Zimmer Biomet (ZBH) Tops Q2 Earnings, Raises FY16 Guidance

Zimmer Biomet Holdings, Inc. (NYSE:ZBH) reported second-quarter 2016 adjusted earnings per share (EPS) of $2.02, up 27.8% year over year. Adjusted earnings also exceeded the Zacks Consensus Estimate by 3.1%. On a reported basis, net loss came in at 16 cents per share, an improvement from the year-ago net loss of $1.00 per share.

Revenue Details

In the second quarter of 2016, net revenues reached $1.93 billion, a surge of 65.6% (up 4.5% at an adjusted proforma, constant currency basis) year over year. The top line managed to beat the Zacks Consensus Estimate of $1.90 billion.

Revenues generated in the Americas during the quarter touched $1.18 billion (up 3.6% at an adjusted proforma; constant exchange rate or CER). On the other hand, the same in EMEA grossed $461 million (up 4.5%) while in the Asia-Pacific, the figure was $292 million (up 8.2%).

Segments

Revenues derived from Knees were up 5% year over year at adjusted proforma; CER at $697 million, while Hips recorded sales of $477 million, up 3.2% compared with the prior-year quarter figure. Revenues from S.E.T. (Surgical, Sports Medicine, Foot and Ankle, Extremities and Trauma) were up 7.2% year over year to $412 million.

Among the other segments at Zimmer, Spine & CMF recorded an improvement of 1.4% to $146 million while Dental was down 0.8% at $118 million in the quarter. Other revenues improved 8% to $84 million.

Margins

Zimmer Biomet’s gross margin contracted 730 basis points (bps) to 67.5% in the second quarter on a substantial 113.6% rise in cost of products sold. Selling, general and administrative expenses shot up 64.8% to $732 million while research and development expenses were up a significant 72.7% at $88.6 million. Adjusted operating margin contracted a massive 729 bps to 25.1%.

Cash Position

Zimmer Biomet exited the second quarter with cash and cash equivalents and short-term investments of $976.3 million, lower than $1.01 billion as of the first quarter end. Long-term debt was $10.53 billion, compared with $11.12 billion at the end of the first quarter.

Year-to-date operating cash flow was $652.4 million compared with $288.7 million in the year-ago period. The company also paid $47.8 million in dividends during the quarter.

2016 Outlook

Zimmer Biomet raised its guidance for full-year 2016. The company currently envisages sales within the band of $7.680 to $7.715 billion representing annualized growth (at CER) in the range of 3% to 3.5% (earlier expectation was 2% to 3%) on an adjusted proforma basis. According to the company, foreign currency translation will have a 0.5% adverse impact (earlier 1%) on the year’s revenues, resulting in organic revenue growth between 2.5% and 3% (1% to 2%). The current Zacks Consensus Estimate for revenues is pegged at $7.57 billion, lower than the guided range.

Adjusted EPS for the year is expected to remain in the range of $7.90 to $8.00 ($7.85 to $8.00). The current Zacks Consensus Estimate for 2016 EPS remains at $7.96, above the midpoint of the guided range.

Our Take

Zimmer Biomet reported a better-than-expected second quarter with respect to both earnings and revenues. Encouragingly, the company posted sales growth in all other geographies. However, the still sluggish sales in Dental concern us. The huge margin contraction also poses a major threat.

We still look forward to the expected synergy from the grand $13.35 billion acquisition of Biomet. We are encouraged by the strong strategic and financial goals which the combined entity expects to reach now that the deal has been closed. The raised guidance for 2016 also boosts up our confidence on the stock.

Zacks Rank

Currently, Zimmer Biomet carries a Zacks Rank #2 (Buy). Some other well-ranked Medical Product stocks are Baxter International Inc. (NYSE:BAX) , GW Pharmaceuticals plc (NASDAQ:GWPH) and Vascular Solutions Inc. (NASDAQ:VASC) , all with a Zacks Rank #2.