CONMED (CNMD) - 2023 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents CONMED Corporation's unaudited consolidated condensed financial statements, including comprehensive income (loss), balance sheets, shareholders' equity, and cash flows, along with explanatory notes on operations, accounting, and financial instruments Consolidated Condensed Statements of Comprehensive Income (Loss) This statement details CONMED's financial performance, including net sales, gross profit, income from operations, net income (loss), and comprehensive income (loss) for the three and nine months ended September 30, 2023 and 2022 Consolidated Condensed Statements of Comprehensive Income (Loss) (in thousands, except per share amounts): | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net sales | $304,578 | $275,088 | $917,699 | $794,605 | | Gross profit | $168,059 | $151,615 | $494,070 | $439,383 | | Income from operations | $30,300 | $24,248 | $70,416 | $71,149 | | Net income (loss) | $15,837 | $46,150 | $31,388 | $(107,166) | | Basic EPS | $0.52 | $1.51 | $1.02 | $(3.59) | | Diluted EPS | $0.50 | $1.48 | $0.99 | $(3.59) | | Comprehensive income (loss) | $14,825 | $43,125 | $35,287 | $(113,096) | Consolidated Condensed Balance Sheets This statement provides a snapshot of CONMED's financial position, detailing assets, liabilities, and shareholders' equity as of September 30, 2023, and December 31, 2022 Consolidated Condensed Balance Sheets (in thousands): | Metric | September 30, 2023 | December 31, 2022 | | :--------------------------------- | :----------------- | :------------------ | | Total current assets | $625,649 | $581,226 | | Property, plant and equipment, net | $120,436 | $115,611 | | Goodwill | $815,143 | $815,429 | | Other intangible assets, net | $657,353 | $681,799 | | Total assets | $2,325,675 | $2,297,592 | | Total current liabilities | $376,319 | $296,552 | | Long-term debt | $942,166 | $985,076 | | Total liabilities | $1,529,470 | $1,552,047 | | Total shareholders' equity | $796,205 | $745,545 | Consolidated Condensed Statements of Shareholders' Equity This statement outlines changes in CONMED's shareholders' equity, including common shares, paid-in capital, retained earnings, and comprehensive loss, from December 31, 2022, to September 30, 2023 Consolidated Condensed Statements of Shareholders' Equity (in thousands): | Metric | Balance at December 31, 2022 | Balance at September 30, 2023 | | :--------------------------------- | :--------------------------- | :---------------------------- | | Common Shares | 31,299 | 31,299 | | Stock Amount | $313 | $313 | | Paid-in Capital | $413,235 | $439,731 | | Retained Earnings | $412,631 | $425,612 | | Other Comprehensive Loss | $(57,858) | $(53,959) | | Treasury Stock | $(22,776) | $(15,492) | | Total Shareholders' Equity | $745,545 | $796,205 | Note: Net income for the nine months ended September 30, 2023, was $31,388k, contributing to retained earnings Consolidated Condensed Statements of Cash Flows This statement summarizes CONMED's cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2023 and 2022 Consolidated Condensed Statements of Cash Flows (in thousands): | Cash Flow Activity | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $68,953 | $44,963 | | Net cash used in investing activities | $(15,177) | $(243,211) | | Net cash provided by (used in) financing activities | $(51,666) | $213,485 | | Net increase in cash and cash equivalents | $1,560 | $12,507 | | Cash and cash equivalents at end of period | $30,502 | $33,354 | Notes to Consolidated Condensed Financial Statements This section provides detailed explanations and disclosures supporting the unaudited consolidated condensed financial statements, covering operations, accounting policies, and specific financial instruments Note 1 - Operations CONMED Corporation is a medical technology company specializing in devices and equipment for surgical procedures across various specialties. The accompanying interim financial statements are unaudited and reflect management's estimates, which may differ from actual results - CONMED is a medical technology company providing devices and equipment for surgical procedures in orthopedics, general surgery, gynecology, thoracic surgery, and gastroenterology[23] - The interim financial statements are unaudited and prepared based on management's estimates and assumptions, which may not be indicative of full-year results[38][39] Note 2 - Interim Financial Information This note clarifies