CNMD CONMED Corporation

CONMED Corporation (Nasdaq:CNMD) today announced financial results for the second quarter ended June 30, 2016.

Second Quarter 2016 Highlights

• Sales were $193.4 million, an increase of 6.9% compared to the second quarter of 2015. On a constant currency basis, sales increased 9.2% over the prior-year period.
• GAAP gross margin expanded 130 basis points year over year to 52.9%.
• Adjusted gross margin expanded 290 basis points year over year to 55.4%.
• Diluted net earnings per share (GAAP) were $0.10, compared to diluted net earnings per share (GAAP) of $0.27 in the second quarter of 2015.
• Adjusted diluted net earnings per share(1) were $0.47 versus $0.43 in the prior-year period.
• Revising 2016 guidance lower due to weaker-than-anticipated organic sales growth and updated foreign exchange impact, partially offset by stronger-than-expected AirSeal® performance.

“We are encouraged by several trends in our second quarter results, highlighted by the strong contribution from the AirSeal® System, a return to constant currency growth in all three of our product categories internationally, and gross margin expansion,” commented Curt R. Hartman, CONMED’s President and Chief Executive Officer. “However, these positives were offset by our domestic organic performance, which was again below our expectations. Looking to the remainder of the year, we will continue to invest in innovative products, to focus on operating efficiencies, and to pursue our strategic initiatives to position the Company for continued improvement and growth.”

Sales Analysis

For the quarter ended June 30, 2016, domestic sales, which represented 51.0% of total revenue, increased 10.9% as strong growth in General Surgery was partially offset by declines in Orthopedics and Visualization. The SurgiQuest acquisition contributed to 26.5% year-over-year growth in the U.S. General Surgery business. International sales, which represented 49.0% of total revenue, increased 2.9% compared to the second quarter of 2015 on a reported basis. Foreign currency exchange rates, including the effects of the FX hedging program, had a negative impact of $4.3 million on second quarter sales. In constant currency, international sales increased 7.5% versus the prior-year period.

Earnings Analysis

For the quarter ended June 30, 2016, reported net earnings totaled $2.9 million, compared to reported net earnings of $7.5 million a year ago. Reported diluted net earnings per share were $0.10 in the quarter, compared to reported diluted net earnings per share of $0.27 in the prior-year period. Reported net earnings for 2016 include business acquisition and restructuring costs, and 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.

As previously announced, the Company is excluding after-tax costs of special items including acquisitions, restructuring, 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 $13.2 million increased 9.8% year over year and adjusted diluted net earnings per share(1) of $0.47 increased 9.3% year over year. The increase in adjusted net earnings was largely attributable to improved gross margin and a lower tax rate during the quarter, partially offset by higher selling and administrative expenses and the unfavorable impact of foreign exchange rates.

2016 Outlook

Based on weaker-than-expected organic sales performance to date, the Company is reducing its 2016 constant currency organic sales growth estimate to -1% to 1%, compared to the previous range of 1% to 3%. Also, based on foreign currency exchange rates as of July 22, 2016, the Company is updating the anticipated negative impact of foreign exchange for the year to $17 to $19 million, compared to the previous range of $13 to $15 million. Additionally, due to stronger-than-expected year-to-date performance of AirSeal®, the Company is increasing its sales forecast related to the SurgiQuest acquisition to $62 to $67 million, compared to the previous range of $55 to $60 million.

As a result, the Company is revising its 2016 guidance for reported sales and adjusted diluted net earnings per share. The Company now forecasts 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, compared to the previous range of $768 to $778 million. Based on the Company’s revised 2016 reported sales estimate range, adjusted diluted net earnings per share are now expected to be in the range of $1.83 to $1.93, compared to the previous range of $1.95 to $2.05. The adjusted diluted net earnings per share estimates for 2016 exclude the cost of special items including acquisition costs, restructuring costs, and debt refinancing, which are now estimated in the range of $21 to $23 million, net of tax, compared to the previous range of $18 to $20 million, and amortization of intangible assets, which are still 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 4:30 p.m. ET to discuss its second quarter 2016 results.

