CONMED Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012; filed October 26, 2012. Financial statements are unaudited. CONMED is a medical technology company focused on surgical devices and equipment for minimally invasive procedures, including arthroscopy, powered surgical instruments, electrosurgery, cardiac monitoring, endosurgery and endoscopic technologies.
Financial Results and Position
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $181.9 million | $172.8 million | $565.9 million | $539.5 million |
| Gross profit | $97.9 million | $91.3 million | $298.6 million | $278.5 million |
| Gross margin | 53.8% | 52.8% | 52.8% | 51.6% |
| Income from operations | $14.1 million | $15.9 million | $48.2 million | $49.9 million |
| Operating margin | 7.7% | 9.2% | 8.6% | 9.3% |
| Net income | $9.3 million | $8.2 million | $29.6 million | $25.9 million |
| Diluted EPS | $0.32 | $0.29 | $1.03 | $0.90 |
Q3 sales increased 5.3%, while nine-month sales increased 4.9%. Net income rose 13.5% in the quarter and 14.3% year to date, supported by higher sales, improved gross margins and lower interest expense. The effective tax rate declined to 27.0% from 37.5% in Q3 and to 32.6% from 37.4% for the nine-month period, reflecting foreign earnings mix and tax benefits from determinations and examinations by taxing authorities.
Single-use product sales increased 7.0% in Q3 and 7.8% year to date. Capital equipment sales decreased 1.1% in Q3 and 5.5% year to date, reflecting hospital capital-purchasing constraints and difficult comparisons with the prior year.
For the nine months, operating cash flow was $61.3 million versus $76.7 million in the prior-year period. Cash flow was reduced by a $6.5 million pension contribution and higher income-tax payments. Investing cash outflows were $98.8 million, including the MTF transaction, the Viking acquisition and $16.0 million of capital expenditures.
Cash and cash equivalents were $19.8 million at September 30, 2012, compared with $26.0 million at December 31, 2011. Net working capital was $219.1 million. Total debt was approximately $169.4 million, comprising $168.4 million of long-term debt and $1.0 million of current debt. The company had $160.0 million drawn on its $250.0 million revolving credit facility, with $80.2 million of available borrowing capacity and approximately $9.8 million reserved for letters of credit.
Material Changes Versus Prior Period
- Arthroscopy sales increased 10.4% in Q3 and 13.2% year to date, primarily from the MTF distribution agreement and higher procedure-specific product sales.
- Endoscopic Technologies sales increased 10.6% in Q3 and 8.4% year to date, with substantial improvement in operating margins.
- Electrosurgery sales declined 3.0% in Q3 and 4.7% year to date, driven primarily by lower generator and other capital-equipment sales.
- Patient Care sales declined 0.7% in Q3 and 3.7% year to date; the segment remained loss-making.
- The aggregated Linvatec, Electrosurgery and Endosurgery segment’s operating margin declined to 12.3% from 14.9% in Q3 and to 12.6% from 14.6% year to date, due to restructuring, higher MTF-related selling costs and acquisition expenses.
- Q3 and nine-month operating results included other expense of $2.7 million and $6.4 million, respectively, including administrative restructuring, Viking acquisition costs, Nordic distributor acquisition costs and legal arbitration costs.
- CONMED adopted a $0.15-per-share quarterly dividend policy in February 2012. Dividends of $8.6 million were paid during the first nine months, and $4.3 million was payable at September 30.
Guidance, Outlook, Risks and Unusual Items
Management stated that operating cash flow, cash on hand and available revolver capacity should be adequate for operating needs, debt service, capital expenditures and planned share repurchases in the foreseeable future. Capital expenditures were expected to approximate $20.0 million for full-year 2012.
Management estimated total 2012 restructuring costs of approximately $10.0 million to $11.0 million. The restructuring includes transferring production to Mexico and consolidating Finland operations into facilities in Florida and New York. An accrual of $1.9 million was recorded at September 30, 2012.
The January 2012 MTF agreement required a $63.0 million upfront payment and includes up to $84.0 million of contingent payments over four years, of which $34.0 million is due within the next fiscal year. The full $84.0 million was accrued because management considered achievement of the supply targets probable. The arrangement is recorded in other assets and amortized over 25 years.
CONMED acquired Viking Systems on September 24, 2012 for approximately $22.5 million in cash. The preliminary purchase-price allocation included $22.0 million of goodwill. The acquisition did not materially affect Q3 results or EPS.
Key risks include economic weakness and hospital capital-budget constraints, foreign currency and interest-rate volatility, competition, product development and regulatory requirements, integration of acquisitions, availability of allograft tissue, restructuring execution, product liability and patent litigation. Bonutti Skeletal Innovations filed a patent-infringement complaint in September 2012 involving certain CONMED Linvatec products; the company believes the products do not infringe and intends to defend the matter vigorously.
The company uses foreign-exchange forwards for risk management. Notional amounts at September 30, 2012 were $125.6 million for designated cash-flow hedges and $41.3 million for non-designated contracts.
Important Facts for Investors to Verify
- Reconcile the reported debt balances, revolving-facility availability and covenant compliance, including the November 30, 2015 maturity of the revolver.
- Assess the remaining $84.0 million of contingent MTF payments and the associated supply-target assumptions.
- Evaluate whether restructuring costs remain within the $10.0 million to $11.0 million full-year estimate and whether projected savings are realized.
- Review the preliminary Viking purchase-price allocation, goodwill and integration performance.
- Monitor capital-equipment demand, particularly in Electrosurgery and Powered Surgical Instruments, where hospital budget constraints reduced sales.
- Assess the sustainability of the lower effective tax rate, which benefited from foreign earnings mix and discrete tax benefits.
- Review the Bonutti patent litigation, product-liability exposure, regulatory compliance and adequacy of insurance coverage.
- Consider the company’s liquidity after dividends, capital expenditures, acquisition payments and potential future share repurchases.