Zimmer’s Third-Quarter Net Sales Rise but Earnings Tumble 13 Percent

The most recent financial quarter had its fair share of ups and downs for Zimmer Holdings Inc.

Net sales at the Warsaw, Ind.-based orthopedic device behemoth rose 4.8 percent but net earnings slid 13.3 percent in the three months ended Sept. 30. And while spinal sales fell slightly, knee revenue rebounded strongly as hip proceeds remained flat and extremities sales soared.

Net sales increased by $40 million to $1.07 billion (a 6.7 percent hike in constant cur-rency) but higher operating costs offset the profit. Net earnings slipped to $154.4 million from $178.1 million during the same period last year but jumped 6.7 percent on an adjusted basis to $215.6 million. Operating cash flow for the third quarter was $292.7 million.

“Zimmer achieved accelerated top-line growth in the third quarter, fueled by our new product offerings and the focused execution of our global sales teams,” President/CEO David Dvorak said. “For the balance of 2013, we expect to continue building stockholder value through the ongoing execution of our growth and capital deployment strategies.”

Spine device sales decreased slightly in the third quarter, shrinking 3.6 percent to $48 million. Zimmer’s knee replacement devices performed well over the summer, growing 5.6 percent to $435 million. More than half of the sales gains emanated in North and South America—both continents amassed $270 million for the company, a 9 percent increase compared with their 2012 feat. Europe contributed $92 million, a 4 percent increase, while the Asia-Pacific region collected $73 million, a 4 percent decrease compared with Q3 2012.

Hip sales remained flat at $308 million but the geographic breakdown of revenue mirrored that of knee implants: North and South America led sales, garnering $150 million (a 3 percent increase), followed by Europe, which generated $97 million in revenue (a 1 percent gain). Asia-Pacific trailed with $61 million, a 9 percent drop compared with 2012.

Surgical and other product sales recorded the largest growth in the third quarter, skyrocketing 21 percent to $104 million. Extremities sales jumped 15 percent to $45 million, while trauma revenue swelled 5 percent to $79 million and dental proceeds edged up 1 percent to $55 million.

Diluted EPS (earnings per share) were 90 cents reported, a decrease of 11.8 percent compared with the prior year period, and $1.25 adjusted, an increase of 8.7 percent.

During the quarter, Zimmer recorded pre-tax charges of $46.4 million in special items and $43.8 million in cost of products sold pertaining to global restructuring, quality and operational excellence initiatives, certain litigation and recent acquisitions.

The company spent $17.5 million to acquire 0.2 million shares. At the end of the third quarter, $536.4 million remained authorized under the current share repurchase pro-gram, which expires Dec. 31, 2014. Additionally, 1.6 million stock options were exer-cised in the quarter, resulting in $108.7 million of cash proceeds. Through the end of the third quarter, 5 million stock options had been exercised in 2013, resulting in $325.4 million of cash proceeds. As a result, the company now estimates diluted weighted average common shares outstanding for the full year to be approximately 171.5 million shares. Zimmer also declared cash dividends of $33.9 million on its outstanding shares in the third quarter.

Executives expect full-year revenues to rise 4.5 percent on a constant currency basis compared with 2012. Foreign currency translation most likely will decrease revenues between 1.5 percent and 2 percent for the year, resulting in reported revenue growth between 2.5 percent and 3 percent. Previously, the company had estimated foreign currency translation would decrease revenues by 2 percent.

The company now projects full-year 2013 diluted earnings per share to be $4.40 on a reported basis and roughly $5.70 on an adjusted basis. Prior guidance for full-year 2013 reported and adjusted diluted earnings per share was $4.70 to $4.80 and $5.70 to $5.80, respectively. The updated guidance includes estimated charges for inventory step-up and other inventory and manufacturing related charges, certain claims and special items of $335 million on a pre-tax basis, or approximately $1.30 per diluted share, on an after-tax basis. Prior guidance reflected an estimate of $250 million, on a pre-tax basis, for these items.