Consensus Estimate of $4.78.
Revenues increased $1.17 billion, up 2.9% on a reported basis and 2.4% at constant exchange rates ("CER"), marginally beating the Zacks Consensus Estimate of $1.17 billion. For the fiscal year, revenues increased 2.6% at CER to $4.45 million, at par with the Zacks Consensus Estimate. While revenues generated in the Americas remained unchanged at $620 million, revenues from Europe and Asia-Pacific increased 6% (at CER) to $338 million and 5% to $209 million, respectively.
Zimmer’s biggest segment, Reconstructive Implant, recorded a 2% increase in revenue (at CER) to $877 million driven by growth in Asia Pacific (6% to $154 million), Europe (6% to $267 million), partially offset by a 2% decline in the Americas to $456 million. Revenues from Knees (within Reconstructive) remained unchanged at $475 million while Hips and Extremities recorded a respective growth of 4% (at CER) to $358 million and 9% to $44 million.
Among the other segments at Zimmer, barring Spine that declined 6% (at CER) to $56 million, growth was witnessed across the board including Surgical and Other (5% annually to $93 million), Trauma (11% to $77 million) and Dental (2% to $64 million).
A 3% increase in revenues coupled with a 11% rise in cost of products sold resulted in gross profit of $864.1 million during the quarter, almost unchanged from the year-ago quarter. Consequently gross margin declined 180 basis points (bps) to 74%.
While selling, general and administrative expenses remained flat at $461.9 million during the quarter, lower gross margin coupled with a 15% rise in research and development expenses to $65 million led to a 130 bps decline in operating margin to 28.9%. Zimmer also benefited from a 6% decline in interest expense and a 9% lower share count.
Balance Sheet and Cash flow
Zimmer exited 2011 with cash and cash equivalents of $768.3 million compared with $668.9 million as of December 2010. Long-term debt increased to $1576 million compared with $1,142.1 million at the end of 2010.
Operating cash flow for the year was $1176.9 million, marginally down from $1193.5 million in the previous year. The company repurchased 2.7 million shares for $143.3 million during the quarter and 18.9 million shares for $1.05 billion during the year. Recently, Zimmer announced a new $1.5 billion share repurchase program, which expires at the end of 2014. During the fourth quarter, the company initiated a quarterly cash dividend of 18 cents per share. Banking on a strong balance sheet, the company targets suitable acquisitions and recently completed the acquisition of ExtraOrtho.
Outlook and Recommendation
Zimmer unveiled its outlook for 2012. The company expects to report revenue growth of 2−4% at CER. Currency movement is expected to lower revenues by 1%, which in turn would lead to reported revenue growth of 1−3%. Besides, adjusted EPS guidance for 2012 stands at $5.20-$5.40 ($4.75−$4.95 on a reported basis). The current Zacks Consensus Estimate of 2.2% revenue growth and $5.22 EPS is within the company’s guidance range.
Zimmer plans to continue with its global restructuring and transformation initiatives in 2012 that are designed to streamline business operations and support functions. The programs to be completed in 2012 are expected to generate annualized pre-tax savings of more than $80 million, of which $30-$40 million will be realized in 2012. The company expects to record pre-tax charges of approximately $100 million associated with these programs and another $10 million related to integration costs associated with some acquisitions.
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.
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 players such as Smith & Nephew , Johnson & Johnson among others.
We have a ‘Neutral’ recommendation on Zimmer. The stock holds short-term Zacks #3 Rank ('Hold').