Mindray Medical International Limited (MR), a prominent Chinese medical devices company, reported second-quarter fiscal 2011 adjusted (excluding one-time expenses other than stock-based compensation expense) earnings per share of 42 cents, beating the Zacks Consensus Estimate of 38 cents. Reported net income climbed 6% year over year to $44.8 million (or 37 cents per share) in the second quarter.
Sales jumped 21.2% year over year to $217.3 million, exceeding the Zacks Consensus Estimate of $210 million. Mindray posted ex-China sales of $126.6 million, up 18.5% year over year. Revenues in China expanded 25.3% year over year to $90.7 million in the reported quarter.
Segment-wise Revenues
Patient Monitoring & Life Support Products (42.8% of total sales) revenues increased 12.3% year over year in the reported quarter to $93 million. In-Vitro Diagnostic Products (25.9% of total revenue) sales were $56.4 million, up 30.5%.
Medical Imaging Systems (25.6% of total sales) revenues were $55.7 million, a growth of 30.6%. Other revenues (5.7% of total revenue) were up 15.3% to $12.2 million.
Adjusted gross profit was $125.2 million in the quarter, higher 18.3% year over year. Adjusted gross margin of 57.6% was below 59% in the year-ago period.
Adjusted selling expenses were $38.5 million, or 17.7% of total net sales, compared with 14.5% a year ago. Adjusted general and administrative expenses were $16.7 million, or 7.7% of sales, compared with 8.4% a year ago. Adjusted research and development expenses were $17.4 million, or 8% of sales, versus 7.6% in the prior-year quarter.
Adjusted operating income was $52.5 million in the quarter, a year-over-year hike of 2.6%. Adjusted operating margin was 24.2%, lower than 28.6% in the year-ago quarter.
Balance Sheet and Cash Flow
As of June 30, 2011, Mindray had $467.1 million in cash and liquid investments, up about 5.5% on a sequential basis. Net cash generated from operating activities was $33.8 million in the second quarter compared with $19.8 million a year ago. Capital expenditure amounted to $17 million compared with $11.3 million a year ago.
Outlook
Mindray continues to provide guidance on a full year basis. The company maintains its sales growth guidance of 16% for fiscal 2011. It also forecasts adjusted net income for the year to increase 10% year over year. The guidance does not take into account tax advantage on account of key software enterprise status ($7.6 million and $8.6 million in the first quarters of 2011 and 2010, respectively) and assumes a corporate tax rate of 15% on the Shenzhen subsidiary. The forecast for capital expenditure, for fiscal 2011, remains in the range of $70 million to $80 million.
Mindray is a bellwether in the Chinese MedTech industry with a solid international presence. It operates in three segments: Patient Monitoring, In-vitro Diagnostics and Medical Imaging. 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. The company plans to bring to market 7 to 10 new products in fiscal 2011 after introducing several new products in fiscal 2010. New products contribute in a major way to Mindray’s revenues.
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. The company expects Chinese government tender sales to be a smaller portion of its domestic revenues.
Mindray’s competitors, in different niche segments, include General Electric (GE), Philips (PHG) and Siemens (SI). We currently have a long-term Neutral rating on the stock.
