CONMED Corporation Announces Third Quarter 2016 Financial Results

UTICA, N.Y.--()--CONMED Corporation (Nasdaq: CNMD) today announced financial results for the third quarter ended September 30, 2016.

Third Quarter 2016 Highlights

  • Sales were $184.8 million, an increase of 9.2% compared to the third quarter of 2015. On a constant currency basis, sales increased 11.2% and grew 0.8% organically.
  • AirSeal® sales continued to show strength at $17.3 million in the quarter, with total year-to-date sales of $48.5 million.
  • Global General Surgery sales grew 29.2% as reported, 30.6% in constant currency, and 4.2% organically in constant currency.
  • Diluted net earnings per share (GAAP) were $0.26, compared to diluted net earnings per share (GAAP) of $0.32 in the third quarter of 2015.
  • Adjusted diluted net earnings per share(1) were $0.41 versus $0.45 in the prior-year period.

“We are encouraged by the continued progress in our international markets, strong contribution from AirSeal®, and solid organic growth within General Surgery. While the rebuilding of our domestic Orthopedics franchise is taking longer than expected, we feel confident that we are making the appropriate changes to return this business to growth. Overall, we are pleased with a return to positive organic growth on a constant currency basis,” commented Curt R. Hartman, CONMED’s President and Chief Executive Officer. “As we close out the year, we look to build upon the recent momentum across several of our businesses while continuing to focus on improving operating efficiencies and reaccelerating organic growth across all of our product categories.”

Sales Analysis

For the quarter ended September 30, 2016, domestic sales, which represented 53.7% of total revenue, increased 13.0% as strong growth in General Surgery was partially offset by declines in Orthopedics and Visualization. The SurgiQuest acquisition contributed to 32.1% year-over-year growth in the U.S. General Surgery business. International sales, which represented 46.3% of total revenue, increased 5.1% compared to the third quarter of 2015 on a reported basis. Foreign currency exchange rates, including the effects of the FX hedging program, had a negative impact of $3.4 million on third quarter sales. In constant currency, international sales increased 9.2% versus the prior-year period.

Earnings Analysis

For the quarter ended September 30, 2016, reported net earnings totaled $7.3 million, compared to reported net earnings of $8.9 million a year ago. Reported diluted net earnings per share were $0.26 in the quarter, compared to reported diluted net earnings per share of $0.32 in the prior-year period. Reported net earnings for 2016 include business acquisition and restructuring costs, as well as a gain on the sale of the Company’s facility in Centennial, Colorado, while reported net earnings for 2015 include restructuring costs. The effect of each of these items on reported net earnings and reported diluted net earnings per share appears in the reconciliation of GAAP to non-GAAP measures below.

The Company excludes the after-tax costs of special items including acquisitions, restructuring, the gain on the sale of the Company’s facility in Centennial, Colorado, and debt refinancing, as well as amortization of intangible assets, net of tax, from its adjusted diluted net earnings per share. Excluding the impact of these items, adjusted net earnings(2) of $11.5 million decreased 8.0% year over year and adjusted diluted net earnings per share(1) of $0.41 decreased 8.9% year over year. The decrease in adjusted net earnings was largely attributable to lower gross margin, higher R&D as a percentage of sales, and the unfavorable impact of foreign exchange rates, partially offset by a lower tax rate during the quarter.

2016 Outlook

There is no change to CONMED’s previously issued financial guidance. The Company continues to expect 2016 constant currency organic sales growth in the range of -1% to 1% and sales related to the SurgiQuest acquisition in the range of $62 to $67 million. Based on foreign currency exchange rates as of October 21, 2016, the Company continues to anticipate the negative impact of foreign exchange for the year in the range of $17 to $19 million.

The Company continues to expect 2016 reported sales in the range of $757 to $767 million, which represents growth of 5.3% to 6.7% over reported 2015 revenue of $719 million. Adjusted diluted net earnings per share are still expected in the range of $1.83 to $1.93. The adjusted diluted net earnings per share estimates for 2016 exclude the cost of special items including acquisition costs, restructuring costs, the gain on the sale of the Company’s facility in Centennial, Colorado, and debt refinancing, which are now estimated in the range of $19 to $21 million, net of tax, compared to the previous range of $21 to $23 million, and amortization of intangible assets, which continue to be estimated in the range of $12 to $14 million, net of tax.

