Zimmer Biomet (ZBH) Beats On Q1 Earnings, Lowers Guidance

Zimmer Biomet Holdings, Inc. (NYSE:ZBH) reported first-quarter 2017 adjusted earnings per share (EPS) of $2.13, up 6% year over year. Adjusted earnings were ahead of the Zacks Consensus Estimate by 2 cents. On a reported basis, net earnings came in at 1.47 cents per share, marking a massive 172.2% increase from the year-ago number.

Revenue Details

Zimmer Biomet’s first-quarter net revenue came in at $1.98 billion, marking a 3.8% rise (up 4.5% at constant exchange rate or CER) year over year. The recently included LDR Holding contributed 220 basis points (bps) to the top line. Excluding the contribution from LDR Holding in the quarter, revenues increased 2.3% year over year. Revenues also topped the Zacks Consensus Estimate of $1.96 billion.

Revenues generated in the Americas during the quarter touched $1.24 billion (up 4.7% year over year at CER) while the same in EMEA (Europe, the Middle East and Africa) grossed $453 million (up 3.1%). In the Asia-Pacific, the figure was $289 million (up 5.9%).

Segments

Revenues derived from Knees were up 0.6% year over year at CER to $702 million. Hips recorded sales of $475 million, up 2.4% from the prior-year quarter. Revenues from S.E.T. (Surgical, Sports Medicine, Foot and Ankle, Extremities and Trauma) were up 6.5% year over year to $425 million.

Among the other segments, Spine & CMF recorded an improvement of 32.1% to $186 million while Dental was up a marginal 0.1% to $108 million in the quarter. Other revenues dropped 1.2% to $81 million.

Margins

With 19.9% reduction in cost of products sold to $512.9 million, Zimmer Biomet’s gross margin expanded 771 bps to 74.1% in the first quarter. Selling, general and administrative expenses were up 6.1% at $760.8 million while research and development expenses increased 6.3% to $91.1 million. However, adjusted operating margin expanded 677 bps to 30.9% on 32.9% surge in operating profit to $612.5 million during the quarter.

Cash Position

Zimmer Biomet exited the first quarter with cash and cash equivalents of $1.04 billion, higher than $634.1 million as of 2016 end. Total long-term debt was $11.5 billion compared with $11.2 billion at the end of 2016.

First-quarter operating cash flow was $275.4 million compared with $272.8 million in the year-ago period. The company also paid $48.1 million in dividends during the quarter.

2017 Outlook

Zimmer Biomet has lowered its full-year 2017 guidance. The company currently expects to register revenue growth at CER in the range of 3.2–4.2% (earlier prediction was 3.7% to 4.7%). This includes contribution of approximately 120 bps from the LDR transaction. Foreign currency translation is expected to impact revenues by 1.2% (earlier the forecast was a drop of 1.5%).

Accordingly, the reported revenue growth is projected in the band of 2.0% to 3.0% (2.2% to 3.2%) or be in a range of $7.835 billion to $7.915 billion ($7.855 billion to $7.930 billion) for 2017. The current Zacks Consensus Estimate for revenues is pegged at $7.89 billion, near the upper end of the guided range.

The adjusted EPS expectation has been forecasted within the range of $8.50 to $8.60 compared with the earlier range of $8.50−$8.68 for the year. The current Zacks Consensus Estimate for 2017 EPS is pegged at $8.61..

Our Take

Zimmer Biomet ended the quarter on a mixed note. While earnings and revenues both topped the respective Zacks Consensus Estimate, the lowered 2017 guidance added to our concerns. Nevertheless, improved top-line show across all geographies was encouraging. Also improved Knees encouraged us after a sluggish performance. However, Dental still remains flat.

We look forward to the expected synergy from the LDR Holding acquisition, which should broaden and complement the company's musculoskeletal offering. We are also encouraged by the strong strategic and financial goals which the combined entity expects to reach now that the deal has been closed.

Zacks Rank & Key Picks

Zimmer Biomet currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the broader Medical space include Inogen, Inc. (NASDAQ:INGN) , ZELTIQ Aesthetics, Inc. (NASDAQ:ZLTQ) and Hill-Rom Holdings, Inc. (NYSE:HRC) . While Inogen and ZELTIQ Aesthetics sport a Zacks Rank #1 (Strong Buy), Hill-Rom carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Inogen gained 62% in the last year, compared with the S&P 500’s gain of 14.0%. The company reported a stellar four-quarter positive average earnings surprise of over 49.08%.

ZELTIQ Aesthetics surged 82.8% in the last year, compared with the S&P 500’s gain. Its four-quarter average earnings surprise was a positive of 12.30%.

Hill-Rom gained over 33.7% in the past year, better than the S&P 500 mark. It posted a trailing four-quarter positive average earnings surprise of 3.1%.

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