Mindray's Mixed Results

Chinese medical devices major Mindray Medical International Limited’s (MR - Analyst Report) first-quarter fiscal 2012 adjusted (excluding one-time expenses other than stock-based compensation expense) earnings per share of 32 cents missed the Zacks Consensus Estimate of 35 cents. Reported net income moved lower 3.1% year over year to $36.6 million (or 31 cents per share) in the quarter.

Revenues

Sales were up sharply 21.1% year over year to $219 million, in the first quarter, beating the Zacks Consensus Estimate of $217 million.

During the reported quarter, Mindray recorded ex-China sales of $127.2 million, up 17.3% year over year. Revenues in the Chinese market increased 26.8% year over year to $91.8 million in the reported quarter. Emerging markets performed well with growth of 23.2%.

Segment-wise Revenues

Patient Monitoring & Life Support Products (43.7% of total sales) revenues grew 22.5% year over year in the reported quarter to $95.7 million. In-Vitro Diagnostic Products (25.8% of total revenue) sales were $56.6 million, up 22.4%. Revenues from reagents grew, contributing 31.5% of In-Vitro Diagnostic segment sales during the quarter.

Medical Imaging Systems(24.1% of total sales) revenues rose to $52.8 million, a growth of 11%. Other revenues (6.4% of total revenue) were up 55.6% to $13.9 million.

Margins

Adjusted gross profit stood at $121.4 million in the quarter, higher 20.2% year over year. Adjusted gross margin of 55.5% was lower than 55.9% in the year-ago period.

Adjusted selling expenses were $38.4 million, or 17.5% of total net sales, compared with 17.7% a year ago. Adjusted general and administrative expenses were $19.1 million, or 8.7% of sales, versus 7.7% a year ago. Adjusted research and development expenses were $23.4 million, or 10.7% of sales, compared with 9.7% in the prior-year quarter.

Adjusted operating income amounted to $40.5 million in the quarter, a year-over-year growth of 7.9%. Adjusted operating margin was 18.5%, lower than 20.8% in the year-ago quarter.

Balance Sheet and Cash Flow

As of March 31, 2012, Mindray had $664.2 million in cash and liquid investments, up about 10.1% on a sequential basis. Net cash generated from operating activities was $60.1 million in the quarter while capital expenditure amounted to $16.2 million.

Outlook

Mindray continues to provide guidance on a full year basis. The company forecasts sales growth in excess of 18% for fiscal 2012. It also expects adjusted net income for the year to increase a minimum of 13% year over year. The guidance does not take into account any tax advantage on account of key software enterprise status. The forecast for capital expenditure, for fiscal 2012, is about $90 million.

Mindray is a bellwether in the Chinese MedTech industry with a solid international presence. A key distinction with domestic competitors is that the majority of Mindray’s products have CE Mark and/or Food and Drug Administration (“FDA”) clearance.

Mindray maintains a decent product pipeline and brings out several new products each year. New products contribute in a major way to Mindray’s revenues. In fiscal 2011, the company launched 13 new products.

The company has entered the premium segment globally, where its competitive advantage is still unclear. Also, on the negative side, health care reform, in China and the U.S., may reduce demand for Mindray’s products. Competition is fierce and leads to price erosion over time.

Mindray’s competitors, in different niche segments, include GE Healthcare, a part of General Electric (GE - Analyst Report), Philips (PHG - Analyst Report) and Siemens (SI - Analyst Report). Our Neutral recommendation is supported by a short-term Zacks #3 Rank (Hold).