To participate in the conference call, dial 877-573-5235 (domestic) or 503-406-4448 (international) and enter the passcode 45094961.

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 7:30 p.m. ET on Wednesday, July 27, 2016, until 11:59 p.m. ET on Wednesday, August 10, 2016. To hear this recording, dial 855-859-2056 (domestic) or 404-537-3406 (international) and enter the passcode 45094961.

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 risks 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   Six Months Ended June 30, June 30, 2016   2015 2016   2015     Net sales $ 193,433 $ 181,027 $ 374,634 $ 358,967 Cost of sales   91,011       87,529     174,472       173,187   Gross profit   102,422       93,498     200,162       185,780   % of sales 52.9 % 51.6 % 53.4 % 51.8 % Selling and administrative expense 86,729 73,581 172,672 148,367 Research & development   8,009       7,501     16,267       14,043   Income from operations   7,684       12,416     11,223       23,370   % of sales 4.0 % 6.9 % 3.0 % 6.5 % Other expense - - 2,942 - Interest expense   3,757       1,489     7,587       2,949   Income before income taxes 3,927 10,927 694 20,421 Provision for income taxes   1,043       3,466     75       6,648   Net income $ 2,884     $ 7,461   $ 619     $ 13,773     Basic EPS $ 0.10 $ 0.27 $ 0.02 $ 0.50 Diluted EPS 0.10 0.27 0.02 0.49   Basic shares 27,776 27,620 27,753 27,603 Diluted shares 27,941 27,857 27,926 27,839  

Consolidated Condensed Balance Sheets

(in thousands, unaudited)

    June   December

2016

 

2015

Assets: Cash and cash equivalents $ 23,295 $ 72,504 Accounts receivable, net 139,620 133,863 Inventories 179,913 166,894 Other current assets   28,172       20,076   Total Current Assets 371,000 393,337 Property, plant and equipment, net 125,381 125,452 Goodwill 398,154 260,651 Other intangible assets, net 428,960 308,171 Other assets   15,339       14,089   Total Assets $ 1,338,834     $ 1,101,700     Liabilities and Shareholders' Equity: Current liabilities $ 106,221 $ 119,718 Long-term debt, excluding current maturities 508,639 269,471 Other liabilities 144,241 127,438 Shareholders' equity   579,733       585,073   Total Liabilities and Shareholders' Equity $ 1,338,834     $ 1,101,700    

Consolidated Condensed Statements of Cash Flows

Six Months Ended June 2016 and 2015

(in thousands, unaudited)

    2016   2015 Operating Activities Net income $ 619 $ 13,773 Depreciation and amortization 27,291 21,081 Changes in operating assets and liabilities and other, net   (28,033 )   (9,799 ) Net cash provided by (used in) operating activities   (123 )   25,055     Investing Activities Payments related to business acquisitions (256,450 ) (6,104 ) Purchases of property, plant and equipment   (7,667 )   (7,783 ) Net cash used in investing activities   (264,117 )   (13,887 )   Financing Activities Payments on senior debt (4,376 ) - Proceeds of debt 253,015 19,000 Payments related to debt issuance costs (5,556 ) (1,410 ) Payment related to distribution agreement (16,667 ) (16,667 ) Payments related to contingent consideration (200 ) (2,423 ) Dividend payments on common stock (11,088 ) (11,026 ) Other, net   209     1,461   Net cash provided by (used in) financing activities 215,337 (11,065 )   Effect of exchange rate change on cash and cash equivalents   (306 )   (4,219 ) Net decrease in cash and cash equivalents (49,209 ) (4,116 ) Cash and cash equivalents at beginning of period   72,504     66,332   Cash and cash equivalents at end of period $ 23,295   $ 62,216    

Sales Summary

(in millions, unaudited)

    Three Months Ended June 30,     % Change     Domestic   International

As

Constant

As

 

