by Jin Wu
Zimmer Holdings Inc. (NYSE and SIX: ZMH), the Indiana-based joint replacement manufacturer, reported lower profits in both the fourth quarter and the full year due to foreign currency volatility and expenses of its pending merger with Biomet Inc., another medical devices manufacturer.
For the quarter ended December 31, Zimmer earned $156.6 million, or 91 cents per diluted share, down 33.6 percent from $235.9 million, or $1.36 per diluted share, in the year-earlier quarter. The diluted EPS missed the $1.44 analysts’ estimate compiled by Bloomberg.
However, based on Zimmer’s adjusted measurement, which excluded elements such as intangible asset amortization, Biomet merger expenses, inventory and manufacturing related expenses, the company earned $295.6 million, or $1.71 per diluted share, up from $288.6 million, or $1.66 per diluted share, in the year-earlier quarter, topping the consensus estimate of $1.705 on adjusted EPS.
About Zimmer’s adjusted earnings measurement, analysts gave their explanations. “They didn’t say it’s a cash EPS. Zimmer is one of the few companies that haven’t moved to using cash EPS. By moving to that, it essentially eliminates amortization from the reported number. In Zimmer’s case, that means 40 cents,” said Joanne K. Wuensch, research analyst at BMO Capital Markets Corp.
In the fourth quarter, revenues decreased 14.3 percent to $1.22 billion from $1.24 billion. The company paid $37.2 million in dividends and declared a fourth quarter dividend of 22 cents per share, up 10 percent over the prior year period.
For the 2014 fiscal year, Zimmer’s net income dropped 5.4 percent to $720.1 million from $761 million. Earnings per diluted share decreased to $4.19 from $4.43 compared with 2013, missing the consensus estimate of $6.05 per diluted share. Adjusted diluted EPS increased to $6.06 from $5.75, topping the consensus estimate of $6.05.
Full year 2014 revenues were 4.67 billion, up 1.1 percent from $4.62 billion.
The negative currency impact related to the recent strengthening of the U.S. dollar against the euro and the Japanese yen is one of the key factors behind Zimmer’s decreasing profits in fourth quarter.
However, the Europe and Asia-Pacific regions still contributed to sales growth in the full year. The Europe region delivered 4.7 percent growth, the Asia-Pacific region increased sales by 2.4 percent, while sales in U.S. dropped by 0.98 percent.
Zimmer’s Extremities, Dental and Spine businesses delivered growth in both the fourth quarter and the full year.
“The hip market is weaker than we expected, especially in the U.S. market,” said Richard Newitter, senior analyst at Leerink Partners LLC. “But the company offset it with businesses in other regions outside of U.S. and in other categories such as Spine.”
The impending $13.35 billion acquisition of Biomet is expected to bring Zimmer great opportunities.
“Currently, revenues from the large-joints segment is 70 percent of Zimmer’s revenue base,” said Wuensch. “When the two companies combined, it becomes 60 percent of the revenue base. The reason that’s important is the remaining portion of Orthopedics market is actually growing a lot faster. So it’s an opportunity to be able to more fully leverage some of the faster growing aspects of the Orthopedics market such as Spine, Dental, Trauma, Sports Medicine.”
In the interview, Newitter mentioned another economic benefit from merging with Biomet: relieving Zimmer from pricing pressure. “It will shift powers to the manufacturers,” he said.
In a conference call, James T. Crines, the chief financial officer and executive vice president of finance at Zimmer, gave the company’s outlook for first quarter revenues: “On a constant-currency basis, with the additional billing days, we expect first quarter revenues to grow between 4.5 percent and 5.5 percent. On a reported basis, taking into account the effect of foreign currency translation, our revenues are projected to be between 1.5 percent and 0.5 percent below the prior year.”
For first quarter 2015, Zimmer expects to post diluted EPS of $1.12 to $1.14 on a reported basis and $1.58 to $1.60 on an adjusted cash basis, which excludes about 46 cents per diluted share influenced by pending Biomet merger.
Guidance for the full year of 2015 will be released after the Biomet transaction closed.
The stock closed at $112.52, down $1.98 or 1.73 percent.