Zimmer (ZMH:NYSE) Crushes the Street - Again.
BY JOHN CHOPACK, MAY 2, 2005
During the 4Q:04 Zimmer beat analyst expectations by $0.07 in earnings-per-share and $18 million in revenues. For their encore, Zimmer reported 1Q:05 adjusted earnings-per-share (diluted) of $0.75 and revenues of $829 million which was exceeded analysts' forecasts by $0.08 and $17 million, respectively.' 'The $829 million was a 12% increase over the 1Q:04 on an as reported basis and a 10% increase constant currency. The significant difference this quarter compared to the 4Q:04 was ZMH's stock performance. Last quarter, Zimmer's stock shot-up 11% during the initial day of trading. This quarter, ZMH shares closed down 0.5% on Tuesday.
We believe that the poor stock performance was driven by several factors. First, and the most significant, is investors concerns of the uncertainty surrounding both the on-going Department of Justice investigation into selling practices in the hip and knee market and the potential for "gain-sharing" arrangements in the orthopedic market. Second, is Zimmer's relatively lack luster hip product sales which at 3% constant currency is approximately 7% below the market. Zimmer has limited control over the outcomes regarding the DOJ and "gain-sharing", however, the Company has a plan on how to jump start hip sales during the rest of the year (see hip section).'
Operating Cash Flow & Debt Take Down
Positive cashflow has always been strong at Zimmer. Since the Centerpulse acquisition 18 months ago Zimmer has generated $1.2 billion in operating cashflow. ZMH generated $153 million in operating cashflow during the 1Q:05. Zimmer has used a significant portion of its cashflow to take down its debt which now stands at $351 million (net debt).
Gain Sharing
Ray Elliott commented on the potential impact of gain sharing on both Zimmer and the overall orthopedic sector stating it
1) will have a limited presence
2) will create more issues than solutions
3) will have an immaterial impact on orthopedic profitability
4) will have little surgeon acceptance without their full understanding
Pricing, Unit/Product Mix, Foreign Currency Translation
Unit/product mix remained in-line with the 4Q:04 at 9%. Pricing has declined slightly representing 1% of the 12% revenue growth experienced during the 1Q:05 which was down from 2% during the 4Q:04. Pricing declined primarily as a consequence of a reduction in price in both Japan and Germany by 4% and 5%, respectively. Zimmer is still anticipating price to contribute 2-3% of its overall revenue growth during 2005.
Table 1
Source: Company Reports.
Product & Revenue Highlights:
- Knees - 17% increase on constant currency basis
- Overall knee market increased by 1%
- 89% increase in NexGen LPS Flex knee
- NexGen LPS Flex is the knee of choice for MIS Mini and Quad Sparing Procedures
- CR Prolong annual run rate of $25 million and represents 50% of all NexGen CR Inserts
- CR Flex Mobile knee in full development
- Trabecular tibial trays increased 30% and are expected to generated $100 million in 2005
Source: Company Reports.
- Hips - 3% increase on a constant currency basis
- Overall hip market declined 1%
- No underlying decline in primary unit demand for ZMH hips
- Mix/price has been negatively impacted
- New products are backlogged and will be launched during 2H:05
- Fiber metal and ML taper stems generated $27 million and increased 28% in the 1Q:05
- Spine - 13% increase on a constant currency basis - a 12% acceleration from the 4Q:04
- Spine showed a "significant improvement" during the 1Q:05
- Cage sales totaled between $8-9 million and now represent 23% of all spine sales
- Cage sales previously represented 50-60% of spine sales
- Dynesys generated $8 million in the 1Q:05 which was triple the amount a year prior
Guidance
- 2Q:05 - EPS to approximate $0.75 which was is a penny higher than its previous guidance
- 2005 - management raised it's adjusted EPS guidance to $3.00'
