CONMED Corporation — Q3 2023 Form 10-Q Summary
Business context and reporting period
CONMED is a global medical technology company providing surgical devices and equipment for orthopedic, general, gynecologic, thoracic, gastroenterology and other procedures. The filing covers the three and nine months ended September 30, 2023. Products are reported in two product lines: orthopedic surgery and general surgery. Approximately 84% of revenue is derived from single-use products, and international sales represented approximately 44% of nine-month revenue.
Financial performance and key metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net sales | $304.6 million | $275.1 million | $917.7 million | $794.6 million |
| Gross profit | $168.1 million | $151.6 million | $494.1 million | $439.4 million |
| Gross margin | 55.2% | 55.1% | 53.8% | 55.3% |
| Income from operations | $30.3 million | $24.2 million | $70.4 million | $71.1 million |
| Operating margin | 9.9% | 8.8% | 7.7% | 9.0% |
| Net income (loss) | $15.8 million | $46.2 million | $31.4 million | $(107.2) million |
| Diluted EPS | $0.50 | $1.48 | $0.99 | $(3.59) |
Q3 sales increased 10.7% as reported and 11.9% in constant currency. Nine-month sales increased 15.5% as reported and 17.6% in constant currency. Q3 orthopedic sales increased 5.1%, while general surgery sales increased 15.0%. For the nine months, orthopedic and general surgery sales increased 14.5% and 16.2%, respectively.
Q3 gross margin improved modestly because of product mix. The nine-month gross margin declined 150 basis points, primarily because of inflation and higher raw-material and production costs, including $6.5 million of In2Bones inventory step-up amortization. Nine-month operating income declined slightly despite higher sales because of cost pressures and special operating expenses.
Interest expense increased to $10.0 million in Q3 and $30.3 million for the nine months, driven primarily by higher rates on the senior credit agreement and the full-period impact of the 2.250% convertible notes issued in June 2022. The nine-month 2022 results included $112.0 million of other expense associated primarily with convertible-note extinguishment and related hedge and financing costs.
Cash flow, debt and liquidity
- Net cash provided by operating activities was $69.0 million for the nine months ended September 30, 2023, compared with $45.0 million in the prior-year period.
- Capital expenditures were $14.2 million, compared with $16.1 million in the prior-year period.
- Cash used in investing activities was $15.2 million, versus $243.2 million in 2022, when the Company funded the In2Bones and Biorez acquisitions.
- Cash used in financing activities was $51.7 million, compared with $213.5 million of financing cash inflow in 2022.
- Cash and cash equivalents were $30.5 million at September 30, 2023, compared with $28.9 million at December 31, 2022.
- Total debt was $1.013 billion, including $70.6 million classified as current. Long-term debt was $942.2 million.
- Debt maturities include $70.0 million of 2.625% convertible notes due in 2024 and $800.0 million of 2.250% convertible notes due in 2027. The senior credit agreement and term loan mature in 2026.
- The Company had $22.0 million outstanding on its revolving credit facility and reported $561.4 million of available borrowing capacity, with approximately $1.6 million reserved for letters of credit.
- CONMED was in compliance with its debt covenants at September 30, 2023. Management believes operating cash flow, cash on hand and available borrowing capacity will meet foreseeable operating, debt-service, capital-expenditure and dividend requirements.
Material changes versus the prior comparable period
- Revenue growth reflected contributions from the In2Bones and Biorez product lines, growth in AirSeal, Buffalo Filter and other general-surgery products, and improved warehouse-management-system performance that reduced shipping delays.
- Nine-month gross margin fell from 55.3% to 53.8% because of inflation, higher production costs and acquisition-related inventory step-up amortization.
- Nine-month selling and administrative expense included $6.9 million of contingent-consideration fair-value adjustments, $6.1 million of warehouse-management-system implementation costs, $2.1 million related to distribution-agreement terminations and $1.6 million of severance.
- Research and development expense increased to $38.6 million from $34.9 million for the nine months, although it declined as a percentage of sales.
- Net income improved substantially from the prior-year nine-month loss, but the comparison is affected by the $112.0 million of other expense recorded in 2022 in connection with convertible debt transactions.
- Shareholders’ equity increased to $796.2 million from $745.5 million at December 31, 2022. No shares were repurchased under the authorized $200.0 million repurchase program during 2023; $37.4 million remained available under the authorization.
Guidance, outlook, risks and unusual items
The filing does not provide specific numerical revenue, earnings or margin guidance. Management expects inflationary pressures and supply-chain challenges to continue through 2023 and may take additional cost-reduction actions or refinance debt if necessary.
- Key risks include economic weakness, inflation, higher interest rates, supply-chain constraints, regulatory changes, product acceptance, competition, cybersecurity and information-technology disruption.
- Medical-device risks include product liability, patent and other litigation, regulatory enforcement, Foreign Corrupt Practices Act compliance, availability of allograft tissue and sterilization capacity, including risks associated with ethylene oxide.
- The Company is defending Georgia litigation involving alleged ethylene-oxide exposure and related indemnification and insurance disputes. The potential loss cannot currently be estimated, and no liability has been recorded because management does not believe a loss is probable.
- Potential earn-out obligations remain from the In2Bones and Biorez acquisitions. At September 30, 2023, contingent consideration liabilities totaled approximately $193.4 million, including $82.5 million classified as current and $110.9 million as long-term.
- The Company is challenging the Italian medical-device tax relating to sales to public hospitals; no amounts have been remitted, and the filing does not provide a clear estimate of potential exposure.
- Forward foreign-exchange contracts and variable-rate debt expose the Company to currency and interest-rate movements. The senior credit agreement was subject to an interest rate of 6.614% for the applicable SOFR-based borrowing at September 30, 2023.
Facts investors should verify
- Progress toward addressing the $70.0 million convertible-note maturity in 2024 and the longer-term $800.0 million maturity in 2027.
- Whether gross-margin pressure from inflation, acquisition-related costs and supply-chain conditions is temporary or persistent.
- Conversion of revenue growth into operating cash flow, particularly given the increase in accounts receivable and the Company’s substantial debt burden.
- Actual earn-out payments and revised fair values for the In2Bones and Biorez contingent consideration liabilities.
- Developments in the Georgia ethylene-oxide litigation, related insurance coverage and the Italian medical-device tax challenge.
- Execution of warehouse-system improvements and the effect of cost-reduction initiatives on operating expenses and service levels.
- Any changes to debt covenants, borrowing costs, refinancing plans, dividends or the authorized share-repurchase program.