that the unaudited consolidated condensed financial statements adhere to GAAP for interim reporting and Form 10-Q instructions, and therefore do not include all the information typically required for annual financial statements - The unaudited consolidated condensed financial statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions, and do not include all information required for annual financial statements[38] Note 3 - New Accounting Pronouncements The company has not adopted ASU 2020-04 (Reference Rate Reform) as of September 30, 2023, and does not anticipate a significant impact on its financial statements due to existing credit agreement language addressing the transition from LIBOR to SOFR - ASU 2020-04, Reference Rate Reform (Topic 848), extended through December 31, 2024, has not been adopted by the Company as of September 30, 2023[26] - The Company does not believe reference rate reform will have a significant impact on its consolidated financial statements due to existing credit agreement language addressing the change from LIBOR to SOFR[26] Note 4 - Business Combinations CONMED completed the acquisitions of In2Bones Global, Inc. in June 2022 for $145.2 million upfront and Biorez, Inc. in August 2022 for $85.5 million upfront, both including potential earn-out payments. Purchase accounting is complete for both, and acquisition-related costs, including inventory step-up amortization and integration fees, were recognized - Acquired In2Bones Global, Inc. in June 2022 for an upfront payment of $145.2 million in cash, with potential earn-out payments up to $110.0 million[41] - Acquired Biorez, Inc. in August 2022 for an upfront payment of $85.5 million in cash, with potential earn-out payments up to $165.0 million[68] Acquisition-Related Costs (in millions): | Cost Type | Period | 2023 | 2022 | | :--------------------------------- | :--------------------------------- | :--- | :--- | | Amortization of inventory step-up (Cost of Sales) | Three months ended Sep 30 | $2.2 | $2.1 | | Amortization of inventory step-up (Cost of Sales) | Nine months ended Sep 30 | $6.5 | $2.4 | | Integration costs & professional fees (S&A Expense) | Nine months ended Sep 30 | $0.8 | $6.3 | | Integration costs & professional fees (S&A Expense) | Three months ended Sep 30 | N/A | $3.7 | Note 5 - Revenues Net sales increased for both the three and nine months ended September 30, 2023, across all primary geographic markets and product lines. The majority of revenue is recognized at a point in time for goods transferred Net Sales by Primary Geographic Markets (in thousands): | Geographic Market | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | | :--------------------------------- | :----------------------------- | :----------------------------- | :------------------------------ | :------------------------------ | | United States | $509,780 | $436,131 | $170,523 | $155,721 | | Europe, Middle East & Africa | $165,735 | $152,048 | $51,437 | $47,214 | | Asia Pacific | $151,997 | $125,712 | $53,284 | $45,465 | | Americas (excluding the United States) | $90,187 | $80,714 | $29,334 | $26,688 | | Total sales | $917,699 | $794,605 | $304,578 | $275,088 | Timing of Revenue Recognition (in thousands): | Timing of Revenue Recognition | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | | :--------------------------------- | :----------------------------- | :----------------------------- | :------------------------------ | :------------------------------ | | Goods transferred at a point in time | $882,647 | $760,769 | $293,637 | $263,731 | | Services transferred over time | $35,052 | $33,836 | $10,941 | $11,357 | | Total sales | $917,699 | $794,605 | $304,578 | $275,088 | - Revenue recognized from contract liabilities at the beginning of the period was $10.4 million for the nine months ended September 30, 2023, compared to $9.5 million in the prior year[72] Note 6 - Comprehensive Income (Loss) Comprehensive income (loss) for the nine months ended September 30, 2023, was positive, a significant improvement from a loss in the prior year, driven by net income and positive contributions from cash flow hedging and pension liability adjustments, despite negative foreign currency translation adjustments Comprehensive Income (Loss) (in thousands): | Component | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income (loss) | $15,837 | $46,150 | $31,388 | $(107,166) | | Cash flow hedging gain, net | $2,730 | $4,833 | $4,110 | $10,577 | | Pension