CONMED Corporation — 2019 Q1 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 report covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018.
On February 11, 2019, CONMED acquired Buffalo Filter, a smoke-evacuation technology business, for approximately $365.0 million in cash. Buffalo Filter contributed $6.1 million of reported sales during the quarter.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $218.4 million | $202.1 million | 8.1% increase; 9.3% constant currency |
| Gross profit | $121.4 million | $109.6 million | 10.8% increase |
| Gross margin | 55.6% | 54.2% | Up 1.4 percentage points |
| Income from operations | $11.6 million | $17.3 million | 32.6% decrease |
| Operating margin | 5.3% | 8.6% | Down 3.3 percentage points |
| Net income | $1.0 million | $10.7 million | 90.4% decrease |
| Diluted EPS | $0.04 | $0.37 | Decrease |
| Operating cash flow | $(3.9) million | $25.0 million | Decrease of $28.9 million |
Net margin was approximately 0.5% in Q1 2019 versus 5.3% in Q1 2018. International sales represented approximately 46% of revenue, compared with 47% in the prior-year quarter. Approximately 79% of revenue came from single-use products.
Orthopedic surgery sales increased 4.2% as reported, or 5.7% in constant currency, to $113.4 million. General surgery sales increased 12.6% as reported, or 13.4% in constant currency, to approximately $105.0 million, supported by Buffalo Filter, AirSeal and new product introductions.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $23.4 million at March 31, 2019, compared with $17.5 million at December 31, 2018.
- Total debt was $817.9 million, including $269.0 million under the revolving facility, $263.2 million of term-loan debt, and $284.4 million carrying value of convertible notes.
- Long-term debt increased from $438.6 million at year-end 2018 to $803.6 million, principally reflecting financing for the Buffalo Filter acquisition.
- The amended senior credit agreement includes a $265.0 million term loan and a $585.0 million revolving facility. Available revolver capacity was $313.0 million, with approximately $3.0 million reserved for letters of credit.
- The $345.0 million convertible notes bear a 2.625% coupon and mature in February 2024. The initial conversion price was approximately $88.80 per share.
- Management stated that cash flow, cash on hand and available borrowing capacity should satisfy anticipated working capital, debt service, capital expenditure and repurchase requirements in the foreseeable future.
- Capital expenditures were $4.0 million in Q1 2019; management expected approximately $16.0 million for full-year 2019.
Material Changes Versus the Prior Comparable Period
- Revenue growth was broad-based, with especially strong general surgery performance and $6.1 million of Buffalo Filter revenue.
- Gross margin improved due primarily to favorable inventory variances, partially offset by a $0.7 million Buffalo Filter inventory-adjustment charge.
- Selling and administrative expense increased to $99.2 million from $84.6 million, including $7.2 million of Buffalo Filter transaction and integration costs.
- Research and development expense increased to $10.6 million from $7.7 million as CONMED continued new-product development.
- Interest expense increased to $9.4 million from $4.8 million because of additional borrowings and the convertible notes.
- Other expense was $4.2 million, including a $3.6 million lender commitment-fee charge and a $0.3 million loss on early extinguishment of debt.
- The income tax benefit was $3.0 million, producing an unusual effective tax rate of 152.2%, primarily due to discrete benefits related to stock options and other federal tax items.
- Operating cash flow turned negative, primarily because of lower earnings, higher inventory, and higher commission and incentive compensation payments.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide explicit full-year revenue or earnings guidance. Management identified continued product development, new product introductions, Buffalo Filter integration, and growth in recurring single-use product sales as important business factors.
Key risks include the ability to integrate and realize expected synergies from Buffalo Filter, elevated leverage and interest-rate exposure, compliance with debt covenants, foreign exchange movements, regulatory and FCPA matters, product liability, patent and other litigation, cybersecurity, supply and material costs, tariffs, competition, and the availability of allograft tissue.
Management stated that it was in compliance with all credit-agreement covenants at March 31, 2019. The company does not expect pending claims or investigations to have a material effect, but noted that future claims, regulatory inquiries, product liability matters or environmental obligations could be material.
CONMED is defending litigation related to contingent milestone and royalty payments associated with the discontinued EndoDynamix clip-applier development. The filing states that the company cannot assure it will prevail.
The company adopted the new lease standard on January 1, 2019, recognizing approximately $17.9 million of operating lease right-of-use assets and liabilities. The adoption did not materially affect net income, EPS or cash flow.
Important Facts for Investors to Verify
- Whether Buffalo Filter achieves the expected revenue synergies, cost savings and integration benefits supporting the $214.8 million of acquisition goodwill.
- Progress in reducing leverage and managing the 2023–2024 debt maturities, including the $345.0 million convertible notes.
- Whether negative first-quarter operating cash flow reverses as earnings and working-capital trends improve.
- The sustainability of the 55.6% gross margin and the effect of acquisition-related and other nonrecurring costs on future profitability.
- The impact of interest rates, foreign exchange rates and potential conversion or warrant dilution on future results.
- Developments in the EndoDynamix litigation and any regulatory, FCPA, product-liability or environmental matters.
- Whether the company’s stated liquidity and available revolver capacity remain sufficient while funding acquisitions, capital expenditures, dividends and other obligations.