CONMED Corporation 2020 Q3 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. Its product lines are orthopedic surgery and general surgery. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
COVID-19 materially reduced non-urgent surgical procedures and capital equipment purchases during the first half of 2020. Temporary closures were lifted in several markets during the third quarter, and the company returned to year-over-year sales growth in that quarter. International sales represented approximately 44% of nine-month revenue, compared with 46% in 2019.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $237.8 million | $233.6 million | $609.6 million | $690.2 million |
| Gross profit | $133.7 million | $130.1 million | $324.8 million | $382.7 million |
| Gross margin | 56.2% | 55.7% | 53.3% | 55.5% |
| Income from operations | $29.4 million | $20.9 million | $21.3 million | $51.2 million |
| Operating margin | 12.4% | 9.0% | 3.5% | 7.4% |
| Net income (loss) | $6.9 million | $7.0 million | $(14.6) million | $13.7 million |
| Diluted EPS | $0.23 | $0.23 | $(0.51) | $0.47 |
Q3 sales increased 1.8% year over year, with general surgery sales up 10.0% to $135.6 million and orthopedic surgery sales down 7.4% to $102.2 million. Nine-month sales decreased 11.7%; orthopedic surgery declined 22.8% and general surgery declined 0.9%.
Q3 single-use product sales increased 3.6% to $190.9 million, while capital product sales decreased 4.7% to $46.9 million. For the nine-month period, single-use sales declined 9.1% and capital product sales declined 21.5%.
Q3 operating performance improved primarily because of favorable product and channel mix, lower production costs, reduced travel and trade-show expenses, and lower research and development spending. The nine-month operating margin declined because of lower volume and COVID-19-related manufacturing and restructuring costs.
Interest expense was $11.9 million in Q3 and $32.9 million for the nine months. Income tax expense was $10.5 million in Q3, producing a 60.5% quarterly effective tax rate, and $2.7 million for the nine months. Management attributed the unusually high Q3 rate to the year-to-date loss-to-income change and tax effects related to final regulations concerning U.S. tax on foreign earnings.
Cash flow, liquidity and debt
- Net cash provided by operating activities was $44.4 million for the nine months, down from $54.3 million in 2019.
- Capital expenditures were $9.9 million, compared with $13.9 million in the prior-year period.
- Net cash used in investing activities was $10.5 million, including $3.2 million of proceeds from a facility sale. The prior-year period included the $364.9 million Buffalo Filter acquisition.
- Net cash used in financing activities was $24.9 million, compared with $337.9 million of financing cash inflow in 2019.
- Cash and cash equivalents increased to $35.6 million from $25.9 million at December 31, 2019.
- Total debt was $777.3 million at September 30, 2020, consisting primarily of $230.0 million drawn on the revolving facility, $245.1 million of term-loan borrowings and $345.0 million principal amount of convertible notes due 2024.
- Available revolving-facility capacity was $352.5 million, with approximately $2.5 million reserved for letters of credit.
- The company was in compliance with its debt covenants and amended its credit agreement to suspend required leverage ratios for up to four quarters, subject to minimum liquidity and fixed-charge coverage requirements.
Material changes versus the prior comparable period
- COVID-19 drove a significant nine-month revenue decline and contributed to a net loss, although Q3 revenue returned to growth.
- General surgery outperformed orthopedic surgery in Q3, supported by Buffalo Filter and AirSeal products, while orthopedic results remained pressured by deferred procedures and lower capital spending.
- Nine-month gross margin declined 220 basis points to 53.3%, including $6.6 million of plant-underutilization costs, $2.2 million of product-rationalization inventory charges, $1.1 million of COVID-related restructuring costs and $4.0 million of manufacturing-consolidation costs.
- Selling and administrative expense decreased 7.9% for the nine months, partly reflecting lower travel, trade-show and commission costs and the absence of $11.2 million of 2019 Buffalo Filter acquisition and integration costs.
- The company paid quarterly dividends of $0.20 per share and made no share repurchases during 2020 through September 30. The remaining authorization was $37.4 million.
Guidance, outlook, risks and unusual items
The filing does not provide clear numerical revenue or earnings guidance. Management expects cash flow from operations, cash on hand and revolving-credit availability to meet foreseeable liquidity needs and forecasts compliance with the amended credit agreement’s liquidity and fixed-charge requirements. However, management states that the outlook for the remainder of 2020 and 2021 is uncertain until an effective vaccine is broadly available.
Key risks include a prolonged or renewed COVID-19 impact on surgical volumes, hospital and ambulatory surgery-center budgets, supply-chain reliability, production schedules and debt covenant compliance. A more severe or prolonged downturn could require additional cost reductions or debt refinancing.
Unusual matters include COVID-related plant underutilization and restructuring charges, product rationalization costs, manufacturing consolidation costs, a $3.2 million facility sale, and an unusually high Q3 effective tax rate. The company also disclosed an early-stage South Korean transfer-pricing investigation and pending EndoDynamix litigation, with a trial scheduled for December 2020. Management did not believe losses from these matters were probable or expected them to materially affect the financial statements.
Most important facts for investors to verify
- Whether surgical volumes and orthopedic capital-equipment demand continue recovering after the third-quarter rebound.
- Whether COVID-19 resurgence, governmental restrictions or hospital budget pressure cause further revenue declines or manufacturing underutilization.
- Compliance with the amended credit agreement’s minimum liquidity and fixed-charge coverage requirements, including available revolver capacity and debt maturities.
- The sustainability of Q3 operating-margin improvement after excluding or normalizing unusual cost actions and COVID-related charges.
- The impact of the $345.0 million convertible notes due 2024, including potential cash repayment, refinancing requirements and dilution risk.
- Developments in the EndoDynamix litigation, South Korean investigation and other product-liability, regulatory, environmental and intellectual-property contingencies.