CONMED Corporation 10-Q Summary
Business context and reporting period
CONMED is a global medical technology company focused on surgical devices and equipment for minimally invasive procedures and monitoring. Its products serve orthopedic, general surgery, gynecology, neurosurgery and gastroenterology markets. This filing covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods. Effective January 1, 2013, CONMED began reporting as a single operating segment.
Key financial metrics
| Metric | Three months ended June 30, 2013 | Year-over-year change | Six months ended June 30, 2013 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $193.0 million | Up 1.7% | $380.0 million | Down 1.0% |
| Gross profit | $102.9 million | Up 3.2% | $205.6 million | Up 2.5% |
| Gross margin | 53.3% | Up 0.7 percentage points | 54.1% | Up 1.9 percentage points |
| Income from operations | $15.7 million | Down 8.2% | $31.5 million | Down 7.5% |
| Net income | $9.5 million | Down 7.4% | $20.0 million | Down 1.2% |
| Diluted EPS | $0.34 | Down from $0.36 | $0.71 | Unchanged |
| Operating cash flow | Not separately provided | — | $23.2 million | Down from $33.3 million |
Quarterly sales growth was led by surgical visualization, which increased 25.9% to $18.0 million, and general surgery, which increased 2.2% to $73.2 million. Orthopedic surgery sales declined 1.9% to $101.8 million. For the first six months, orthopedic sales declined 1.8%, general surgery declined 0.7%, and surgical visualization increased 2.5%.
Capital equipment sales increased 8.6% in the quarter and 2.1% year to date, while single-use product sales increased 0.1% in the quarter and declined 1.8% year to date. International sales represented approximately 51.8% of quarterly sales and 51.2% of six-month sales.
Quarterly selling and administrative expense increased 4.7% to $77.2 million, and research and development expense declined 8.4% to $6.6 million. The 2.3% U.S. medical device excise tax reduced results by $1.4 million in the quarter and $3.0 million year to date. The quarterly effective tax rate was 33.2%; the six-month rate was 29.8%.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $38.1 million at June 30, 2013, up from $23.7 million at December 31, 2012.
- Total current assets were $358.6 million and total current liabilities were $99.2 million; management reported net working capital of $259.5 million.
- Total debt was approximately $234.1 million, consisting primarily of $233.0 million of long-term debt and $1.1 million of current debt.
- CONMED entered into a $350.0 million revolving senior credit facility expiring January 17, 2018. Borrowings were $226.0 million at June 30, 2013, with $115.4 million available and approximately $8.6 million reserved for letters of credit.
- The revolving facility was secured by substantially all company property and assets. CONMED stated that it was in compliance with all debt covenants.
- The company also had an $8.1 million mortgage note secured by its Largo, Florida facilities.
- Six-month financing activity included $44.7 million of share repurchases, $8.4 million of dividends, $73.0 million of revolving-facility borrowings and a $34.0 million payment under the MTF distribution agreement.
Material changes versus the prior comparable period
- Quarterly revenue returned to modest growth, but first-half revenue declined 1.0%, reflecting weaker orthopedic and general surgery sales.
- Gross margin improved substantially, primarily from completed operational restructuring and lower manufacturing costs; however, higher selling and marketing expenses caused operating income and operating margin to decline.
- The company incurred $1.4 million of medical device excise tax expense in the quarter and $3.0 million year to date, with no comparable 2012 expense.
- Operating cash flow declined to $23.2 million from $33.3 million, largely because of pension contributions, medical device excise-tax payments and working-capital changes.
- The company refinanced its senior credit facility in January 2013 and recorded a $0.3 million loss on early extinguishment of debt.
- Treasury-stock repurchases reduced shareholders’ equity to $584.7 million from $607.0 million at year-end 2012.
- Goodwill was reduced by $7.7 million after finalizing the purchase-price allocation for the Viking Systems acquisition, due to recognition of an acquired deferred tax asset.
Outlook, commentary, risks and unusual items
Management described the domestic economic environment as cautiously improving but continued to identify Europe and other international markets as challenging. It expects 2013 capital expenditures to approximate $20.0 million and believes operating cash flow, cash on hand and available revolver capacity will meet foreseeable working-capital, debt-service, capital-expenditure and repurchase needs.
Restructuring continued through production transfers to Chihuahua, Mexico and consolidation of Finland and Westborough, Massachusetts operations. Restructuring and other costs are estimated at approximately $14.0 million to $15.0 million for full-year 2013. A $3.5 million restructuring accrual remained at June 30, 2013, and management expected this phase and related cash payments to be substantially completed in 2013.
CONMED faces risks from foreign exchange, competition, technology changes, regulatory requirements, product quality and recalls, customer purchasing patterns, material costs, acquisitions, indebtedness, allograft tissue supply and patent litigation. Bonutti Skeletal Innovations has asserted patent infringement claims against CONMED products; the company believes the products do not infringe, intends to defend the claims vigorously and stated that potential losses cannot currently be estimated.
The company maintains $25 million of product-liability insurance per incident and in the annual aggregate, but cautioned that claims could exceed coverage or coverage might not remain available on acceptable terms. The filing states that pending claims and investigations are not expected to have a material adverse effect, while acknowledging that future matters could do so.
Important facts for investors to verify
- Whether the first-half sales decline, particularly in orthopedic and single-use products, reverses in the second half of 2013.
- Whether restructuring delivers the expected cost savings and whether total 2013 restructuring costs remain within the $14.0 million to $15.0 million estimate.
- Progress on reducing the $226.0 million revolver balance and compliance with financial covenants.
- The effect of the medical device excise tax, foreign currency movements and international market conditions on future margins.
- The status and potential exposure of the Bonutti patent litigation and any other regulatory or product-liability matters.
- Whether operating cash flow improves after the 2013 pension contribution and related tax payments.
- The sustainability of share repurchases and dividends given leverage, cash generation and remaining repurchase authorization of approximately $60.1 million.