MR Montage Resources Corporation

Chinese medical devices major Mindray Medical International Limited’s (MR) second-quarter 2012 adjusted (excluding one-time expenses other than stock-based compensation expense) earnings per share of 45 cents beat the Zacks Consensus Estimate of 44 cents. Reported net income moved up 16.1% year over year to $52 million (or 44 cents per share) in the quarter.

Revenues

Revenues were up sharply 23.3% year over year to $267.8 million, in the second quarter, beating the Zacks Consensus Estimate of $258 million.

During the reported quarter, Mindray recorded outside-China sales of $152.5 million, up 20.5% year over year. Revenues in China increased 27.1% year over year to $115.3 million in the reported quarter. The company performed well in other emerging markets with growth of 21.1%.

Segment-wise Revenues

Patient Monitoring & Life Support Products (42.8% of total sales) sales grew 23.3% year over year in the reported quarter to $114.6 million. In-Vitro Diagnostic Products (27.6% of total revenue) revenues were $73.9 million, up 31.1%. Revenues from reagents contributed 34.4% of In-Vitro Diagnostic segment sales during the quarter.  

Medical Imaging Systems (24% of total sales) sales rose to $64.1 million, a growth of 15.1%. Other revenues (5.6% of total revenue) were up 24.4% to $15.1 million.

Margins

Adjusted gross profit amounted to $154.8 million in the quarter, higher 23.7% year over year. Adjusted gross margin was 57.8% slightly higher than 57.6% in the year-ago period.

Adjusted selling expenses were $45.5 million, or 17% of total net sales, compared with 17.7% a year ago. Adjusted general and administrative expenses were $23.3 million, or 8.7% of sales, versus 7.7% a year ago. Adjusted research and development expenses were $22.5 million, or 8.4% of sales, compared with 8% in the prior-year quarter.

Adjusted operating income stood at $63.5 million in the quarter, a year-over-year growth of 20.9%. Adjusted operating margin was 23.7%, lower than 24.2% in the year-ago quarter.

Balance Sheet and Cash Flow

As of June 30, 2012, Mindray had $710.1 million in cash and liquid investments, up about 52% from the year ago. Long-term bank loan stood at $85.1 million, up 143.3% from a year ago. Net cash generated from operating activities was $61.4 million in the quarter (up 81.6% year over year) while capital expenditure amounted to $16.7 million.

Outlook

Mindray provides guidance on a full year basis. The company continues to forecast sales growth in excess of 18% for 2012. It also expects adjusted net income for the year to increase by a minimum of 15% year over year (a minimum of 13% earlier). 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), Philips (PHG) and Siemens (SI). Our Neutral recommendation is supported by a short-term Zacks #3 Rank (Hold).

 
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