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Zimmer Biomet (ZBH) Q3 Earnings Top, Operating Margin Falls

Zacks Equity Research

Zimmer Biomet Holdings, Inc. ZBH posted third-quarter 2019 adjusted earnings per share (EPS) of $1.77, a penny ahead of the Zacks Consensus Estimate. The figure also improved 8.6% year over year.

On a reported basis, EPS came in at $2.08, reflecting a 163.3% surge from 79 cents a year ago.

Revenue Details

Third-quarter net sales of $1.89 billion increased 3% (up 3.9% at constant exchange rate or CER) year over year. The figure also exceeded the Zacks Consensus Estimate of $1.87 billion by 1.1%.

During the quarter under review, sales generated in the Americas totaled $1.18 billion (up 2.3% year over year at CER) while the same in EMEA (Europe, the Middle East and Africa) grossed $375 million (up 4.8% year over year at CER). Asia-Pacific registered 8.8% growth at CER to $338 million.

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Segments

Sales in the Knees unit improved 4.9% year over year at CER to $652 million. Hips recorded a 4.3% increase at CER from the prior-year quarter’s $460 million. Revenues in the S.E.T. (Surgical, Sports Medicine, Foot and Ankle, Extremities and Trauma) unit rose 6.2% year over year to $438 million.

Zimmer Biomet Holdings, Inc. Price, Consensus and EPS Surprise

Zimmer Biomet Holdings, Inc. Price, Consensus and EPS Surprise
Zimmer Biomet Holdings, Inc. Price, Consensus and EPS Surprise

Zimmer Biomet Holdings, Inc. price-consensus-eps-surprise-chart | Zimmer Biomet Holdings, Inc. Quote

Among the other segments, Spine & CMF (Craniomaxillofacial)dipped 1.3% at CER to $181 million while Dental inched up 3% to $94 million. Other revenues were down 6.1% to $67 million.

Margins

Gross margin after excluding intangible asset amortization came in at 71.7%, reflecting an expansion of 49 bps in the third quarter. Selling, general and administrative expenses were 5.4% up to $830.1 million. Research and development expenses rose 19.5% to $114.4 million. Adjusted operating margin contracted 132 bps to 21.8% during the quarter.

Cash Position

Zimmer Biomet exited the third quarter with cash and cash equivalents of $512.5 million compared with $403.1 million in the second quarter. Long-term debt at the end of the third quarter totaled $6.35 billion, reflecting a reduction from $6.72 billion in the second quarter.

Year to date, net cash provided by operating activities was $1.16 billion compared with $1.37 billion a year ago.

2019 Guidance Reaffirmed

The company’s prior guidance for 2019 is unchanged, which is as follows:

Sales in 2019 are projected to be flat to up 0.5% compared with the previous year. Earlier, management noted that estimated sales growth figures include an impact of 125-175 basis points from an adverse currency movement. Adjusted EPS for 2019 is expected in the range of $7.75-$7.90.

Our Take

Zimmer Biomet ended the quarter on a strong note with better-than-expected results.

The company witnessed strong sales growth across all geographies such as, the Americas, the Asia Pacific and EMEA regions. Most operating segments also registered strong growth at CER. However, the company’s declining Spine & CMF sales at CER disappoint. We believe that escalating costs and expenses are putting pressure on the adjusted operating margin.

Zacks Rank & Key Picks

Currently, Zimmer Biomet carries a Zacks Rank #4 (Sell).

Some better-ranked medical device companies, which posted solid results this earnings season, are ResMed Inc RMD, NuVasive, Inc NUVA and Thermo Fisher Scientific Inc TMO.

ResMed currently has a Zacks Rank #2 (Buy). The company reported first-quarter fiscal 2020 adjusted EPS of 93 cents, surpassing the Zacks Consensus Estimate by 6.9%. Its revenues of $681.1 million also outpaced the consensus mark by 3.7%.

NuVasive’s third-quarter 2019 adjusted EPS of 59 cents surpassed the Zacks Consensus Estimate by 9.3%. Moreover, its revenues of $290.8 million surpassed the consensus estimate by 2.4%. The stock currently carries a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Thermo Fisher is a Zacks #2 Ranked player. It delivered third-quarter 2019 adjusted EPS of $2.94, beating the Zacks Consensus Estimate by 2.1%. Further, its revenues of $6.27 billion beat the Zacks Consensus Estimate by 1.3%.

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