CONMED Corporation’s (CNMD) third-quarter 2013 adjusted earnings per share of 40 cents missed the Zacks Consensus Estimate by a penny and was lower than the year-ago earnings of 43 cents by 7%. However, earnings were within the company’s guidance of 37–42 cents. Adjusted earnings per share would have come in at 43 cents excluding the medical devices excise tax (MDET).
The medical technologies and surgical devices company’s reported net income dropped to $5.7 million or 20 cents per share from $9.3 million or 32 cents in the year-ago quarter. The decline was mainly driven by special charges and a 3-cent hit from the MDET.
Revenues decreased 1.4% year over year (down 0.4% at constant exchange rate or CER) to $179.3 million, missing the Zacks Consensus Estimate of $187 million. It also failed to meet the company’s revenue guidance of $184–$189 million. The downfall resulted from weaker sales of capital equipment, specifically in the surgical visualization and powered instrument businesses.
On a geographic basis, revenues in the U.S. were down 3.6% to $89 million, while international revenues inched up 0.8% (2.9% at CER) to $90 million. We also note that single-use products sales (81% of total sales) increased 2.4% at CER to $145.9 million, while capital offerings (19%) dropped 11.1% at CER to $33.4 million in the quarter.
Margins
Adjusted gross margin (excluding restructuring expenses) increased 30 basis points (bps) to 55.1% in the third quarter of 2013 from 54.8% in same quarter of 2012. Sequentially, adjusted gross margin increased 90 bps. However, on a reported basis, gross margin declined 60 bps to 53.2% from 53.8% in the prior-year period. The fall in margin was attributed to increased expenses associated with the termination of the company’s ECOM product line and facility consolidation expenses.
Selling and administrative charges decreased 0.8% to $73.5 million, while research and development expenses increased 0.4% to $7.1 million in the quarter. On an adjusted basis, operating margin dipped 10 bps to 10.1%. However, on a reported basis, operating margin was 4.9% in the third quarter compared with 7.8% in the year-ago quarter.
This is mainly on account of higher restructuring expenses and the MDET. Management has also decided to discontinue its ECOM product line and endotracheal measure cardiac output, which it intends to sell off to a third party.
Segment Analysis
The orthopedic surgery product line includes CONMED’s sports medicine group and power surgical instruments. Revenues from this product line inched down 0.6% (up 0.8% at CER) to $95.6 million.
CONMED has combined its electrosurgery, endosurgery, endoscopic technologies and patient care into the general surgery categorization. Revenues from this product group increased 1.0% (1.7% at CER) to $69.9 million.
However, revenues from the surgical visualization line, which includes 2D and 3D imaging devices, surprisingly plunged 16.4% both in terms of reported and CER to $13.8 million in the quarter. This reflects a marked disappointment from the sales growth of 25.2% recorded in the second quarter of 2013.
Balance Sheet
CONMED exited the third quarter with cash and cash equivalents of $49.3 million, significantly higher than $23.7 million at the end of 2012. Long-term debt (inclusive of current portion) increased 39.0% to $225.1 million from $161.9 million as of Dec 31, 2012.
For the nine months ending Sep 30, 2013, operating cash flow declined 12.6% to $53.6 million versus $61.3 million in the comparable year-ago period. The company repurchased 1.4 million shares for $44.7 million in the first nine months of 2013, all of which were repurchased as of June 30, 2013.
Guidance
For the fourth quarter, revenues are expected in the band of $195–$200 million. This translated into lower revenue guidance of $754–$759 million for the full year-2013 compared with the earlier guided range of $770–$775 million. The current Zacks Consensus Estimate for earnings for the fourth quarter and full year 2013 is pegged at $203 million and $771 million, respectively.
Management reduced its outlook in anticipation of a difficult capital spending environment in the U.S. as well as in other nations. However, based on solid sales of single-use surgical devices in the first nine months of 2013, CONMED is confident that surgical procedures will continue to improve globally.
CNMD expects fourth-quarter 2013 adjusted earnings in the range of 47 cents to 52 cents. Hence, the forecast for 2013 adjusted earnings per share has been reduced to $1.75–$1.80 from the earlier guidance of $1.80–$1.85. The current Zacks Consensus Estimate for earnings for the fourth quarter and full year 2013 is pegged at $203 million and $771 million, respectively.
Our Take
We are disappointed with CONMED’s third-quarter results, which missed the Zacks Consensus Estimate on both fronts. The company’s stock price fell almost 3% to $36.61 on Oct 24, following the earnings release. The persistent dismal macroeconomic conditions along with poor capital spending loom as causes of concern. Moreover, the company operates in a highly competitive orthopedic surgery market against much larger and more technically competent companies.
CONMED’s tempered guidance failed to impress us as well. However, the only positive factor we took note of was improving surgical procedure growth, which led to higher sales of single-use surgical offerings.
CONMED carries a Zacks Rank #3 (Hold). While we choose to remain on the sidelines regarding CNMD, other companies like Align Technology Inc. (ALGN), Cardinal Health, Inc. (CAH) and Merit Medical Systems, Inc. (MMSI) are expected to do well in the medical/dental supplies industry. All these stocks carry a Zacks Rank #1 (Strong Buy).
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