CONMED Corporation 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, general surgery and surgical visualization markets. This unaudited Form 10-Q covers the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods.
Approximately 80% of revenue is generated from single-use products. International sales represented approximately 48% of third-quarter revenue and 50% of nine-month revenue.
Financial Performance and Liquidity
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $169.2 million | $175.0 million | $528.2 million | $545.1 million |
| Gross profit | $93.5 million | $96.4 million | $279.3 million | $300.0 million |
| Gross margin | 55.3% | 55.1% | 52.9% | 55.0% |
| Income from operations | $14.8 million | $2.4 million | $38.2 million | $35.7 million |
| Net income | $8.9 million | $2.0 million | $22.6 million | $20.9 million |
| Diluted EPS | $0.32 | $0.07 | $0.81 | $0.75 |
Third-quarter operating margin was 8.8%, compared with 1.4% in the prior-year quarter. Nine-month operating margin was 7.3%, compared with 6.5%. Net margin was 5.3% for the quarter and 4.4% for the nine-month period.
Nine-month operating cash flow was $38.7 million, compared with $39.5 million in 2014. Capital expenditures were $11.5 million, acquisition-related payments were $6.1 million, and net cash used in investing activities was $17.6 million. Dividends paid were $16.6 million. Cash and cash equivalents were $65.3 million at September 30, 2015, compared with $66.3 million at December 31, 2014.
Debt consisted of $256.0 million outstanding under the revolving credit facility and a $5.8 million mortgage note, in addition to approximately $1.3 million of current debt. The amended and restated senior credit agreement provides a $450.0 million revolving facility expiring April 28, 2020. Available revolver capacity was $188.9 million, with approximately $5.1 million reserved for letters of credit. The company was in compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales declined 3.3% and nine-month sales declined 3.1% on a reported basis, primarily reflecting lower orthopedic and general surgery sales and unfavorable currency effects.
- Excluding currency effects and the hedging program, sales increased 0.5% in the quarter and 0.3% year to date.
- Capital equipment sales increased 5.2% in the quarter and 1.6% year to date, while single-use product sales declined 5.2% and 4.2%, respectively.
- Orthopedic sales declined 3.6% in the quarter and 5.4% year to date. General surgery declined 5.2% in the quarter and 0.3% year to date. Surgical visualization increased 9.6% in the quarter and was essentially flat year to date.
- Quarterly gross margin improved modestly due to favorable production variances and product mix, but year-to-date gross margin declined 210 basis points because of currency effects, unfavorable production variances and restructuring costs.
- Selling and administrative expense declined substantially, partly because the 2014 period included $11.0 million of executive management restructuring costs and shareholder activism expenses.
- The nine-month period included $9.8 million of selling and administrative restructuring costs and $5.2 million of operational restructuring costs. The prior-year period included $11.0 million of executive management restructuring costs, legal costs and shareholder activism expenses.
- Foreign currency translation reduced comprehensive income; accumulated other comprehensive loss increased to $53.8 million at September 30, 2015 from $39.8 million at December 31, 2014.
Guidance, Outlook, Risks and Unusual Items
Management stated that available cash, operating cash flow and borrowing capacity should be sufficient to meet anticipated operating, capital expenditure, debt service and other obligations for the foreseeable future. Capital expenditures were expected to approximate $16.0 million for 2015.
The Centennial, Colorado manufacturing consolidation was expected to be completed within approximately three months. Management estimated additional restructuring costs of $2.0 million to $3.0 million, net of tax, for the remainder of 2015 and expected annual cost-of-sales savings of $3.5 million to $4.5 million beginning in 2016. The filing does not provide formal revenue or earnings guidance.
The company expected to pay the remaining $16.7 million under its sports medicine distribution and development agreement in January 2016. Remaining contingent consideration related to the EndoDynamix acquisition was $7.8 million at September 30, 2015, with expected payments extending from 2016 through 2021.
Key risks include foreign exchange movements, competition, product acceptance and technology changes, acquisition integration, material availability, regulatory enforcement, product liability, patent and other litigation, allograft tissue availability, debt levels and compliance with regulatory requirements. The Centennial facility remained subject to FDA-related remediation and potential future inspections or enforcement actions following prior Form 483 observations and a Warning Letter.
The company maintained $25 million of product liability insurance per incident and in the annual aggregate, but cautioned that claims could exceed coverage or become unavailable at a reasonable cost. Pending claims and investigations were not expected to materially affect financial condition, results of operations or cash flows, although no assurance was provided.
Investor Verification Items
- Verify whether reported sales weakness in orthopedic and single-use products stabilizes and whether constant-currency growth translates into reported growth.
- Monitor the effect of foreign exchange, hedging gains and production variances on gross margin.
- Track completion costs and timing of the Centennial consolidation and whether the projected $3.5 million to $4.5 million annual savings are achieved in 2016.
- Confirm funding and payment of the $16.7 million MTF obligation and future EndoDynamix contingent consideration.
- Review revolver borrowings, available capacity, interest rates and compliance with debt covenants.
- Follow FDA remediation and any additional inspections, warning letters, consent decrees or fines related to the Centennial facility.
- Assess the impact of restructuring and other nonrecurring 2014 charges when comparing future profitability.
- Monitor inventory, which increased to $161.6 million from $148.1 million at December 31, 2014, and evaluate fourth-quarter sell-through.