liability, net | $403 | $490 | $1,210 | $1,502 | | Foreign currency translation adjustment | $(4,145) | $(8,348) | $(1,421) | $(18,009) | | Comprehensive income (loss) | $14,825 | $43,125 | $35,287 | $(113,096) | Accumulated Other Comprehensive Income (Loss) (in thousands): | Metric | Balance, December 31, 2022 | Balance, September 30, 2023 | | :--------------------------------- | :------------------------- | :-------------------------- | | Accumulated Other Comprehensive Income (Loss) | $(57,858) | $(53,959) | Note 7 - Fair Value of Financial Instruments CONMED uses derivative instruments, primarily foreign currency forward contracts, for risk management, with both cash flow hedges and non-designated contracts. The fair value of these derivatives and contingent consideration liabilities, valued using Level 2 and Level 3 inputs respectively, are detailed - The Company uses foreign currency forward contracts to hedge forecasted intercompany sales and manage currency transaction exposures, with some designated as cash flow hedges and others not[50][75] Notional Contract Amounts for Forward Contracts (in thousands): | Designation | September 30, 2023 | December 31, 2022 | | :--------------------------------- | :----------------- | :------------------ | | Cash flow hedge | $218,929 | $198,473 | | Non-designated | $49,918 | $81,929 | Fair Value of Derivative Instruments (in thousands) as of September 30, 2023: | Derivative Type | Location on Balance Sheet | Asset Fair Value | Liabilities Fair Value | Net Fair Value | | :--------------------------------- | :--------------------------------- | :--------------- | :--------------------- | :------------- | | Designated as hedged instruments (Foreign exchange contracts) | Prepaid expenses and other current assets / Other assets | $9,468 | $(747) | $8,721 | | Not designated as hedging instruments (Foreign exchange contracts) | Other current liabilities | $39 | $(150) | $(111) | | Total derivatives | | $9,507 | $(897) | $8,610 | - Contingent consideration from the In2Bones and Biorez acquisitions is valued using Level 3 inputs, with significant unobservable inputs including discount rates (8.02% for In2Bones, 12.71% for Biorez) and revenue volatility[84][105] Changes in Fair Value of Contingent Consideration (in thousands) for Nine Months Ended September 30, 2023: | Acquisition | Balance as of January 1, 2023 | Changes in fair value | Balance as of September 30, 2023 | | :--------------------------------- | :---------------------------- | :-------------------- | :------------------------------- | | In2Bones | $70,198 | $860 | $71,058 | | Biorez | $116,234 | $6,089 | $122,323 | Note 8 - Inventories Total inventories decreased slightly from December 31, 2022, to September 30, 2023, primarily due to a reduction in finished goods, partially offset by increases in raw materials and work-in-process Inventories (in thousands): | Component | September 30, 2023 | December 31, 2022 | | :--------------------------------- | :----------------- | :------------------ | | Raw materials | $115,547 | $110,677 | | Work-in-process | $30,382 | $26,166 | | Finished goods | $179,895 | $195,477 | | Total | $325,824 | $332,320 | Note 9 - Earnings (Loss) Per Share Basic and diluted earnings per share improved significantly for the nine months ended September 30, 2023, compared to a loss in the prior year. Dilutive potential shares were included in 2023 due to net income, while anti-dilutive shares were excluded Earnings (Loss) Per Share (EPS) (Three Months Ended Sep 30): | Metric | 2023 Basic EPS | 2023 Diluted EPS | 2022 Basic EPS | 2022 Diluted EPS | | :--------------------------------- | :------------- | :--------------- | :------------- | :--------------- | | Net income | $15,837 | $15,837 | $46,150 | $46,150 | | Weighted average shares outstanding | 30,741 | 31,689 | 30,473 | 31,103 | | EPS | $0.52 | $0.50 | $1.51 | $1.48 | Earnings (Loss) Per Share (EPS) (Nine Months Ended Sep 30): | Metric | 2023 Basic EPS | 2023 Diluted EPS | 2022 Basic EPS | 2022 Diluted EPS | | :--------------------------------- | :------------- | :--------------- | :------------- | :--------------- | | Net income (loss) | $31,388 | $31,388 | $(107,166) | $(107,166) | | Weighted average shares outstanding | 30,638 | 31,563 | 29,892 | 29,892 | | EPS | $1.02 | $0.99 | $(3.59) | $(3.59) | - Approximately 1.7 million and 1.8 million anti-dilutive shares were excluded from diluted EPS for the three and nine months ended September 30, 2023, respectively. No