As

 

Constant

2016

 

2015

Reported

 

Currency

Reported

 

Reported

 

Currency

Orthopedic Surgery $ 92.7 $ 96.8 -4.2 % -1.3 % -5.1 % -3.6 % 1.1 % General Surgery 87.6 71.1 23.1 % 24.5 % 26.5 % 17.3 % 21.0 % Surgical Visualization   13.1       13.1   0.0 % 2.6 % -5.7 %   6.5 %   12.1 % $ 193.4     $ 181.0   6.9 % 9.2 % 10.9 %   2.9 %   7.5 %   Single-use Products $ 154.2 $ 145.3 6.1 % 8.4 % 9.9 % 2.2 % 6.8 % Capital Products   39.2       35.7   10.1 % 12.5 % 15.7 %   5.5 %   9.9 % $ 193.4     $ 181.0   6.9 % 9.2 % 10.9 %   2.9 %   7.5 %   Domestic $ 98.7 $ 89.0 10.9 % 10.9 % International   94.7       92.0   2.9 % 7.5 % $ 193.4     $ 181.0   6.9 % 9.2 %     Six Months Ended June 30, % Change Domestic   International

As

Constant

As

As

Constant

2016   2015

Reported

 

Currency

Reported

 

Reported

 

Currency

Orthopedic Surgery $ 186.2 $ 195.4 -4.7 % -1.3 % -2.1 % -6.3 % -0.7 % General Surgery 163.5 137.2 19.2 % 20.7 % 23.0 % 12.1 % 16.4 % Surgical Visualization   24.9       26.4   -5.4 % -2.6 % -1.2 %   -9.4 %   -3.9 % $ 374.6     $ 359.0   4.4 % 7.1 % 10.7 %   -1.7 %   3.6 %   Single-use Products $ 299.1 $ 285.5 4.8 % 7.5 % 9.1 % 0.3 % 5.9 % Capital Products   75.5       73.5   2.8 % 5.5 % 18.4 %   -8.0 %   -3.7 % $ 374.6     $ 359.0   4.4 % 7.1 % 10.7 %   -1.7 %   3.6 %   Domestic $ 194.8 $ 176.0 10.7 % 10.7 % International   179.8       183.0   -1.7 % 3.6 % $ 374.6     $ 359.0   4.4 % 7.1 %  

Reconciliation of Reported Net Earnings to Adjusted Net Earnings

(in thousands, except per share amounts, unaudited)

    Three Months Ended June 30, 2016  

Selling &

           

Gross

Administrative

Operating

Other

Tax

Effective

Net

Diluted

Profit

 

Expense

 

Income

 

Expense

 

Expense

 

Tax Rate

 

Income

 

EPS

As reported $ 102,422     $ 86,729     $ 7,684     $

-

 

  $ 1,043   26.6 %   $ 2,884   $

0.10

 

% of sales 52.9 % 44.8 % 4.0 % Restructuring costs(1) 4,673 (953 ) 5,626 - 1,888 3,738 0.14 Business acquisition(2)   -       (4,996 )     4,996       -       1,677         3,319     0.12   $ 107,095     $ 80,780     $ 18,306     $ -     $ 4,608   31.7 % $ 9,941 $ 0.36 % of sales 55.4 % 41.8 % 9.5 % Amortization of intangible assets $ 1,500 $ (3,493 ) $ 4,993 $ - $ 1,764   3,229     0.11   Adjusted earnings $ 13,170   $ 0.47       Three Months Ended June 30, 2015

Selling &

Gross

Administrative

Operating

Other

Tax

Effective

Net

Diluted

Profit

 

Expense

 

Income

 

Expense

 

Expense

 

Tax Rate

 

Income

 

EPS

As reported $ 93,498     $ 73,581     $ 12,416     $ -     $ 3,466   31.7 %   $ 7,461   $ 0.27   % of sales 51.6 % 40.6 % 6.9 % Restructuring costs(1)   1,534       (2,284 )     3,818       -       1,374         2,444     0.09   $ 95,032     $ 71,297     $ 16,234     $ -     $ 4,840   32.8 % $ 9,905 $ 0.36 % of sales 52.5 % 39.4 % 9.0 % Amortization of intangible assets $ 1,500 $ (1,769 ) $ 3,269 $ - $ 1,177   2,092     0.07   Adjusted earnings $ 11,997   $ 0.43  

(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 our Centennial, Colorado manufacturing operations into other existing CONMED manufacturing facilities.