Supplemental Financial Disclosures

(1) A reconciliation of reported diluted net earnings per share to adjusted diluted net earnings per share, a non-GAAP financial measure, appears below.

(2) A reconciliation of reported net earnings to adjusted net earnings, a non-GAAP financial measure, appears below.

In conjunction with this earnings press release, CONMED has prepared supplemental financial disclosures which are available on the home page of the “Investors – Financial Reports” section of the Company’s website at www.conmed.com.

Conference Call

The Company’s management will host a conference call today at 5:30 p.m. ET to discuss its third quarter 2016 results.

To participate in the conference call, dial 844-889-7792 (domestic) or 661-378-9936 (international) and enter the passcode 95238932.

This conference call will also be webcast and can be accessed from the “Investors” section of CONMED's website at www.conmed.com. The webcast replay of the call will be available at the same site approximately one hour after the end of the call.

A recording of the call will also be available from 8:30 p.m. ET on Thursday, October 27, 2016, until 7:30 p.m. ET on Thursday, November 10, 2016. To hear this recording, dial 855-859-2056 (domestic) or 404-537-3406 (international) and enter the passcode 95238932.

About CONMED Corporation

CONMED is a medical technology company that provides surgical devices and equipment for minimally invasive procedures. The Company’s products are used by surgeons and physicians in a variety of specialties, including orthopedics, general surgery, gynecology, neurosurgery, and gastroenterology. The Company distributes its products worldwide from several manufacturing locations. CONMED has a direct selling presence in 17 countries, and international sales constitute approximately 50% of the Company’s total sales. Headquartered in Utica, New York, the Company employs approximately 3,400 people. For more information, visit www.conmed.com.

Forward-Looking Statements

This press release and today’s conference call may contain forward-looking statements based on certain assumptions and contingencies that involve risks and uncertainties, which could cause actual results, performance, or trends to differ materially from those expressed in the forward-looking statements herein or in previous disclosures. For example, in addition to general industry and economic conditions, factors that could cause actual results to differ materially from those in the forward-looking statements may include, but are not limited to, the risk factors discussed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015. Any and all forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and relate to the Company’s performance on a going-forward basis. The Company believes that all forward-looking statements made by it have a reasonable basis, but there can be no assurance that management’s expectations, beliefs or projections as expressed in the forward-looking statements will actually occur or prove to be correct.

Supplemental Information - Reconciliation of GAAP to Non-GAAP Financial Measures

The Company supplements the reporting of its financial information determined under accounting principles generally accepted in the United States (GAAP) with certain non-GAAP financial measures, including percentage sales growth in constant currency; adjusted gross profit; cost of sales excluding specified items; adjusted selling and administrative expenses; adjusted operating income; adjusted income tax expense; adjusted effective income tax rate; adjusted net earnings and adjusted diluted net earnings per share (EPS). The Company believes that these non-GAAP measures provide meaningful information to assist investors and shareholders in understanding our financial results and assessing our prospects for future performance. Management believes percentage sales growth in constant currency and the other adjusted measures described above are important indicators of our operations because they exclude items that may not be indicative of, or are unrelated to, our core operating results and provide a baseline for analyzing trends in the Company’s underlying business. Further, the presentation of EBITDA is a non-GAAP measurement that management considers useful for measuring aspects of the Company’s cash flow. Management uses these non-GAAP financial measures for reviewing the operating results and analyzing potential future business trends in connection with our budget process and bases certain management incentive compensation on these non-GAAP financial measures.

To measure percentage sales growth in constant currency, the Company removes the impact of changes in foreign currency exchange rates that affect the comparability and trend of sales. To measure earnings performance on a consistent and comparable basis, the Company excludes certain items that affect the comparability of operating results and the trend of earnings. These adjustments are irregular in timing, may not be indicative of our past and future performance and are therefore excluded to allow investors to better understand underlying operating trends.

Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. These adjusted financial measures should not be considered in isolation or as a substitute for reported sales growth, gross profit, cost of sales, selling and administrative expenses, operating income, income tax expense, effective income tax rate, net earnings and diluted net earnings per share, the most directly comparable GAAP financial measures. These non-GAAP financial measures are an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the reconciliations to corresponding GAAP financial measures below, provide a more complete understanding of our business. The Company strongly encourages investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.

