CONMED Corporation — Q1 2021 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 filing covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020. Approximately 81% of revenue came from single-use products, and international sales represented approximately 47% of revenue versus 44% in the prior-year quarter.
Financial performance and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $232.7 million | $214.0 million | 8.7% increase |
| Gross profit | $128.4 million | $119.2 million | 7.8% increase |
| Gross margin | 55.2% | 55.7% | Down 50 basis points |
| Income from operations | $20.1 million | $13.2 million | 52.4% increase |
| Operating margin | 8.6% | 6.2% | Up 240 basis points |
| Net income | $9.9 million | $5.9 million | 66.3% increase |
| Diluted EPS | $0.31 | $0.20 | Increase |
| Net margin | 4.2% | 2.8% | Up 140 basis points |
| Operating cash flow | $22.3 million | $3.7 million | Increase of $18.6 million |
- Orthopedic surgery revenue was $107.2 million, up 7.9% reported and 5.9% on a constant-currency basis.
- General surgery revenue was $125.5 million, up 9.4% reported and 8.2% on a constant-currency basis.
- Single-use product sales increased 5.5% to $187.4 million; capital product sales increased 24.7% to $45.3 million.
- Selling and administrative expense rose 2.6% to $98.3 million but declined to 42.3% of sales from 44.8%, reflecting reduced travel and trade-show spending.
- Research and development expense was $10.0 million, or 4.3% of sales, compared with 4.7% in the prior-year period.
- Interest expense increased to $10.4 million from $9.6 million, primarily due to higher borrowing rates.
- The company reported a $0.1 million income tax benefit and an effective tax rate of negative 1.3%, compared with a $2.4 million benefit and negative 69.8% effective rate in Q1 2020.
Liquidity, cash flow, debt and balance sheet
- Cash and cash equivalents were $36.8 million at March 31, 2021, up from $27.4 million at December 31, 2020.
- Net cash provided by operating activities was $22.3 million. Capital expenditures were $3.1 million, and net cash used in investing activities was $3.1 million.
- Net cash used in financing activities was $8.9 million, including $8.0 million of net revolving-credit repayment and $5.8 million of dividends paid.
- Total debt was $745.4 million, including $199.0 million drawn on the revolving facility, $238.5 million of term-loan borrowings and $345.0 million principal amount of convertible notes due in 2024. Reported long-term debt, net of current maturities and discounts, was $725.3 million.
- Available revolving-credit capacity was $383.4 million, with approximately $2.6 million reserved for letters of credit.
- The company was in compliance with its debt covenants and stated that cash flow, cash on hand and available borrowing capacity should meet foreseeable liquidity needs.
- The COVID-19-related suspension of required leverage ratios ended April 15, 2021, after the reporting date, reinstating those requirements.
- Working capital was $242.2 million at March 31, 2021. Inventories increased to $205.8 million from $194.9 million at year-end 2020.
Material changes versus the prior comparable period
- Revenue growth reflected increased procedure volumes as hospitals and surgery centers resumed more non-urgent surgeries, along with continued growth in Buffalo Filter and AirSeal products.
- Operating and net income benefited from higher revenue, expense-control actions and the absence of Q1 2020 manufacturing-consolidation charges of $1.8 million and acquisition-related inventory and other charges of $0.8 million.
- Gross margin nevertheless declined 50 basis points because of unfavorable production variances in Q1 2021.
- Comprehensive income improved to $10.7 million from a comprehensive loss of $1.1 million, primarily because foreign-currency translation losses were less severe.
- Operating cash flow improved substantially, driven mainly by higher net income and lower incentive-compensation payments.
- Net sales growth was partly offset by unfavorable currency effects of approximately 1.5 percentage points.
- The company recorded a $0.4 million charge for sales-force restructuring in Q1 2021, compared with $0.8 million of acquisition and integration costs in selling and administrative expense in Q1 2020.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide specific full-year revenue or earnings guidance. Management expects general surgery to recover faster than orthopedic surgery because of the nature of the procedures and products, but continues to identify substantial uncertainty regarding the duration and economic effects of COVID-19. Management expects liquidity to remain adequate but stated that a more severe or prolonged downturn could require additional cost reductions or debt refinancing.
- Key risks include COVID-19 and procedure deferrals, regulatory requirements and enforcement, product liability, intellectual-property litigation, cybersecurity, supply and material availability, sterilization capacity and costs, foreign exchange and interest rates, acquisitions, competition and changes in customer preferences.
- The EndoDynamix litigation remains pending. A non-jury trial began March 18, 2021, with testimony concluding April 7, 2021. Plaintiffs claim liquidated damages and additional damages of up to $24.8 million. The company has not accrued a loss because it does not believe a loss is probable.
- The company has $200.0 million of share-repurchase authorization, with $37.4 million remaining as of March 31, 2021. No repurchases were made during Q1 2021.
- The 2.625% convertible notes mature in February 2024. Diluted EPS included potential shares related to the notes and warrants because the average share price exceeded the relevant conversion and warrant prices.
- Management reported no material change in market-risk exposures and concluded that disclosure controls and procedures were effective.
Important facts for investors to verify
- Whether surgical volumes continue to normalize and whether COVID-19 resurgences or regional disparities affect orthopedic and general surgery demand.
- The company’s ability to meet reinstated leverage requirements following the April 15, 2021 termination of covenant relief.
- Refinancing or repayment plans for the term loan and convertible notes, both of which have significant maturities in 2023 and 2024.
- The outcome and potential financial exposure of the EndoDynamix litigation.
- Whether unfavorable production variances, inventory growth and supply-chain conditions pressure gross margins or cash flow.
- The extent of potential dilution from the convertible notes and warrants if the share price remains above the applicable strike prices.