Zimmer Biomet Raises Guidance Again On Hips And S.E.T., But Flat EPS And A Knee Slide Leave It Short Of The Whisper

Zimmer Biomet's third quarter beat consensus by a penny and still fell short of what investors wanted. Adjusted EPS of $1.90 topped the $1.89 consensus but missed the $1.95 Earnings Whisper number, a 2.6% shortfall, and was unchanged from a year ago. Revenue of $2.063 billion rose 3.1% and beat the $2.05 billion consensus by 0.6%. Management raised full-year guidance for the third straight quarter, and the call outlined a credible diversification story. The central tension is that sales are holding up while profits are not. Flat adjusted EPS, a 140-basis-point drop in adjusted operating margin and a worsening knee business show that the company is buying growth with margin.

The quality of the quarter deserves scrutiny. Adjusted net earnings fell to $362.8 million from $377.0 million. Per-share earnings held flat only because diluted shares dropped to 191.4 million from 198.8 million, after $579.3 million of buybacks in the first nine months. Adjusted operating margin slipped to 25.1% from 26.5%, and adjusted gross margin eased to 71.7% from 72.6%. SG&A climbed to $855.0 million from $811.4 million while R&D declined. GAAP EPS fell 13.8% to $1.00, partly because the year-ago quarter included $55.1 million of contingent-consideration income. Earnings growth has clearly decelerated: nine-month adjusted EPS of $6.06 is still ahead of last year's $5.78, but the third quarter added nothing. The brightest spot was cash generation. Free cash flow rose 34% to $372.4 million. Even so, net debt edged up to $7.10 billion from $6.93 billion at year-end as buybacks outpaced cash generation.

The mix beneath the headline is improving in some places and deteriorating in others.

• **Hips** grew 7.0% in constant currency, up from 5.1% in the second quarter. Z1 now accounts for more than half of U.S. stems.
• **S.E.T.** accelerated to 7.1% from 3.4% in Q2 and 1.6% in Q1. Paragon 28 is growing about 18%.
• **Pricing** improved, with a 70-basis-point drag versus 80 basis points in Q2.
• **Knees**, the largest franchise, fell 2.6% in constant currency. U.S. knees declined 2.0% after gains of 1.4% in Q2 and 2.2% in Q1, and management attributed roughly 90% of the weakness to its own execution.
• **Technology & Data** growth slowed to 13% from 21.5%.

Measured on a constant-currency basis, which in the third quarter no longer includes a Paragon 28 contribution, growth of 3.7% is consistent with the 3.5% organic pace for the year to date. Excluding China, growth was 4.7%.

The U.S. sales force transition is the biggest risk. More than 75% of the force is now dedicated, and turnover is in the single digits, both ahead of plan. However, the program is entering its third and highest-risk stage just as knees are slipping. Competitors are also flagging softer reconstructive procedure volumes and payer pre-authorization denials. On the catalyst side, the forward story got richer:

• The Monogram 510(k) filing is imminent, and the fully autonomous launch has been pulled forward to the first half of 2027.
• The THINK Surgical agreement was extended.
• Management plans to resume M&A in 2027, with deals of up to about $2 billion.
• An AI-driven expense program targets operating expenses of about 46% of sales.
• The China distributor headwind, which will cost about 100 basis points in Q4, anniversaries in January.

The guidance raise was real but incremental. Organic constant-currency growth guidance rose to 3.0%-3.5% from 2.25%-3.25%, and the full-year adjusted gross margin outlook moved to about 72%. Adjusted EPS guidance rose only to $8.50-$8.60 from $8.47-$8.59, as a smaller foreign-exchange tailwind and higher interest expense absorbed much of the operating upside. Earnings Whispers characterizes the raise as in line with estimates, which takes some force out of the beat-and-raise narrative.

Investors were already wary heading in. Sentiment slipped further into negative territory, to -0.43 from -0.36, a modest but notable deterioration. The stock closed at $97.06 ahead of the report, down 3.9% from the open after the prior release. That leaves shares 5.6% below the September high of $102.86, but 11.4% above the October low and 5.8% above the 200-day moving average. Trend readings are mixed, with momentum positive and AVWAP negative, consistent with a stock that has recovered without regaining conviction.

The bottom line is that Zimmer Biomet is showing real progress in diversification, with hips, S.E.T. and Paragon 28 accelerating and cash flow strengthening. The earnings engine, however, is stalled. Margins are compressing, buybacks are carrying per-share growth, and the core knee franchise is weakening during the riskiest phase of the sales transition. Until operating leverage reappears, and knees stabilize, bears have legitimate ammunition despite the raised outlook.

Read our earnings preview for Zimmer Biomet Holdings, Inc.: https://www.earningswhispers.com/article/ZBH/21764

This earnings review was originally published on Earnings Whispers.

This article is for informational purposes only and is not investment advice. Earnings Whispers and its staff may hold positions in the securities mentioned. It is AI-assisted, based on proprietary Earnings Whispers data and company reports, and edited by Earnings Whispers staff.