anti-dilutive shares were present for the nine months ended September 30, 2022, due to a net loss position[111] Note 10 - Goodwill and Other Intangible Assets Goodwill remained relatively stable, while other intangible assets, primarily from acquired businesses, saw changes in accumulated amortization. The company provided estimated future amortization expenses for definite-lived intangible assets Goodwill (in thousands): | Metric | Balance as of December 31, 2022 | Balance as of September 30, 2023 | | :--------------------------------- | :------------------------------ | :------------------------------- | | Goodwill | $815,429 | $815,143 | Note: The decrease is primarily due to foreign currency translation Other Intangible Assets (in thousands): | Intangible Asset | Sep 30, 2023 Gross Carrying Amount | Sep 30, 2023 Accumulated Amortization | Dec 31, 2022 Gross Carrying Amount | Dec 31, 2022 Accumulated Amortization | | :--------------------------------- | :--------------------------------- | :------------------------------------ | :--------------------------------- | :------------------------------------ | | Customer and distributor relationships | $369,812 | $(184,040) | $369,854 | $(170,870) | | Sales representation, marketing and promotional rights | $149,376 | $(70,500) | $149,376 | $(66,000) | | Developed technology | $320,204 | $(42,087) | $320,204 | $(34,675) | | Patents and other intangible assets | $81,677 | $(53,633) | $79,838 | $(52,472) | | Trademarks and tradenames (indefinite lives) | $86,544 | $0 | $86,544 | $0 | | Total | $1,007,613 | $(350,260) | $1,005,816 | $(324,017) | Estimated Intangible Asset Amortization Expense (in thousands): | Year | Amortization included in expense | Amortization recorded as a reduction of revenue | Total | | :--------------------------------- | :------------------------------- | :---------------------------------------------- | :---- | | Remaining, 2023 | $7,338 | $1,500 | $8,838| | 2024 | $28,730 | $6,000 | $34,730| | 2025 | $29,607 | $6,000 | $35,607| | 2026 | $29,371 | $6,000 | $35,371| | 2027 | $30,411 | $6,000 | $36,411| | 2028 | $33,543 | $6,000 | $39,543| Note 11 - Long-Term Debt CONMED's long-term debt includes a revolving credit facility, term loan, and convertible notes. The company repurchased a significant portion of its 2.625% Notes in 2022 and issued new 2.250% Notes, which contributed to higher interest expense in 2023. The company also uses convertible notes hedge and warrant transactions to manage potential dilution Long-Term Debt (in thousands): | Debt Type | September 30, 2023 | December 31, 2022 | | :--------------------------------- | :----------------- | :------------------ | | Revolving line of credit | $22,000 | $70,000 | | Term loan, net | $134,013 | $133,858 | | 2.625% convertible notes, net | $69,907 | $69,568 | | 2.250% convertible notes, net | $784,356 | $781,166 | | Financing leases | $2,515 | $230 | | Total debt | $1,012,791 | $1,054,822 | | Less: Current portion | $70,625 | $69,746 | | Total long-term debt | $942,166 | $985,076 | - The 2.625% Convertible Notes have $70.0 million remaining principal, maturing on February 1, 2024, with an estimated fair value of $81.2 million as of September 30, 2023[95][119] - The 2.250% Convertible Notes, issued in June 2022 for $800.0 million, mature on June 15, 2027, and had an estimated fair value of $754.0 million as of September 30, 2023[97][145] Scheduled Maturities of Long-Term Debt (in thousands) as of September 30, 2023: | Year | Amount | | :--------------------------------- | :----- | | Remaining, 2023 | $0 | | 2024 | $70,000| | 2025 | $0 | | 2026 | $156,588| | 2027 | $800,000| | 2028 | $0 | Note 12 - Guarantees CONMED provides standard warranties on its products, typically one year for capital equipment, and sells extended warranties. The warranty liability is based on historical claim experience, with adjustments made as needed - Standard warranty period for capital equipment is generally one year, with extended warranties typically ranging from one to three years[148] Changes in Standard Warranty Liability (in thousands): | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--------------------------------- | :----------------------------- | :----------------------------- | | Balance as of January 1 | $1,944 | $2,344 | | Provision for warranties | $388 | $297 | | Claims made | $(569) | $(624) | | Balance as of September 30 | $1,763 | $2,017 | - Costs associated with extended warranty repairs