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CONMED Corporation (CNMD - Analyst Report), a medical technologies and surgical devices company, reported third quarter 2012 adjusted earnings (excluding one-time expenses) of 43 cents per share, beating the Zacks Consensus Estimate of 40 cents. The company also surpassed the year-ago earnings of 33 cents a share, up 30.3%.

Adjusted earnings exclude one-time items such as facility and administrative costs, amortization of debt discount charges along with the Viking acquisition expenses.

Profit in the reported quarter was $9.3 million (or 32 cents per share) compared with a profit of $8.2 million (or 29 cents per share) in the year-ago quarter, up 13.5%. Profit was driven by acquisitions and cost containment measures.

CONMED completed the acquisition of Massachusetts-based healthcare company, Viking Systems Inc. in the third quarter. Viking has developed the innovative 3D-HD Vision System which is used during minimally invasive laparoscopic surgery. The acquisition is expected to boost CONMED’s surgical video products portfolio.

Revenue

Revenues grew 5.3% (up 6% in terms of constant currency) year over year to $181.9 million trailing the Zacks Consensus Estimate of $183 million. On an organic basis, revenues inched up 1.2% in the quarter. Growth was mainly backed by higher sales across Arthroscopy, Endoscopic Technologies and Powered Surgical Instruments businesses, while all other businesses did not make any significant contribution to revenue growth.

In addition, single-use products sales (79.7% of total sales) grew 7.0% (up 7.6% in terms of constant currency) but capital offerings (20.3% of total sales) dipped 1.1% (up 0.3% in terms of constant currency) in the quarter.

On a geographic basis, revenues from the international markets (49.1% of total sales) were $89.3 million. Despite the company’s foreign exchange hedging policy, sales declined $2.2 million in the quarter.

Segment Analysis

Revenues from the core Arthroscopy segment increased 10.4% year over year (up 11.5% in constant currency) to $76.6 million. Revenues from the Endoscopic Technologies division grew 10.6% to $13.6 million. Moreover, sales from Powered Surgical Instruments and Endosurgery increased 3.7% and 0.6% year over year to $36.1 million and $17.8 million, respectively.

However, revenues from Electrosurgery and Patient Care dropped 3% and 0.7%, to $22.6 million and $15.2 million, respectively.

Margins

Gross margin inched up to 53.8% in the third quarter of 2012 from 52.8% in the year-ago quarter. Adjusted operating margin increased 50 basis points to 10.2%.

Selling and administrative charges were higher at 40.7% of sales compared with 39.6% in the year-ago quarter. Research and Development expenses, as a percentage of sales, were 3.9% versus 4.1% in the prior-year quarter.

Balance Sheet

CONMED exited third quarter 2012 with cash and cash equivalents of $19.8 million, down 50.3% year over year. Long-term debt (inclusive of current portion) decreased 3.5% year over year to $169.4 million. Cash provided by operating activities stood at $28 million in the quarter.

Guidance

The company expects adjusted earnings to be in a range of 48 cents to 52 cents for the fourth quarter of 2012. Revenues are projected to remain in the band of $199 million and $204 million for the fourth quarter.

CONMED narrowed its guidance for 2012 based on the company’s financial performance in the last nine months as well as the prevailing global economic headwinds. Revenues are forecast to remain between $765 million and $770 million (earlier $765 million to $775 million) for 2012. Its adjusted earnings are expected to be in the range of $1.76 to $1.80 per share (earlier $1.75 to $1.85 per share) for 2012.

For 2013, revenues are anticipated to be between $785 million and $795 million in 2013. CONMED expects adjusted earnings to be in the band of $1.80 and $1.90 per share for 2013, reflecting a 5% growth in earnings per share. Earlier, the company had planned 15% earnings growth but the upcoming Medtech tax, foreign exchange fluctuations and the ongoing headwinds in global healthcare utilization have dampened earnings growth.

Adjusted earnings forecast for the fourth quarter and full year 2013 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, as well as the Viking acquisition expenses. The company is also continuing the merger of the Tampere, Finland facility into the U.S. facilities.

The current Zacks Consensus Estimates for revenue and earnings per share for full year 2012 are $725 million and $1.78, respectively.

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.

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).

We currently have an Underperform recommendation on CONMED.  The company retains a short-term Zacks #4 Rank (Sell rating).

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