CONMED Corp (CNMD) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our Consolidated Financial Statements and related notes contained elsewhere in this report.
This section of this Form 10-K generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussions of 2022 items and year-to-year comparisons between 2023 and 2022 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Amounts reported in millions within this Form 10-K are computed based on the amounts in thousands, and therefore, the sum of the components may not equal the total amount reported in millions due to rounding. Additionally, certain columns and rows within tables may not sum due to rounding.
Overview of CONMED Corporation
CONMED Corporation (“CONMED”, the “Company”, “we” or “us”) is a medical technology company that provides devices and equipment for surgical procedures. The Company’s products are used by surgeons and other healthcare professionals in a variety of specialties including orthopedics, general surgery, gynecology, thoracic surgery and gastroenterology.
Our product lines consist of orthopedic surgery and general surgery. Orthopedic surgery consists of sports medicine instrumentation and lower extremities instrumentation and implants, small bone, large bone and specialty powered surgical instruments as well as imaging systems for use in minimally invasive surgical procedures and service fees related to the promotion and marketing of sports medicine allograft tissue. General surgery consists of a complete line of endo-mechanical instrumentation for minimally invasive laparoscopic and gastrointestinal procedures, smoke evacuation devices, a line of cardiac monitoring products as well as electrosurgical generators and related instruments. These product lines as a percentage of consolidated net sales are as follows:
| 2024 | 2023 | 2022 | ||||||
|---|---|---|---|---|---|---|---|---|
| Orthopedic surgery | 42 | % | 43 | % | 44 | % | ||
| General surgery | 58 | 57 | 56 | |||||
| Consolidated net sales | 100 | % | 100 | % | 100 | % |
A significant amount of our products are used in surgical procedures with approximately 85% of our revenues derived from the sale of single-use products. Our capital equipment offerings also facilitate the ongoing sale of related single-use products and accessories, thus providing us with a recurring revenue stream. We manufacture substantially all of our products in facilities located in the United States and Mexico. We market our products both domestically and internationally directly to customers and through distributors. International sales approximated 43% in 2024, 44% in 2023 and 45% in 2022.
Business Environment
The Company has been and continues to be impacted by the macro-economic environment and we are experiencing higher manufacturing and operating costs caused by inflationary pressures and ongoing supply chain challenges. We work with suppliers to mitigate these impacts; however, we expect these challenges to continue in 2025. This will likely continue to impact our results of operations and we therefore have engaged a consulting firm to evaluate and propose improvements in our manufacturing operations. See "Item 1A. Risk Factors" for more information.
The Company has not been materially impacted by the conflicts in Ukraine and the Middle East. The Company has no direct operations in these regions with our business limited to selling to third party distributors. Total revenues and accounts receivable associated with sales to third party distributors in these regions are not material to the consolidated financial statements. We will continue to monitor and adjust our business strategy in response to the conflicts in these regions.
Critical Accounting Policies
Preparation of our financial statements requires us to make estimates and assumptions which affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 describes the significant accounting policies used in preparation of the consolidated financial statements. The most significant areas involving management judgments and estimates are described
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below and are considered by management to be critical to understanding the financial condition and results of operations of CONMED Corporation. Actual results may or may not differ from these estimates.
Goodwill and Intangible Assets
We have a history of growth through acquisitions. Assets and liabilities of acquired businesses are recorded at their estimated fair values as of the date of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Factors that contribute to the recognition of goodwill include synergies that are expected to increase net sales and profits; acquisition of a talented workforce; cost savings opportunities; the strategic benefit of expanding our presence in core and adjacent markets; and diversifying our product portfolio. Customer and distributor relationships, trademarks, tradenames, developed technology, patents and other intangible assets primarily represent allocations of purchase price to identifiable intangible assets of acquired businesses. Sales representation, marketing and promotional rights represent intangible assets created under our agreement with Musculoskeletal Transplant Foundation (“MTF”). Determining the fair value of intangible assets acquired as part of a business combination requires us to make significant estimates. These estimates include the timing and amount of cash flow projections, including revenue growth rates, obsolescence rate, EBITDA margin, the customer attrition rate, royalty rate and discount rates. As these are significant estimates, we would obtain the assistance of a third-party valuation specialist in estimating fair values of intangible assets for significant acquisitions.
Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to at least annual impairment testing. It is our policy to perform our annual impairment testing in the fourth quarter. The identification and measurement of goodwill impairment involves the estimation of the fair value of our business. Estimates of fair value are based on the best information available as of the date of the assessment. We completed our goodwill impairment testing of our single reporting unit during the fourth quarter of 2024. We performed our impairment test utilizing the market capitalization approach to determine whether the fair value of a reporting unit is less than its carrying amount. Based upon our assessment, the fair value of our reporting unit continues to exceed carrying value.
Intangible assets with a finite life are amortized over the estimated useful life of the asset and are evaluated each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. Intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The carrying amount of an intangible asset subject to amortization is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset. An impairment loss is recognized by reducing the carrying amount of the intangible asset to its current fair value.
For all other indefinite-lived intangible assets, we perform a qualitative impairment test. Based upon this assessment, we have determined that our indefinite-lived intangible assets are not impaired.
See Note 7 for further discussion of goodwill and other intangible assets.
Contingent Consideration
Certain acquisitions involve potential payments of future consideration that is contingent upon the acquired businesses reaching certain performance milestones. The Company records contingent consideration at fair value at the date of acquisition based on the consideration expected to be transferred, estimated as the probability-weighted future cash flows, discounted back to present value. The fair value of contingent consideration is measured using projected payment dates, discount rates, revenue volatilities, and projected revenues. Projected revenues are based on the Company’s most recent internal operational budgets and long-range strategic plans. The discount rate used is determined at the time of measurement in accordance with accepted valuation methodologies. Changes in projected revenues, revenue volatilities, discount rates, and projected payment dates may result in adjustments to the fair value measurements. Contingent consideration is remeasured each reporting period using Level 3 inputs, and the change in fair value, including accretion for the passage of time, is recognized as income or expense within selling and administrative expense in the consolidated statements of comprehensive income (loss). The fair value of contingent consideration at December 31, 2024 was $11.2 million for the In2Bones acquisition and $61.0 million for the Biorez acquisition. Contingent consideration payments made soon after the acquisition date are classified as investing activities in the consolidated statements of cash flows. Contingent consideration payments not made soon after the acquisition date that are related to the acquisition date fair value are reported as financing activities in the consolidated statements of cash flows, and amounts paid in excess of the original acquisition date fair value are reported as operating activities in the consolidated statements of cash flows. See Note 16 for further discussion of contingent consideration.
Pension Plan
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We sponsor a defined benefit pension plan (the “pension plan”) that was frozen in 2009. It covered substantially all our United States based employees at the time it was frozen. In conjunction with the pension plan, we recorded a pension benefit obligation totaling $69.2 million as of December 31, 2024. In accounting for this pension plan, we are required to make a number of assumptions, including the discount rate and mortality. The discount rate represents the interest rate used in estimating the present value of projected cash flows to settle the Company’s pension obligations. The discount rate assumption is determined by using a full yield curve approach, which involves applying the specific spot rates along the yield curve used in the determination of the benefit obligation that correlates to the relevant projected cash flows. The mortality assumptions are based on the Pri-2012 Mortality Tables using the MP-2021 mortality improvement scale.
In performing a sensitivity analysis on the pension benefit obligation, a 0.25% increase in our discount rate would decrease the pension benefit obligation by $1.3 million and a 0.25% decrease in the discount rate would increase the pension benefit obligation by $1.4 million. See Note 13 for further discussion of the pension plan.
