CONMED Corporation — Form 10-Q Summary
Business Context and Reporting Period
CONMED is a medical technology company providing surgical devices and equipment for minimally invasive procedures across orthopedic and general surgery. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
On February 11, 2019, CONMED acquired Buffalo Filter for approximately $365.0 million in cash. Buffalo Filter provides smoke-evacuation technologies and contributed $13.9 million of third-quarter sales and $33.4 million of nine-month sales.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $233.6 million | $202.3 million | $690.2 million | $617.2 million |
| Gross profit | $130.1 million | $110.6 million | $382.7 million | $336.5 million |
| Gross margin | 55.7% | 54.7% | 55.5% | 54.5% |
| Income from operations | $20.9 million | $11.5 million | $51.2 million | $45.5 million |
| Operating margin | 9.0% | 5.7% | 7.4% | 7.4% |
| Net income | $7.0 million | $5.8 million | $13.7 million | $25.2 million |
| Diluted EPS | $0.23 | $0.20 | $0.47 | $0.87 |
| Net cash from operations | Not provided | Not provided | $54.3 million | $50.0 million |
Q3 sales increased 15.5% reported and 15.6% on a constant-currency basis. Nine-month sales increased 11.8% reported and 12.6% on a constant-currency basis. Orthopedic surgery sales increased 7.2% in the quarter and 5.5% year to date; general surgery sales increased 24.0% and 18.8%, respectively.
Approximately 79% of revenue came from single-use products. International sales represented approximately 46% of nine-month revenue, compared with 48% in 2018.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $30.1 million at September 30, 2019, compared with $17.5 million at December 31, 2018.
- Total debt was $794.2 million, including $247.0 million drawn on the revolving facility, $256.7 million of term debt, and $290.0 million carrying value of convertible notes.
- The company had $335.5 million of available revolving credit capacity, with approximately $2.5 million reserved for letters of credit.
- CONMED issued $345.0 million of 2.625% convertible notes due 2024 and entered into a $265.0 million term loan and a $585.0 million revolving credit facility.
- Interest expense increased to $11.2 million in Q3 and $32.4 million for the first nine months, versus $5.2 million and $15.1 million, respectively, in the prior-year periods.
- Capital expenditures were $13.9 million year to date; management expected approximately $19.0 million for full-year 2019.
- The company paid $16.9 million in dividends during the first nine months and had $37.4 million remaining under its $200.0 million share-repurchase authorization. No repurchases were made in 2019 through September 30.
Management stated that operating cash flow, cash on hand and available borrowing capacity should be adequate for anticipated working capital, debt service, capital expenditures, dividends and repurchases. The company was in compliance with its credit agreement covenants at September 30, 2019.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by continued orthopedic growth, broader general surgery growth, and the Buffalo Filter acquisition.
- Gross margin improved by 1.0 percentage point in both the quarter and year-to-date period, primarily because of improved manufacturing performance, partially offset by Buffalo Filter inventory adjustments and manufacturing consolidation costs.
- Q3 operating margin improved to 9.0% from 5.7%; year-to-date operating margin was unchanged at 7.4% because of acquisition-related costs and higher amortization.
- Year-to-date net income and diluted EPS declined materially because of higher interest expense, amortization of acquired intangible assets, amortization of the convertible-note discount, and acquisition-related costs.
- Research and development expense declined in Q3 because the 2018 period included a $4.2 million impairment charge for in-process research and development.
- Operating cash flow increased modestly despite lower net income, which management attributed primarily to non-cash amortization.
- Total assets increased to $1.76 billion from $1.37 billion, primarily reflecting the Buffalo Filter goodwill and acquired intangible assets.
Guidance, Outlook, Risks and Unusual Items
Management did not provide explicit revenue or earnings guidance in the filing. The filing states that interim results are not necessarily indicative of full-year 2019 results.
- Unusual and nonrecurring items included $11.2 million of Buffalo Filter acquisition-related selling and administrative costs, $2.8 million of acquisition-related inventory and manufacturing consolidation costs, $3.9 million of debt refinancing costs, and a $0.3 million loss on early debt extinguishment.
- Acquired goodwill totaled $215.8 million and acquired intangible assets totaled $140.0 million. Future amortization is expected to remain significant.
- Key risks include regulatory and FCPA compliance, product liability, patent and other litigation, competition, product acceptance, supply and material costs, foreign exchange and interest rates, cybersecurity, acquisition integration, tariffs, and environmental requirements.
- Approximately 25% of products are sterilized using ethylene oxide, creating potential exposure to environmental and sterilization-related disruptions or costs.
- The company continues to defend litigation involving the former EndoDynamix shareholders and potential contingent payments. Management does not expect pending matters to have a material adverse effect, but states that no assurance can be given.
- CONMED adopted the new lease standard in 2019, recording $17.9 million of initial right-of-use assets and lease liabilities. Management reported no material effect on net income, EPS or cash flow.
Important Facts for Investors to Verify
- Whether Buffalo Filter revenue growth and expected synergies offset the acquisition’s additional amortization, interest expense and integration costs.
- The company’s ability to reduce leverage and refinance or repay the $345.0 million convertible notes and other debt obligations maturing or becoming due through 2024.
- The effect of higher interest expense and debt-discount amortization on future EPS and cash generation.
- Progress toward the expected $19.0 million of 2019 capital expenditures and the adequacy of available revolving-credit capacity.
- Future gross-margin performance after manufacturing consolidation and acquisition-related costs conclude.
- Potential dilution from the convertible notes and warrants, including the stated $88.80 conversion price and $114.92 hedge strike price.
- Developments in EndoDynamix litigation, product-liability or regulatory matters, and environmental or ethylene-oxide sterilization risks.