CONMED Corporation — Q2 2022 Form 10-Q Summary
Business context and reporting period
CONMED is a global medical technology company that develops, manufactures and sells surgical devices and equipment for minimally invasive procedures. Its principal product lines are orthopedic surgery and general surgery. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
Approximately 83% of revenue was derived from single-use products. International sales represented approximately 46% of six-month revenue, compared with 45% in the prior-year period.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $277.2 million | $255.2 million | $519.5 million | $487.8 million |
| Gross profit | $151.8 million | $141.4 million | $287.8 million | $269.9 million |
| Gross margin | 54.8% | 55.4% | 55.4% | 55.3% |
| Income from operations | $24.5 million | $25.7 million | $46.9 million | $45.8 million |
| Operating margin | 8.8% | 10.1% | 9.0% | 9.4% |
| Net income (loss) | $(168.3) million | $13.3 million | $(153.3) million | $23.2 million |
| Diluted EPS | $(5.65) | $0.41 | $(5.18) | $0.72 |
| Net cash from operating activities | Not separately provided | Not separately provided | $19.1 million | $56.6 million |
Q2 sales increased 8.6% year over year, or 9.8% on a constant-currency basis. Six-month sales increased 6.5%, or 7.2% on a constant-currency basis. Q2 orthopedic surgery sales increased 11.4% and general surgery sales increased 6.6%. Six-month orthopedic and general surgery sales increased 5.9% and 7.0%, respectively.
At June 30, 2022, cash and cash equivalents were $53.2 million. Total debt was $982.7 million, including $800.0 million of 2.250% convertible notes due 2027, $69.4 million of remaining 2.625% convertible notes due 2024, $133.9 million of term-loan borrowings and other debt. The revolving credit facility had no borrowings outstanding and approximately $582.8 million of availability, subject to approximately $2.2 million reserved for letters of credit.
Material changes versus the prior comparable period
- Net sales increased, driven by recovery and increased procedure volumes in orthopedic markets, growth in AirSeal and other advanced general-surgery products, and higher single-use product sales.
- Q2 gross margin declined 60 basis points to 54.8%, primarily because of approximately $10.0 million of unfavorable production variances related to inflation in raw materials, freight and other production costs. These costs were deferred in inventory and are expected to affect future cost of sales as the inventory is sold.
- Operating margin declined to 8.8% from 10.1%, reflecting lower gross margin and higher selling and administrative expense. Selling and administrative expense included $2.6 million of In2Bones acquisition-related consulting and legal costs and $0.8 million related to litigation settlement costs.
- Interest expense decreased to $5.9 million in Q2 and $10.9 million for the six-month period, compared with $9.4 million and $19.8 million, respectively, primarily because of lower borrowings, lower weighted-average rates and adoption of ASU 2020-06.
- Net loss was driven primarily by $112.0 million of other expense, including a $103.1 million conversion premium on the extinguishment of $275.0 million of 2.625% convertible notes, $5.5 million related to settlement of associated hedges and $3.4 million of debt extinguishment costs. These charges were not comparable with the prior-year periods.
- On June 13, 2022, CONMED acquired In2Bones Global for $145.0 million, including a $2.0 million holdback. The transaction added $140.3 million of goodwill and $63.9 million of acquired intangible assets and includes potential earn-out payments of up to $110.0 million. In2Bones contributed immaterial sales and earnings during the reported periods.
- On June 6, 2022, CONMED issued $800.0 million of 2.250% convertible notes due 2027. Proceeds funded the In2Bones acquisition, repayment of the revolving credit balance, a $90.0 million term-loan prepayment and the repurchase of $275.0 million of 2.625% notes.
- Operating cash flow declined to $19.1 million from $56.6 million, primarily due to working-capital investment in accounts receivable and inventory, including inventory increases intended to mitigate supply-chain risks.
Guidance, outlook, commentary and risks
The filing does not provide a clear quantitative revenue or earnings guidance figure. Management states that liquidity from operating cash flow, cash on hand and available revolving-credit capacity is expected to be adequate for anticipated working-capital needs, debt service, capital expenditures, dividends and share repurchases in the foreseeable future.
Management expects inflationary pressures, higher manufacturing and operating costs, supply-chain challenges and staffing shortages to continue through 2022 and potentially affect results. COVID-19 variants and hospital responses may continue to delay or reduce non-urgent procedures. The company also identified risks related to foreign exchange and interest rates, regulatory compliance, product acceptance, cybersecurity, competition, availability and cost of materials, acquisition integration, intellectual property, litigation, environmental and ethylene-oxide sterilization requirements, and geopolitical conditions.
CONMED reported no direct operations in Russia or Ukraine; sales to distributors in those countries were immaterial, and the company reserved approximately $0.5 million of related receivables at June 30, 2022.
Potential legal matters include Georgia litigation involving alleged ethylene-oxide exposure, related insurance-coverage disputes, possible indemnification claims involving a contract sterilizer, and other ordinary-course claims. The company has not recorded reserves for matters where loss was not considered probable or estimable. On June 30, 2022, CONMED prevailed in the EndoDynamix litigation, subject to any appeal.
The company stated that it was in compliance with its credit-agreement covenants at June 30, 2022, and that disclosure controls and procedures were effective.
Important facts for investors to verify
- Whether the approximately $10.0 million of deferred unfavorable production variances and broader inflationary pressures reduce gross margin in subsequent periods.
- The integration, sales performance and profitability of In2Bones, including potential earn-out payments of up to $110.0 million.
- Leverage, refinancing requirements and cash-flow capacity relative to scheduled debt maturities of $70.0 million in 2024, $134.6 million in 2026 and $800.0 million in 2027.
- The sustainability of operating cash flow after inventory normalization and resolution of supply-chain constraints.
- Future dilution or cash obligations associated with the convertible notes, related hedges and warrants.
- Potential effects of COVID-19, procedure volumes, inflation, supply-chain disruption, interest rates and foreign exchange movements.
- Developments in the Georgia ethylene-oxide litigation, insurance-coverage disputes and any appeals or indemnification claims.
- The company’s future share-repurchase and dividend decisions, given available liquidity and credit-agreement restrictions.