CMD Cantel Medical Corp

Cepheid (CPHD) reported net income of $5.6 million or 8 cents per share in the fourth quarter of 2012, a significant improvement from net loss of $1.6 million or 3 cents per share in the year-ago quarter. After adjusting for amortization and impairment expenses, the company reported earnings per share of 11 cents, better than the Zacks Consensus Estimate of break-even earnings per share and 6 cents per share in the year-ago quarter.

For 2012, adjusted loss per share came in at 4 cents compared with earnings of 15 cents per share in 2011. The adjusted figures take into account litigation settlement incurred in 2012. The Zacks Consensus was pegged at a loss of 39 cents per share.

Quarter in Detail

Revenues increased 15.4% year over year to $92.4 million in the fourth quarter. Growth was single-handedly led by commercial clinical franchise. As per the preliminary results reported earlier this month, the company expected revenues to be in the neighborhood of $92 million, trailing the then Zacks Consensus Estimate of $94 million.

For 2012, revenues surged 19.3% year over year to $331.2 million, marginally missing the Zacks Consensus Estimate of $332 million.

Among the segments, the Clinical segment (up 19% year over year to $82.2 million) consisting of Clinical Systems (down 33% to $13.4 million) and Clinical Reagents (up 40% to $68.8 million) contributed about 89% of the total sales in the quarter. Cepheid’s Non-Clinical business declined 6% year over year to $7.5 million.

On a geographic basis, product sales from North America grew 13% year over year to $60.4 million whereas overseas market recorded a 26% year-over-year surge to $29.3 million.

Placements of Cepheid’s GeneXpert systems were lower during the reported quarter with 153 systems (175 in the year-ago quarter) taking the total number of placements to 523 systems in 2012. Placements as part of the High Burden Developing Country (‘HBDC’) program were lower at 68 (181 in the prior year quarter) due to manufacturing issues and choppy demand from the HBDC countries. This takes the annual total to 506 placements. Including the HBDC systems, a cumulative 3,835 systems (compared with 2,843 systems at the end of 2011) have been placed worldwide as of Dec 31, 2012.

Gross margin was 54% in the reported quarter, up 200 basis points (bps) from the year-ago period. The margin expansion was on account of favorable mix and lower negative impact from manufacturing disruptions.

Operating expenses amounted to $43.1 million, up 4.3% year over year, driven by higher research and development (up 3.9% year over year to $17.3 million) as well as sales and marketing (up 12.4% to $16.3 million) expenditure, partially offset by lower general and administrative (down 6.7% to $9.5 million) expenses. Operating margin came in at 7% compared with 0.2% in the year-ago quarter. Adjusted income from operations was $13.9 million or 15% of total revenues in the fourth quarter.

Outlook

Cepheid issued guidance for 2013. It expects revenues in the range of $375–$385 million. The company expects the 2013 adjusted earnings per share (considering the stock based compensation as a regular expense) in the range of 1 cent–7 cents. The current Zacks Consensus Estimate of $396 million for revenues and earnings per share of 12 cents remain outside the said band.

Recommendation

While we believed that Cepheid’s manufacturing concerns were temporary and waning, the company’s return to profitability encourages our confidence. Cepheid should further benefit from surging demand for its offerings. The company is currently focused to meet the higher demand for its Xpert Flu test due to a burdensome flu season.

Cepheid should further gain from normal manufacturing operations after addressing the underlying issues, which negatively affected the financial results in the second half of 2012. Moreover, it plans to triple its production capacity in 2013. As the headwinds take a backseat, we look forward to the company’s performance in 2013. However, seasonality trends, variability in HBDC revenues and a weak capital spending environment keeps us on the sidelines.

The stock carries a Zacks Rank #3 (Hold) in the short-term. While we have a non-committal stance on Cepheid, we look forward to the results of Cantel Medical (CMN), Cyberonics (CYBX) and Delcath Systems (DCTH), each carrying a Zacks Rank #1 (Strong Buy).
 

 
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