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Zimmer Biomet (ZBH) Beats on Q1 Earnings, Margins Drag

Zimmer Biomet Holdings, Inc. ZBH reported first-quarter 2016 adjusted earnings per share (EPS) of $2.00, up 29.9% year over year. Adjusted earnings also exceeded the Zacks Consensus Estimate by 3.6%. On a reported basis, EPS came in at 52 cents, a huge 47.5% decline from the year-ago EPS of 99 cents.

Revenue Details

In the first quarter of 2016, revenues reached $1.9 billion, a surge of 67.8% (up 1.2% at an adjusted proforma; constant currency basis) year over year. The top line managed to beat the Zacks Consensus Estimate of $1.88 billion.

Revenues generated in the Americas during the quarter touched $1.18 billion (up 1.8% at an adjusted proforma; constant exchange rate or CER). On the other hand, the same in EMEA grossed $456 million (down 1.5%) while in the Asia-Pacific, the figure was $271 million (up 1.2%).

Segments

Revenues derived from Knees were up 3.5% year over year at adjusted proforma; CER at $703 million, while Hips recorded sales of $468 million, up 0.5% compared with the prior-year quarter figure. Revenues from S.E.T. (Surgical, Sports Medicine, Foot and Ankle, Extremities and Trauma) edged up 0.2% year over year to $401 million.

Among the other segments at Zimmer, Spine & CMF recorded a fall of 1% to $141 million while Dental was down 6% at $109 million in the quarter. Other revenues improved 5.6% to $82 million.

Margins

Zimmer Biomet’s gross margin contracted 825 basis points (bps) to 66.6% in the first quarter on a substantial 122.9% rise in cost of products sold. Selling, general and administrative expenses shot up 69% to $716.9 million while research and development expenses were up a significant 77.4% at $85.7 million. Adjusted operating margin contracted a massive 876 bps to 24.5%.

Cash Position

Zimmer Biomet exited the first quarter with cash and cash equivalents and short-term investments of $1.01 billion, lower than $1.62 billion as of 2015 end. Long-term debt was $11.12 billion, compared with $11.49 billion at the end of 2015.

The quarter’s operating cash flow was $265.2 million compared with $91.5 million in the year-ago period. The company also paid $44.6 million in dividends during the quarter. Additionally, it repurchased 4.2 million shares for $415.5 million.

2016 Outlook

Zimmer Biomet raised its guidance for full-year 2016. The company currently envisages sales growth (at CER) in the range of 2% to 3% (earlier expectation was 1.5% to 2.5%). According to the company, foreign currency translation will have a 1% adverse impact (earlier 2%) on the year’s revenues, resulting in revenue growth between 1% and 2% (negative 0.5% and positive 0.5%). The current Zacks Consensus Estimate for revenues is pegged at $7.49 billion.

Adjusted EPS for the year is expected to remain in the range of $7.85 to $8.00 ($7.80 to $7.95). The current Zacks Consensus Estimate for 2016 EPS remains at $7.90, at the midpoint of the guided range.

Our Take

Zimmer Biomet reported a better-than-expected first quarter with respect to both earnings and revenues. Barring the EMEA region, the company posted sales growth for all other geographies. However, sales in Dental and Spine & CMF concern us. The huge margin contraction also poses a major threat. However, 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.

Zacks Rank

Currently, Zimmer Biomet carries a Zacks Rank #2 (Buy). Some other well-ranked stocks in the medical products industry include Baxter International Inc. BAX, Boston Scientific Corporation BSX and Capricor Therapeutics, Inc. CAPR. All the three stocks also hold a Zacks Rank #2.

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