CONMED Corporation — 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 surgery, general surgery and surgical visualization. This unaudited filing covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods.
On January 4, 2016, CONMED acquired SurgiQuest for approximately $257.7 million in cash. SurgiQuest develops the AirSeal system for laparoscopic and robotic procedures. SurgiQuest contributed $18.5 million of revenue in the second quarter and $31.2 million for the six-month period.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 | ||
|---|---|---|---|---|
| 2016 | 2015 | 2016 | 2015 | |
| Net sales | $193.4 million | $181.0 million | $374.6 million | $359.0 million |
| Gross profit | $102.4 million | $93.5 million | $200.2 million | $185.8 million |
| Gross margin | 52.9% | 51.6% | 53.4% | 51.8% |
| Income from operations | $7.7 million | $12.4 million | $11.2 million | $23.4 million |
| Operating margin | 4.0% | 6.9% | 3.0% | 6.6% |
| Net income | $2.9 million | $7.5 million | $0.6 million | $13.8 million |
| Diluted EPS | $0.10 | $0.27 | $0.02 | $0.49 |
Six-month operating cash flow was negative $0.1 million, compared with $25.1 million of cash generated in the prior-year period. Investing cash use was $264.1 million, including $256.5 million for the SurgiQuest acquisition and $7.7 million of capital expenditures. Financing activities provided $215.3 million, principally from new borrowings.
Cash and cash equivalents were $23.3 million at June 30, 2016, compared with $72.5 million at December 31, 2015. Net working capital was $264.8 million.
Total debt was $518.8 million at June 30, 2016, compared with $270.8 million at year-end 2015. Debt included $344.3 million drawn on the revolving facility, $170.6 million of term-loan borrowings and a $4.5 million mortgage note. Revolving-credit availability was $175.9 million, with approximately $4.8 million reserved for letters of credit. The company was in compliance with its debt covenants.
Capital expenditures are expected to approximate $16.0 million for 2016. The company paid dividends of $11.1 million during the first six months and maintained a quarterly dividend of $0.20 per share.
Material Changes Versus the Prior Comparable Period
- Reported sales increased 6.9% in the second quarter and 4.4% for the six-month period. Constant-currency growth was 9.2% and 7.1%, respectively.
- Excluding SurgiQuest, sales declined 3.4% in the second quarter and 4.3% for the six-month period, primarily reflecting unfavorable foreign-currency effects and weaker underlying sales.
- General surgery sales rose 23.1% in the quarter and 19.2% year to date, mainly from SurgiQuest. Excluding SurgiQuest, general surgery sales declined 2.9% and 3.6%, respectively.
- Orthopedic surgery sales declined 4.2% in the quarter and 4.7% year to date. Surgical visualization sales were flat in the quarter and declined 5.4% year to date.
- Gross margin improved by 1.3 percentage points in the quarter and 1.6 percentage points year to date, helped by production variances and product mix. Restructuring charges and foreign exchange partly offset the improvement.
- Selling and administrative expense increased $13.1 million in the quarter and $24.3 million year to date, including SurgiQuest acquisition and integration costs of $5.0 million and $14.0 million, respectively.
- Interest expense increased to $3.8 million in the quarter and $7.6 million year to date from $1.5 million and $2.9 million, respectively, because of higher borrowings and interest rates used to finance the acquisition.
- The company recorded $4.5 million of non-cash charges related to discontinuing the Altrus product offering, along with other restructuring and acquisition-related expenses.
Guidance, Outlook, Risks and Unusual Items
- Management expects the AirSeal system to generate approximately $62 million to $67 million of revenue in 2016.
- Management stated that operating cash flow, cash on hand and available revolving-credit capacity should be adequate for anticipated working capital, debt service, capital expenditures and share repurchases in the foreseeable future.
- CONMED expects to continue evaluating operational and administrative restructuring. Additional employee termination and exit costs may be incurred, but the filing does not provide a current estimate.
- The company discontinued Altrus and recorded a $4.5 million non-cash cost-of-sales charge. A $2.2 million restructuring accrual remained at June 30, 2016.
- The SurgiQuest purchase-price allocation remained preliminary. Acquired goodwill was $136.4 million and acquired amortizing intangible assets were $130.8 million.
- An FDA warning letter and ongoing communications relate to prior inspections of the Centennial, Colorado facility. Further regulatory actions, fines or remediation costs could be material, although costs incurred to date were not material.
- A lawsuit assumed with SurgiQuest involves claims by Lexion Medical. Lexion is seeking $14.8 million for alleged lost profits, $18.7 million for alleged corrective advertising and unspecified disgorgement. CONMED believes the claims lack merit and intends to defend them vigorously.
- Key risks include foreign exchange and interest-rate movements, acquisition integration, competition, product acceptance, regulatory compliance, product liability, patent litigation, availability of allograft tissue and debt obligations.
- The company plans to adopt the new revenue-recognition standard on January 1, 2018 and was evaluating its effect and transition method. The filing does not provide a quantified expected impact.
Important Facts for Investors to Verify
- Whether SurgiQuest integration delivers the projected $62 million to $67 million of 2016 AirSeal revenue and produces expected synergies.
- Underlying organic sales trends, particularly in orthopedic and general surgery products after excluding SurgiQuest and currency effects.
- Whether operating cash flow returns to positive levels while the company carries approximately $518.8 million of debt.
- Compliance with credit-agreement covenants and the company’s ability to refinance or repay the substantial debt maturities concentrated in the period from 2020 to 2021.
- The resolution and potential exposure from the Lexion litigation and the ongoing FDA regulatory matter.
- The magnitude and timing of additional restructuring charges and the realization of reported cost savings.
- The final purchase-price allocation for SurgiQuest and the resulting amortization, goodwill and impairment risks.