Orthopedic medical devices maker Zimmer (NYSE:ZMH) met analysts’ expectations with its 1st quarter earnings, but saw a steep decline in its spinal sales.
The orthopedic devices maker reported a 10% decrease in its global spine business, a division that the company predicted would continue to struggle amid pressure on pricing, reimbursement rates and utilization of particular procedures. The business generated $47.4 million in revenue in Q1 2013, compared with $53.2 million during the same period last year.
In total, Zimmer reported a 4.3% increase in profit amid flat overall revenue, according to an SEC filing. The Warsaw, Ind.-based orthopedics giant posted $218.6 million in earnings, or $1.28 per diluted share, on $1.14 billion in sales during the 3 months ended March 31, 2013. That compares with profits of $209.6 million, or $1.17 per share, on sales of $1.14 billion during the same period last year.
ZMH shares gained 2% on the news today, trading at $75.79 as of about 12:05 p.m.
Pressure on the spinal business was due partly to "some disruption in the quarter" that Zimmer president & CEO David Dvorak related to actions the company took during the 4th quarter of 2012. In December 2012 Zimmer pulled its PEEK Ardis Inserter instruments after receiving reports that the inserters may put too much pressure on the Ardis Interbody Spacers, fracturing the spinal devices during implant. The recall got Class I status from the FDA in January.
"We do expect to resolve these issues by the second half of this year," Dvorak said during a conference call with analysts today.
Also sliding were revenues for Zimmer’s flagship reconstructive division (knees, hips extremities) and its smaller dental devices business, which declined 2% and 1% respectively. The reconstructive division was weighed down by a 4% slide in hips and a 1% slide in knees, but extremities saw a 7% increase in sales. Zimmer’s trauma division saw 9% revenue growth during the quarter and the "surgical and other" division grew 14%.
Zimmer didn’t report any impact due to the medical device tax which took effect at the start of the year, telling investors today that the levy will appear in the company’s profits & losses report in the 2nd half of the year.
"The tax as it gets reported and paid, it gets capitalized, in our case in inventory initially," Stryker CFO James Crines said. "It will begin to show up in the P&L in the second half of the year and we’ve estimated that we would expect to see somewhere in the order of $10 million to $15 million of charges working their way through cost of goods in each of the 3rd and 4th quarters as we work our way through the balance of the year."
Excluding the impact of special items, Zimmer’s adjusted net earnings amounted to $240.8 million, a 4.1% increase over last year. Adjusted per-share earnings for the quarter were $1.41, a penny more than analysts’ consensus estimate and 8.5% more than reported last year.
Zimmer reaffirmed its 2013 projections of a revenue increase of between 2.5%-4.5% but now expects foreign currency translations to reduce revenues by about 1.5% for the full year, according to the filing, cutting reported revenue growth to between 1%-3%. The device maker still expects to generate full-year diluted earnings per share in the range of $5.05-5.25 on a reported basis and $5.65-$5.85 on an adjusted basis.
