CONMED Corporation — Fiscal 2022 Form 10-K Summary
Business context and reporting period
CONMED is a medical technology company providing surgical devices and equipment for orthopedic and general surgery, including sports medicine, minimally invasive surgery, electrosurgery, endoscopy, smoke evacuation and patient monitoring. The filing covers the fiscal year ended December 31, 2022; it is an annual filing rather than a standalone fourth-quarter filing. CONMED had approximately 4,100 employees, sold products in more than 100 countries and generated approximately 45% of revenue outside the United States.
Orthopedic surgery represented 44% of 2022 sales and general surgery 56%. Approximately 84% of revenue came from single-use products. CONMED acquired In2Bones on June 13, 2022, and Biorez on August 9, 2022.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net sales | $1,045.5 million | $1,010.6 million | +3.4%; +4.6% constant currency |
| Gross profit | $571.2 million | $568.0 million | +0.6% |
| Gross margin | 54.6% | 56.2% | Down 1.6 percentage points |
| Income from operations | $70.1 million | $109.7 million | Down 36.1% |
| Operating margin | 6.7% | 10.9% | Down 4.2 percentage points |
| Net income (loss) | $(80.6) million | $62.5 million | Turned to loss |
| Diluted EPS | $(2.68) | $1.94 | Turned to loss |
| Cash flow from operations | $33.4 million | $111.8 million | Down $78.4 million |
| Capital expenditures | $21.8 million | $14.9 million | Increased |
Orthopedic sales increased 5.3% to $461.5 million, including $24.8 million from the In2Bones and Biorez acquisitions. General surgery sales increased 2.1% to $584.0 million. Single-use product sales increased 6.7% to $874.9 million, while capital product sales declined 10.5% to $170.6 million.
At December 31, 2022, cash and cash equivalents were $28.9 million, inventories were $332.3 million and net working capital was $284.7 million. The balance sheet reported total debt of $1,054.8 million, including $69.7 million classified as current. The company separately described approximately $1,074.6 million of debt outstanding for leverage purposes. Revolver borrowings were $70.0 million, term-loan borrowings were approximately $134.6 million and available revolver capacity was $513.2 million, with approximately $1.8 million reserved for letters of credit.
CONMED paid $23.96 million of common dividends in 2022 and maintained a quarterly dividend of $0.20 per share. The company did not repurchase shares during 2022 and had $37.4 million remaining under its $200.0 million repurchase authorization.
Material changes versus the prior comparable period
- Revenue growth slowed from 17.2% in 2021 to 3.4% in 2022 as foreign exchange, lower capital product sales, supply-chain pressures and fourth-quarter warehouse-management-system disruptions affected results.
- Gross margin declined because of inflation in raw materials, freight and other production costs, unfavorable production variances, $4.5 million of In2Bones inventory step-up costs and $2.0 million of consulting fees related to a cost-improvement initiative.
- Selling and administrative expense increased to $454.0 million from $414.8 million. 2022 included $10.1 million of acquisition integration costs, $6.8 million of warehouse-management-system costs, $2.5 million of contingent-consideration fair-value adjustments, $0.8 million of litigation-related legal fees and $0.8 million of severance.
- Other expense increased to $112.0 million, primarily from a $103.1 million conversion premium on the repurchase and extinguishment of $275.0 million of 2.625% convertible notes, a $5.5 million hedge-settlement charge and $3.4 million of debt-related write-offs.
- Operating cash flow fell sharply, principally because inventories increased by $100.7 million year over year to mitigate supply challenges and because lower fourth-quarter sales affected working capital.
- Debt financing changed materially: CONMED issued $800.0 million of 2.250% convertible notes, repurchased $275.0 million of 2.625% notes, prepaid $90.0 million of term debt and entered into related convertible-note hedge and warrant transactions.
- Goodwill increased to $815.4 million from $617.5 million and net intangible assets increased to $681.8 million from $471.0 million, primarily due to the acquisitions.
Outlook, commentary, risks and unusual items
Management stated that inflationary pressures, supply-chain challenges, staffing shortages, COVID-19 uncertainty and the warehouse-management-system implementation were expected to continue affecting 2023 results. The company expects increased capital spending in 2023 and plans to use operating cash flow to fund it. Management believes available cash, operating cash flow and revolver capacity will be adequate for foreseeable operating needs, debt service, capital expenditures, dividends and share repurchases, while noting that additional cost reductions or debt refinancing may become necessary.
The warehouse-management-system implementation in the fourth quarter caused significant shipping delays, lost or delayed sales and incremental costs. CONMED stated that it could not assure recovery in 2023 of sales delayed or lost during the disruption.
The In2Bones acquisition includes potential earn-outs of up to $110.0 million, and the Biorez acquisition includes potential earn-outs of up to $165.0 million. The recorded fair values of these contingent consideration liabilities were $70.2 million and $116.2 million, respectively, at December 31, 2022. The acquisitions involve substantial valuation judgment regarding projected revenue, margins, discount rates, revenue volatility, customer attrition and technology obsolescence.
Key risks include leverage and variable-rate debt, the $70.0 million of 2.625% notes due in 2024, $800.0 million of 2.250% notes due in 2027, covenant restrictions, foreign-exchange exposure, medical-device regulation, product liability and intellectual-property litigation, cybersecurity, dependence on third-party EtO sterilization, supplier concentration, competitive pricing pressure and the ability to integrate and commercialize the acquired businesses. Approximately 30% of products by revenue use third-party EtO sterilization, although management did not currently expect availability to have a material impact.
CONMED reported no material unresolved staff comments, no material adverse effect from pending legal matters, compliance with credit agreement covenants at year-end and effective disclosure controls and internal control over financial reporting. The independent auditor issued an unqualified opinion and identified acquisition-related valuation of contingent consideration and intangible assets as a critical audit matter.
Important facts investors should verify
- Reconcile the company’s reported debt of $1,054.8 million with the approximately $1,074.6 million debt figure used in leverage disclosures, including treatment of principal amounts, issuance costs and finance leases.
- Track 2023 resolution of warehouse-management-system disruptions, related customer service issues, incremental costs and any recovery of lost sales.
- Assess cash conversion, inventory normalization and the sustainability of operating cash flow after the 2022 decline.
- Evaluate the maturity and refinancing risk of the $70.0 million 2.625% notes due in 2024 and the $800.0 million 2.250% notes due in 2027.
- Monitor contingent earn-outs and the valuation assumptions supporting the In2Bones and Biorez intangible assets and liabilities.
- Review the effect of inflation, supply availability, EtO sterilization capacity, foreign exchange and interest rates on margins and liquidity.
- Confirm the status and potential exposure of EtO-related litigation, insurance coverage, the Italian medical-device tax matter and other regulatory or product-liability claims.