Consolidated Results of Operations
The following table presents, as a percentage of net sales, certain categories included in our consolidated statements of comprehensive income (loss) for the periods indicated:
| Years Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||
| Cost of sales | 43.9 | 45.7 | 45.4 | |||||
| Gross profit | 56.1 | 54.3 | 54.6 | |||||
| Selling and administrative expense | 36.6 | 40.4 | 43.4 | |||||
| Research and development expense | 4.2 | 4.2 | 4.5 | |||||
| Income from operations | 15.3 | 9.7 | 6.7 | |||||
| Interest expense | 2.9 | 3.2 | 2.8 | |||||
| Other expense | — | — | 10.7 | |||||
| Income (loss) before income taxes | 12.5 | 6.5 | (6.8) | |||||
| Provision for income taxes | 2.3 | 1.3 | 0.9 | |||||
| Net income (loss) | 10.1 | % | 5.2 | % | (7.7) | % |
Net Sales
The following table presents net sales by product line for the years ended December 31, 2024, 2023 and 2022:
| % Change from2023 to 2024 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | As Reported | Impact of Foreign Currency | Constant Currency a | |||||||||||||||
| Orthopedic surgery | $ | 544.0 | $ | 533.1 | 2.0 | % | 0.5 | % | 2.5 | % | |||||||||
| General surgery | 763.0 | 711.6 | 7.2 | % | 0.3 | % | 7.5 | % | |||||||||||
| Net sales | $ | 1,307.0 | $ | 1,244.7 | 5.0 | % | 0.3 | % | 5.3 | % | |||||||||
| Single-use products | $ | 1,112.1 | $ | 1,038.5 | 7.1 | % | 0.3 | % | 7.4 | % | |||||||||
| Capital products | 194.9 | 206.2 | -5.5 | % | 0.4 | % | -5.1 | % | |||||||||||
| Net sales | $ | 1,307.0 | $ | 1,244.7 | 5.0 | % | 0.3 | % | 5.3 | % |
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| % Change from2022 to 2023 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | As Reported | Impact of Foreign Currency | Constant Currency a | ||||||||||||
| Orthopedic surgery | $ | 533.1 | $ | 461.5 | 15.5 | % | 2.2 | % | 17.7 | % | ||||||
| General surgery | 711.6 | 584.0 | 21.9 | % | 1.5 | % | 23.4 | % | ||||||||
| Net sales | $ | 1,244.7 | $ | 1,045.5 | 19.1 | % | 1.8 | % | 20.9 | % | ||||||
| Single-use products | $ | 1,038.5 | $ | 874.9 | 18.7 | % | 1.8 | % | 20.5 | % | ||||||
| Capital products | 206.2 | 170.6 | 20.9 | % | 1.9 | % | 22.8 | % | ||||||||
| Net sales | $ | 1,244.7 | $ | 1,045.5 | 19.1 | % | 1.8 | % | 20.9 | % |
(a) Refer to Non-GAAP Financial Measures below for further details.
Net sales increased 5.0% in 2024 due to growth in both the orthopedic surgery and general surgery product lines.
•Orthopedic surgery sales increased 2.0% in 2024 as a result of growth in our sports medicine and BioBrace® product offerings.
•General surgery sales increased 7.2% in 2024 as a result of growth in our AirSeal® and biliary product offerings.
Cost of Sales
Cost of sales was $574.0 million in 2024 compared to $568.5 million in 2023. Gross profit margins were 56.1% in 2024 and 54.3% in 2023. The increase in gross profit margin of 1.8 percentage points in 2024 was mainly due to favorable product mix as well as during 2023 we incurred costs for the amortization of inventory step-up to fair value of $8.6 million related to the In2Bones acquisition.
Selling and Administrative Expense
Selling and administrative expense was $478.3 million in 2024 compared to $503.0 million in 2023. Selling and administrative expense as a percentage of net sales was 36.6% in 2024 and 40.4% in 2023.
The decrease in selling and administrative expense as a percentage of net sales in 2024 was primarily driven by:
•a decrease of $38.6 million in costs related to fair value adjustments to contingent consideration ($41.0 million of income in 2024 compared to $2.4 million of income in 2023), see Note 16;
•$6.8 million in costs related to the implementation of a new warehouse management system during 2023. These costs mainly consisted of incremental freight, labor and professional fees; and
•efficiency improvements in our distribution sites.
These decreases were partially offset by $5.1 million in costs incurred during 2024 for third party services pertaining to the review of potential issues with certain royalty payments to surgeons involved in design teams.
Salesforce and commissions, marketing, general & administrative costs and amortization expense in 2024 were in line with 2023 as a percentage of sales.
Research and Development Expense
Research and development expense was $54.4 million in 2024 and $52.6 million in 2023. As a percentage of net sales, research and development expense was 4.2% in both 2024 and 2023. The increase in spending in 2024 compared to 2023 was related to the timing of projects.
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Interest Expense
Interest expense decreased to $37.3 million in 2024 compared to $39.8 million in 2023. The weighted average interest rates on our borrowings were 3.15% in 2024 increasing from 3.12% in 2023. The decrease in interest expense in 2024 was driven by lower weighted average borrowings outstanding during 2024.
Provision for Income Taxes
A provision for income taxes was recorded at an effective rate of 18.8% and 20.3% in 2024 and 2023, respectively. As compared to the federal statutory rate of 21.0%, the 2024 effective tax rate was lower primarily due to the change in fair value of contingent consideration that is excluded from income for tax purposes, federal tax benefits from the research credit and US tax on worldwide earnings at different rates. These benefits were offset by state tax expense and foreign tax expense from jurisdictions with higher statutory tax rates. The 2023 effective tax rate was lower primarily due to federal tax benefits from the research credit and US tax on worldwide earnings at different rates. These benefits were offset by state tax expense and foreign tax expense from jurisdictions with higher statutory tax rates. A reconciliation of the United States statutory income tax rate to our effective tax rate is included in Note 9.
