Leading orthopedic company Zimmer
For the second quarter, sales rose 15% (13% net of foreign exchange), with volumes increasing at a double-digit rate. Sales of reconstructive products, the company's core business, climbed 16% for the quarter, and both the spinal and dental businesses grew more than 20%.
Management also did a solid job on the "blocking and tackling" aspects of the business. Gross margin improved by more than five points and ended the quarter at 77.7%. The operating margin was even better -- improving almost nine points to 32.6% for the quarter. While year-to-date operating cash flow (and free cash flow) is very slightly below last year's level, I'll repeat my admonitions that intrayear cash flow analysis is often unreliable and misleading.
Zimmer continued to experience double-digit growth from all sides of its reconstructive business. Knee sales were 20% higher in the quarter, and Zimmer would appear to be more than holding its own in the market. Likewise, Zimmer delivered double-digit reported revenue growth in hips, a solid result and a meaningful improvement from the previous quarter.
The company continues to do an excellent job of paying down debt. At quarter's end, long-term debt was only about $268 million -- a rather inconsequential number compared with the $4.3 billion in shareholder equity on the balance sheet. Elsewhere, receivables and inventories both seem to be well under control.
True, there are concerns about the industry as a whole -- price resistance from hospitals and payers and a government investigation -- but the market is still poised for significant growth. Better still, Zimmer continues to pursue new products and technologies that will help it keep a leg up on the likes of Stryker
Zimmer's 30-plus trailing price-to-earnings ratio still looks high, but it is in line with this industry's current multiples. What's more, when you find leading companies with multibillion-dollar market capitalizations projected to grow earnings at a 20% clip, they don't often trade for discount-level P/Es.
Bone up on some more orthopedic takes: