CONMED Corp CNMD posted adjusted earnings of 42 cents per share in the first quarter of 2015, which beat the Zacks Consensus Estimate by a penny. However, earnings declined roughly 14.2% on a year-over-year basis on the back of lower sales and contracting margins.
Quarter Details
Net sales in the quarter dipped 2.2% (up 0.8% on a constant currency basis) to stand at $177.9 million, but exceeded the Zacks Consensus Estimate of $174 million.
Domestic sales, which accounted for 48.9% of total sales, increased slightly due to positive growth in capital equipment sales. Meanwhile, international sales fell 4.2% to $90.9 million, accounting for 51.1% of total sales, primarily owing to foreign exchange headwinds.
On a constant currency basis, international sales increased 1.5% year over year driven by an increase in capital sales, offset by a slight decline in the sales of single-use products.
In terms of product category, CONMED generated sales of $140.1 million and $37.8 million from single-use and capital products, respectively. Both single-use and capital products sales declined 4.3% and 6.5% from the prior-year quarter, respectively.
In terms of product lines, Orthopedic Surgery sales declined 6.9% (or 3.2% in constant currency) to $98.6 million due to a decline in the company’s power business as well as general softness in the sports medicine market. On the other hand, sales from General Surgery went up 4.1% (or 5.8% in constant currency) to $66.1 million, with growth seen across the advanced surgical endoscopic technologies and critical care categories.
Also, Surgical Visualization sales increased 5.6% (or 9.6% in constant currency) to $13.2 million, primarily led by strength in 2D video systems.
Adjusted gross margin contracted 370 basis points (bps) to 53.2%, primarily owing to foreign exchange headwinds, unfavorable product mix and production variances due to inventory reduction.
Selling and administrative expenses fell 8.7% to $68.6 million, or 38.5% of net sales, thanks to considerable expense control while research and development expenses decreased 5.3% to $6.5 million, or 3.7% of sales.
Despite lower operating expenses, adjusted operating margin contracted 90 bps to 10.9% due to lower gross margin base.
Financial Position
CONMED ended the first quarter with cash and cash equivalents of $65.7 million as of Mar 31, 2015, lower that $66.3 million as of Dec 31, 2014.
Long-term debt (excluding current maturities) increased to $257.2 million from $240.2 million as of Dec 31, 2014. Consequently, the long-term-debt-to-capitalization ratio rose by 170 bps to 30.9% from 29.2% as of Dec 31, 2014.
In the first three months of 2015, cash flow generated from operating activities was $14.8 million, lower than $17.0 million generated in the same period of 2014. The reduction can be attributed to increased working capital.
2015 Outlook
CONMED reiterated its previously announced constant currency sales growth guidance of 1% to 3% for 2015, banking on new product launches and reorganization of certain aspects of the commercial sales organization.
However, the company has updated its 2015 guidance in order to incorporate the significant volatility in the currency markets. If foreign currency exchange rates hold near current levels, CONMED expects net sales in the last three quarters of 2015 to be impacted by $3.9 million.
Taking into consideration current exchange rates, CONMED now anticipates full-year revenues in the range of $723–$738 million as against the prior range of $727–$742 million. Adjusted earnings are projected in the band of $1.82–$1.92, in line with the prior guidance.
Our Take
We believe that volatile foreign exchange will remain a major headwind for CONMED in 2015, as reflected by management’s conservative guidance.
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 represent substantial growth opportunity for the company. By leveraging its offerings and infrastructure, CONMED will be able 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.
Zacks Rank
Currently, CONMED carries a Zacks Rank #4 (Sell).
Better-ranked stocks in the medical/dental supplies industry include Merit Medical Systems MMSI, AmerisourceBergen Corp. ABC and Becton, Dickinson and Company BDX. While Merit Medical Systems sports a Zacks Rank #1 (Strong Buy) both AmerisourceBergen and Becton, Dickinson carry a Zacks Rank #2 (Buy).
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