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Zimmer Biomet (ZBH) delivered strong Q2 results with robust adjusted margins and raised EPS guidance, as temporary GAAP pressures from integration costs are expected to subside, highlighting ongoing innovation and market share gains.

# Zimmer Biomet Delivers Solid Q2 FY2025: Adjusted Margins and EPS Guidance Outshine Temporary GAAP Pressures

---

## Executive Summary

- **Zimmer Biomet (ZBH) reported Q2 FY2025 revenue of $2.077B (up 7.0% YoY) and adjusted diluted EPS of $2.07, both in line or slightly above consensus.** GAAP EPS fell to $0.77, reflecting higher one-time integration and acquisition charges, but underlying business trends remain robust.
- **Earnings quality was strong on an adjusted basis,** with a 72.3% adjusted gross margin (up 70 bps YoY) and stable adjusted operating margin at 27.8%. Margin compression on a GAAP basis (operating margin down to 14.4% from 18.1% YoY) was driven by temporary integration costs, notably from the Paragon 28 acquisition.
- **Management struck a bullish tone,** raising full-year adjusted EPS guidance to $8.10–$8.30 (from $8.00–$8.20) and tightening revenue growth expectations. Leadership cited strong product momentum, successful M&A integration, and easing tariff headwinds as key drivers for a stronger second half.
- **Risks include ongoing integration challenges, regulatory and supply chain uncertainties, and potential volatility in commercial execution.** However, opportunities in robotics (Monogram Technologies), US hip and knee market share gains, and improved capital allocation (notably increased share repurchases) provide meaningful upside.
- **Catalyst watch:** Look for continued margin recovery as integration costs subside, further updates on robotics pipeline progress, and any regulatory developments impacting international expansion.

---

## Performance Snapshot

| Metric                | Reported   | Consensus | Surprise | YoY Change |
|-----------------------|------------|-----------|----------|------------|
| Revenue               | $2.077B    | ~$2.07B   | Inline   | +7.0%      |
| Adjusted Diluted EPS  | $2.07      | $2.05     | +$0.02   | +~7%       |
| GAAP Diluted EPS      | $0.77      | $0.80     | -$0.03   | -          |
| Adjusted Gross Margin | 72.3%      | 71.6%     | +70 bps  | +70 bps    |
| GAAP Operating Margin | 14.4%      | 16.0%     | -160 bps | -370 bps   |
| Adjusted Operating Margin | 27.8%  | 27.5%     | +30 bps  | -20 bps    |

**Key Segment KPIs:**
- US Hips & Knees: Outperformed, driven by new product adoption and pricing power
- Robotics: Early momentum from Monogram Technologies acquisition

---

## Earnings Quality

Zimmer Biomet’s Q2 FY2025 results highlight a **clear divergence between GAAP and adjusted profitability**. While GAAP margins were pressured by $78.9M in Paragon 28 RSU vesting charges and higher integration costs, **adjusted gross margin improved to 72.3%**, reflecting strong pricing and favorable product mix. The company’s cost structure remains disciplined, with restructuring expenses down significantly YoY. **Adjusted operating margin stability (27.8%) underscores effective cost management** despite ongoing commercial and integration investments.

---

## Management Commentary & Guidance

Management’s tone was **confident and forward-looking**, emphasizing robust product momentum, successful M&A integration, and a disciplined approach to cost control. The team **raised full-year adjusted EPS guidance to $8.10–$8.30** (from $8.00–$8.20) and expects reported revenue growth of 6.7–7.7%. Assumptions include **improved FX tailwinds (+50 bps) and reduced tariff headwinds** (now $40M vs. $60–80M prior). Leadership expects margin recovery as integration costs normalize and highlighted a **positive shift in capital allocation** with increased share repurchases.

---

## Key Risks

- **Integration and Acquisition Costs:** Ongoing integration of Paragon 28 and Monogram Technologies could continue to pressure GAAP margins in the near term.
- **Regulatory and Supply Chain:** International expansion and supply chain reliability remain potential headwinds.
- **Commercial Execution:** Sustaining US market share gains and robotics adoption will be critical.

---

## Expected Market Reaction

**Analyst and investor sentiment is likely to be positive,** focusing on the raised EPS guidance, underlying margin strength, and confidence in the company’s innovation pipeline. The market may look past temporary GAAP margin compression, viewing it as a short-term integration issue rather than a structural concern.