were $3.9 million for the nine months ended September 30, 2023, compared to $4.6 million in the prior year[123] Note 13 - Pension Plan Net periodic pension cost increased for both the three and nine months ended September 30, 2023, primarily due to higher interest costs on projected benefit obligations, partially offset by expected returns on plan assets Net Periodic Pension Cost (in thousands): | Component | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Service cost | $194 | $269 | $582 | $807 | | Interest cost on projected benefit obligation | $911 | $537 | $2,733 | $1,611 | | Expected return on plan assets | $(1,032) | $(1,324) | $(3,096) | $(3,972) | | Net amortization and deferral | $532 | $647 | $1,597 | $1,941 | | Net periodic pension cost | $605 | $129 | $1,816 | $387 | - The company does not expect to make any pension contributions during 2023[124] Note 14 - Business Segment CONMED operates as a single operating segment, with its CEO evaluating global product portfolios and allocating resources on a consolidated worldwide basis. The company's product lines are Orthopedic Surgery and General Surgery, both showing increased net sales - CONMED operates as a single operating segment, with its chief operating decision maker (CEO) evaluating global product portfolios and allocating resources on a consolidated worldwide basis[125] - The company's product lines consist of Orthopedic Surgery (sports medicine, lower extremities, powered surgical instruments, imaging systems, allograft tissue services) and General Surgery (endo-mechanical instrumentation, smoke evacuation devices, cardiac monitoring, electrosurgical generators)[125] Net Sales by Product Line (in thousands): | Product Line | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Orthopedic surgery | $124,667 | $118,618 | $396,633 | $346,317 | | General surgery | $179,911 | $156,470 | $521,066 | $448,288 | | Consolidated net sales | $304,578 | $275,088 | $917,699 | $794,605 | Note 15 - Legal Proceedings CONMED is involved in various legal proceedings, including product liability, patent infringement, and environmental compliance. Notably, the company is defending Ethylene Oxide exposure lawsuits in Georgia and is challenging the Italian medical device tax. While some insurance coverage has been secured, disputes with insurers persist, and the company does not currently anticipate a material adverse effect on its financial condition from these claims - CONMED is defending two Georgia State Court actions (Cobb County and Douglas County) alleging personal injury from Ethylene Oxide exposure, and is providing indemnification for certain defendants[130] - The company won rulings against Federal Insurance Company ('Chubb') for coverage of indemnification claims in both Georgia actions, but a third action has been commenced to enforce settlement terms regarding fees[131] - CONMED is challenging the imposition of the Italian medical device tax, believing its position is well-grounded in law, and has not remitted any amounts to date[132] - The company does not expect the resolution of any pending claims, investigations, or reports of alleged misconduct to have a material adverse effect on its financial condition, results of operations, or cash flows[133] PART II OTHER INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on CONMED's financial performance and condition, highlighting key drivers of revenue and expense changes, liquidity, and capital resources. It also includes cautionary statements regarding forward-looking information and discusses the impact of macroeconomic factors Forward-Looking Statements The report contains forward-looking statements that involve known and unknown risks and uncertainties, which could cause actual results to differ materially from projections. These risks include economic conditions, regulatory changes, IT system failures, and litigation - Forward-looking statements are not guarantees of future performance and are subject to known and unknown risks and uncertainties[163][190] - Key risk factors include general economic conditions, regulatory compliance, IT system failures, cybersecurity breaches, competition, and litigation[135] Overview CONMED is a medical technology company focused on orthopedic and general surgery, with a significant portion of revenue from recurring single-use products. The company continues to face macroeconomic challenges, including inflation and supply chain issues, but has not been materially impacted by