 

Consolidated Condensed Statements of Income

(in thousands, except per share amounts, unaudited)

 
        Three Months Ended   Nine Months Ended
September 30, September 30,
2016   2015   2016   2015  
 
Net sales $ 184,792

$

169,184

$ 559,426 $ 528,151
Cost of sales   83,583     75,638     258,055     248,825  
Gross profit   101,209     93,546     301,371     279,326  
% of sales 54.8 % 55.3 % 53.9 % 52.9 %
Selling and administrative expense 79,009 72,056 251,681 220,423
Research & development   8,353     6,652     24,620     20,695  
Income from operations   13,847     14,838     25,070     38,208  
% of sales 7.5 % 8.8 % 4.5 % 7.2 %
Other expense - - 2,942 -
Interest expense   3,861     1,504     11,448     4,453  
Income before income taxes 9,986 13,334 10,680 33,755
Provision for income taxes   2,649     4,461     2,724     11,109  
Net income $ 7,337   $ 8,873   $ 7,956   $ 22,646  
 
Basic EPS $ 0.26 $ 0.32 $ 0.29 $ 0.82
Diluted EPS 0.26 0.32 0.28 0.81
 
Basic shares 27,818 27,701 27,785 27,636
Diluted shares 27,951 27,898 27,946 27,853
 
 

Consolidated Condensed Balance Sheets

(in thousands, unaudited)

 
        September     December
2016     2015
Assets:
Cash and cash equivalents $ 26,948 $ 72,504
Accounts receivable, net 133,190 133,863
Inventories 188,528 166,894
Other current assets   20,710       20,076
Total Current Assets 369,376 393,337
Property, plant and equipment, net 123,446 125,452
Goodwill 398,376 260,651
Other intangible assets, net 424,216 308,171
Other assets   15,310       14,089
Total Assets $ 1,330,724     $ 1,101,700
 
Liabilities and Shareholders' Equity:
Current liabilities $ 112,860 $ 119,718
Long-term debt, excluding current maturities 490,176 269,471
Other liabilities 143,513 127,438
Shareholders' equity   584,175       585,073
Total Liabilities and Shareholders' Equity $ 1,330,724     $ 1,101,700
 
 

Consolidated Condensed Statements of Cash Flows

Nine Months Ended September 2016 and 2015

(in thousands, unaudited)

 
        2016     2015  
Operating Activities
Net income $ 7,956 $ 22,646
Depreciation and amortization 41,210 32,308
Changes in operating assets and liabilities and other, net   (24,527 )   (16,234 )
Net cash provided by operating activities   24,639     38,720  
 
Investing Activities
Payments related to business acquisitions (256,450 ) (6,104 )
Proceeds from sale of a facility 5,178 -
Purchases of property, plant and equipment   (10,436 )   (11,478 )
Net cash used in investing activities   (261,708 )   (17,582 )
 
Financing Activities
Payments on term loan (6,564 ) -
Proceeds of term loan 175,000 -
Proceeds of revolver, net 61,654 21,000
Payments related to debt issue costs (5,556 ) (1,410 )
Payments related to distribution agreement (16,667 ) (16,667 )
Dividend payments on common stock (16,649 ) (16,565 )
Other, net   200     (1,613 )
Net cash provided by (used in) financing activities 191,418 (15,255 )
 
Effect of exchange rate changes on cash and cash equivalents   95     (6,889 )
Net decrease in cash and cash equivalents (45,556 ) (1,006 )
Cash and cash equivalents at beginning of period   72,504     66,332  
Cash and cash equivalents at end of period $ 26,948   $ 65,326  
 
 

Sales Summary

(in millions, unaudited)

 
      Three Months Ended September 30,
    % Change  
    Domestic   International
2016   2015 As Reported   Constant Currency As Reported   As Reported   Constant Currency
Orthopedic Surgery $ 86.3 $ 89.4 -3.5 % -1.1 % -3.5 %   -3.5 %   0.6 %
General Surgery 85.4 66.1 29.2 % 30.6 % 32.1 % 23.7 % 27.7 %
Surgical Visualization   13.1     13.7 -4.3 % -3.0 % -16.1 %   11.3 %   14.8 %
$ 184.8   $ 169.2 9.2 % 11.2 % 13.0 %   5.1 %   9.2 %
 
Single-use Products $ 146.7 $ 134.9 8.7 % 10.7 % 10.9 % 6.2 % 10.5 %
Capital Products   38.1     34.3 11.2 % 13.2 % 22.1 %   1.2 %   4.8 %
$ 184.8   $ 169.2 9.2 % 11.2 % 13.0 %   5.1 %   9.2 %
 
