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CONMED Corporation (CNMD - Analyst Report), a medical technologies and surgical devices company, reported second quarter 2012 adjusted earnings (excluding one-time expenses) of 43 cents per share missing the Zacks Consensus Estimate by a penny. The company, however, surpassed the year-ago earnings of 35 cents a share, up 23%.

Profit in the reported quarter was $10.3 million (or 36 cents per share) compared with a profit of $8.9 million (or 30 cents per share) in the year-ago quarter, up 15.7%. Profit was driven by higher sales and margin expansion.

Revenue

Revenues rose 3.5% (down 0.4% organic) year over year to $189.7 million trailing the Zacks Consensus Estimate of $193 million. Growth was backed by solid sales across Arthroscopy business alone, while all other businesses partially dampened revenue growth. In addition, single-use products sales (81.1% of total sales) grew 7.5% but capital offerings (18.9% of total sales) dropped 10.7% in the quarter.

On a geographic basis, revenues in the international markets were $96.4 million. Foreign exchange rates had no impact on revenues due to the company’s hedging policy, despite considerable volatility in exchange rates recently.

Revenues from the Musculoskeletal Transplant Foundation’s (“MTF”) association were $7.2 million in the second quarter of 2012

Segment Analysis

Revenues from the core Arthroscopy segment jumped 14.7% year over year (up 15% in constant currency) to $81 million. Revenues from Endoscopic Technologies division grew 6.4% to $13.3 million.

However, revenues from Electrosurgery and Patient Care dropped 6.5% and 6%, to $24.4 million and $15.6 million, respectively. Moreover, sales from Powered Surgical Instruments and Endosurgery dipped 2.9% and 4.7% year over year to $37.2 million and 18.2 million, respectively.

Margins

Gross margin increased to 52.6% in second quarter 2012 from 49.9% in the year-ago quarter. Adjusted operating margin increased 90 basis points to 10.6%.

Selling and administrative charges were higher at 38.9% of sales compared with 37% in the year-ago quarter. Research and Development expenses, as a percentage of sales, were 3.8%, roughly flat year over year.

Balance Sheet

CONMED exited second quarter 2012 with cash and cash equivalents of $16.2 million, down 33.2% year over year. Long-term debt (inclusive of current portion) decreased 3.8% year over year to $168 million. Cash provided by operating activities increased year over year and stood at $25.6 million in the quarter.

Guidance

The company expects adjusted earnings to be in a range of 38 cents to 42 cents for the third quarter of 2012. Revenues are forecast to remain in a band of $180 million and $185 million for the third quarter.

Conmed revised its sales guidance for 2012 based on the company’s soft capital equipment sales due to prevailing global economic headwinds. Revenues are forecast to remain between $765 million and $775 million (earlier $775 million to $785 million) for 2012. The company, however, reiterated its adjusted earnings forecast to be in the range of $1.75 to $1.85 per share for 2012.

Adjusted earnings forecast for the third quarter and full year 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. The company also announced the merging of the Tampere, Finland facility into the U.S. facilities.

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. We maintain our ‘Neutral’ recommendation on Conmed. The company retains a short-term Zacks #2 Rank (Buy).

However, we remain concerned about poor capital product sales due to the ongoing dismal macroeconomic conditions. Moreover, Conmed operates in a highly-competitive orthopedic surgery market against much larger, more technically-competent companies, such as Covidien plc (COV - Analyst Report), Smith & Nephew (SNN - Snapshot Report) and Stryker Corporation (SYK - Analyst Report).

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