CONMED Corporation — Fiscal 2020 Form 10-K Summary
Business context and reporting period
CONMED is a medical technology company providing surgical devices and equipment for minimally invasive procedures in orthopedic and general surgery, with approximately 3,400 employees and products sold in more than 100 countries. This filing covers the fiscal year ended December 31, 2020; quarterly data shows fourth-quarter 2020 results separately. The business was materially affected by COVID-19-related postponements of non-urgent procedures, hospital restrictions and reduced customer activity.
Financial performance and position
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $862.5 million | $955.1 million | Down 9.7% |
| Gross profit | $460.3 million | $524.7 million | Down 12.3% |
| Gross margin | 53.4% | 54.9% | Down 1.5 points |
| Income from operations | $46.0 million | $79.1 million | Down 41.8% |
| Operating margin | 5.3% | 8.3% | Down 3.0 points |
| Net income | $9.5 million | $28.6 million | Down 66.8% |
| Diluted EPS | $0.32 | $0.97 | Down $0.65 |
| Cash flow from operations | $64.5 million | $95.1 million | Down 32.2% |
| Capital expenditures | $13.0 million | $20.1 million | Down 35.1% |
Orthopedic surgery sales declined 19.1% to $374.7 million, primarily because of deferred procedures and lower capital-equipment purchases. General surgery sales declined 0.8% to $487.8 million. Approximately 82% of revenue came from single-use products, while capital products represented approximately 18% of revenue. International sales represented approximately 44% of consolidated sales.
Fourth-quarter 2020 net sales were $252.8 million, gross profit was $135.5 million and net income was $24.1 million, compared with fourth-quarter 2019 net sales of $264.9 million, gross profit of $142.0 million and net income of $14.9 million.
Cash and cash equivalents were $27.4 million at year-end, including approximately $26.3 million held by foreign subsidiaries. Net working capital was $226.5 million. Total debt was $753.6 million on the balance sheet, while the filing also describes approximately $793.8 million of debt obligations for contractual-maturity purposes. Available revolving-credit capacity was $375.5 million, with approximately $2.5 million reserved for letters of credit.
Material changes versus the prior comparable period
- COVID-19 reduced surgical volumes and customer purchases, with the largest impact on orthopedic procedures and capital equipment.
- Gross margin declined because of $6.6 million of plant-underutilization costs, $4.0 million of manufacturing-consolidation costs, $2.8 million of acquisition-related costs, $2.2 million of product-rationalization costs and $1.1 million of restructuring costs.
- Selling and administrative expense fell to $373.8 million from $400.1 million as travel, trade-show and commission costs declined, partly offset by $4.8 million of severance and sales-force restructuring costs and $2.1 million of field-inventory write-offs.
- Research and development expense decreased to $40.5 million from $45.5 million as the company reduced spending while continuing selected projects.
- Interest expense increased to $44.1 million from $42.7 million despite lower average borrowing rates, primarily because of higher non-cash interest expense.
- Operating cash flow declined by $30.6 million, mainly because of lower sales and earnings, while inventories increased by $30.3 million.
- Investing cash use fell sharply to $13.6 million from $387.7 million because 2019 included the $365 million Buffalo Filter acquisition.
- Financing activities used $52.1 million in 2020, principally for debt repayments and dividends, compared with $300.9 million of financing inflows in 2019.
Guidance, outlook, risks and unusual items
Management expects 2021 revenue to increase from 2020 levels, with the United States expected to recover faster than international markets and general surgery expected to rebound faster than orthopedic surgery. Management stated that cash from operations, cash on hand and available borrowing capacity should satisfy foreseeable liquidity needs, but acknowledged that a more severe or prolonged pandemic could require additional cost reductions or debt refinancing.
- The senior credit agreement was amended in April 2020 to suspend required leverage ratios for up to four quarters and amended again in November 2020 to reduce applicable loan margins and the Eurocurrency interest-rate floor. The company was compliant with applicable covenants and minimum liquidity requirements at year-end.
- Debt maturities include approximately $405.8 million in 2023 and $345.0 million of convertible notes in 2024. Approximately $448.8 million of debt was variable-rate debt at year-end; a 1-percentage-point rate increase was estimated to increase annual interest expense by approximately $4.5 million.
- The 2.625% convertible notes mature in February 2024 and have an initial conversion price of approximately $88.80 per share. Convertible-note hedges raise the effective conversion price to $114.92, while warrants could create dilution above their strike price.
- COVID-19 remains the principal near-term uncertainty, affecting procedure volumes, sales-force access, supply-chain reliability, customer liquidity and debt-covenant compliance.
- Approximately 33% of products by revenue require third-party ethylene oxide sterilization. The company had secured alternate capacity, but further restrictions could materially affect operations.
- Other risks include regulatory compliance and product recalls, competitive pricing, raw-material availability, foreign-exchange exposure, cybersecurity, intellectual-property and product-liability claims, allograft-tissue supply, and implementation of European Medical Device Regulation.
- The company disclosed an EndoDynamix dispute in which plaintiffs seek liquidated and other damages of up to $24.8 million; management had not recorded a reserve because it did not believe a loss was probable. Trial was expected in March and April 2021.
- The company recorded a $7.9 million pension-related benefit obligation increase in funded deficit, ending with a projected benefit obligation of $101.2 million and funded status of negative $24.3 million.
- The 2020 effective tax rate was negative 493.9%, primarily because of tax benefits recorded against very low pre-tax income. The resulting income-tax benefit was $7.9 million.
Important facts for investors to verify
- Whether surgical volumes and revenue recovery in 2021 met management’s expectations, particularly in orthopedic and international markets.
- Progress in restoring gross margin and absorbing pandemic-related underutilization, restructuring and product-rationalization costs.
- Liquidity, leverage and refinancing plans ahead of the 2023 term-loan maturity and 2024 convertible-note maturity.
- Compliance with reinstated debt covenants after the temporary leverage-ratio suspension.
- Inventory levels and potential excess or obsolete inventory as customer ordering patterns normalize.
- Availability and cost of ethylene oxide sterilization, raw materials and other critical supply-chain inputs.
- Potential dilution or cash requirements related to the convertible notes, hedges and warrants.
- Resolution and financial impact of the EndoDynamix litigation and any future regulatory, product-liability or compliance matters.
- The filing reports effective disclosure controls and internal control over financial reporting as of December 31, 2020, with an unqualified audit opinion from PricewaterhouseCoopers LLP.