CONMED Corporation: Fiscal 2016 Form 10-K Summary
Business context and reporting period
CONMED is a medical technology company providing surgical devices and equipment for minimally invasive procedures in orthopedic surgery, general surgery and surgical visualization. The filing covers the fiscal year ended December 31, 2016, with selected unaudited fourth-quarter data. The company had approximately 3,300 employees and sold products in more than 100 countries.
On January 4, 2016, CONMED acquired SurgiQuest for approximately $257.7 million in cash, adding the AirSeal access-management system to its general surgery portfolio. SurgiQuest contributed $68.4 million of 2016 net sales.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $763.5 million | $719.2 million | Up 6.2% |
| Gross profit | $408.3 million | $381.7 million | Up 7.0% |
| Gross margin | 53.5% | 53.1% | Up 0.4 points |
| Income from operations | $37.7 million | $51.2 million | Down 26.4% |
| Operating margin | 4.9% | 7.1% | Down 2.2 points |
| Net income | $14.7 million | $30.5 million | Down 51.9% |
| Diluted EPS | $0.52 | $1.09 | Down 52.3% |
| Cash flow from operations | $38.2 million | $48.1 million | Down 20.5% |
Sales were composed of orthopedic surgery of $370.5 million, general surgery of $341.4 million and surgical visualization of $51.6 million. Single-use product sales were $605.8 million, or approximately 79% of total sales, while capital equipment sales were $157.7 million.
Fourth-quarter 2016 net sales were $204.1 million versus $191.0 million in the prior-year quarter. Fourth-quarter gross profit was $107.0 million versus $102.4 million, and net income was $6.7 million versus $7.9 million. Diluted EPS was $0.24 versus $0.28.
At December 31, 2016, cash and cash equivalents were $27.4 million, including approximately $25.7 million held by foreign subsidiaries. Net working capital was $216.6 million. Total assets were $1.329 billion and shareholders’ equity was $580.6 million.
Total debt was $498.5 million, consisting principally of $329.0 million drawn on the revolving credit facility and $166.3 million outstanding under the term loan. Available revolving capacity was approximately $191.2 million, subject to approximately $4.8 million reserved for letters of credit. The company was in compliance with its debt covenants at year-end.
Material changes versus the prior comparable period
- Reported sales increased primarily because of the SurgiQuest acquisition; excluding SurgiQuest, sales decreased 3.3% on a reported basis.
- General surgery sales increased 24.5%, while orthopedic surgery sales declined 4.7% and surgical visualization sales declined 7.8%.
- Foreign exchange reduced 2016 sales by approximately $17 million and income before taxes by approximately $12 million compared with 2015.
- Selling and administrative expense increased to $338.4 million from $303.1 million, driven largely by acquisition, integration, legal, consulting and ongoing AirSeal sales and marketing costs.
- Research and development expense increased to $32.3 million from $27.4 million as the company increased product development and innovation spending.
- Interest expense increased to $15.4 million from $6.0 million because of acquisition-related borrowings and higher interest rates.
- Operating cash flow declined primarily because of lower earnings and working-capital investment related to SurgiQuest integration and anticipated sales growth.
- Investing cash outflows increased to $266.0 million, including $256.5 million for acquisitions, compared with $24.4 million in 2015.
Guidance, outlook, management commentary, risks and unusual items
Management stated that operating cash flow, cash on hand and available borrowing capacity should be adequate for working capital, debt service, capital expenditures and potential share repurchases in the foreseeable future. Capital expenditures were expected to be approximately $15 million to $20 million in 2017. The filing does not provide formal revenue or earnings guidance.
Management expects to continue reviewing manufacturing, sales and administrative operations for cost reductions. The company incurred $3.1 million of operational restructuring costs, $4.5 million of non-cash charges related to discontinuing the Altrus product offering and $6.9 million of sales and administrative restructuring costs in 2016. Acquisition, restructuring and other expense included $20.6 million of SurgiQuest-related costs, partly offset by a $1.9 million gain on the sale of the Centennial facility.
The FDA closed CONMED’s outstanding warning letter on August 1, 2016. A Lexion Medical lawsuit assumed through the SurgiQuest acquisition was scheduled for trial on April 3, 2017; Lexion sought $14.8 million for alleged lost profits, $18.7 million for alleged corrective advertising costs and unspecified disgorgement. CONMED disputed the claims and intended to defend them.
Former EndoDynamix shareholders filed a February 2017 Delaware action seeking approximately $12.7 million in accelerated contingent and revenue-based payments. CONMED disputed the asserted acceleration and intended to defend the claim.
Key risks include high leverage and variable-rate debt, restrictive credit agreement covenants, foreign currency exposure, competitive pricing pressure, healthcare cost controls and regulatory changes, product recalls and liability claims, raw-material and supplier risks, patent litigation, cybersecurity incidents, allograft tissue availability, acquisition integration and impairment risk, and the ability to commercialize new products. A 1-percentage-point change in average market interest rates was estimated to affect 2017 interest expense and pretax income by approximately $5.0 million.
Most important facts for investors to verify
- Whether SurgiQuest and the AirSeal system deliver sustainable organic growth and operating synergies after acquisition-related costs subside.
- Progress in recovering orthopedic and surgical visualization sales and managing foreign exchange effects.
- Debt paydown, covenant compliance, refinancing requirements and sensitivity to variable interest rates.
- Cash conversion and working-capital requirements, particularly field inventory and integration-related spending.
- Resolution and potential exposure from the Lexion and EndoDynamix legal matters.
- Future restructuring charges, Altrus discontinuation effects and the realization of anticipated cost savings.
- Regulatory, product liability, patent, supply-chain and allograft tissue risks.
- Goodwill of $397.7 million and other intangible assets of $419.5 million, including the assumptions supporting impairment testing.
- The company’s 2017 capital expenditure outlook of $15 million to $20 million and the absence of formal revenue or earnings guidance in the filing.