CONMED Corporation (CNMD) saw a marginal rise in adjusted net earnings to $14.9 million or 53 cents per share for the fourth quarter of 2013 from 52 cents per share in the same quarter of 2012. Earnings per share exceeded the Zacks Consensus Estimate by 4 cents.
For full year 2013, adjusted net earnings fell 1.7% to $50.8 million from $51.7 million a year ago but earnings per share rose 0.6% to $1.81 from $1.80 in 2012 and surpassed the Zacks Consensus Estimate by 5 cents.
Revenues
Revenues in the quarter went up 1.1% (2.1% on a constant currency basis) to $203.4 million, in line with the Zacks Consensus Estimate. The increase was attributable to stronger economy and higher procedure rates. Revenues in the U.S. inched up 0.4% while international revenues increased 1.7%, comprising 50.5% of overall revenues.
Revenues from orthopedic surgery rose 2.2% on a constant currency basis. Under this product line, sports medicine devices and tissue revenues went up 3.4%, while powered instruments revenues were nearly flat compared with the prior year.
Revenues from surgical visualization rose 5.6%, both on a reported and constant currency basis, due to higher sales in the export markets. Revenues from general surgery were up 1.2% in constant currency.
For the full year 2013, revenues increased marginally by 0.6% to $762.7 million. Revenues from orthopedic surgery were flat compared with the prior year. Revenues from sports biologics product line escalated 5.4%, driven by good progress with the MTF distribution arrangement.
Revenues from surgical visualization slipped 0.9% in the year, mainly driven by a weak capital environment and a delayed product launch due to the integration of Santa Barbara and Westborough, Mass. locations following CONMED’s acquisition of Viking in Sep of 2012 and the movement of product manufacturing to other facilities.
Revenues from general surgery sales rose 0.5% in 2013, with growth in both single-use and capital products on a constant currency basis. Revenues from both GI and pulmonary and endomechanical product lines went up more than 2% in 2013.
Margins
Gross margin in the quarter went up 150 basis points (bps) to 54.8%. After adjusting for the restructuring costs, gross margin in the fourth quarter rose 120 bps to 55.8% from 54.6% in the same quarter of 2012.
Adjusted operating margin in the quarter rose 70 basis points to 12.2% excluding the medical device tax for comparability. For the full year, adjusted operating margin improved 40 bps to 11.1%.
Financial Position
CONMED exited the year with cash and cash equivalents of $54.4 million, which is more than double compared to $23.7 million at the end of 2012. Long-term debt (inclusive of current portion) increased 33.2% to $215.6 million from $161.9 million as of Dec 31, 2012. Consequently, long-term-debt-to-capitalization ratio rose 510 bps to 26.2% from 21.1% as of Dec 31, 2012.
In 2013, operating cash flow declined 15.0% to $80.9 million versus $95.2 million in the prior year. Capital expenditures (net) fell 6.4% to $18.4 million from $19.7 million in 2012.
Dividend and Share Repurchase
CONMED’s Board of Directors declared a quarterly cash dividend of 20 cents per share, paid on Jan 6, 2014. This quarterly dividend reflects a 33% rise from the prior dividend of 15 cents per share. With this, CONMED returned about $22.5 million to shareholders through cash dividends annually.
In 2013, CONMED repurchased nearly 1.6 million shares at an average price of $32.04. In addition, the company instituted a 10b-5 plan in December last year to repurchase additional shares under the existing board repurchase authorization.
Since the beginning of 2014, CONMED repurchased an additional 400,000 shares for $16.8 million. With this, the Board’s remaining share repurchase authorization stands at $37 million, which may be revised in the first half of the year.
Guidance
For the 2014-first quarter, CONMED expects revenues in the band of $191–$196 million. Meanwhile, adjusted earnings per share are expected between 45 and 49 cents for the quarter.
For 2014, CONMED anticipates revenues in the range of $770 to $780 million reflecting a 1–2% rise from 2013 based on continued single use products sales growth and improved capital products sales. It compared with the Zacks Consensus Estimate of $780 million.
Adjusted earnings per share are anticipated between $1.90 and $2.00 compared with the Zacks Consensus Estimate of $1.91. The expected EPS implies a 5–10.5% rise from 2013. Adjusted operating and EBITDA margins are expected to improve 50 bps in the year.
Our Take
Despite the beat, we are disappointed with CONMED’s marginal rise in fourth quarter earnings. 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. However, improving surgical procedure growth, and better guidance trigger optimism about the stock at the same time.
Currently, CONMED carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the medical/dental supplies industry include Cardinal Health, Inc. (CAH), CR Bard Inc. (BCR), and Becton, Dickinson and Company (BDX). All these stocks carry a Zacks Rank #2 (Buy).
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