Domestic $ 99.2 $ 87.8 13.0 % 13.0 %
International   85.6     81.4 5.1 % 9.2 %
$ 184.8   $ 169.2 9.2 % 11.2 %
 
 
Nine Months Ended September 30,
% Change  
Domestic   International
2016   2015 As Reported   Constant Currency As Reported   As Reported   Constant Currency
Orthopedic Surgery $ 272.5 $ 284.8 -4.3 % -1.2 % -2.5 % -5.5 % -0.3 %
General Surgery 248.9 203.3 22.4 % 23.9 % 26.0 % 15.8 % 20.0 %
Surgical Visualization   38.0     40.1 -5.0 % -2.7 % -6.8 %   -3.1 %   1.8 %
$ 559.4   $ 528.2 5.9 % 8.4 % 11.4 %   0.4 %   5.3 %
 
Single-use Products $ 445.8 $ 420.4 6.0 % 8.6 % 9.7 % 2.1 % 7.3 %
Capital Products   113.6     107.8 5.5 % 8.0 % 19.7 %   -5.3 %   -1.2 %
$ 559.4   $ 528.2 5.9 % 8.4 % 11.4 %   0.4 %   5.3 %
 
Domestic $ 294.0 $ 263.8 11.4 % 11.4 %
International   265.4     264.4 0.4 % 5.3 %
$ 559.4   $ 528.2 5.9 % 8.4 %
 
 

Reconciliation of Reported Net Earnings to Adjusted Net Earnings

(in thousands, except per share amounts, unaudited)

 
      Three Months Ended September 30, 2016
Gross Profit   Selling & Administrative Expense   Operating Income   Other Expense   Tax Expense   Effective Tax Rate   Net Income   Diluted EPS
As reported $ 101,209     $ 79,009     $ 13,847     $ -   $ 2,649     26.5 %   $ 7,337     $ 0.26  
% of sales 54.8 %   42.8 %   7.5 %          
Restructuring costs (1) - (361 ) 361 - 172 189 0.01
Business acquisition costs (2) - (3,314 ) 3,314 - 1,486 1,828 0.06
Gain on sale of facility (3)   -       1,890       (1,890 )     -     (853 )         (1,037 )     (0.04 )
$ 101,209     $ 77,224     $ 15,632     $ -   $ 3,454     29.3 % $ 8,317 $ 0.29
% of sales 54.8 % 41.8 % 8.5 %
Amortization of intangible assets $ 1,500 $ (3,498 ) $ 4,998 $ - $ 1,777   3,221       0.12  
Adjusted earnings $ 11,538     $ 0.41  
 
Three Months Ended September 30, 2015
Gross Profit   Selling & Administrative Expense   Operating Income   Other Expense   Tax Expense   Effective Tax Rate   Net Income   Diluted EPS
As reported $ 93,546     $ 72,056     $ 14,838     $ -   $ 4,461     33.5 %   $ 8,873     $ 0.32  
% of sales 55.3 % 42.6 % 8.8 %
Restructuring costs (1)   1,316       (1,331 )     2,647       -     953           1,694       0.06  
$ 94,862     $ 70,725     $ 17,485     $ -   $ 5,414     33.9 % $ 10,567 $ 0.38
% of sales 56.1 % 41.8 % 10.3 %
Amortization of intangible assets $ 1,500 $ (1,578 ) $ 3,078 $ - $ 1,108   1,970       0.07  
Adjusted earnings $ 12,537     $ 0.45  
 
(1) In 2016 and 2015, the Company restructured certain sales, marketing and administrative functions and incurred severance and other related costs. In 2015, the Company continued the operational restructuring, including the consolidation of its Centennial, Colorado manufacturing operations into other existing CONMED manufacturing facilities.
(2) In 2016, the Company incurred consulting fees, legal fees, and integration related costs associated with the acquisition of SurgiQuest, Inc.
(3) In 2016, the Company recorded a gain on the sale of its facility in Centennial, Colorado.
 
