CONMED 1Q Earnings Beat; Sales Lag

Zacks

CONMED Corporation’s (CNMD) first-quarter 2013 adjusted earnings per share (excluding one-time expenses) of 45 cents were in line with the Zacks Consensus Estimate. The company also surpassed the year-ago adjusted earnings by 4.7%. Adjusted earnings would have increased by 14.0% excluding the medical devices excise tax. The result was within the company’s earlier provided guidance.

Adjusted earnings exclude one-time items such as severance and relocation costs as well as certain consolidation and legal charges. Total one-time expenses amounted to $2.4 million in the first quarter.

Reported profit of the medical technologies and surgical devices company (including the one-time expenses) grew 5.3% to $10.5 million (or 37 cents per share) in the quarter.

Revenue

Revenues dropped 3.8% year over year to $187.0 million as a result of fewer selling days, foreign exchange fluctuations and soft healthcare spending in international markets. Revenues missed the Zacks Consensus Estimate of $201 million by 7%. It also failed to meet the company’s revenue guidance of $192-$198 million, announced in the previous quarter.

On a geographic basis, sales in the U.S. and international markets (50.5% of total sales) dropped by 3.6% and 3.9% (3.2% in constant currency), respectively.

In addition, single-use products sales (79% of total sales) dipped 3.4% in constant currency to $147.8 million and capital offerings (21% of total sales) also declined 3.4% to $39.2 million in the quarter.

Segment Analysis

The company has integrated its various segments into three categories viz. orthopedic surgery, general surgery and surgical visualization. The reshuffling became necessary after the acquisition of Viking, which the company acquired in 2012.

The orthopedic surgery product line include sports medicine group and power surgical instruments of CONMED. Revenues from this product line declined 1.7% in the quarter to $105.0 million due to 3.3% drop in sports medicine product sales, partially offset by 1.1% growth in powered surgical instruments

CONMED had combined its electrosurgery, endosurgery, endoscopic technologies and patient care into the general surgery categorization. Revenues from the general surgery product group fell 3.9% to $66.8 million.

Revenues from the surgical visualization line, which includes all 2D and 3D imaging devices, dropped 15.6% to $15.2 million, mainly on account of tough year-over-year comparisons.

Margins

Gross margin rose to 54.9% in the first quarter of 2013 from 51.9% in the year-ago quarter. Operating margin was 8.5% versus 8.8% in the prior year quarter as positive impact of an improvement in the cost structure was dampened by the medical devices excise tax. On an adjusted basis, operating margin increased 70 basis points to 11.2% of sales.

Selling and administrative charges were higher at 41.6% of sales compared with 38.5% in the year-ago quarter, led by foreign exchange rates and several headwinds affecting the top line. Research and Development expenses, as a percentage of sales, were down at 3.0% of sales versus 3.7% in the prior-year quarter, as the company successfully completed certain R&D projects.

Balance Sheet

CONMED exited the first quarter of 2013 with cash and cash equivalents of $32.4 million, up 66.2% year over year. Long-term debt (inclusive of current portion) increased 16.9% year over year to $225.9 million. Operating cash flow was flat year over year at $5.5 million in the quarter, representing 2.9% of sales in the first quarter.

CONMED repurchased 0.8 million shares in the quarter amounting to $25.7 million and plans to repurchase an additional $25 million shares over the year.

Guidance

CONMED expects second quarter 2013 adjusted earnings in a range of 41 cents to 46 cents. Revenues are projected to remain in the band of $191 million and $196 million. The current Zacks Consensus Estimates for revenues and earnings per share in 2013 are $197 million and 49 cents, respectively.

CONMED reiterated its earnings guidance outlook for 2013 on the back of improving gross margins, despite the negative impact of the medical device excise tax and foreign exchange fluctuations. It expects adjusted earnings to be in the band of $1.80 and $1.90 per share for 2013, reflecting 5% growth in earnings per share.

However, management lowered its top line guidance owing to the difficult austerity measures persisting in Europe as well as flattish healthcare utilization rate in the U.S., despite an improvement in the broad U.S. economy. In addition, the surgical video visualization product line is adversely affected by constrained hospital spending for capital equipments in Europe and other international markets. As a result, management lowered its estimated 2013 sales forecast to $770-$780 from $785-$795 million predicted earlier.

The current Zacks Consensus Estimates for revenue and earnings per share for full year 2013 are $766 million and $1.85, respectively.

Our Take

CONMED is a medical products maker, specializing in surgical instruments and devices. Although the company has been able to maintain its bottom line on the back of solid margins and effective tax rate, this might not be sustainable over the long haul. This is because of the declining revenue trend which the company is experiencing in 2013.

Ongoing dismal macroeconomic conditions along with poor capital product sales and sluggish volume/procedure growth are a worry. Moreover, CONMED operates in a highly competitive orthopedic surgery market against much larger, more technically-competent companies. However, a large percentage of the company’s products are designed for minimally invasive surgery, a trend that is extremely popular.

The company carries a Zacks Rank #3 (Hold). While we remain on the sidelines regarding CONMED, companies like Tornier N.V. (TRNX), carrying a Zacks Rank #1 (Strong Buy), as well as The Cooper Companies Inc. (COO) and MWI Veterinary Supply, Inc. (MWIV), which carry a Zacks Rank #2 (Buy), are expected to do well in the medical/dental supply industry.

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