Earnings Scorecard: Zimmer Holdings

| About: Zimmer Biomet (ZBH)

Following the release of fourth quarter and fiscal 2010 results of Zimmer Holdings (ZMH) on January 27, 2011, estimate revisions by analysts have been inclined towards the positive direction.

Previous quarter highlights

Zimmer Holdings reported an EPS of 18 cents during the fourth quarter of fiscal 2010, 76% lower than 74 cents in the year-ago quarter. However, after considering one-time adjustments, the EPS was $1.27, surpassing the Zacks Consensus Estimate of $1.19 and $1.12 in the fourth quarter of fiscal 2009.

For fiscal 2010, the company reported an adjusted EPS of $4.33, well above the Zacks Consensus Estimate of $4.26 and $3.94 in the previous year.

Zimmer reported revenues of $1,134.7 million during the quarter, 2% higher than the year-ago period and the Zacks Consensus Estimate of $1,107 million. For the full year, the company reported revenues of $4,220.2 million, up 3% compared with 2009 and higher than the Zacks Consensus Estimate of $4,197 million.

Higher revenues coupled with a 6.8% decline in outstanding shares, partially offset by higher interest expenses (up 174%) contributed to the rise in adjusted earnings.

Zimmer expects to report adjusted EPS of $4.60-$4.80 (reported basis: $4.25-$4.45) on revenue growth of 2%-4% at constant exchange rates in 2011. Currency movement is expected to have a favorable impact of 1% in revenues.

Agreement of Analysts

Following the release of fourth quarter results, estimate revision trends among analysts reveal a favorable bias for the company’s earnings in the forthcoming periods. Over the last 30 days, 8 of the 23 analysts covering the stock have made upward revisions for the first quarter of fiscal 2011, with 6 revisions in the opposite direction.

While the upward movement is not that significant for the first quarter, the two fiscals reveal a stark difference with the upward revisions far outweighing the downward revisions. For fiscal 2011 and 2012, 15 and 10 analysts, respectively, have raised their estimates with 2 moving in the reverse.

We believe the analysts have raised their estimates primarily based on the company’s improved outlook with respect to both pricing and procedure volume. Zimmer continues to face pricing pressure in the fourth quarter although the situation has improved a bit relative to the third one and reflects stability.

Reduced procedural volume resulting from sluggish global economic conditions and unemployment has been a challenge in the past few quarters. However, Zimmer has witnessed some stability in procedure volume and expects further recovery as the economy strengthens.

Within Zimmer’s product portfolio, Spine was the only unit to record a decline in revenues during the quarter as it continues to face pricing pressure and reimbursement issues in the US. However, outside the Americas, the Spine business recorded an 11.3% growth. The company is confident that though the US market is currently facing certain challenges, its long-term potential remains attractive.

Viewing the persistent pricing pressure and reimbursement challenges, Zimmer charged $204 million for goodwill impairment during the quarter. However, the company expects to pursue several operational changes and introduce aggressive new products in 2011 including percutaneous MIS pedicle screw system and Pathfinder NX for its Spinal business.

In order to streamline its business, Zimmer will continue with its restructuring initiatives and divert the savings for further investment. The programs to be completed in 2011 are expected to generate annualized pre-tax savings of more than $100 million.

Zimmer is confident that based on higher investments in R&D, it will be able to strengthen its position in the Reconstructive segment. Moreover, the company has guided a lower interest expense for 2011 along with a 4% potential reduction in share count.

Magnitude of Estimate Revisions

The magnitude of revisions is modest following the fourth quarter results. Overall, estimates for the next two quarters have not changed. However, estimates for 2011 and 2012 have gone up by 4 cents to $4.49 and 6 cents to $5.15, respectively.


Zimmer offers a broad line of reconstructive implant and trauma products, as well as orthopedic surgical instruments and supplies. The company is on a growth trajectory through 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. In order to streamline its business, Zimmer plans to continue with its global restructuring program. We maintain our ‘Neutral’ recommendation on the stock.