CONMED Corporation 2021 Form 10-K Summary
Business context and reporting period
CONMED is a medical technology company providing surgical devices and equipment for orthopedic, general surgery, gynecology, thoracic surgery and gastroenterology procedures. The filing covers the fiscal year ended December 31, 2021; it does not provide separate fourth-quarter financial results. The company had approximately 3,800 employees and sold products in more than 100 countries.
Revenue was generated 43% from orthopedic surgery and 57% from general surgery. Approximately 81% of revenue came from single-use products, and approximately 45% of consolidated sales were to customers outside the United States.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $1,010.6 million | $862.5 million | 17.2% increase |
| Gross profit | $568.0 million | $460.3 million | 23.4% increase |
| Gross margin | 56.2% | 53.4% | Up 2.8 percentage points |
| Income from operations | $109.7 million | $46.0 million | 138.5% increase |
| Operating margin | 10.9% | 5.3% | Up 5.6 percentage points |
| Net income | $62.5 million | $9.5 million | Substantial increase |
| Net margin | 6.2% | 1.1% | Up 5.1 percentage points |
| Diluted EPS | $1.94 | $0.32 | Increase |
| Cash flow from operations | $111.8 million | $64.5 million | Increase |
| Capital expenditures | $14.9 million | $13.0 million | Increase |
Orthopedic surgery sales increased 17.0% to $438.4 million, while general surgery sales increased 17.3% to $572.2 million. Single-use product sales increased 16.7% to $820.1 million, and capital product sales increased 19.5% to $190.5 million.
At December 31, 2021, cash and cash equivalents were $20.8 million, net working capital was $263.5 million, and total debt was $684.7 million on the balance sheet, including $712.6 million of contractual long-term debt obligations before debt discounts and issuance costs. Total debt represented approximately 47% of total capitalization as disclosed by the company.
Material changes versus the prior comparable period
- Revenue recovered from the COVID-19-affected 2020 period as surgical procedure volumes improved.
- Gross margin expanded primarily because of higher volume, favorable product mix and the absence of significant 2020 charges, including $6.6 million of plant underutilization, $4.0 million of manufacturing consolidation costs, $2.8 million of acquisition-related inventory step-up costs, $2.2 million of product rationalization costs and $1.1 million of restructuring costs.
- Selling and administrative expense increased to $414.8 million from $373.8 million, but declined as a percentage of sales to 41.0% from 43.3%.
- Research and development expense increased to $43.6 million from $40.5 million, while declining as a percentage of sales to 4.3% from 4.7%.
- Interest expense declined to $35.5 million from $44.1 million, reflecting lower average borrowings and lower interest rates.
- Operating cash flow increased to $111.8 million, although inventory investment reduced cash flow as the company built inventory to address supply challenges.
- Total debt declined from $753.6 million at year-end 2020 to $684.7 million at year-end 2021. The company repaid $67.0 million of revolving borrowings and made $14.2 million of net term-loan payments during 2021.
Liquidity, debt and capital allocation
- On July 16, 2021, CONMED entered into a seventh amended and restated senior credit agreement extending the term loan and revolving facility maturities to July 16, 2026 and reducing applicable interest margins and commitment fees.
- At year-end, term-loan borrowings were approximately $227.6 million and revolving borrowings were $140.0 million. Revolving availability was $442.5 million, with approximately $2.5 million reserved for letters of credit.
- The company was in compliance with its debt covenants at December 31, 2021. The credit agreement is secured by substantially all of the company’s personal property and assets and restricts certain dividends, acquisitions, additional debt and other activities.
- The company had $20.8 million of cash, including approximately $17.7 million held by foreign subsidiaries. Management stated that operating cash flow, cash on hand and available borrowing capacity should meet anticipated working capital, debt service, capital spending, dividends and repurchase needs.
- The board maintained a $200.0 million share repurchase authorization. Through year-end, 6.1 million shares had been repurchased for $162.6 million, leaving $37.4 million available; no shares were repurchased in 2021.
- The quarterly dividend remained $0.20 per share, or $0.80 annually. The company expects higher capital spending in 2022 but did not provide a specific amount.
Guidance, outlook, management commentary and risks
Management did not provide specific 2022 revenue or earnings guidance in the filing. Management expected continued recovery in operating results but emphasized uncertainty regarding post-pandemic surgical volumes and stated that capital spending was expected to increase in 2022.
- COVID-19: Hospital staffing shortages, postponement of non-urgent procedures, facility access restrictions and potential future variants could reduce demand and disrupt operations.
- Supply chain and inflation: Raw-material availability, supplier concentration, higher wages, inflation and transportation or component costs could pressure margins and product availability.
- Ethylene oxide sterilization: Approximately 32% of products by revenue were sterilized by third-party providers using EtO. The company had secured capacity at filing, but future restrictions or facility closures could materially affect operations.
- Interest-rate and refinancing risk: Approximately $367.6 million of variable-rate debt was outstanding under the senior credit agreement. A 1% increase in comparable market rates was estimated to increase annual interest expense and reduce pretax income by approximately $4.1 million.
- Convertible notes: The 2.625% convertible notes mature in February 2024 with approximately $345.0 million principal at issuance. The notes may create cash settlement requirements or dilution if conversion conditions are met. Adoption of ASU 2020-06 on January 1, 2022 was expected to reduce 2022 interest expense by approximately $10.4 million but increase potential dilution.
- Litigation and contingencies: The company is defending an EndoDynamix dispute, two Georgia actions involving alleged EtO exposure and other routine claims. Management did not consider potential losses probable and recorded no related expense for the disclosed matters; loss ranges were not estimable for the EtO matters.
- Regulatory and product risks: FDA, international regulatory, EU MDR, product liability, recall, intellectual property, cybersecurity, FCPA and environmental compliance risks could affect operations and financial results.
- Pension: The frozen defined-benefit plan had a projected benefit obligation of $95.5 million and a funded deficit of $16.1 million at year-end. No pension contribution was expected for 2022.
Most important facts for investors to verify
- Whether surgical volumes and revenue growth remain above pre-pandemic levels as COVID-19 impacts evolve.
- Whether gross-margin improvement is sustained after the absence of 2020 restructuring, rationalization and underutilization charges.
- Inventory growth, working-capital absorption and the company’s ability to convert earnings into cash.
- Debt maturities, particularly the 2024 convertible notes and the company’s ability to refinance or repay them.
- Exposure to variable interest rates, LIBOR transition requirements and covenant compliance.
- Availability and cost of EtO sterilization and other critical supply-chain inputs.
- Potential outcomes and insurance coverage associated with the EndoDynamix and Georgia EtO-related litigation.
- The effect of ASU 2020-06 on reported debt, retained earnings, interest expense and diluted share count beginning in 2022.