CONMED Corporation: Q1 2020 Form 10-Q Summary
Business context and reporting period
CONMED is a medical technology company providing surgical devices and equipment for minimally invasive procedures, including orthopedic and general surgery products. This unaudited report covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019.
Approximately 83% of revenue came from single-use products. International sales represented approximately 44% of revenue, compared with 46% in the prior-year period.
Financial performance and key metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $214.0 million | $218.4 million | Down 2.0% |
| Gross profit | $119.2 million | $121.4 million | Down 1.9% |
| Gross margin | 55.7% | 55.6% | Up 10 basis points |
| Income from operations | $13.2 million | $11.6 million | Up 13.2% |
| Operating margin | 6.2% | 5.3% | Up 90 basis points |
| Net income | $5.9 million | $1.0 million | Up $4.9 million |
| Diluted EPS | $0.20 | $0.04 | Up $0.16 |
| Cash flow from operations | $3.7 million | $(3.9) million | Improved $7.6 million |
General surgery sales increased 9.3% to $114.7 million, including approximately 590 basis points of growth from Buffalo Filter. Orthopedic surgery sales decreased 12.5% to $99.3 million, primarily because COVID-19 caused hospitals and surgery centers to defer non-urgent procedures and capital equipment purchases. On a constant-currency basis, total sales decreased 0.7%, with single-use product sales up 4.5% and capital product sales down 20.1%.
Interest expense increased to $9.6 million from $9.4 million, while the weighted-average borrowing rate decreased to 3.12% from 3.97%. The reported tax benefit was $2.4 million, producing an effective tax rate of negative 69.8%; discrete tax benefits related to stock options and tax settlements materially affected the rate.
Liquidity, balance sheet and debt
- Cash and cash equivalents were $24.3 million at March 31, 2020, compared with $25.9 million at December 31, 2019.
- Net working capital was $233.2 million. Accounts receivable declined to $166.5 million, while inventories increased to $174.5 million.
- Total debt was $786.2 million, including $238.0 million drawn on the revolving facility, $251.8 million of term-loan borrowings and $345.0 million of convertible notes, net of applicable discounts and issuance costs.
- Available borrowing capacity under the revolving facility was $344.5 million, with approximately $2.5 million reserved for letters of credit.
- Capital expenditures were $2.8 million. Net cash used in investing activities was $6.7 million, compared with $369.0 million in Q1 2019, which included the Buffalo Filter acquisition.
- The company paid $5.7 million in dividends during the quarter and had $37.4 million remaining under its authorized share-repurchase program; no program repurchases occurred in 2020 through March 31.
Material changes versus the prior comparable period
- COVID-19-related deferrals of non-urgent surgeries reduced orthopedic demand and capital equipment sales, partially offset by general surgery growth.
- Operating income improved despite lower revenue, primarily because Q1 2019 included $7.2 million of Buffalo Filter acquisition-related selling and administrative costs; Q1 2020 included $0.8 million of such costs.
- Q1 2020 included $1.8 million of manufacturing-consolidation costs in cost of sales. The company is winding down certain locations and moving production lines; a Buffalo, New York facility with a $3.0 million net book value was classified as held for sale.
- Q1 2019 included approximately $3.9 million of debt-refinancing costs and a $0.3 million loss on early extinguishment of debt, which did not recur in Q1 2020.
- Comprehensive income was a loss of $1.1 million in Q1 2020, compared with comprehensive income of $1.1 million in Q1 2019, primarily due to a $10.0 million unfavorable foreign-currency translation adjustment.
Guidance, outlook, risks and unusual items
Management expects materially lower sales while lockdowns and surgery deferrals continue, anticipated at least through June 30, 2020, and expects a net loss for the quarter ending June 30, 2020. The company has reduced spending and expenses and believes operating cash flow, cash on hand and revolver availability will meet foreseeable liquidity needs. However, management cannot reliably predict the duration or severity of the pandemic and stated that a more severe or prolonged downturn could require additional cost reductions or debt refinancing.
On April 17, 2020, after the quarter-end, CONMED amended its senior credit agreement to suspend its normal leverage covenants for up to four quarters. The amendment imposes minimum liquidity and fixed-charge coverage requirements and increases applicable interest margins. Management forecasted compliance with the amended requirements, but failure to meet them could constrain liquidity and financing flexibility.
COVID-19 risks include reduced procedure volumes, customer payment and reimbursement pressures, supply-chain disruption, production delays, increased operating costs, potential restructuring or impairment charges, and difficulty accessing capital. Other ongoing risks include regulatory enforcement, product liability, intellectual-property litigation, foreign exchange and interest-rate exposure, and acquisition integration.
The company is defending litigation related to the discontinued EndoDynamix clip applier. The former shareholders seek approximately $12.7 million in accelerated contingent payments; CONMED disputes the claim, and a non-jury trial was scheduled for December 2020. Management does not expect pending matters to have a material effect, but states that no assurance can be given.
Investor verification checklist
- Verify the pace and durability of recovery in elective and non-urgent surgical volumes, particularly orthopedic procedures and capital equipment purchases.
- Monitor compliance with the amended credit agreement’s minimum liquidity and fixed-charge coverage requirements, including the higher post-amendment borrowing costs.
- Assess cash generation, inventory levels, revolver availability and the timing of debt maturities, including $345.0 million of convertible notes due in 2024.
- Separate recurring operating performance from acquisition, manufacturing-consolidation, tax, foreign-exchange and other unusual items.
- Track the EndoDynamix litigation, potential restructuring or impairment charges, and any changes in product liability, regulatory or supply-chain exposures.