Goodwill Charges slash ZMH's Profit - Analyst Blog

Zimmer Holdings (ZMH) 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 certain 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 adjusted EPS of $4.33, well above the Zacks Consensus Estimate of $4.26 and $3.94 in the previous year.

Among the various adjustments considered in the reported quarter, the maximum ($204 million or $1.03 per share) was made based on the goodwill impairment charges related to Zimmer's US Spine business. The company was forced to take such a measure due to the changes in the outlook of the US spine market, lower projected revenues associated with Dynesys dynamic stabilization system as well as products added to the portfolio with the acquisition of Abbott Spine.

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's Reconstructive Implant recorded a 1% increase in revenue to $856 million driven by growth in Asia Pacific (9%) and Americas (3%), partially offset by a 4% decline in sales from Europe. In addition, barring the Spine Products (5% decline to $60 million); growth was witnessed across almost all other business segments including Surgical and Other (8% annually to $87 million), Trauma (9% to $69 million) and Dental (10% to $63 million).

On a geographic basis, revenue derived from Americas and Asia-Pacific increased 3% to $624 million and 10% to $190 million, respectively. However, Europe experienced a 3% decline in revenue to $321 million.

Zimmer exited the fiscal 2010 with cash and cash equivalents of $668.9 million, a 3.3% decline from $691.7 million as of December 2009. Debt burden of the company increased marginally to $1,142.1 million compared with $1,127.6 million at the end of 2009. The company repurchased 2 million shares for $100.9 million during the quarter and is left with $1.2 billion authorization, which expires at the end of 2013.

Outlook

Zimmer also provided its outlook for 2011. The company 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. The Zacks Consensus Estimate of $4.65 is within this range. Currency movement is expected to have a favorable impact of 1% in revenues. In order to streamline its business, Zimmer plans to continue with its global restructuring program. Savings from these initiatives will enable the company to invest in new products and technologies to drive growth.

We are currently ‘Neutral' on the stock.