Conmed's 4Q EPS Tops, Slips to Loss

Conmed Corporation’s (CNMD - Analyst Report) fourth-quarter fiscal 2011 adjusted (excluding one-time items) earnings per share of 46 cents outstripped the Zacks Consensus Estimate of 39 cents and the year-ago adjusted earnings 36 cents. The results also exceeded the company’s guidance of 37 cents and 42 cents.

However, on a reported basis, the New York-based company slipped into a loss in the quarter, hit by the twin impact of a lofty non-cash goodwill impairment charge (of $60.3 million) related to its Patient Care business and meager top line growth. Conmed recorded a net loss of $25 million (or 90 cents a share) in the quarter versus a profit of $6.9 million (or 24 cents a share) a year ago.

The company, however, recorded a positive income tax adjustment (of $1.3 million) in the quarter, which increased its full year earnings (both reported and adjusted) by 5 cents.

For the full year, adjusted earnings of $1.50 a share topped the Zacks Consensus Estimate of $1.45 and was ahead of the year-ago earnings of $1.30 and the company’s guidance of $1.42 to $1.47.

Revenues and Margins

Revenues for the quarter rose narrowly (roughly 0.8%) year over year to $185.6 million, missing the Zacks Consensus Estimate of $190 million. Sales were within the company’s forecast range of $183 million to $187 million. For the fiscal, revenues crept up 1.6% year over year to $725.1 million, in line with the Zacks Consensus Estimate.

International sales climbed roughly 2.5% year over year to $91.3 million in the fourth quarter, representing 49.2% of total revenues.

Revenues from the company’s Arthroscopy business edged up 1.8% year over year to $74.4 million in the quarter. Powered Surgical Instruments sales nudged down 0.3% to $36.8 million. Electrosurgery revenues dipped 2.7% to $25.7 million.

Endoscopic Technologies sales inched up 2.4% to $12.6 million. Revenues from Endosurgery rose 5.6% to $19 million. Total single-use and reposable revenues rose 3.4% to $144.9 million while consolidated revenues from capital equipment fell 7.5% to $40.7 million.

Gross margin rose to 52% in the fourth quarter from 49.4% a year ago. Adjusted operating margin was 10.7% versus 9.5% in the prior year quarter.

Balance Sheet and Cash flow

Cash and cash equivalents more than doubled year over year to $26 million at the end of fiscal 2011. Long-term debt decreased 27% year over year to $143.5 million. The company generated operating cash flows of $26.3 million during the fourth quarter which was primarily used to repay debt. For the fiscal, operating cash flows was $103 million while free cash flows soared 63% year over year to a record $85.4 million.

Restructuring

Conmed continues to consolidate some of its administrative functions and transfer additional product lines to its new manufacturing plant in Chihuahua, Mexico. Costs associated with these activities were $0.9 million in the fourth quarter and $4.3 million for the full year. Conmed expects restructuring expenses of $3 million to $4 million for 2012.

Guidance Raised

Conmed has lifted its guidance for fiscal 2012 released in October 2011. The company now envisions sales of $780 million to $790 million compared with its earlier forecast of $745 million to $755 million. The increase reflects the company’s recent collaboration with Musculoskeletal Research Foundation (“MTF”) in sports medicine.

Adjusted earnings for fiscal 2012 now have been forecast in a band of $1.75 to $1.88 versus the prior view of $1.60 to $1.70, a 17%-25% year-over-year growth. The MTF deal is expected to be accretive to 2012 earnings by 15 cents to 18 cents. According to the Zacks Consensus Estimate, revenues and earnings for fiscal 2012 are $756 million and $1.73 a share, respectively.

For first-quarter 2012, Conmed expects revenues in the range of $190 million to $195 million and adjusted earnings per share of between 42 cents and 47 cents. The current Zacks Consensus Estimates for revenues and earnings for the quarter are $193 million and 42 cents a share, respectively.

The adjusted earnings forecast for the first quarter and fiscal 2012 exclude restructuring costs associated with the transfer of manufacturing activities to the company’s manufacturing plants in Chihuahua, Mexico and Largo, Florida, from Santa Barbara, California.

Conmed is a medical products maker specializing in surgical instruments and devices. A large percentage of the company’s products are designed for minimally invasive surgery, a trend that is extremely popular these days.

The company operates in a highly-competitive orthopedic surgery market against much larger, more technically-competent companies, such as Johnson & Johnson (JNJ - Analyst Report), Smith & Nephew (SNN - Snapshot Report) and Stryker Corporation (SYK - Analyst Report). Currently, we are Neutral on Conmed, backed by a short-term Zacks #3 Rank (Hold).