Non-GAAP Financial Measures
Net sales on a "constant currency" basis is a non-GAAP measure. The Company analyzes net sales on a constant currency basis to better measure the comparability of results between periods. 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 net sales.
Because non-GAAP financial measures are not standardized, it may not be possible to compare this financial measure with other companies' non-GAAP financial measures having the same or similar names. This adjusted financial measure should not be considered in isolation or as a substitute for reported net sales growth, the most directly comparable GAAP financial measure. This non-GAAP financial measure is an additional way of viewing net sales that, when viewed with our GAAP results, provides 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.
EBITDA is also a non-GAAP measure and is defined as earnings before income tax, interest expense, depreciation and amortization.
Liquidity and Capital Resources
Our liquidity needs arise primarily from capital investments, working capital requirements and payments on indebtedness under the seventh amended and restated senior credit agreement and outstanding convertible notes. We have historically met these liquidity requirements with funds generated from operations, borrowings under our revolving credit facility and issuances of debt in the capital markets. In addition, we have historically used term borrowings, including borrowings under the amended and restated senior credit agreement and borrowings under separate loan facilities, in the case of real property purchases, to finance our acquisitions, including payments of contingent consideration. We also have the ability to raise funds through the sale of stock or we may issue debt through a private placement or public offering.
We had total cash on hand at December 31, 2024 of $24.5 million, of which approximately $20.2 million was held by our foreign subsidiaries outside the United States with unremitted earnings. During 2024, we redeployed $9.0 million of cash from certain non-U.S. subsidiaries primarily for U.S. debt reduction. We may repatriate funds from certain foreign subsidiaries in the future. Refer to Note 9 for further details.
Operating Cash Flows
Our net working capital position was $361.9 million at December 31, 2024. Net cash provided by operating activities was $167.0 million in 2024 and $125.3 million in 2023 generated on net income of $132.4 million in 2024 and $64.5 million in 2023. The change in cash provided by operating activities in 2024 as compared to 2023 was mainly driven by higher net income. In addition, below is a summary of significant changes in assets and liabilities:
•An increase in cash flows from accounts receivable due to timing of sales and cash receipts compared to the same period a year ago;
•A decrease in cash flows from inventory as we increased inventory due to supply chain challenges; and
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•A decrease in cash flows from accrued compensation and benefits as a result of higher incentive compensation payments during 2024 compared to 2023.
Investing Cash Flows
Net cash used in investing activities decreased by $6.9 million in the year ended December 31, 2024 mainly due to capital expenditures being lower at $13.1 million in 2024 compared to $19.0 million in the year ended December 31, 2023.
Financing Cash Flows
Financing activities in 2024 used cash of $151.0 million compared to $110.4 million in 2023. Below is a summary of the significant financing activities impacting the change during 2024 compared to 2023:
•During 2024, we repaid the remaining $70.0 million outstanding on the 2.625% Notes.
•During 2024, we paid $56.9 million in contingent consideration related to the In2Bones and Biorez acquisitions compared to $13.9 million in 2023.
•During 2024, we had net payments on our revolving line of credit of $2.0 million, compared to $68.0 million in 2023.
•During 2024, we had net cash proceeds of $5.5 million related to stock issued under employee plans compared to $18.1 million in 2023.
•During 2024, we did not make any payments on our term loan compared to $20.0 million in payments in 2023.
Other Liquidity Matters
Our cash balances and cash flows generated from operations may be used to fund strategic investments, business acquisitions, including contingent consideration payments, working capital needs, research and development, common stock repurchases and payments of dividends to our shareholders. Management believes that cash flow from operations, including cash and cash equivalents on hand and available borrowing capacity under our seventh amended and restated senior credit agreement, will be adequate to meet our anticipated operating working capital requirements, debt service, funding of capital expenditures, dividend payments and common stock repurchases in the foreseeable future. In addition, management believes we could access capital markets, as necessary, to fund future business acquisitions.
We are also being impacted by the macro-economic environment and we are experiencing higher manufacturing and operating costs caused by inflationary pressures and ongoing supply chain challenges. We continue to monitor our spending and expenses in light of these factors. However, we may need to take further steps to reduce our costs, or to refinance our debt. See “Item 1A. Risk Factors - Risks Related to Our Indebtedness."
