CONMED Corporation — Fiscal 2018 Form 10-K Summary
Business context and reporting period
CONMED is a medical technology company providing surgical devices and equipment for minimally invasive procedures in orthopedic and general surgery. The filing covers the fiscal year ended December 31, 2018; fourth-quarter figures are presented in the filing but are not separately audited.
- Approximately 3,100 employees and products sold in more than 100 countries.
- Orthopedic surgery represented 52% of sales; general surgery represented 48%.
- Approximately 79% of revenue came from single-use products, supporting recurring demand. International sales represented approximately 48% of consolidated sales.
Financial performance and liquidity
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $859.6 million | $796.4 million | 7.9% increase |
| Gross profit | $469.1 million | $431.0 million | 8.8% increase |
| Gross margin | 54.6% | 54.1% | 0.5 percentage-point increase |
| Operating income | $71.3 million | $46.9 million | 51.9% increase |
| Operating margin | 8.3% | 5.9% | 2.4 percentage-point increase |
| Net income | $40.9 million | $55.5 million | 26.4% decrease |
| Diluted EPS | $1.41 | $1.97 | Decrease |
| Cash flow from operations | $74.7 million | $65.6 million | 13.9% increase |
| Capital expenditures | $16.5 million | $12.8 million | Increase |
- Orthopedic sales increased 4.1% to $446.7 million; general surgery sales increased 12.4% to $412.9 million.
- Adjusted sales growth, excluding foreign exchange and the ASC 606 presentation effect, was 8.4%.
- Net income and EPS declined despite stronger operating results because 2017 included a $31.9 million tax benefit related to the Tax Cuts and Jobs Act. The 2018 effective tax rate was 19.3%, compared with a 2017 benefit rate of 93.1%.
- Cash and cash equivalents were $17.5 million at year-end, compared with $32.6 million in 2017. Net working capital was $213.4 million.
- Total debt was $456.9 million at year-end, including $312.0 million on the revolving facility and $144.4 million of term debt. Revolver availability was $210.0 million, subject to approximately $3.0 million reserved for letters of credit.
- Debt represented approximately 40% of total capitalization. The company was in compliance with its debt covenants at December 31, 2018.
- The quarterly dividend remained $0.20 per share, or $0.80 annually. The company had $37.4 million remaining under its $200 million share-repurchase authorization and made no program repurchases in 2018.
Material changes versus the prior comparable period
- Revenue growth accelerated from 4.3% in 2017 to 7.9% in 2018, driven particularly by general surgery and AirSeal product growth.
- Gross margin improved from 54.1% to 54.6%, primarily due to product mix, lower restructuring costs and favorable foreign exchange, partly offset by ASC 606 effects.
- Selling and administrative expense increased modestly in dollars but declined to 41.4% of sales from 44.2%. The improvement reflected the absence of approximately $17.5 million of primarily litigation-related costs recorded in 2017 and the reclassification of $8.3 million of group purchasing organization fees under ASC 606.
- Research and development expense increased to $42.2 million from $32.3 million, including a $4.2 million net charge primarily related to an in-process research and development impairment.
- Interest expense increased to $20.7 million from $18.2 million as the weighted-average borrowing rate increased to 4.35% from 3.52%.
- Operating cash flow increased, although inventory and accounts receivable absorbed cash as production increased to support new products and sales growth.
- The company adopted ASC 606 using the modified retrospective method. The adoption reduced reported 2018 revenue by $8.3 million relative to the prior presentation but did not affect net income or EPS.
- Fourth-quarter 2018 sales were $242.4 million and net income was $15.7 million, compared with fourth-quarter 2017 sales of $222.6 million and net income of $46.7 million. The prior-year quarter benefited from the Tax Reform tax benefit.
Guidance, outlook, commentary, risks and unusual items
- Management stated that operating cash flow, cash on hand and available borrowing capacity were expected to be adequate for working capital, debt service, capital expenditures and repurchases in the foreseeable future.
- 2019 capital expenditures were expected to be approximately $15 million to $20 million.
- On February 11, 2019, after year-end, CONMED acquired Buffalo Filter for approximately $365 million in cash. Buffalo Filter supplies smoke evacuation technologies complementary to CONMED’s advanced surgical portfolio.
- The acquisition was financed with $345 million of 2.625% convertible notes due 2024 and borrowings under a new senior credit agreement. The new agreement included a $265 million term loan and a $585 million revolving facility.
- The convertible notes are convertible under specified conditions at an initial conversion price of approximately $88.80 per share. Related hedge transactions are intended to reduce dilution, while warrants could create dilution if CONMED’s share price exceeds the warrant strike price.
- Key exposures include variable-rate debt, foreign currency fluctuations, competitive pricing pressure, healthcare purchasing constraints, medical-device regulation, product recalls, intellectual-property litigation, product liability, cybersecurity, supply-chain disruptions and the availability of allograft tissue.
- A 1 percentage-point increase in market interest rates was estimated to increase annual interest expense and reduce pretax income by approximately $4.6 million, assuming no debt repayments.
- CONMED paid $12.3 million in July 2018, including post-judgment interest, to resolve the Lexion Medical litigation judgment recorded in 2017. The company also disclosed ongoing EndoDynamix litigation and does not expect pending matters to have a material adverse effect, while noting that future outcomes remain uncertain.
- Goodwill impairment testing in the fourth quarter found that estimated fair value exceeded carrying value; no goodwill impairment was recorded.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2018.
Most important facts for investors to verify
- Reconcile reported revenue growth with the $8.3 million ASC 606 revenue reclassification and the company’s 8.4% adjusted constant-currency growth measure.
- Assess post-acquisition leverage, debt maturities, interest-rate sensitivity and liquidity after the Buffalo Filter transaction and 2019 refinancing.
- Separate underlying earnings improvement from the unusually large 2017 Tax Reform benefit and the 2017 litigation charges.
- Evaluate whether general surgery growth, AirSeal adoption and new product introductions can offset competitive, pricing and hospital-budget pressures.
- Review the accounting, integration progress and pro forma contribution of Buffalo Filter, which were not fully available in this filing.
- Monitor foreign currency exposure, allograft supply, regulatory compliance, product liability, intellectual-property matters and the unresolved EndoDynamix claims.