CONMED Corporation (CNMD) posted adjusted earnings of 53 cents per share in the fourth quarter of 2014, which remained flat on a year-over-year basis. While earnings improved on the back of lower operating costs, a lower tax rate and reduced shares outstanding, it was offset by lower sales and gross margin.
Quarter Details
Net sales in the quarter dipped 4.1% (2.7% on a constant currency basis) to stand at $195 million.
Domestic sales, which accounted for 50.7% of total sales, declined 1.8% to $98.9 million. The decline in the U.S. was caused by reduced single-use product revenues, partly offset by higher capital equipment sales.
Meanwhile, international sales fell 6.5% (3.8% on a constant currency basis) to $96.1 million, accounting for 49.3% of total sales. The downside can be primarily attributed to foreign exchange headwinds and reduced capital equipment sales.
In terms of product category, CONMED generated revenues of $154.7 million and $40.3 million from single-use and capital products, respectively. Both single-use and capital products revenues declined 4.2% and 3.8% from the prior-year quarter, respectively.
Revenues from the company’s three major product lines also reveal year-over-year declines. Orthopedic Surgery revenues declined 5.6% (or 3.9% in constant currency) to $101.7 million. Meanwhile, revenues from General Surgery were down 1.8% (or 0.9% in constant currency) to $75.4 million.
Also, revenues from Surgical Visualization slipped 5.3% (or 3.7% in constant currency) to $17.9 million. However, domestic visualization sales increased 15.8% in the fourth quarter due to the launch of IM-8000 in October last year.
Adjusted gross margin contracted 150 basis points (bps) to 54.3%, primarily owing to foreign exchange headwinds, unfavorable product mix and production variances due to inventory reduction.
Selling and administrative expenses fell 9.1% to $74.9 million, or 38.4% of net sales, thanks to considerable expense control. On the other hand, research and development expenses climbed 10.4% to $7.1 million, or 3.6% of sales, owing to several product development programs.
Adjusted operating margin improved 10 bps to 11.5% driven by lower operating expenses.
Financial Position
CONMED exited the year with cash and cash equivalents of $66.3 million, higher than $54.4 million as of Dec 31, 2013.
Long-term debt (inclusive of current portion) increased to $241.4 million from $215.6 million as of Dec 31, 2013. Consequently, the long-term-debt-to-capitalization ratio rose 310 bps to 29.3% from 26.2% as of Dec 31, 2013.
In 2014, cash flow generated from operating activities was $65.2 million, lower than $80.9 million in 2013. The reduction can be attributed to significant special charges incurred in 2014 and minor increases in working capital.
2015 Outlook
CONMED anticipates constant currency sales growth of 1% to 3% for 2015, banking on new product launches and reorganization of certain aspects of the commercial sales organization in early 2015.
However, the company has updated its 2015 guidance in order to incorporate the significant volatility in the currency markets witnessed in Jan 2015. Based on currency spot rates as of Jan 23, 2015, management expects a negative foreign exchange impact of $19 million to revenues and 14 cents to EPS versus the prior estimates of $6 million and 4 cents, respectively.
Accordingly, the company now anticipates full-year revenues in the range of $727–$742 million as against the prior range of $740–$755 million. Adjusted earnings are projected in the band of $1.82–$1.92 per share, lower than the earlier guidance of $1.92–$2.02. The current Zacks Consensus Estimate of $1.95 lies above the company’s updated guidance range.
Our Take
CONMED’s fourth-quarter results have failed to impress us. Though the company announced a series of changes to its commercial structure in order to reposition itself for growth, we feel that some of these changes will likely cause sales disruption in the short term.
CONMED’s plans to combine its domestic Advanced Energy and Endomechanical organizations should enable the company to provide enhanced customer focus and achieve better top-line performance. However, we believe that this initiative will begin showing results in the second half of 2015.
Moreover, volatile foreign exchange is expected to remain a major headwind for CONMED in 2015.
Zacks Rank
Currently, CONMED carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the medical/dental supplies industry include Bio-Reference Laboratories (BRLI), Halyard Health (HYH) and AmerisourceBergen Corp. (ABC). While both Bio-Reference Laboratories and Halyard Health sport a Zacks Rank #1 (Strong Buy), AmerisourceBergen carries a Zacks Rank #2 (Buy).
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