CONMED Corporation 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, general surgery, gynecology, neurosurgery and gastroenterology applications. This unaudited filing covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016.
Approximately 80% of revenue came from single-use products, and international sales represented approximately 47% of revenue in both periods. The company reports as a single operating segment, with orthopedic surgery and general surgery product lines.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $186.6 million | $181.2 million | +3.0% reported; +3.7% constant currency |
| Gross profit | $99.9 million | $97.7 million | +2.2% |
| Gross margin | 53.5% | 53.9% | Down 0.4 percentage points |
| Operating income (loss) | $(2.5) million | $3.5 million | Declined $6.0 million |
| Operating margin | (1.3%) | 2.0% | Down 3.3 percentage points |
| Net loss | $(4.5) million | $(2.3) million | Loss increased $2.3 million |
| Diluted loss per share | $(0.16) | $(0.08) | Loss increased $0.08 per share |
| Cash flow from operations | $15.3 million | $(16.6) million | Improved $31.9 million |
| Capital expenditures | $2.6 million | $2.8 million | Down $0.2 million |
| Cash and equivalents | $34.7 million | $19.9 million at March 31, 2016 | March 31, 2017 balance up from $27.4 million at December 31, 2016 |
Orthopedic surgery sales were $103.8 million, down 1.4% reported, while general surgery sales were $82.8 million, up 9.1%. Single-use product sales increased 3.3% to $149.8 million, and capital product sales increased 1.5% to $36.8 million.
Interest expense increased to $4.1 million from $3.8 million, primarily because of higher borrowing rates. The weighted-average borrowing rate increased to 3.21% from 2.91%. The effective tax benefit rate was 31.3%, compared with 29.9%.
At March 31, 2017, total debt was approximately $498.3 million, consisting principally of $164.1 million under the term loan, $331.0 million under the revolving facility and a $3.9 million mortgage note. Revolving-facility availability was $189.2 million, with approximately $4.8 million reserved for letters of credit. The company reported compliance with all debt covenants.
Material changes versus the prior comparable period
- Revenue increased 3.0%, driven mainly by AirSeal, endoscopic technologies, generators and sports medicine products. Growth was partly offset by weaker powered instrument, video system and critical care sales.
- Gross margin declined because of unfavorable foreign exchange effects and operational restructuring costs.
- Selling and administrative expense increased $8.9 million to $94.8 million. The increase included a $12.2 million accrual for the SurgiQuest-Lexion litigation verdict and approximately $1.0 million of patent settlement and other legal costs.
- Acquisition-related costs declined to $1.5 million from $9.0 million, primarily reflecting the reduced impact of the 2016 SurgiQuest acquisition and integration activities.
- Research and development expense decreased to $7.6 million from $8.3 million due to project timing.
- Operating cash flow improved substantially, principally because the prior-year quarter included significant SurgiQuest acquisition cash outflows. The 2017 operating cash flow also benefited from accruals related to the Lexion verdict.
- The company paid $5.6 million in dividends and made $2.2 million of term-loan repayments. Net revolving-borrowing activity was approximately $2.0 million.
Guidance, outlook, commentary, risks and unusual items
Management expects 2017 capital expenditures to approximate $15.0 million and believes operating cash flow, cash on hand and available borrowing capacity will be adequate for working capital, debt service, capital expenditures and potential share repurchases in the foreseeable future. No broader quantitative earnings or revenue guidance is provided in the filing.
CONMED expects to continue reviewing and restructuring operations and sales, marketing and administrative functions. Additional severance and exit charges may occur, and anticipated cost savings may not be achieved. The restructuring accrual was $1.8 million at March 31, 2017.
The Lexion litigation jury verdict, entered April 13, 2017, found SurgiQuest liable for $2.2 million of compensatory damages and $10.0 million of punitive damages. CONMED recorded $12.2 million in expense and was evaluating whether to appeal; the filing states that an appeal may not be successful.
Former EndoDynamix shareholders filed a Delaware Chancery Court complaint seeking approximately $12.7 million of accelerated contingent milestone and revenue-based payments. CONMED denies that acceleration is warranted and intends to defend the claims.
Other risks include medical-device regulation, product liability, patent and other litigation, foreign exchange and interest-rate exposure, competition, technology changes, acquisition integration, availability and cost of materials, allograft tissue availability and compliance with anti-corruption requirements. The company maintains product-liability insurance of $25 million per incident and $25 million in annual aggregate coverage.
The company adopted inventory measurement and certain cash-flow and share-based-payment accounting updates in the quarter without a material current-period impact. It plans to adopt the new revenue-recognition standard on January 1, 2018, currently expecting to use the modified retrospective method.
Most important facts for investors to verify
- Whether general surgery growth, particularly AirSeal, offsets continued weakness in orthopedic powered instruments and video systems.
- The recurring versus nonrecurring nature of the $12.2 million Lexion verdict accrual and the outcome of any appeal.
- The status and potential exposure from the EndoDynamix contingent-payment litigation.
- Progress on restructuring initiatives, related future charges and realized cost savings.
- Debt covenant compliance, interest-rate exposure and the $189.2 million of reported revolving-facility availability.
- Whether operating cash flow remains sufficient to fund capital expenditures, dividends, debt service and any future share repurchases.
- The effect of foreign exchange, regulatory requirements, patent disputes and product-liability claims on future margins and cash flows.