CNMD

CONMED Corp. 10-Q Summary: Quarter Ended September 30, 2002

Business Context and Reporting Period

CONMED Corporation is a medical technology company specializing in instruments, implants, and video equipment for arthroscopic sports medicine, powered surgical instruments, electrosurgery systems, endoscopy products, and patient care devices. This report covers the unaudited financial results for the three and nine months ended September 30, 2002.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 7.6% year-over-year for the quarter and 7.1% for the nine-month period. Orthopedic sales grew 8.3% in the quarter, driven by a 14.2% increase in powered surgical instruments (including new PowerPro battery systems) and a 4.0% increase in arthroscopy sales.
• Profitability: Net income rose 67% for the quarter and 57% for the nine-month period compared to 2001. This improvement was significantly aided by the adoption of SFAS 142, which eliminated goodwill amortization, increasing net income by approximately $1.4 million for the quarter and $4.2 million for the nine months.
• Debt Reduction: Total borrowings declined to $253.8 million from $388.4 million in the prior year. This reduction resulted from a $66.1 million public stock offering in May 2002 and the refinancing of the old senior credit agreement.
• Interest Expense: Interest expense decreased to $5.8 million for the quarter (from $7.6 million) and $18.7 million for the nine months (from $23.8 million) due to lower principal balances and a reduced weighted average interest rate (6.53% vs. 6.88%).

Guidance, Outlook, and Management Commentary

• Capital Structure: In August 2002, the company entered a new $200 million senior credit agreement consisting of a $100 million revolving facility and a $100 million term loan. Approximately $99 million of the revolving facility was available at period end. The agreement prohibits dividend payments and restricts certain indebtedness.
• Accounting Changes: The company adopted SFAS 142 effective January 1, 2002, discontinuing the amortization of goodwill and certain intangible assets. No impairment losses were recognized during the period.
• Unusual Items: An extraordinary charge of $0.9 million (net of tax) was recorded to write off deferred financing fees associated with the early extinguishment of the old senior credit agreement.
• Liquidity: Management believes cash from operations, current resources, and the new credit facility are sufficient for working capital, debt service, and capital expenditures. Capital expenditures are expected to remain at $12.0 to $14.0 million annually.
• Risks: Forward-looking statements are subject to risks including general economic conditions, regulatory actions, and the availability of capital. The company relies on an accounts receivable sales agreement for liquidity; if receivables do not qualify for sale, the company must access its revolving credit facility.

Investor Verification Checklist

• Debt Covenants: Verify compliance with the new senior credit agreement covenants, specifically working capital levels and financial ratios, given the prohibition on dividends.
• Goodwill Valuation: Confirm the methodology and results of the SFAS 142 impairment testing for goodwill and indefinite-lived intangible assets, which comprise 61% of total assets.
• Receivables Facility: Monitor the status of the $50 million accounts receivable sales agreement and ensure the pool of receivables remains in compliance with statistical ratios required by the conduit purchaser.
• Product Mix Margins: Assess the impact of sample sales of PowerPro instruments to DePuy Orthopaedics on overall gross margins, as these were sold at lower margins than end-user sales.
• Subordinated Notes: Track the $130 million 9% Senior Subordinated Notes maturing in 2008, as refinancing or repayment by 2007 is a condition for extending the term loan portion of the new credit agreement.