Zimmer Holdings’ Earnings Stumble in First Quarter

It was a rough first quarter for Zimmer Holdings Inc.

Net sales at the Warsaw, Ind.-based orthopedic device behemoth fell 2.3 percent to $1.13 billion, missing the Zacks Consensus Estimate of $1.14 billion. Diluted earnings per share (EPS) plummeted 21 percent to $1.02 but adjusted EPS was down just 1.3 percent, to $1.58 as the company struggled to overcome severe currency headwinds and an increase in its outstanding share count in the reported quarter (ended March 31).

Revenues generated in the Americas during the quarter reached $645 million — up 1 percent year over year on reported basis or up 2 percent at a constant exchange rate. European sales, however, grossed $299 million, a 9 percent decrease on reported basis or a 9 percent increase at a constant exchange rate (CER). In Asia-Pacific, total sales slipped 3 percent to $190 million.

Zimmer’s biggest segment – Reconstructive Implants – recorded revenues of $852 million, up 5 percent on a year-over-year basis, thanks mainly to a 2 percent increase in the Americas, a 7 percent increase in Asia Pacific and 9 percent sales growth in Europe.

Revenues derived from Knees (within Reconstructive) were up 6 percent compared with Q1 2014 to $488 million, while Hips recorded sales of $312 million, up 3 percent compared with the same period last year. Revenues from Extremities increased 5 percent year-over-year to $52 million.

Among the other segments at Zimmer, spine recorded an increase of 7 percent $49 million while Trauma was up 7 percent. Surgical and Other increased 3 percent to $98 million while Dental declined 3 percent to $56 million.

“In the first quarter, Zimmer achieved steady sales growth in several geographies and product categories, while continuing to meet our financial commitments and deliver expanded operating margin leverage,” said David Dvorak, President and CEO of Zimmer.  “Notably, we recently received approval from the European Commission and the Japan Fair Trade Commission for our pending combination with Biomet, which we now expect to close during the month of May, 2015.  This historic merger will enhance our leadership in musculoskeletal healthcare by drawing upon the talent and capabilities that have enabled the extraordinary growth and sustained success of our two companies.”

Zimmer’s gross margin expanded 158 basis points (bps) to 75.4 percent in the first quarter. Selling, general and administrative expenses edged down 4.4 percent to $425 million while research and development expenses were up 2.1 percent to $48.4 million. Adjusted operating margin expanded 220 bps to 33.7 percent.

For the quarter, operating cash flow was $91.5 million compared to $188.8 million in the year-ago period. The company also paid $37.3 million in dividends and declared a dividend of 22 cents per share during the quarter.

The company reduced its adjusted EPS on a standalone basis to a range of $6.30 to $6.40 (a substantial fall from an earlier provided range of $6.50-$6.60). According to Zimmer, the currency headwind is expected to negatively impact Biomet Inc.’s earnings. However, Zimmer expects this to be partially offset by greater synergies from the pending merger. 

Net annual operating earnings synergies from the pending merger are now anticipated to reach $350 million by the third year post the closing of the transaction. This is an improvement from the prior guidance of net annual synergies of $270 million for the same period. However, the company expects accretion from the pending merger with Biomet to contribute in the range of 95 cents to $1.05 to adjusted EPS in the first year of the acquisition (down from earlier projection of $1.05-$1.15).

Zimmer’s long-anticipated $13.35 billion acquisition of Biomet is expected to close in May. The deal has been blessed by both the European Commission and Japan Fair Trade Commission.