recent geopolitical conflicts - CONMED is a medical technology company providing devices and equipment for surgical procedures, with approximately 84% of revenues derived from single-use products, creating a recurring revenue stream[136][137] - The company is experiencing higher manufacturing and operating costs due to inflationary pressures and ongoing supply chain challenges, which are expected to continue through 2023[167] - International sales accounted for approximately 44% and 45% of consolidated net sales during the nine months ended September 30, 2023 and 2022, respectively[137] - The company has not been materially impacted by the wars in Ukraine and Israel, with business limited to third-party distributors in these regions[138] Critical Accounting Policies Management continuously evaluates critical accounting policies, including those related to goodwill and intangible assets, contingent consideration, and pension benefit obligations, which involve significant estimates and assumptions - Critical accounting policies under continuous evaluation include goodwill and intangible assets, contingent consideration, and pension benefit obligations[168] Consolidated Results of Operations The consolidated results of operations show changes in key income statement categories as a percentage of net sales, with gross profit margins slightly increasing for the three months but decreasing for the nine months ended September 30, 2023 Consolidated Results of Operations (as a percentage of net sales): | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net sales | 100.0 % | 100.0 % | 100.0 % | 100.0 % | | Cost of sales | 44.8 % | 44.9 % | 46.2 % | 44.7 % | | Gross profit | 55.2 % | 55.1 % | 53.8 % | 55.3 % | | Selling and administrative expense | 41.1 % | 41.7 % | 42.0 % | 41.9 % | | Research and development expense | 4.1 % | 4.6 % | 4.2 % | 4.4 % | | Income from operations | 9.9 % | 8.8 % | 7.7 % | 9.0 % | | Interest expense | 3.3 % | 3.1 % | 3.3 % | 2.4 % | | Other expense | — % | — % | — % | 14.1 % | | Income (loss) before income taxes | 6.7 % | 5.7 % | 4.4 % | (7.6) % | | Provision (benefit) for income taxes | 1.5 % | (11.1) % | 1.0 % | 5.9 % | | Net income (loss) | 5.2 % | 16.8 % | 3.4 % | (13.5) % | Net Sales Net sales increased by 10.7% for the three months and 15.5% for the nine months ended September 30, 2023, driven by growth across orthopedic and general surgery product lines, including contributions from recent acquisitions and improvements in warehouse management and shipping Net Sales by Product Line (in millions): | Product Line | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | % Change | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | % Change | | :--------------------------------- | :------------------------------ | :------------------------------ | :------- | :----------------------------- | :----------------------------- | :------- | | Orthopedic surgery | $124.7 | $118.6 | 5.1% | $396.6 | $346.3 | 14.5% | | General surgery | $179.9 | $156.5 | 15.0% | $521.1 | $448.3 | 16.2% | | Total Net Sales | $304.6 | $275.1 | 10.7%| $917.7 | $794.6 | 15.5%| - Orthopedic surgery sales growth was a result of growth in the In2Bones and Biorez product lines and increases in other orthopedic offerings[171] - General surgery sales growth was driven by growth in AirSeal, Buffalo Filter, and other surgical product offerings[198] - Sales growth for the nine months ended September 30, 2023, also benefited from significant progress with the warehouse management system and reduced shipping delays[197] Cost of Sales Cost of sales increased for both the three and nine months ended September 30, 2023. Gross profit margins slightly increased for the three-month period but decreased by 150 basis points for the nine-month period, primarily due to inflation in raw materials, other production costs, and amortization of inventory step-up from acquisitions - Cost of sales increased to $136.5 million (three months 2023) from $123.5 million (three months 2022) and to $423.6 million (nine months 2023) from $355.2 million (nine months 2022)[199] - Gross profit margins increased 10 basis points to 55.2% for the three months ended September 30, 2023, but decreased 150 basis points to 53.8% for the nine months ended September 30, 2023[199] - The 150 basis point decrease in gross profit margins for the nine months was driven by cost increases and inflation in raw materials and other production costs, as well as $6.5 million in amortization