 

Reconciliation of Reported Net Earnings to Adjusted Net Earnings

(in thousands, except per share amounts, unaudited)

 
      Nine Months Ended September 30, 2016
Gross Profit   Selling & Administrative Expense   Operating Income   Other Expense   Tax Expense   Effective Tax Rate   Net Income   Diluted EPS
As reported $ 301,371     $ 251,681     $ 25,070     $ 2,942     $ 2,724     25.5 %   $ 7,956     $ 0.28  
% of sales 53.9 %   45.0 %   4.5 %          
Restructuring costs (1) 5,537 (4,105 ) 9,642 - 3,215 6,427 0.23
Business acquisition costs (2) - (17,355 ) 17,355 - 6,035 11,320 0.41
Gain on sale of facility (3) - 1,890 (1,890 ) - (853 ) (1,037 ) (0.04 )
Debt refinancing costs (4)   -       -       -       (2,942 )     930           2,012       0.07  
$ 306,908     $ 232,111     $ 50,177     $ -     $ 12,051     31.1 % $ 26,678 $ 0.95
% of sales 54.9 % 41.5 % 9.0 %
Amortization of intangible assets $ 4,500 $ (10,489 ) $ 14,989 $ - $ 5,341   9,648       0.35  
Adjusted earnings $ 36,326     $ 1.30  
 
Nine Months Ended September 30, 2015
Gross Profit   Selling & Administrative Expense   Operating Income   Other Expense   Tax Expense   Effective Tax Rate   Net Income   Diluted EPS
As reported $ 279,326     $ 220,423     $ 38,208     $ -     $ 11,109     32.9 %   $ 22,646     $ 0.81  
% of sales 52.9 % 41.7 % 7.2 %
Restructuring costs (1)   5,179       (9,795 )     14,974       -       5,391           9,583       0.35  
$ 284,505     $ 210,628     $ 53,182     $ -     $ 16,500     33.9 % $ 32,229 $ 1.16
% of sales 53.9 % 39.9 % 10.1 %
Amortization of intangible assets $ 4,500 $ (4,896 ) $ 9,396 $ - $ 3,383   6,013       0.21  
Adjusted earnings $ 38,242     $ 1.37  
 
(1) In 2016 and 2015, the Company restructured certain sales, marketing and administrative functions and incurred severance and other related costs. Additionally, in the second quarter of 2016, the Company terminated a product offering and incurred charges mainly related to inventory and fixed assets. Finally, in 2016 and 2015, the Company continued and completed the operational restructuring, including the consolidation of its Centennial, Colorado manufacturing operations into other existing CONMED manufacturing facilities.
(2) In 2016, the Company incurred investment banking fees, consulting fees, legal fees, and integration related costs associated with the acquisition of SurgiQuest, Inc.
(3) In 2016, the Company recorded a gain on the sale of its facility in Centennial, Colorado.
(4) In 2016, in conjunction with the acquisition of SurgiQuest, Inc., the Company refinanced its existing credit facility and incurred one-time fees associated with an agreement between the Company and JP Morgan Chase Bank, N.A., as well as costs associated with the early extinguishment of debt.
 
 

Reconciliation of Reported Net Income to EBITDA & Adjusted EBITDA

(in thousands, unaudited)

       
Three Months Ended Nine Months Ended
September 30, September 30,
2016   2015   2016   2015  
 
Net income $ 7,337   $ 8,873   $ 7,956   $ 22,646  
Provision for income taxes 2,649 4,461 2,724 11,109
Interest expense 3,861 1,504 11,448 4,453
Depreciation 5,301 4,723 15,242 13,919
Amortization   8,357     6,354     25,187     17,943  
EBITDA $ 27,505   $ 25,915   $ 62,557   $ 70,070  
 
Stock based compensation 1,921 1,784 5,784 4,822
Restructuring costs 361 2,647 9,642 14,974
Business acquisition costs 3,314 - 17,355 -
Gain on sale of facility (1,890 ) - (1,890 ) -
Debt refinancing costs   -     -     2,942     -  
Adjusted EBITDA $ 31,211   $ 30,346   $ 96,390   $ 89,866  
 
 
EBITDA Margin
EBITDA 14.9 % 15.3 % 11.2 % 13.3 %
Adjusted EBITDA 16.9 % 17.9 % 17.2 % 17.0 %
 

Contacts

CONMED Corporation
Luke A. Pomilio, 315-624-3202
Chief Financial Officer
LukePomilio@conmed.com

Contacts

CONMED Corporation
Luke A. Pomilio, 315-624-3202
Chief Financial Officer
LukePomilio@conmed.com