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Zimmer Biomet (ZBH) Beats on Q4 Earnings, to Rejig Portfolio

Zimmer Biomet Holdings, Inc. ZBH posted fourth-quarter 2020 adjusted earnings per share (EPS) of $2.11, beating the Zacks Consensus Estimate by 2.4%. The figure declined 8.3% year over year.

The quarter’s adjustments include certain amortization, restructuring, quality remediation, acquisition, integration and related costs among others.

On a reported basis, the company registered earnings of $1.59 per share, a 3.2% rise from the year-ago period.

Full-year adjusted earnings were $5.67, a 27.9% decline from the year-ago period. However, the figure exceeded the Zacks Consensus Estimate by 0.7%.

Revenue Details

Fourth-quarter net sales of $2.09 billion were down 1.9% (down 3.7% at constant exchange rate or CER) year over year. The figure exceeded the Zacks Consensus Estimate by 0.6%.

Full-year net sales were $7.03 billion, down 12% (down 12.4% at CER) from 2019. This too came in marginally ahead of the Zacks Consensus Estimate of $7.01 billion.

Segmental Details

During the fourth quarter, sales generated in the Americas totaled $1.28 billion (down 0.3% year over year at CER) while the same in EMEA (Europe, the Middle East and Africa) grossed $408.3 million (down 17.5% year over year at CER). Asia-Pacific registered 2% rise at CER to $393.1 million.

Segments

Sales in the Knees unit declined 4.8% year over year at CER to $737.1 million. Hips recorded a 3.4% decline at CER to $504.1 million. Revenues in the S.E.T. (Sports Medicine, Extremities and Trauma) unit increased 3.3% year over year to $375.9 million.

Among other segments, Dental, Spine & CMFT (Craniomaxillofacial and Thoracic) rose 0.8% at CER to $3145 million. Other revenues were down 9.3% to $154.2 million.

Margins

Gross margin, after excluding intangible asset amortization, came in at 68.9%, reflecting a contraction of 365 basis points (bps) in the fourth quarter. Selling, general and administrative expenses were up 1.3% to $893.9 million. Research and development expenses declined 17.4% to $100 million. Adjusted operating margin contracted 412 bps to 21.3% during the quarter.

Cash Position

Zimmer Biomet exited 2020 with cash and cash equivalents of $802.1 million compared with $617.9 million at 2019 end. Long-term debt at the end of 2020 totaled $7.63 billion compared with $6.72 billion at the end of 2019.

Cumulative net cash provided by operating activities at the end of the year was $1.20 billion compared with $1.59 billion in the year-ago period.

2021 Guidance

According to Zimmer Biomet, there continues to be uncertainty around the scope and duration of COVID-19 and its ongoing impact. Accordingly, it did not provide any guidance for 2021.

Spine and Dental Spin-Off Plan

In a parallel release today, Zimmer Biomet announced that in its effort to focus on high growth, high priority areas in Knees, Hips, S.E.T. and CMFT, the company is going to spin off its Spine and Dental businesses. This divestment will form a new and independent, publicly traded company (NewCo).  According to Zimmer Biomet management, this is part of the company’s third phase of ongoing transformation, which includes changing the complexion of the business through active portfolio management in order to accelerate growth and drive value creation.     

Our Take

Zimmer Biomet ended the fourth quarter with better-than-expected revenues and earnings. However, year-over-year decline in sales across most of its operating segments and geographies was concerning. The company noted that continued pressure from the COVID-19 pandemic slowed the recovery of elective procedures in the fourth quarter. However, its core business remained strong. Margin pressure also remains a cause of worry.

Meanwhile, the spin-off decision of the non-core dental and spine business might prove strategic.

Zacks Rank and Key Picks

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

Some better-ranked stocks in the broader medical space that have already announced quarterly results are PerkinElmer, Inc. PKI, Abbott Laboratories ABT and AngioDynamics, Inc. ANGO, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

PerkinElmer reported fourth-quarter 2020 adjusted earnings per share (EPS) of $3.96, which beat the Zacks Consensus Estimate of $3.61 by 9.7%. Revenues of $1.36 billion too surpassed the consensus mark by 7.7%.  

Abbott reported fourth-quarter 2020 adjusted EPS of $1.45, which surpassed the Zacks Consensus Estimate by 6.6%. Further, fourth-quarter worldwide sales of $10.7 billion outpaced the consensus mark by 7.9%.

AngioDynamics reported second-quarter fiscal 2021 adjusted EPS of a penny. The Zacks Consensus Estimate was of a loss per share of 2 cents. Additionally, revenues of $72.8 million beat the consensus mark by 8%.

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