(2) In Q2 2016, the Company incurred consulting fees, legal fees and integration related costs associated with the acquisition of SurgiQuest, Inc.

 

Reconciliation of Reported Net Earnings to Adjusted Net Earnings

(in thousands, except per share amounts, unaudited)

    Six Months Ended June 30, 2016  

Selling &

           

Gross

Administrative

Operating

Other

Tax

Effective

Net

Diluted

Profit

 

Expense

 

Income

 

Expense

 

Expense

 

Tax Rate

 

Income

 

EPS

As reported $ 200,162     $ 172,672     $ 11,223     $ 2,942     $ 75     10.8 %   $ 619   $ 0.02   % of sales 53.4 % 46.1 % 3.0 % Restructuring costs(1) 5,537 (3,744 ) 9,281 - 3,044 6,237 0.22 Business acquisition(2) - (14,041 ) 14,041 - 4,550 9,491 0.35 Debt refinancing costs(3)   -       -       -       (2,942 )     930           2,012     0.07   $ 205,699     $ 154,887     $ 34,545     $ -     $ 8,599     31.9 % $ 18,359 $ 0.66 % of sales 54.9 % 41.3 % 9.2 % Amortization of intangible assets $ 3,000 $ (6,991 ) $ 9,991 $ - $ 3,563   6,428     0.23   Adjusted earnings $ 24,787   $ 0.89       Six Months Ended June 30, 2015

Selling &

Gross

Administrative

Operating

Other

Tax

Effective

Net

Diluted

Profit

 

Expense

 

Income

 

Expense

 

Expense

 

Tax Rate

 

Income

 

EPS

As reported $ 185,780     $ 148,367     $ 23,370     $ -     $

6,648

 

  32.6 %   $ 13,773   $

0.49

 

% of sales 51.8 % 41.3 % 6.5 % Restructuring costs(1)   3,863       (8,464 )     12,327       -       4,438           7,889     0.29   Adjusted $ 189,643     $ 139,903     $ 35,697     $ -     $ 11,086     33.9 % $ 21,662 $ 0.78 % of sales 52.8 % 39.0 % 9.9 % Amortization of intangible assets $ 3,000 $ (3,318 ) $ 6,318 $ - $ 2,274   4,044     0.14   Adjusted earnings $ 25,706   $ 0.92  

(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 our 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, 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   Six Months Ended June 30, June 30, 2016   2015 2016   2015     Net income $ 2,884     $ 7,461   $ 619     $ 13,773   Provision for income taxes 1,043 3,466 75 6,648 Interest expense 3,757 1,489 7,587 2,949 Depreciation 4,955 4,563 9,941 9,196 Amortization   8,818       6,199     16,830       11,589   EBITDA $ 21,457     $ 23,178   $ 35,052     $ 44,155     Stock based compensation 2,094 1,782 3,863 3,038 Restructuring costs 5,626 3,818 9,281 12,327 Business acquisition 4,996 - 14,041 - Debt refinancing costs   -       -     2,942       -   Adjusted EBITDA $ 34,173     $ 28,778   $ 65,179     $ 59,520       EBITDA Margin EBITDA 11.1 % 12.8 % 9.4 % 12.3 % Adjusted EBITDA 17.7 % 15.9 % 17.4 % 16.6 %

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CONMED CorporationLuke A. Pomilio, 315-624-3202Chief Financial OfficerLukePomilio@conmed.com