CONMED Lags on Q2 Earnings & Revenues, Cuts View

Zacks

CONMED Corporation (CNMD) posted adjusted earnings per share of 47 cents for the second quarter of 2014, up 9.3% from 43 cents recorded in the same quarter of 2013. However, earnings fell short of the Zacks Consensus Estimate by a penny. Adjusted net earnings improved 8.7% to $12.9 million from $11.9 million in the same quarter of 2013.
 

Revenue Details

Revenues in the quarter dipped 2.5% (2.3% on a constant currency basis) to $188.2 million and also missed the Zacks Consensus Estimate of $190 million. The decrease can be attributed to weaker sales of General Surgery devices, Surgical Visualization capital products and the discontinuance of the Cascade PRP product line.

Geographically, domestic revenues came in at $87.7 million, accounting for 46.6% of total revenues. International revenues in the quarter totaled $100.4 million, accounting for 53.4% of total revenues.

In terms of product category, CONMED generated revenues of $150.2 million and $38.0 million from single-use and capital products, respectively. Both, single-use and capital products revenues reflected a decline of 2.3% and 3.1%, respectively, from the prior-year quarter.

Revenues from the Orthopedic Surgery business edged up 0.6% (or 0.8% in constant currency) to $102.4 million. Meanwhile, revenues from General Surgery were down 3.4% (or 3.2% in constant currency) to $70.7 million. Revenues from Surgical Visualization slipped 16.1% both in reported and constant currency to $15.1 million.

Expenses and Margins

Gross profit declined 1.8% to $101.0 million in the reported quarter. However, adjusted gross margin expanded 20 basis points (bps) to 54.4% from 54.2% in the year-ago quarter.

Selling and administrative expenses fell 4.1% to $74.0 million while research and development expenses increased 4.0% to $6.9 million.

Adjusted operating earnings increased 4.1% to $20.1 million and adjusted margin expanded 70 basis bps to 10.7% from 10.0% in the second quarter of 2013. Adjusted EBITDA edged up 0.4% to $32.8 million in the quarter while adjusted EBITDA margin rose 50 bps to 17.4% from 16.9% in the same period a year ago.

Financial Position

CONMED exited the quarter with cash and cash equivalents of $60.4 million as of Jun 30, 2014, up 11.0% from $54.4 million as of Dec 31, 2013. Long-term debt (inclusive of current portion) increased 14.1% to $246.0 million from $215.6 million as of Dec 31, 2013. Consequently, the long-term-debt-to-capitalization ratio rose 280 bps to 29.0% from 26.2% as of Dec 31, 2013.

Guidance

CONMED lowered its adjusted earnings and revenue guidance for full-year 2014. Adjusted earnings per share are expected in the range of $1.85–$1.95 compared to the prior range of $1.90–$2.00. The Zacks Consensus Estimate of $1.93 lies within the guided range.

According to management, new products such as the IM 800 surgical visualization system and the Edge Ablation system, expected to be launched in the second half of 2014, should boost revenues. However, it may take more time than the final six months of the year for the products to reach their potential.

Consequently, CONMED lowered its revenues guidance to the range of $735 to $745 million from the prior range of $770 to $780 million for full-year 2014. The Zacks Consensus Estimate for the same is currently pegged higher at $770 million.

Our Take

CONMED’s second-quarter earnings and revenue miss as well as a slashed guidance for the full year raises concern. Additionally, the company faces near-term challenges such as forestalled customer orders, ineffective supply by its contract suppliers and weak single-use product sales.

Moreover, lower level of healthcare utilization in the U.S. and the current capital spending environment continues to dampen sales of medtech companies. Nevertheless, CONMED is slated to launch several new products in the second half of 2014 which should drive revenues and restore our confidence in the stock to some extent.

Currently, CONMED carries a Zacks Rank #3 (Hold). Better-ranked stocks in the medical/dental supplies industry include AmerisourceBergen Corporation (ABC), Bio-Reference Laboratories Inc. (BRLI) and The Cooper Companies Inc. (COO). All these stocks carry a Zacks Rank #2 (Buy).

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