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, serving orthopedic, general surgery, gynecology, thoracic surgery and gastroenterology markets. The filing covers the three and six months ended June 30, 2021. Results were materially affected by comparison with the COVID-19-disrupted 2020 periods, when elective procedures and capital equipment purchases were deferred.
CONMED operates as one reportable segment. Approximately 81% of revenue is generated from single-use products, and international sales represented approximately 45% of six-month revenue in both 2021 and 2020.
Financial Results and Key Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Net sales | $255.2 million | $157.8 million | $487.8 million | $371.8 million |
| Gross profit | $141.4 million | $71.9 million | $269.9 million | $191.1 million |
| Gross margin | 55.4% | 45.6% | 55.3% | 51.4% |
| Operating income (loss) | $25.7 million | $(21.2) million | $45.8 million | $(8.1) million |
| Operating margin | 10.1% | (13.5%) | 9.4% | (2.2%) |
| Net income (loss) | $13.3 million | $(27.4) million | $23.2 million | $(21.5) million |
| Diluted EPS | $0.41 | $(0.96) | $0.72 | $(0.75) |
| Operating cash flow | Not separately provided | Not separately provided | $56.6 million | $9.3 million |
Q2 net sales increased 61.7% year over year, or 58.2% on a constant-currency basis. Six-month sales increased 31.2%, or 28.9% on a constant-currency basis. Q2 orthopedic surgery sales increased 78.4%, while general surgery sales increased 51.4%. Six-month increases were 34.6% and 28.7%, respectively.
Q2 selling and administrative expense was $104.4 million, or 40.9% of sales, compared with 53.5% in the prior-year quarter. Research and development expense was $11.3 million, or 4.4% of sales. Interest expense declined to $9.4 million from $11.4 million, primarily due to lower borrowings and interest rates.
At June 30, 2021, cash and cash equivalents were $46.4 million, accounts receivable were $169.0 million, inventories were $211.3 million and net working capital was approximately $244.7 million. Total debt was $729.7 million, including $185.0 million drawn on the revolving facility, $233.5 million of term-loan borrowings and $345.0 million principal amount of convertible notes, net of accounting adjustments. Revolving-facility availability was $397.4 million, with approximately $2.6 million reserved for letters of credit.
Material Changes Versus the Prior Comparable Period
- Revenue recovered across all product lines as elective procedures resumed following the severe COVID-19 impact in Q2 2020.
- Gross margin improved by 980 basis points in Q2 and 390 basis points for the six-month period. The comparison benefited from the absence of 2020 plant underutilization, inventory write-offs, restructuring, manufacturing-consolidation and acquisition-related costs.
- Operating results shifted from losses to profitability, with six-month operating income of $45.8 million versus an $8.1 million loss in 2020.
- Operating cash flow increased to $56.6 million from $9.3 million, reflecting higher earnings and working-capital effects.
- Net debt declined from approximately $726.3 million at December 31, 2020 to approximately $683.3 million at June 30, 2021, based on total debt less cash.
- The company paid $11.6 million in dividends during the first six months and issued $13.1 million of net proceeds from employee-plan share issuances. No shares were repurchased under the $200 million authorization during 2021 through June 30.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a specific quantitative revenue or earnings forecast. Management expects continued recovery but states that market variability and the duration and severity of COVID-19 remain uncertain. General surgery is expected to rebound faster than orthopedic surgery because of the nature of the procedures and products.
Management believes operating cash flow, cash on hand and available revolver capacity will meet foreseeable operating, capital expenditure, debt-service, dividend and repurchase needs. However, a more severe or prolonged downturn could require additional cost reductions or debt refinancing.
On July 16, 2021, after quarter-end, CONMED entered into a seventh amended and restated senior credit agreement with a $233.5 million term loan and a $585.0 million revolving facility. Initial pricing was LIBOR plus a 1.75% margin, compared with a 2.625% margin at June 30, 2021. The new agreement has a five-year maturity and includes financial covenants and restrictions.
Key risks include COVID-19-related procedure volumes, supply and material availability, inflationary or manufacturing pressures, foreign exchange and interest-rate exposure, regulatory compliance, cybersecurity, competition, acquisition integration, product liability, intellectual-property claims and environmental or ethylene-oxide sterilization issues.
Significant contingencies include the EndoDynamix litigation, in which plaintiffs seek liquidated and other damages potentially up to $24.8 million; the company has not accrued a loss because it does not believe a loss is probable. Two Georgia actions involving alleged ethylene-oxide exposure are in early stages; the company cannot estimate a possible loss and has not accrued one. The company also noted ordinary-course product liability, patent, regulatory and environmental risks.
Most Important Facts for Investors to Verify
- Whether the post-pandemic recovery in elective procedures continues, particularly in orthopedic surgery.
- Whether the 2021 margin improvement is sustained after excluding the unusually high COVID-19-related charges recorded in 2020.
- Compliance with leverage and other covenants under the new credit agreement and the effect of LIBOR transition or other reference-rate changes.
- The February 2024 maturity and potential dilution or cash requirements associated with the $345.0 million convertible notes and related warrants.
- Inventory growth to $211.3 million and the risk of obsolescence, supply constraints or working-capital pressure.
- Potential financial exposure from the EndoDynamix, ethylene-oxide and other legal or regulatory matters, including insurance coverage.
- The absence of formal quantitative guidance in this filing and the uncertainty surrounding future procedure volumes, capital spending and international sales.