CONMED Corporation 10-Q Summary
Business context and reporting period
CONMED is a medical technology company that develops, manufactures and sells surgical devices and equipment for minimally invasive procedures. Its product lines are orthopedic surgery and general surgery, serving customers globally. The filing covers the quarter and six months ended June 30, 2018; financial statements are unaudited.
Approximately 80% of revenue is generated from single-use products, and international sales represented approximately 48% of six-month revenue. The company adopted ASC 606 revenue recognition on January 1, 2018 using the modified retrospective method; management reported no material impact on net income or earnings per share.
Key financial metrics
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Net sales | $212.8 million | $197.2 million | $414.9 million | $383.7 million |
| Gross profit | $116.3 million | $104.7 million | $225.8 million | $204.5 million |
| Gross margin | 54.6% | 53.1% | 54.4% | 53.3% |
| Income from operations | $16.7 million | $12.8 million | $34.0 million | $10.3 million |
| Operating margin | 7.8% | 6.5% | 8.2% | 2.7% |
| Net income | $8.7 million | $6.1 million | $19.4 million | $1.6 million |
| Diluted EPS | $0.30 | $0.22 | $0.67 | $0.06 |
| Net cash provided by operating activities | — | — | $45.6 million | $31.3 million |
General surgery sales increased 12.1% in the quarter and 12.3% year to date, supported by new products and continued strength in AirSeal. Orthopedic surgery sales increased 4.3% and 4.6%, respectively, driven primarily by sports medicine and powered instruments.
Research and development expense increased to $10.0 million in the quarter and $17.7 million year to date, reflecting increased investment in new product development. Interest expense increased to $5.1 million in the quarter and $9.9 million year to date, primarily because of higher borrowing rates.
Material changes versus the prior comparable period
- Net sales increased 7.9% in the quarter and 8.1% for the six months. On the company’s adjusted constant-currency basis, including comparable treatment of ASC 606 administrative fees, growth was 7.4% and 7.1%, respectively.
- ASC 606 required approximately $2.0 million of administrative fees in the quarter and $3.9 million year to date to be reported as reductions of revenue rather than selling and administrative expense. The change did not affect net income or EPS.
- Gross margin improved by 1.5 percentage points in the quarter and 1.1 percentage points year to date, primarily due to favorable foreign exchange, product mix and lower restructuring costs, partly offset by ASC 606 presentation effects.
- Year-to-date operating income benefited from the absence of significant 2017 legal, restructuring and acquisition-related costs. The first six months of 2017 included $12.2 million related to the SurgiQuest-Lexion litigation verdict, $4.5 million of other legal costs, $1.3 million of restructuring costs and $0.9 million of acquisition costs.
- Cash flow from operations increased by $14.3 million year to date, while cash used in financing increased to $47.1 million from $13.7 million, primarily reflecting net repayment of the revolving credit facility and dividends.
Debt, liquidity and capital resources
- Cash and cash equivalents were $23.4 million at June 30, 2018, compared with $32.6 million at December 31, 2017.
- Total debt was approximately $449.2 million, consisting of $17.0 million of current debt and $432.2 million of long-term debt, compared with approximately $486.4 million at year-end 2017.
- At June 30, 2018, term-loan borrowings were $150.9 million and revolving-credit borrowings were $297.0 million. The company reported $225.0 million of available revolving capacity, with approximately $3.0 million reserved for letters of credit.
- The senior credit agreement expires January 4, 2021 and bears interest at LIBOR plus 1.875%; the stated rate was 3.98% at June 30, 2018. The company was in compliance with its debt covenants.
- Capital expenditures were $7.3 million year to date, and management expects approximately $15.0 million for 2018. Net working capital was $170.7 million at June 30, 2018.
- Dividends paid were $11.2 million year to date. The company had $37.4 million remaining under its $200.0 million share-repurchase authorization, although no repurchases were made during 2018 through June 30.
Guidance, outlook, commentary and risks
Management stated that operating cash flow, cash on hand and available borrowing capacity should be adequate for anticipated working capital, debt service, capital expenditures and potential share repurchases in the foreseeable future. The filing does not provide a specific full-year revenue or earnings guidance range.
The company expects continued product development and identified new product introductions, sports medicine and powered instruments, and AirSeal sales as growth drivers. Results may be affected by foreign exchange, interest rates, customer purchasing patterns, competition, technology changes, product acceptance, material costs, tariffs and regulatory requirements.
- CONMED paid $12.3 million, including post-judgment interest, on July 10, 2018 to resolve the SurgiQuest-Lexion judgment. The related liability had been accrued at June 30, 2018.
- The company continues to defend an EndoDynamix dispute in which the former shareholders seek approximately $12.7 million in accelerated contingent and revenue-based payments. Management believes there is a substantive contractual basis for its position, but no assurance of the outcome is provided.
- Other risk areas include product liability, patent litigation, potential government or FCPA investigations, environmental obligations, cybersecurity, availability of allograft tissue and future regulatory changes. Management does not expect currently pending matters to have a material adverse effect, but notes that future claims or investigations could be material.
- Forward foreign-exchange contracts had aggregate notional amounts of $136.9 million for cash-flow hedges and $34.3 million for non-designated contracts at June 30, 2018.
Important facts for investors to verify
- Whether the company sustains its reported general-surgery growth and improves orthopedic growth.
- The effect of ASC 606 presentation changes on reported revenue growth and comparability.
- Borrowing costs, leverage reduction and available revolving-credit capacity as interest rates change.
- Post-quarter-end cash payment and any remaining exposure related to the Lexion litigation.
- The status and potential financial impact of the EndoDynamix litigation.
- Progress and returns from increased research and development spending and new product introductions.
- Finalization of accounting for the Tax Cuts and Jobs Act, including the GILTI election, and the future effects of new lease and hedging standards.