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Zimmer Biomet's (ZBH) Q2 Earnings Beat, Margins Contract

Zacks Equity Research
·5 mins read

Zimmer Biomet Holdings, Inc. ZBH posted second-quarter 2020 adjusted earnings per share (EPS) of 5 cents in contrast to the Zacks Consensus Estimate of a loss of 72 cents per share. The figure however was way below from adjusted EPS of $1.93 in the year-ago period.

On a reported basis, the company registered loss of $1.00 per share against year-ago earnings of 65 cents per share.

A significant year-over-year decline in the company’s second-quarter revenues and margins, negatively impacted by the coronavirus outbreak, resulted in poor earnings performance of Zimmer Biomet.

Revenue Details

Second-quarter net sales of $1.23 billion decreased 38.3% (down 38% at constant exchange rate or CER) year over year. The figure however exceeded the Zacks Consensus Estimate by 31.7%. The company noted that the coronavirus pandemic resulted in significant deferral of elective procedures through the quarter. However, according to the company, the maximum decline in those procedures to date was seen in April 2020, with incremental improvement in May and June. 

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

During the second quarter, sales generated in the Americas totaled $733.7 billion (down 39.5% year over year at CER) while the same in EMEA (Europe, the Middle East and Africa) grossed $218.7 million (down 49% year over year at CER). Asia-Pacific registered 18.2% decline at CER to $273.7 million.

Segments

Sales in the Knees unit declined 46.5% year over year at CER to $374.2 million. Hips recorded a 30.7% drop at CER to $329.7 million. Revenues in the S.E.T. (Sports Medicine, Extremities and Trauma) unit declined 28.7% year over year to $252.6 million.

Among other segments, Dental, Spine & CMFT (Craniomaxillofacial and Thoracic) dropped 37.4% at CER to $182.5 million. Other revenues were down 44.3% to $87.1 million.

Margins

Gross margin after excluding intangible asset amortization came in at 65.4%, reflecting a contraction of 538 basis points (bps) in the second quarter.Selling, general and administrative expenses declined 20.7% to $665 million. Research and development expenses declined 21.8% to $87.7 million. Despite the lower expenses, adjusted operating margin contracted 1896 bps to 3.9% during the quarter.

Cash Position

Zimmer Biomet exited the second quarter with cash and cash equivalents of $713.4 million compared with $2.43 billion at first-quarter end. Long-term debt at the end of the quarter totaled $8.21 billion, reflecting a rise from $7.72 billion at the end of the first quarter.

Cumulative net cash provided by operating activities at the end of the second quarter was $398.1 million compared with $584.6 million in the year-ago period.

2020 Guidance

According to Zimmer Biomet, the impact of COVID-19 is still significant and remains very fluid. Owing to lack of clarity around the scope and duration of the pandemic, the company is still unable to gauge the impact on its overall business in 2020. Accordingly, it did not provide any full-year guidance yet again.

Our Take

Zimmer Biomet ended the second quarter on a dismal note with disappointing sales performances across all operating segments and geographies. The company noted that second-quarter performance was negatively impacted by COVID-19, which resulted in a significant decline in elective procedure volumes across all regions through each of the months of the second quarter. However, Zimmer Biomet believes the trend has started to reverse and expects its strong fundamentals and capital structure to position it well in overcoming the ongoing challenges.

Zacks Rank and Key Picks

Zimmer Biomet currently carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the broader medical space are West Pharmaceutical Services, Inc. WST, Thermo Fisher Scientific Inc. TMO and Hologic, Inc. HOLX.

West Pharmaceutical reported second-quarter 2020 adjusted EPS of $1.25, beating the Zacks Consensus Estimate by 37.4%. Net revenues of $527.2 million outpaced the consensus estimate by 6.9%. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Thermo Fisher, a Zacks Rank #2 (Buy) company, reported second-quarter 2020 adjusted EPS of $3.89, beating the Zacks Consensus Estimate by 45.7%. Revenues of $6.92 billion outpaced the consensus mark by 0.1%.

Hologic reported third-quarter fiscal 2020 adjusted EPS of 75 cents, surpassing the Zacks Consensus Estimate by a stupendous 108.3%. Net revenues of $822.9 million exceeded the Zacks Consensus Estimate by 37.1%. It currently sports a Zacks Rank #1.

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