---

## Final Takeaway

**Zimmer Biomet delivered a fundamentally strong quarter,** with robust adjusted earnings, improving gross margins, and a clear path to margin recovery as integration costs subside. The market may be underappreciating the company’s pricing power, cost discipline, and strategic pivot toward robotics and innovation. **Key upcoming catalysts** include further margin normalization, updates on the robotics pipeline, and any regulatory developments impacting international growth. Investors should watch for continued execution on integration and capital allocation as the company positions itself for sustainable long-term growth.

Zimmer Biomet: Margin Strength and Raised Guidance

Zimmer Biomet (ZBH) is managing tariff pressures and leveraging working capital and ASC channel growth to support stable margins and modest revenue gains in Q2 FY2025.

# Zimmer Biomet Holdings: Navigating Tariff Headwinds and Unlocking Growth Catalysts in Q2 FY2025

## Executive Summary

We maintain a **Neutral-to-Bullish outlook** for Zimmer Biomet Holdings (NYSE: ZBH) heading into Q2 FY2025. The company is expected to deliver **modest revenue growth** (estimated $1.89–$1.95 billion) and **stable adjusted operating margins** (26.2% expected, in line with Q1), supported by robust S.E.T. segment performance and disciplined cost control. However, **GAAP margins remain pressured** by ongoing tariff and inflationary headwinds, with management estimating a $60–80 million tariff impact for FY2025. The market may be underestimating the **positive impact of proactive working capital management**—a significant $811 million QoQ increase—which could enhance liquidity and operational flexibility in the near term.

## Recent Trends Signal What’s Next

Zimmer Biomet’s last two quarters reveal a **mixed but stabilizing financial trajectory**. Q1 FY2025 revenue reached **$1.909 billion** (up modestly YoY), with **adjusted gross margin at 71.5%** and **adjusted operating margin at 26.2%**. However, **GAAP operating margin slipped to 15.3%** due to inflation and tariffs. The S.E.T. segment grew **+3.9% YoY**, offsetting a **–4.7% contraction in Technology & Data**. Inventory and working capital trends suggest operational stability.

### Quarterly Financial Trend Table

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | Net Margin (%) | EPS ($) |
|--------------|--------------|------------------|----------------------|---------------|---------|
| Q2 FY2024    | 1.885        | 70.8             | 15.1                 | 10.2          | 0.89    |
| Q3 FY2024    | 1.900        | 71.0             | 15.4                 | 10.5          | 0.91    |
| Q4 FY2024    | 1.915        | 71.2             | 15.6                 | 10.7          | 0.93    |
| Q1 FY2025    | 1.909        | 71.5             | 15.3                 | 10.4          | 0.92    |

**Trend:** Revenue and margins are stable, with slight sequential improvement in gross margin but persistent GAAP operating margin pressure.

## Management’s Forward Tone and Positioning

Management’s Q1 FY2025 commentary was **cautiously optimistic**, balancing confidence in execution with acknowledgment of external risks. Notable quotes include:

- “We’re seeing early signs of normalization in demand.”
- “We remain extremely confident in our ability to accelerate growth in the second half of 2025.”
- “Lower restructuring charges and ongoing cost control initiatives are expected to benefit margins.”

Compared to prior quarters, the tone has shifted from defensive (focused on inflation and supply chain) to **proactive and opportunity-driven**, with a clear emphasis on **cost discipline and new product launches**. The absence of explicit Q2 guidance, replaced by full-year commentary, signals a desire to manage expectations amid macro uncertainty.

## KPI Trends & Upcoming Quarter Drivers

Three KPIs are central for Q2 FY2025:

1. **Working Capital**: **$811 million QoQ increase** in Q1, reflecting proactive management of receivables and payables. This supports liquidity and may enable opportunistic investments or buffer against volatility.
2. **ASC Channel Penetration**: Now **>20% of U.S. sales**, with management targeting **40–60%**. This channel shift is expected to drive higher-margin growth and improve sales efficiency.
3. **ROSA Robotics Installations**: Approaching **2,000 units**, this KPI underpins future high-margin product sales and competitive differentiation.

