CONMED Corporation — Q3 2021 Form 10-Q Summary
Business context and reporting period
CONMED is a global medical technology company providing surgical devices and equipment for minimally invasive procedures, serving orthopedic, general surgery, gynecology, thoracic surgery and gastroenterology markets. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the same periods in 2020.
The business continued to be affected by COVID-19, including procedure deferrals, facility restrictions and supply-chain uncertainty. Approximately 81% of revenue is generated from single-use products, and international sales represented approximately 45% of nine-month 2021 revenue.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $248.8 million | $237.8 million | $736.7 million | $609.6 million |
| Gross profit | $142.3 million | $133.7 million | $412.2 million | $324.8 million |
| Gross margin | 57.2% | 56.2% | 56.0% | 53.3% |
| Income from operations | $26.7 million | $29.4 million | $72.5 million | $21.3 million |
| Operating margin | 10.7% | 12.4% | 9.8% | 3.5% |
| Net income (loss) | $14.9 million | $6.9 million | $38.1 million | $(14.6) million |
| Diluted EPS | $0.47 | $0.23 | $1.19 | $(0.51) |
| Operating cash flow | Not separately provided | Not separately provided | $78.0 million | $44.4 million |
Q3 net sales increased 4.6% year over year, or 4.3% on a constant-currency basis. Nine-month sales increased 20.8%, or 19.3% on a constant-currency basis. Nine-month sales comprised $320.8 million from orthopedic surgery and $415.9 million from general surgery.
At September 30, 2021, cash and cash equivalents were $31.5 million, compared with $27.4 million at December 31, 2020. Net working capital was $260.2 million. Inventories increased to $228.6 million from $194.9 million, primarily to address supply challenges and anticipated revenue growth.
Total debt was $715.6 million, including $171.0 million drawn on the revolving facility, $230.5 million outstanding under the term loan and the carrying value of convertible notes. The company had $411.5 million of available revolver capacity, with approximately $2.5 million reserved for letters of credit, and was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Q3 and nine-month revenue increased across both product lines as procedure volumes and capital-equipment purchases recovered from COVID-19-related disruption.
- General surgery revenue increased 5.5% in Q3 and 19.6% for the nine-month period, supported by AirSeal, Buffalo Filter and advanced endoscopic technologies.
- Orthopedic surgery revenue increased 3.5% in Q3 and 22.5% for the nine-month period, with Q3 growth primarily related to capital products.
- Gross margin improved by 100 basis points in Q3 and 270 basis points for the nine-month period. The improvement reflected higher sales and favorable mix, as well as the absence of 2020 plant underutilization, product rationalization, restructuring, manufacturing consolidation and acquisition-related charges.
- Q3 operating income declined despite higher gross profit because selling and administrative expense increased, including higher shipping costs and resumed travel and trade-show activity. Nine-month operating income increased substantially.
- Interest expense declined to $8.1 million in Q3 and $27.9 million for nine months, reflecting lower borrowing costs and the July 2021 refinancing.
- Operating cash flow increased $33.6 million for the first nine months, although inventory investment reduced cash generation.
- The company entered into a new senior credit agreement on July 16, 2021, with a $233.5 million term loan and a $585.0 million revolving facility, both generally maturing in 2026.
Guidance, outlook, risks and unusual items
The filing does not provide specific numerical revenue or earnings guidance. Management expects continued recovery but cautions that COVID-19-related procedure volumes, hospital restrictions, supply availability and broader market conditions remain difficult to predict. Management believes operating cash flow, cash on hand and available revolver capacity will meet foreseeable operating, capital expenditure, debt service, dividend and repurchase needs, but a more severe or prolonged downturn could require additional cost reductions or debt refinancing.
- Q3 2021 included $1.1 million of other expense related to the July refinancing, including early debt extinguishment losses and third-party fees.
- Nine-month 2021 included $0.4 million of restructuring costs related to the orthopedic sales force. Comparable 2020 periods included significant COVID-19, manufacturing, product rationalization and acquisition-related charges.
- The company reported a $2.4 million net fair value asset for foreign-exchange derivatives at September 30, 2021, compared with a $8.0 million net liability at year-end 2020.
- The company faces litigation involving EndoDynamix, including claims seeking liquidated and other damages of up to $24.8 million; no loss was accrued because management does not believe a loss is probable. The court had not issued a ruling as of the filing date.
- Two Georgia state-court actions allege personal injury related to ethylene oxide exposure. Insurance coverage and indemnification issues remain in dispute, the matters are at an early stage, and the company cannot estimate a possible loss.
- Other principal risks include COVID-19, regulatory and FCPA compliance, product liability, intellectual-property claims, cybersecurity, supply constraints, sterilization availability, foreign-exchange and interest-rate changes, acquisitions and debt levels.
- The company expects to adopt ASU 2020-06 on January 1, 2022 using the modified retrospective method. The adoption is expected to change convertible-debt accounting and diluted EPS presentation.
Important facts for investors to verify
- Whether procedure volumes and capital-equipment demand continue to recover as COVID-19 conditions evolve.
- Whether elevated inventory levels convert into revenue without resulting in obsolescence, excess working capital or margin pressure.
- The company’s ability to reduce leverage and manage the February 2024 maturity of its convertible notes.
- Compliance with financial covenants and the availability of the revolving credit facility under changing interest-rate conditions.
- The potential financial and insurance impact of the EndoDynamix and ethylene oxide litigation.
- The effect of shipping costs, labor and material availability, tariffs and other supply-chain pressures on margins.
- The impact of the 2022 convertible-debt accounting adoption on reported interest expense, equity and diluted EPS.