CONMED (CNMD) - 2023 Q1 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements The unaudited consolidated condensed financial statements for Q1 2023 show a 21.9% net sales increase to $295.5 million, but net income significantly decreased to $1.8 million due to higher costs and expenses, with total assets growing to $2.32 billion and operating cash flow turning negative at ($3.8) million Consolidated Condensed Statements of Comprehensive Income For Q1 2023, net sales increased to $295.5 million, but operating income fell sharply to $12.7 million, and net income dropped to $1.8 million, resulting in diluted EPS of $0.06 | Financial Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $295,468 | $242,327 | 21.9% | | Gross Profit | $155,321 | $135,991 | 14.2% | | Income from Operations | $12,699 | $22,444 | -43.4% | | Net Income | $1,819 | $14,975 | -87.9% | | Diluted EPS | $0.06 | $0.47 | -87.2% | Consolidated Condensed Balance Sheets As of March 31, 2023, total assets reached $2.32 billion, with increases in accounts receivable and inventories, while total liabilities rose to $1.57 billion and shareholders' equity increased to $752.5 million | Balance Sheet Item | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $26,494 | $28,942 | | Total current assets | $610,088 | $581,226 | | Goodwill | $815,499 | $815,429 | | Total Assets | $2,320,120 | $2,297,592 | | Liabilities & Equity | | | | Total current liabilities | $320,686 | $296,552 | | Long-term debt | $995,276 | $985,076 | | Total Liabilities | $1,567,667 | $1,552,047 | | Total Shareholders' Equity | $752,453 | $745,545 | Consolidated Condensed Statements of Cash Flows Net cash used in operating activities was ($3.8) million for Q1 2023, a significant decrease from the prior year, primarily due to lower net income and unfavorable working capital changes, while financing activities provided $5.4 million | Cash Flow Activity | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(3,847) | $328 | | Net cash used in investing activities | $(4,254) | $(3,687) | | Net cash provided by financing activities | $5,350 | $7,489 | | Net (decrease) increase in cash | $(2,448) | $4,017 | Notes to Consolidated Condensed Financial Statements The notes detail key accounting policies, including the impact of 2022 acquisitions, revenue breakdown by segment, long-term debt structure, and the company's single business segment operation - The acquisitions of In2Bones and Biorez in 2022 are in preliminary purchase price allocation, with In2Bones contributing $11.8 million in net sales in Q1 2023, while Biorez sales were immaterial[79][82][84] - The company uses forward foreign exchange contracts to hedge currency fluctuations for intercompany sales and receivables, with $199.0 million notional amount outstanding as of March 31, 2023[61][63][91] - Total long-term debt as of March 31, 2023, was approximately $1.06 billion, primarily comprising a term loan, revolving credit facility, and two series of convertible notes[36] Revenue by Product Line | Revenue by Product Line | Q1 2023 (in thousands) | Q1 2022 (in thousands) | | :--- | :--- | :--- | | Orthopedic Surgery | $131,175 | $107,517 | | General Surgery | $164,293 | $134,810 | | Total Sales | $295,468 | $242,327 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management attributes the 21.9% sales growth in Q1 2023 to reduced shipping delays and acquisitions, but gross margin declined by 350 basis points due to inflation and acquisition costs, while liquidity is supported by $504.2 million available on the revolving credit facility Consolidated Results of Operations Net sales increased 21.9% (25.1% in constant currency) for Q1 2023, driven by both Orthopedic and General Surgery segments, while gross profit margin fell to 52.6%, and interest expense doubled to $10.3 million Product Line Sales | Product Line | Q1 2023 Sales (in millions) | As Reported % Change | Constant Currency % Change | | :--- | :--- | :--- | :--- | | Orthopedic surgery | $131.2 | 22.0% | 26.0% | | General surgery | $164.3 | 21.9% | 24.4% | | Total Net sales | $295.5 | 21.9% | 25.1% | - Gross profit margins decreased by 350 basis points from 56.1% to 52.6%, primarily due to inflation in raw materials, freight, and production costs, alongside $2.1 million in amortization of inventory step-up from the In2Bones acquisition[130] - The increase in Selling and Administrative expense was mainly driven by non-recurring costs, including $4.4 million for fair value adjustments to contingent consideration and $4.3 million for new warehouse management system implementation[126][131] - Interest expense increased from $5.0 million to $10.3 million year-over-year, primarily due to the issuance of 2.250% Convertible Notes in June 2022 and higher interest rates on the senior credit agreement[133] Liquidity and Capital Resources Net cash used in operating activities was $3.8 million for Q1 2023, a decline from the prior year, with $504.2 million available on the revolving credit facility and $37.4 million remaining for share repurchases - Net cash used in operating activities was $3.8 million in Q1 2023, compared to net cash provided of $0.3 million in Q1 2022, primarily due to lower net income and an increase in accounts receivable[139][140] - As of March 31, 2023, the company had $504.2 million in available borrowings on its revolving credit facility and was in full compliance with all debt covenants[145][146] - The company's share repurchase program has $37.4 million remaining under its $200.0 million authorization, with no shares repurchased during Q1 2023[149] Item 3. Quantitative and Qualitative Disclosures About Market Risk There were no significant changes in the company's primary market risk exposures or their management during the three months ended March 31, 2023 - There were no significant changes in the company's primary market risk exposures, which include interest rate risk and foreign currency exchange risk, during the first quarter of 2023[151] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report (March 31, 2023)[152] PART II OTHER INFORMATION Item 1. Legal Proceedings The company is involved in lawsuits related to Ethylene Oxide exposure and is challenging an Italian medical device tax, but does not anticipate a material adverse effect on its financial condition - CONMED is defending two lawsuits in Georgia related to alleged personal injury from Ethylene Oxide exposure, with claims of 44 out of 51 plaintiffs dismissed in one action, and strong defenses for remaining claims[101][102] - The company is challenging a medical device tax passed by the Italian government in 2015, with payment postponed pending court rulings on the law's constitutionality, and no amounts remitted to date[105] - The company maintains commercial product liability insurance of $35 million per incident and in aggregate annually, which it believes is adequate[96] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications required by the Sarbanes-Oxley Act of 2002 and XBRL data files - Exhibits filed with the report include CEO and CFO certifications as required by the Sarbanes-Oxley Act of 2002 (Sections 302 and 906)[157][158] Signatures The report was duly signed on April 27, 2023, by Todd W. Garner, Executive Vice President and Chief Financial Officer of CONMED Corporation - The Form 10-Q was signed on April 27, 2023, by Todd W. Garner, Executive Vice President and Chief Financial Officer[161][163]