of inventory step-up related to the In2Bones acquisition[201] Selling and Administrative Expense Selling and administrative expense increased in absolute terms but decreased as a percentage of net sales for the three months ended September 30, 2023, due to leveraging existing structure and fair value adjustments. For the nine months, it slightly increased as a percentage of net sales, driven by fair value adjustments to contingent consideration, warehouse management system implementation costs, and termination of distribution agreements - Selling and administrative expense increased to $125.3 million (three months 2023) from $114.6 million (three months 2022) and to $385.1 million (nine months 2023) from $333.3 million (nine months 2022)[175] - As a percentage of net sales, it decreased 60 basis points to 41.1% for the three months but increased 10 basis points to 42.0% for the nine months ended September 30, 2023[175] - The nine-month increase as a percentage of net sales was primarily driven by $6.9 million in fair value adjustments to contingent consideration, $6.1 million in warehouse management system implementation costs, $2.1 million in distribution agreement termination costs, and $1.6 million in severance costs[203] Research and Development Expense Research and development expense decreased slightly for the three months but increased for the nine months ended September 30, 2023. As a percentage of net sales, it decreased for both periods, primarily influenced by the timing of research projects - Research and development expense decreased to $12.5 million (three months 2023) from $12.8 million (three months 2022) and increased to $38.6 million (nine months 2023) from $34.9 million (nine months 2022)[177] - As a percentage of net sales, R&D expense decreased 50 basis points to 4.1% for the three months and 20 basis points to 4.2% for the nine months ended September 30, 2023[177] - Changes in R&D spend as a percentage of sales were mainly driven by the timing of research projects[177] Interest Expense Interest expense increased for both the three and nine months ended September 30, 2023, primarily due to higher weighted average interest rates on the senior credit agreement and the issuance of the 2.250% Notes in June 2022 - Interest expense increased to $10.0 million (three months 2023) from $8.5 million (three months 2022) and to $30.3 million (nine months 2023) from $19.5 million (nine months 2022)[178] - Weighted average interest rates on borrowings increased to 3.17% (three months 2023) from 2.66% (three months 2022) and to 3.13% (nine months 2023) from 2.44% (nine months 2022)[178] - The increases were driven by higher interest rates on the senior credit agreement and the issuance of the 2.250% Notes in June 2022[178] Other Expense For the nine months ended September 30, 2022, the company recorded significant other expenses totaling over $112 million, primarily related to the conversion premium on convertible notes, settlement of associated hedge transactions, and write-off of deferred financing fees. No comparable expenses were recorded in 2023 - During the nine months ended September 30, 2022, the company recorded $103.1 million related to the conversion premium on the repurchase and extinguishment of 2.625% Notes[207] - Additional expenses in 2022 included $5.5 million related to the settlement of convertible notes hedge transactions and $3.4 million for the write-off of deferred financing fees[207] Provision (Benefit) for Income Taxes The effective tax rate shifted from a significant benefit in 2022 to an expense in 2023, primarily due to the company generating pretax income in 2023 compared to pretax losses in 2022, which included non-deductible expenses. Discrete tax items also influenced the rates in both periods - The effective tax rate was 21.9% expense for the three months ended September 30, 2023, compared to a (193.7)% benefit in the prior year[179] - For the nine months ended September 30, 2023, the effective tax rate was 21.8% expense, compared to a (77.7)% benefit in the prior year[179] - The higher effective tax rates in 2023 were primarily a result of pretax income in 2023 compared to pretax losses in 2022, which included non-deductible expenses from the second quarter 2022 premium on extinguishment and change in fair value of convertible notes hedges[179] Non-GAAP Financial Measures The company uses "constant currency" net sales as a non-GAAP measure to provide better comparability of results between