### KPI Movement Table

| KPI                        | Q1 FY2024 | Q4 FY2024 | Q1 FY2025 | YoY Change | QoQ Change |
|----------------------------|-----------|-----------|-----------|------------|------------|
| Working Capital ($M)       | 2,100     | 2,250     | 3,061     | +46%       | +36%       |
| ASC Channel (% of US Sales)| 16%       | 19%       | 21%       | +5pp       | +2pp       |
| ROSA Installations         | 1,600     | 1,850     | 1,950     | +22%       | +5%        |

**Impact:** Rising working capital and ASC penetration should support revenue and margin stability, while ROSA growth positions ZBH for future upside.

## Missed by the Street

Two subtle but material signals:

- **Working Capital Surge:** The **$811 million QoQ increase** in working capital is a strategic move to support higher volumes and mitigate supply chain risk. This liquidity buffer is not fully reflected in consensus models.
- **Restructuring Commentary:** Management’s reference to “ongoing restructuring” hints at further cost savings that could quietly lift future earnings, even as headline guidance remains conservative.

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario | Total Revenue ($B) | EPS (GAAP) | Operating Margin (%) | Key Assumptions                                      |
|----------|--------------------|------------|----------------------|------------------------------------------------------|
| Bull     | 1.95               | 0.98       | 15.8                 | Strong product launches, cost control, tariff relief |
| Base     | 1.92               | 0.92       | 15.3                 | Steady execution, moderate FX/tariff impact          |
| Bear     | 1.89               | 0.88       | 14.8                 | Tariff/FX headwinds, competitive pricing pressure    |

**Most Likely:** The **Base case** is most probable, given current execution, stable demand, and management’s balanced tone. Upside exists if cost controls outperform or new products ramp faster; downside if tariffs or competition intensify.

## Appendix – Data Tables & Management Quotes

### Quarterly Financials Table

| Quarter      | Revenue ($B) | EPS ($) | Gross Margin (%) | Operating Margin (%) |
|--------------|--------------|---------|------------------|----------------------|
| Q2 FY2024    | 1.885        | 0.89    | 70.8             | 15.1                 |
| Q3 FY2024    | 1.900        | 0.91    | 71.0             | 15.4                 |
| Q4 FY2024    | 1.915        | 0.93    | 71.2             | 15.6                 |
| Q1 FY2025    | 1.909        | 0.92    | 71.5             | 15.3                 |

### KPI Movement Table

| KPI                        | Q1 FY2024 | Q4 FY2024 | Q1 FY2025 | YoY Change | QoQ Change |
|----------------------------|-----------|-----------|-----------|------------|------------|
| Working Capital ($M)       | 2,100     | 2,250     | 3,061     | +46%       | +36%       |
| ASC Channel (% of US Sales)| 16%       | 19%       | 21%       | +5pp       | +2pp       |
| ROSA Installations         | 1,600     | 1,850     | 1,950     | +22%       | +5%        |

### Key Management Quotes

1. **“We remain extremely confident in our ability to accelerate growth in the second half of 2025.”**  
   *Q1 2025 Earnings Call* – Signals management’s expectation for improving momentum post-Q2.

2. **“Lower restructuring charges and ongoing cost control initiatives are expected to benefit margins.”**  
   *Q1 2025 Earnings Call* – Implies margin upside from cost actions.

3. **“We’re seeing early signs of normalization in demand.”**  
   *Q1 2025 Earnings Call* – Suggests stabilization in end-market demand.

4. **“Tariffs are expected to add $60–80 million in costs over the course of 2025.”**  
   *Q1 2025 10-Q* – Quantifies a key risk to GAAP margins.

5. **“ASC channel now represents over 20% of U.S. sales, with significant runway ahead.”**  
   *Q1 2025 Earnings Call* – Highlights a structural growth driver.

6. **“We are proactively managing working capital to support higher volumes and mitigate supply chain risk.”**  
   *Q1 2025 Earnings Call* – Indicates a strategic liquidity move.

7. **“We continue to invest in robotics and digital platforms to differentiate our portfolio.”**  
   *Q1 2025 Earnings Call* – Points to future growth levers.

---

**Bottom Line:** Zimmer Biomet enters Q2 FY2025 with a solid operational foundation, but investors should closely monitor tariff impacts, working capital deployment, and the pace of new product adoption for signs of upside or risk.

ZBH: Tariff Headwinds, Working Capital, and Growth Drivers