CONMED Corporation — Q1 2023 Form 10-Q Summary
Business context and reporting period
CONMED is a global medical technology company providing surgical devices and equipment for orthopedic, general, gynecologic, thoracic, gastroenterology and other procedures. The filing covers the unaudited three months ended March 31, 2023, compared with the three months ended March 31, 2022.
Orthopedic surgery represented 44% of sales and general surgery 56%. Approximately 84% of revenue was generated by single-use products, and international sales represented approximately 44% of consolidated sales.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $295.5 million | $242.3 million | 21.9% increase |
| Gross profit | $155.3 million | $136.0 million | 14.2% increase |
| Gross margin | 52.6% | 56.1% | 350 basis-point decline |
| Income from operations | $12.7 million | $22.4 million | 43.4% decline |
| Operating margin | 4.3% | 9.3% | 500 basis-point decline |
| Net income | $1.8 million | $15.0 million | 87.9% decline |
| Diluted EPS | $0.06 | $0.47 | Decline |
| Net cash from operating activities | $(3.8) million | $0.3 million | Decline |
Orthopedic surgery sales were $131.2 million, up 22.0%, while general surgery sales were $164.3 million, up 21.9%. Constant-currency sales growth was 25.1% overall, including 26.0% in orthopedic surgery and 24.4% in general surgery.
Cash and cash equivalents were $26.5 million at March 31, 2023, compared with $28.9 million at December 31, 2022. Total debt was $1.065 billion, including $69.7 million classified as current. The company had $504.2 million of available revolving-credit capacity, with approximately $1.8 million reserved for letters of credit, and was in compliance with its debt covenants.
Capital expenditures were $4.3 million. Net cash used in investing activities was $4.3 million, while net cash provided by financing activities was $5.4 million. Net working capital was $289.4 million.
Material changes versus the prior comparable period
- Sales increased primarily because warehouse-management-system shipping disruptions were substantially reduced, acquired In2Bones and Biorez products contributed $13.6 million, and existing product lines grew.
- Gross margin fell because of inflation in raw materials, freight and production costs, as well as $2.1 million of In2Bones inventory step-up amortization, $1.1 million of cost-improvement consulting fees and $1.0 million of severance costs.
- Selling and administrative expense increased to $130.1 million, including $4.4 million of contingent-consideration fair-value adjustments, $4.3 million of warehouse-management-system implementation costs and $1.6 million of severance.
- Interest expense more than doubled to $10.3 million from $5.0 million, reflecting the June 2022 issuance of the 2.250% convertible notes and higher interest rates on the senior credit agreement. The weighted-average borrowing rate increased to 3.14% from 2.22%.
- The effective tax rate increased to 25.6% from 14.2%, primarily because lower 2023 pretax income resulted in a higher relative tax burden and the discrete tax benefit from stock-option exercises was smaller.
- Cash flow from operations declined to an outflow of $3.8 million, driven in part by lower earnings, timing-related increases in accounts receivable and inventory, and payments of accrued compensation.
Guidance, outlook, commentary and risks
The filing does not provide specific quantitative full-year revenue or earnings guidance. Management stated that cash, operating cash flow and available borrowing capacity are expected to be adequate for anticipated working capital, debt service, capital expenditures, dividends and share repurchases in the foreseeable future. Management also noted that refinancing or additional cost reductions may become necessary depending on economic conditions.
Inflationary pressures and supply-chain constraints are increasing manufacturing and operating costs and are expected to continue through 2023. The warehouse-management-system implementation improved materially during the quarter, but incremental costs remain and prior shipping disruptions could result in lost sales or customers.
Material risks include economic downturns, supply-chain disruption, inflation and interest-rate increases, regulatory and enforcement actions, cybersecurity incidents, product acceptance and clinical-development risks, competition, foreign-exchange movements, acquisition integration, litigation, intellectual-property issues and availability of sterilization services, including ethylene oxide.
The company is defending Georgia litigation involving alleged ethylene oxide exposure and has not recorded a loss because management does not believe a potential loss is probable; a loss range cannot currently be estimated. The company is also challenging an Italian medical-device tax, for which no amounts have been remitted. Potential earn-out obligations from the In2Bones and Biorez acquisitions totaled up to $275.0 million, subject to revenue targets.
CONMED paid a $0.20-per-share dividend during the quarter. Its $200.0 million repurchase authorization had $37.4 million remaining at March 31, 2023; no shares were repurchased under the program during 2023. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales growth and warehouse-system improvements are sustained without continued elevated freight, labor and implementation costs.
- The effect of inflation, supply-chain conditions and higher variable interest rates on gross margin, operating income and cash flow.
- Liquidity and refinancing requirements associated with the $70.0 million of convertible notes due in 2023, the 2026 credit-facility maturities and the $800.0 million of convertible notes due in 2027.
- The valuation and eventual cash requirements for In2Bones and Biorez contingent consideration, recorded at $190.9 million at March 31, 2023.
- The outcome and insurance coverage of the Georgia ethylene oxide litigation and the potential Italian medical-device tax liability.
- Whether operating cash flow improves from the Q1 outflow and remains sufficient to support dividends, capital expenditures, acquisitions and any share repurchases.