Zimmer Biomet Holdings, Inc. ZBH, the combined company formed post the Zimmer-Biomet merger, reported its second-quarter 2015 adjusted earnings per share (EPS) of $1.59, up 0.6% year over year. The quarter’s adjusted earnings also topped the Zacks Consensus Estimate by 3 cents or 1.9%. The adjustments include certain non-recurring, pre-tax expenses, including $465.0 million of charges related to the Biomet merger and $89.6 million of special items and certain claims as well as pre-tax amortization expense.
On a reported basis, the company incurred loss per share of 91 cents, a huge 20.9% slash from the year-ago earnings of $1.03 per share.
Revenue Details
In the second quarter of 2015, revenues reached $1.17 billion, down 1.3% (up 5.7% at constant exchange rate or CER) year over year. The top line, however, exceeded the Zacks Consensus Estimate of $1.14 billion. In the quarter, acquired revenue from Biomet totaled $60 million, a 5% contribution at constant exchange rate or CER. Separately, Zimmer recorded 0.7% growth at CER.
Revenues generated in the Americas during the quarter reached $638 million (up 0.4% at CER). On the other hand, the same in EMEA grossed $277 million (down 0.2% at CER) while in Asia-Pacific, the figure was $193 million (up 0.7% at CER).
Segments
Legacy Zimmer’s biggest segment – Reconstructive Implant – recorded revenues of $832 million, up 0.7% year over year at CER. This was due to a 0.4% increase in the Americas, 2% increase in Asia Pacific and 0.6% sales growth in EMEA.
Revenues derived from Knees (within Reconstructive) were up 2.3% year over year at CER to $476 million, while Hips recorded sales of $307 million, down 1.3% compared with the prior-year quarter. Revenues from Extremities were also down 1% year over year at $49 million.
Among the other segments at Zimmer, spine recorded an increase of 4.7% at CER to $52 million while Trauma was down 0.7% at $73 million in the quarter. Surgical and Other also edged down 0.6% to $94 million. Dental, on the other hand, remained flat year over year at $57 million.
Margins
Zimmer Biomet’s gross margin expanded 315 basis points (bps) to 75.1% in the second quarter. Selling, general and administrative expenses edged down 2.1% to $445.1 million while research and development expenses were up 7.1% to $51.4 million. Adjusted operating margin expanded 155 bps to 32.6%.
Cash Position
Zimmer Biomet exited the second quarter with cash and cash equivalents and short-term investments of $1.88 billion, higher than $1.69 billion as of 2014-end. Long-term debt, however, was $12.05 billion, compared with $1.43 billion at the end of 2014.
For the quarter, operating cash flow was $278.3 million compared with $442.9 million in the year-ago period. The company also paid $37.4 million in dividends and declared a dividend of 22 cents per share during the quarter.
2015 Outlook
Zimmer Biomet has provided an update on its full year 2015 financial guidance. Full year 2015 revenue growth is still expected in the range of 1.5% to 2.0% at CER. Foreign currency translation is expected to impact revenues by 6.0% for the full year, resulting in reported revenues decreasing between 4.0% and 4.5%. The current Zacks Consensus Estimate for revenues is pegged at $5.98 billion.
However, the lower-end of the full-year adjusted EPS estimate has been increased by 5 cents, to a new range of $6.65 to $6.80. The current Zacks Consensus Estimate for EPS of $6.69 falls within the guided range.
Net synergies from the merger are still anticipated to reach $350 million in pre-tax by the end of the third year post the transaction. The company also expects accretion from the merger to contribute 95 cents to $1.05 to adjusted earnings per share with $135 million of pre-tax, net synergy savings in the first year of the acquisition.
Our Take
Zimmer Biomet reported a better-than-expected second quarter with both top- and bottom-line beats. As expected, the currency headwind continued to pose a major threat to the company’s sales performance leading to sluggish sales worldwide. The projection for currency translation in 2015 also indicates that the company does not expect any turnaround in the scenario over the near term.
Currently, we look forward to the expected synergy from the grand $13.35 billion acquisition of Biomet. With this acquisition, Zimmer Biomet, the new company will be able to create a market leader in the $45 billion musculoskeletal industry, thereby improving the merged entity's position in the competitive niche. We are encouraged by the company’s strong strategic and financial goals which the combined entity expects to reach after closure of the deal.
On the flip side, intense competition in the orthopedic market and pricing pressure remain key areas of concern. Also, macroeconomic uncertainties adversely impacted sales in the reported quarter.
Currently, Zimmer carries a Zacks Rank #2 (Buy). Better-ranked stocks in the medical products industry include Abaxis, Inc. ABAX, NuVasive, Inc. NUVA and Vascular Solutions Inc. VASC. All of the three stocks sport a Zacks Rank #1 (Strong Buy).
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