CONMED Corporation — Q2 2020 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, including orthopedic and general surgery products. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods.
Results were materially affected by the COVID-19 pandemic, which reduced hospital and ambulatory surgery volumes and led to deferrals of non-urgent procedures. The impact was greater on orthopedic products, particularly capital equipment. Approximately 82% of revenue is derived from single-use products, and international sales represented approximately 45% of six-month 2020 revenue.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $157.8 million | $238.3 million | $371.8 million | $456.6 million |
| Gross profit | $71.9 million | $131.2 million | $191.1 million | $252.6 million |
| Gross margin | 45.6% | 55.1% | 51.4% | 55.3% |
| Operating income (loss) | $(21.2) million | $18.7 million | $(8.1) million | $30.3 million |
| Net income (loss) | $(27.4) million | $5.7 million | $(21.5) million | $6.7 million |
| Diluted EPS | $(0.96) | $0.19 | $(0.75) | $0.23 |
| Net cash from operating activities | Not separately provided | Not separately provided | $9.3 million | $17.7 million |
Q2 sales declined 33.8% year over year, or 32.6% on a constant-currency basis. Six-month sales declined 18.6%, or 17.3% on a constant-currency basis. Q2 orthopedic surgery sales fell 47.7%, while general surgery sales fell 20.6%. Six-month declines were 30.3% for orthopedic surgery and 6.8% for general surgery.
Selling and administrative expense decreased to $84.5 million in Q2 and $180.3 million for the six months, but increased as a percentage of sales to 53.5% and 48.5%, respectively. Research and development expense decreased to $8.7 million in Q2 and $18.8 million for the six months. Interest expense was $11.4 million in Q2 and $21.0 million for the six months.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $35.0 million at June 30, 2020, compared with $25.9 million at December 31, 2019.
- Total debt was $805.6 million, including $258.0 million drawn on the revolving facility, $248.4 million outstanding under the term loan, $300.1 million of convertible notes net of discount and issuance costs, and $0.7 million of financing leases.
- Available revolving credit capacity was $324.5 million, with approximately $2.5 million reserved for letters of credit.
- Net working capital was $228.1 million. Accounts receivable declined to $143.4 million from $189.1 million at year-end, while inventories increased to $175.7 million from $164.6 million.
- Six-month capital expenditures were $6.6 million, compared with $9.0 million in the prior-year period. Six-month investing cash outflow was $10.4 million, compared with $373.9 million in 2019, which included the Buffalo Filter acquisition.
- The April 2020 credit agreement amendment suspended required leverage ratios for up to four quarters and imposed minimum liquidity and fixed-charge coverage requirements. The company stated that it was compliant with these requirements and all applicable covenants at June 30, 2020.
Material changes versus the prior comparable period
- COVID-19-related surgery deferrals drove broad revenue declines, with orthopedic surgery most heavily affected.
- Gross margin declined 950 basis points in Q2 and 390 basis points for the six months, reflecting lower volume and $6.6 million of plant-underutilization costs, $2.2 million of product-rationalization inventory charges, $1.1 million of restructuring costs and manufacturing-consolidation costs of $1.6 million in Q2.
- Additional Q2 selling and administrative charges included $2.1 million of field-inventory write-offs and $2.1 million of severance and orthopedic sales-force restructuring costs.
- The company moved from profitability to an operating and net loss position in both the quarter and year-to-date period.
- Operating cash flow fell to $9.3 million from $17.7 million, primarily because of the net loss, partly offset by cash generated from lower accounts receivable.
- Debt increased from $768.8 million at December 31, 2019 to $805.6 million at June 30, 2020, principally reflecting increased revolving-credit borrowings.
- In contrast with 2019, the company made no share repurchases during the first six months of 2020. The remaining authorization was $37.4 million.
Guidance, outlook, risks and unusual items
Management did not provide specific revenue or earnings guidance in the filing. It expects materially lower sales to continue for at least the remainder of 2020 while the pandemic, government restrictions and surgery deferrals persist. Management expects operating cash flow, existing cash and revolving-credit availability to satisfy foreseeable liquidity needs and forecasts compliance with the amended debt requirements.
Management cautioned that a more severe or prolonged downturn could require further cost reductions or debt refinancing. Key risks include renewed COVID-19 outbreaks, reduced surgery volumes, supply-chain disruption, customer liquidity and reimbursement pressures, covenant compliance, access to capital, foreign exchange and interest-rate exposure, regulatory enforcement, product liability, intellectual-property disputes and acquisition integration.
- The company recorded $14.7 million of acquisition and other expense in cost of sales and $5.4 million in selling and administrative expense for the six months, including plant underutilization, product rationalization, restructuring, manufacturing consolidation and acquisition-related costs.
- A South Korean office was served with a search warrant in June 2020 in an early-stage investigation concerning alleged transfer-pricing and reimbursement-price manipulation. The company is cooperating and believes its transfer pricing was appropriate, but cannot predict the outcome or related costs.
- An EndoDynamix-related Delaware litigation matter seeking approximately $12.7 million in accelerated payments was scheduled for trial in December 2020. The company intends to defend the claims.
- The Buffalo, New York manufacturing facility was classified as held for sale with a June 30, 2020 net book value of $3.0 million.
Important facts for investors to verify
- Whether surgical volumes and revenue recover after the filing date, especially orthopedic procedures and capital-equipment demand.
- Available revolver capacity, cash generation and compliance with the amended minimum-liquidity and fixed-charge coverage requirements.
- The timing and terms of the $456.8 million of scheduled debt maturities in 2023 and 2024, including the $345.0 million convertible notes due in 2024.
- Whether COVID-19-related charges, restructuring, plant underutilization and product-rationalization costs recur or expand.
- The status and potential financial exposure of the South Korean investigation and EndoDynamix litigation.
- Whether inventory levels, manufacturing consolidation and the held-for-sale facility create additional impairment, obsolescence or restructuring charges.