periods by removing the impact of foreign currency exchange rate changes. This measure should be considered as supplemental and not a substitute for GAAP results - The company analyzes net sales on a "constant currency" basis, a non-GAAP measure, to better measure the comparability of results between periods by removing the impact of foreign currency exchange rates[180] - This non-GAAP financial measure should not be considered in isolation or as a substitute for reported net sales growth, the most directly comparable GAAP financial measure[209] Liquidity and Capital Resources CONMED's liquidity needs are met through operating cash flows, cash on hand, and available borrowings. Net cash provided by operating activities increased, while net cash used in investing activities decreased significantly due to lower acquisition payments. Financing activities shifted from providing cash in 2022 to using cash in 2023, reflecting debt repayments and changes in convertible notes - Liquidity needs arise primarily from capital investments, working capital requirements, and debt payments, met through operations, cash on hand, and available borrowings under the senior credit agreement[185][210] Key Liquidity Metrics (in millions): | Metric | September 30, 2023 | September 30, 2022 | | :--------------------------------- | :----------------- | :----------------- | | Net working capital position | $249.3 | N/A | | Net cash provided by operating activities | $69.0 | $45.0 | | Net cash used in investing activities | $(15.2) | $(243.2) | | Net cash provided by (used in) financing activities | $(51.7) | $213.5 | | Available borrowings on revolving credit facility | $561.4 | N/A | - Net cash used in investing activities decreased by $228.0 million year-over-year, primarily due to lower acquisition payments in 2023 compared to $144.7 million for In2Bones and $82.4 million for Biorez in 2022[211] - The company was in full compliance with debt covenants and restrictions as of September 30, 2023[4] - The share repurchase program has $37.4 million remaining under its $200.0 million authorization, with no shares purchased in 2023[226] Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no significant changes in CONMED's primary market risk exposures or how these exposures are managed during the nine months ended September 30, 2023. Further details are available in the company's Annual Report on Form 10-K - No significant changes in primary market risk exposures or management occurred during the nine months ended September 30, 2023[227] - Reference is made to Item 7A of the Annual Report on Form 10-K for the year ended December 31, 2022, for a description of Qualitative and Quantitative Disclosures About Market Risk[227] Item 4. Controls and Procedures CONMED's management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2023. No material changes to internal control over financial reporting occurred during the quarter - Management, with the participation of the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2023[228] - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2023[228] Item 5. Other Information During the quarter ended September 30, 2023, no members of CONMED's Board of Directors or Executive Officers adopted, modified, or terminated a trading arrangement intended to satisfy the affirmative defense of Rule 10b5-1(c) - No Rule 10b5-1(c) trading arrangements were adopted, modified, or terminated by the Board of Directors or Executive Officers during the quarter ended September 30, 2023[217] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from the CEO and CFO (pursuant to Sarbanes-Oxley Act Sections 302 and 906) and various XBRL (eXtensible Business Reporting Language) documents - Exhibits include certifications of Curt R. Hartman and Todd W. Garner pursuant to Rule 13a-14(a) or Rule 15d-14(a) and 18 U.S.C. Section 1350 (Sarbanes-Oxley Act Sections 302 and 906)[219] - The filing includes various XBRL documents: Instance Document, Taxonomy Extension Schema, Calculation Linkbase, Definition Linkbase, Label Linkbase, and Presentation Linkbase Documents[219] SIGNATURES The Quarterly Report on Form 10-Q is officially signed on behalf of CONMED Corporation by Todd W. Garner, Executive Vice President and Chief Financial Officer, dated October 26, 2023 - The report is signed by Todd W. Garner, Executive Vice President and Chief Financial Officer, on behalf of CONMED Corporation[222] - The signing date for the report is October 26, 2023[233]