Zimmer Holdings (NYSE:ZMH) may not be as hard hit by the medical device tax as the company had previously estimated, executives said during a conference call with investors today.
The orthopedic devices maker’s supply chain is set up in such a way that when the tax is assessed Zimmer can account for it as a "cost of goods," president & CEO David Dvorak said.
That means the half of the $40 million to $50 million the company expects to owe on the 2.3% medical device sales tax gets deferred for half a year, leaving more funding for investment.
"The tax is not going to be that expensive, it’s not going to be quite as significant as the $40 million to $50 million that I’ve referenced in 2013," executive vice president of finance and chief financial officer James Crines said. "So that perhaps is going to provide us with some opportunity to invest in 2013 a bit more aggressively, whether it’s in the sales channel or product development."
Zimmer earlier this year announced outsourcing initiatives and layoffs for its Warsaw, Ind.-based headquarters, cited as efforts to offset part of the burden posed by the impending device tax.
CEO Dvorak has said that repealing the tax is one of his main goals during his 2-year term as chairman of industry lobbying group AdvaMed, a position he obtained in March.
Zimmer has "more work to do" in fleshing out the impact of the tax, the company noted, but accounting for the tax as an inventory cost may give the company a leg up over some of its competitors. While many companies will report the tax under profits and losses in the 1st quarter, Zimmer may not see the impact of the tax until later in the year as inventories turn.
"The excise tax is imposed on the first sale in the United States by the manufacturer, producer or importer of the medical device through either a third-party or an affiliated distribution entity," according to Crines. "Since we distribute the majority of our musculoskeletal products through a distribution entity, the tax generally represents an inventoriable cost for us. As such, we expect the excise tax expense recognized in 2013 to be lower than prior estimates and we’ll report the expense in cost of goods sold on the phase of our consolidated income statement."
The orthopedic device maker this week narrowed its full-year earnings outlook as sales and profits slid during the 3rd quarter. Zimmer’s U.S. sales stayed flat during the 3 months ended Sept. 30, 2012, as compared with the same period last year, but European revenues slid 3%, much of that due to the currency exchange impacts.
The orthopedic giant reported earnings of $178 million, or $1.02 per diluted share, on sales of $1.03 billion during its 3rd quarter. That’s a 0.6% slide in revenues when compared with the same period last year, and a 7% drop in profits. Adjusted for 1-time spending, Zimmer reported $1.15 earned per diluted share, beating Wall Street’s consensus estimates for the quarter by 2¢.
