CONMED Corporation Form 10-Q Summary
Business Context and Reporting Period
CONMED is a global medical technology company providing surgical devices and equipment used in orthopedic, general, gynecologic, thoracic, gastroenterological and general surgery procedures. The filing covers the three and six months ended June 30, 2023. The financial statements are unaudited.
The company reports as a single operating segment. Orthopedic surgery represented 44% of sales and general surgery 56% during both the quarter and year-to-date period. Approximately 84% of revenue is derived from single-use products, and international sales represented approximately 45% of year-to-date revenue.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 |
|---|---|---|---|---|
| Net sales | $317.7 million | $277.2 million | $613.1 million | $519.5 million |
| Gross profit | $170.7 million | $151.8 million | $326.0 million | $287.8 million |
| Gross margin | 53.7% | 54.8% | 53.2% | 55.4% |
| Income from operations | $27.4 million | $24.5 million | $40.1 million | $46.9 million |
| Operating margin | 8.6% | 8.8% | 6.5% | 9.0% |
| Interest expense | $10.0 million | $5.9 million | $20.3 million | $10.9 million |
| Net income (loss) | $13.7 million | $(168.3) million | $15.6 million | $(153.3) million |
| Diluted EPS | $0.43 | $(5.65) | $0.49 | $(5.18) |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $22.8 million | $19.1 million |
Q2 sales increased 14.6% as reported and 16.6% on a constant-currency basis. Year-to-date sales increased 18.0% as reported and 20.6% on a constant-currency basis. Orthopedic surgery sales increased 17.1% in Q2 and 19.4% year to date; general surgery sales increased 12.6% and 16.9%, respectively.
At June 30, 2023, cash and cash equivalents were $27.8 million. Accounts receivable were $229.3 million and inventories were $327.3 million. Total debt was $1.041 billion, including $54.0 million drawn on the revolving facility, $134.6 million under the term loan and approximately $853.1 million of convertible notes, net of debt issuance costs. Available revolving capacity was $529.4 million, with approximately $1.6 million reserved for letters of credit.
Net cash used in investing activities was $9.8 million for the six months, primarily capital expenditures. Net cash used in financing activities was $14.4 million, including net revolving-credit repayments and $12.2 million of dividends. Cash decreased by $1.1 million from year-end 2022.
Material Changes Versus the Prior Comparable Period
- Revenue growth benefited from the In2Bones and Biorez acquisitions, growth in AirSeal, Buffalo Filter and other surgical products, and improved performance of the warehouse management system.
- Gross margin declined 110 basis points in Q2 and 220 basis points year to date, primarily because of inflation in raw materials, freight and other production costs, plus $2.2 million of Q2 and $4.3 million of year-to-date inventory step-up amortization related to In2Bones.
- Operating margin declined year to date despite higher sales. Operating expenses included warehouse-management-system costs of $1.8 million in Q2 and $6.1 million year to date, distribution-agreement termination costs of $2.1 million, and year-to-date severance and cost-improvement expenses.
- Interest expense increased substantially because of the 2.250% convertible notes issued in June 2022 and higher borrowing rates under the senior credit agreement.
- Net income improved from the prior-year loss, but the comparison was significantly affected by $112.0 million of 2022 other expense related to the repurchase and extinguishment of convertible notes, associated hedge settlements and debt issuance-cost write-offs.
- Year-to-date operating cash flow increased to $22.8 million from $19.1 million, while investing cash outflows fell sharply because the prior-year period included the $142.6 million In2Bones acquisition payment.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a clear numerical full-year revenue or earnings guidance range. Management expects inflationary pressures, higher manufacturing and operating costs, and supply-chain challenges to continue through 2023. Management stated that cash on hand, operating cash flow and available revolver capacity should be adequate for foreseeable operating needs, debt service, capital expenditures, dividends and repurchases, while noting that additional cost reductions or debt refinancing could become necessary.
- The senior credit agreement matures in 2026; the $70.0 million remaining principal of the 2.625% convertible notes is scheduled to mature in February 2024, and the $800.0 million principal amount of the 2.250% convertible notes is scheduled to mature in June 2027. The company was in compliance with its debt covenants at June 30, 2023.
- In2Bones and Biorez include potential earn-out payments of up to $110.0 million and $165.0 million, respectively. Fair-value liabilities for contingent consideration totaled approximately $190.2 million at June 30, 2023.
- The warehouse management system implemented in late 2022 caused shipping delays and additional costs. Performance improved materially in the first half of 2023, but management continues to identify a risk of lost sales or customers from prior disruptions.
- CONMED is defending Georgia litigation involving alleged exposure to ethylene oxide and has related insurance and indemnification disputes. The company cannot estimate a possible loss range and has recorded no potential damages because it does not believe a loss is probable.
- The company is challenging Italy’s medical-device tax, for which no amounts have been remitted. The filing does not provide a clear quantified exposure.
- Principal risks include supply-chain disruption, inflation, interest-rate and foreign-exchange changes, regulatory and product-liability exposure, cybersecurity, environmental and ethylene-oxide compliance, litigation, acquisition integration, competition and availability of capital.
- The company maintains a $200.0 million share-repurchase authorization, with $37.4 million remaining at June 30, 2023. No shares were repurchased under the program during 2023.
Important Facts for Investors to Verify
- Whether revenue growth and acquired-product performance remain strong after accounting for foreign exchange and the absence of warehouse-related shipment recovery benefits.
- Whether inflation, freight, manufacturing costs and acquisition-related inventory step-up amortization continue to pressure gross margin.
- Liquidity and refinancing plans for the $70.0 million convertible-note maturity in February 2024 and longer-term debt maturities.
- The trajectory of interest expense under higher variable rates and the company’s ability to reduce leverage.
- Potential earn-out payments for In2Bones and Biorez and the assumptions supporting their fair values.
- Resolution, insurance coverage and potential costs associated with the Georgia ethylene-oxide litigation and related indemnification matters.
- Potential exposure from the Italian medical-device tax and other regulatory, product-liability and environmental contingencies.