Zimmer Holdings (ZMH:NYSE) Reports $700 million in 3Q:04 Sales, up 13% (10% constant currency)
BY JOHN CHOPACK, NOVEMBER 3, 2004
Zimmer also beat earnings expectations by $0.03 per share. Hip revenues rose 14%, knees revenues were up 16% but spine declined 2%. These percentages were as reported. We give the constant currency numbers later in this note. Guidance for the remainder of the year is for 10-11% overall sales growth in the final quarter of the year and for 13% revenue growth in 2005. The stock, as we noted earlier, rose 12% last week.
Zimmer reported its 3Q:04 financials after the market close on Monday of this week and held its related conference call on Tuesday morning. ZMH reported net earnings of $0.56 excluding any charges related to the acquisitions of Centerpulse or Implex. This represented a 30% increase over the 3Q:04 and was $0.03 higher than analyst were expecting. Revenues totaled $700 million during the 3Q:04 which was a 13% increase as reported and 10% on a constant currency basis over the 3Q:04. Analysts were anticipating 3Q:04 revenues to total $692 million.
On an adjusted basis, the Company reported gross margin of 77%, operating margin of 30% and net profit margin of 20%. This represents margins which are at the top of the class within the orthopedic sector. Zimmer reported operating cash flows totaled $206 million and that there was $62 million in cash on hand. The strong cash position of the Company has allowed Zimmer to reduce its debt to $680 million from $1.0 billion at the end of 2003. It is clear that operational efficiency and financial positioning are strong at Zimmer.
Pricing, Unit/Product Mix, Foreign Currency Translation
Zimmer reported that price increases contributed 2% to overall revenue growth during the 3Q:04 which was consistent with the increase during the 2Q:04. U.S. pricing increased by 4.7% during the 3Q:04 which was slightly higher than the 4.2% price increase seen during the 2Q:04. More importantly, as Ray Elliot, CEO of Zimmer indicated, is that Zimmer has been able to include the same level of price increases as a part of its recent 2-3 year hospital contracts it has negotiated. This should help to solidify in pricing for the next couple of years within the 2-3% range. Unit/product mix contributed 8.1% of 13% increase in revenues during the 3Q:04 which was slightly lower than the 8.5% contributed during the 2Q:04. Beneficial foreign currency translation contributed 3% to the increase in revenues during the 4Q:04.
Source: Company Reports.
Product & Revenue Highlights:
- Hips - 10% increase on a constant currency basis, 17% in the U.S.
- Legacy Zimmer increased by 26% and Centerpulse increased by 4%
- A 32% increase in Fiber Metal & ML hip stems which are the MIS preferred stems
- Porous stems have a $300 million annualized run rate
- Trabecular metal cups increased by 700%
- Longevity increased by 27%; Alternate bearing surfaces have a $100 million annualized run rate
Source: Company Reports.
- Knees - 14% increase on constant currency basis, 21% in the U.S.
- Constant currency growth rate accelerated by 1% during the 3Q:04 over the 2Q:04
- Legacy Zimmer revenues increased by 25%
- LPS Flex increased by 71% which is the current preferred knee of choice for MIS procedures
- LPS Flex Mobile Bearing IDE is complete and has entered follow-up period
- Prolong - $5 million annualized run rate, increased by 59%, represents 50% of cruciate retaining articulating components and 12% of all articulating tibial components
- Prolong P.S. version available later this year
- Trabecular metal monobloc tibial components increased by 55%, have a $35 million annualized run rate. Demand currently exceeds $50 million and the Company expects to do $100 million in trabecular sales in 200
- Spine - 4% decrease on a constant currency basis
- Cage declined to $9 million from $10 million in 2Q:04
- Dynesys increased by 33% and is currently at a $15 million annualized run rate
- Expected to be flat in growth until introduce trabecular metal and make some small technological acquisitions.
- Expect low-digit growth in the 1H:05.
Guidance
Zimmer's 4Q:04 revenue of guidance of $775-$780 million represents a 10-11% increase over the 4Q:03. The $780 million top end of 4Q:04 revenue guidance is $10 million less than Zimmer stated at the end of the 2Q:04. This was a consequence of an error in estimating foreign currency translation. Management expects earnings to be between $0.62 - $0.64 per share on a diluted basis.
- 2005 Revenues, $3.325 - $3.345 billion, an increase of 13% over 2004. Earnings, $2.68 - $2.73 per share on a diluted basis.
- 2006 Earnings, 25% increase over 2005 diluted earnings per share.