There were $114.6 million in borrowings outstanding on the term loan facility as of December 31, 2024. There were no borrowings outstanding under the revolving credit facility as of December 31, 2024. Our available borrowings on the revolving credit facility at December 31, 2024 were $583.4 million with approximately $1.6 million of the facility set aside for outstanding letters of credit.
The seventh amended and restated senior credit agreement contains covenants and restrictions which, among other things, require the maintenance of certain financial ratios and restrict dividend payments and the incurrence of certain indebtedness and other activities, including acquisitions and dispositions. We were in full compliance with these covenants and restrictions as of December 31, 2024. We are also required, under certain circumstances, to make mandatory prepayments from net cash proceeds from any issuance of equity and asset sales.
In February 2024, we repaid the $70.0 million then outstanding of the 2.625% Notes through borrowings on our revolving credit facility and issued 0.1 million shares of our common stock.
See Note 8 for further information on our financing agreements and outstanding debt obligations.
Our Board of Directors has authorized a $200.0 million share repurchase program. Through December 31, 2024, we have repurchased a total of 6.1 million shares of common stock aggregating $162.6 million under this authorization and have $37.4 million remaining available for share repurchases. The repurchase program calls for shares to be purchased in the open market or in private transactions from time to time. We may suspend or discontinue the share repurchase program at any time. We have not purchased any shares of common stock under the share repurchase program during 2024. We have financed the repurchases and may finance additional repurchases through operating cash flow and from available borrowings under our revolving credit facility.
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The Board of Directors declared a quarterly cash dividend of $0.20 per share in 2023 and 2024. Future decisions as to the payment of dividends will be at the discretion of the Board of Directors. See "Item 1A. Risk Factors - Other Risks Related to our Business - Our Board of Directors may, in the future, limit or discontinue payment of a dividend on common stock."
We expect an increased level of capital spending during the year ending December 31, 2025 compared to 2024. Capital spending will be monitored and controlled as the year progresses. We expect to use operating cash flows to satisfy capital spending requirements.
The following table summarizes our contractual obligations for the next five years and thereafter (amounts in thousands) as of December 31, 2024. Purchase obligations represent purchase orders for goods and services placed in the ordinary course of business. Contingent consideration represents the fair value of the current and non-current portions that while not certain if and/or when the payments will be made, are our best estimate of such payments.
| Payments Due by Period | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | ||||||||||||||
| Long-term debt | $ | 914,588 | $ | — | $ | 914,588 | $ | — | $ | — | ||||||||
| Contingent consideration payments | 72,217 | 35,397 | 36,820 | — | — | |||||||||||||
| Purchase obligations | 156,971 | 153,634 | 3,327 | 10 | — | |||||||||||||
| Lease obligations | 53,711 | 8,808 | 14,852 | 10,966 | 19,085 | |||||||||||||
| Total contractual obligations | $ | 1,197,487 | $ | 197,839 | $ | 969,587 | $ | 10,976 | $ | 19,085 |
In addition to the above contractual obligations, we are required to make periodic interest payments on our long-term debt obligations (see additional discussion under Item 7A. “Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risk” and Note 8). The above table also does not include unrecognized tax benefits of approximately $1.2 million, the timing and certainty of recognition for which is not known (See Note 9).
Stock-based Compensation
We have reserved shares of common stock for issuance to employees and directors under two shareholder-approved share-based compensation plans (the "Plans"). The Plans provide for grants of stock options, stock appreciation rights (“SARs”), dividend equivalent rights, restricted stock, restricted stock units (“RSUs”), performance share units (“PSUs”) and other equity-based and equity-related awards. The exercise price on all outstanding stock options and SARs is equal to the quoted fair market value of the stock at the date of grant. RSUs are valued at the market value of the underlying stock on the date of grant. PSUs are valued using a Monte Carlo valuation model at the date of grant. Stock options, SARs, and RSUs are generally non-transferable other than on death and generally become exercisable over a four to five year period from date of grant. PSUs are generally non-transferable other than on death and cliff vest after three years from date of grant. Stock options and SARs expire ten years from date of grant. SARs are only settled in shares of the Company’s stock (See Note 10). Total pre-tax stock-based compensation expense recognized in the consolidated statements of comprehensive income (loss) was $25.6 million, $24.3 million and $21.7 million for the years ended December 31, 2024, 2023 and 2022, respectively.
New Accounting Pronouncements
See Note 2 for a discussion of new accounting pronouncements.