CONMED Corporation Announces Second Quarter 2007 Financial Results

CONMED Corporation (Nasdaq: CNMD) today announced financial results for the second quarter of 2007. Adjusted net income, on a non-GAAP basis, for the second quarter increased 54% to $10.2 million, or $0.35 per diluted share, compared to second quarter 2006 non-GAAP net income of $6.6 million, or $0.23 per diluted share. GAAP net income in the second quarter of 2007 grew 174% to $9.3 million or $0.32 per diluted share compared to net income of $3.4 million, or $0.12 per diluted share in second quarter of 2006. The increase in net income was driven by top-line growth and continued leverage of CONMED’s infrastructure. The adjusted, non-GAAP figures for the second quarter 2007 exclude facility closure charges and, for the second quarter in 2006, transition costs related to an acquisition (see attached reconciliation for additional information). Sales for the June 30, 2007 quarter increased 3.5% to $169.3 million compared to $163.5 million in the second quarter of 2006. Endosurgery experienced sales growth of 16.5% for the quarter. The Orthopedic product lines of Arthroscopy and Powered Surgical Instruments had combined sales growth of 9.6% over the second quarter of 2006. The combined sales growth in these three product lines was 10.4%, comprising 69% of the quarter’s revenues. "Sales growth in our Arthroscopy, Powered Surgical Instruments and Endosurgery product lines helped to generate significant top-line improvements over the first half of last year, and exceeded management’s expectations. Achieving our overall sales goals and exceeding our cost improvement objectives enabled us to deliver improved profitability. As a result, the second quarter operating margin expanded 280 basis points to 11.9% of sales on a non-GAAP basis compared to 9.1% of sales in the second quarter of 2006. Our strategy remains consistent — increase our revenue base by providing our customers with innovative, high quality, cost-effective medical devices while at the same time expanding the Company’s operating margin by more efficiently leveraging our organizational structure,” commented Joseph J. Corasanti, President and Chief Executive Officer. "Arthroscopy, Powered Surgical Instruments and Endosurgery product lines all had excellent top-line performance in the second quarter and the results from our other product lines remained in line with our short-term expectations,” noted Mr. Corasanti. For the six months ended June 30, 2007, on a non-GAAP basis, without unusual items, which include a litigation gain in 2007 and acquisition related costs in 2006, adjusted net income was $18.6 million in the first half of 2007, or $0.65 per diluted share, an increase of 49% over the $12.5 million, or $0.44 per diluted share reported in the 2006 period. GAAP net income grew 174% to $21.3 million, or $0.74 per diluted share, compared to $7.8 million, or $0.27 per diluted share, in the first half of 2006. Please see the attached reconciliation between GAAP and non-GAAP amounts. Sales outside the United States were $70.4 million in the second quarter of 2007, growing 12.1% overall and 7.1% on a constant currency basis compared to the second quarter of 2006. International sales in the June 2007 quarter were 41.6% of the Company’s total sales compared to 38.4% of sales in the second quarter last year. Foreign currency exchange rates were favorable to the Company in the second quarter 2007 compared to exchange rates in effect during the second quarter of 2006. As a result, sales were higher by $3.0 million than would have been the case had currency rates remained constant. CONMED’s cash flow was strong in the second quarter of 2007, enabling a reduction in the senior credit borrowings of $18.3 million. For the first half of 2007, debt was reduced by $26.8 million. Cash from operations for the first six months of 2007 was $25.8 million resulting in operating cash flow per share (a non-GAAP measurement which management believes is useful to understanding the business) of $0.90 in the first half of 2007. Following is a summary of the Company’s sales by product line for the three months ended June 30, 2007 (in millions): Three Months Ended June 30, Constant Currency 2006 2007 Growth Growth (in millions)   Arthroscopy $ 58.8 $ 64.9 10.4% 7.8%   Powered Surgical Instruments 33.3 36.0 8.1% 5.2%   Electrosurgery 24.2 22.1 -8.7% -9.2%   Endoscopic Technologies 14.7 13.4 -8.8% -10.0%   Endosurgery 13.3 15.5 16.5% 15.4%   Patient Care   19.2   17.4 -9.4% -10.0%   $ 163.5 $ 169.3 3.5% 1.7% The Company’s sports medicine Arthroscopy line grew 10.4% over second quarter 2006 on the continued strength of video imaging sales, including strong market demand for our High Definition (HD) surgical imaging systems, introduced in February. Arthroscopy also benefited from solid performance from our surgical tissue repair devices. Powered Surgical Instruments increased its sales 8.1% on continued sales momentum from our MPower® and MicroPower® platform products introduced in 2006. Endosurgery increased 16.5% with strong growth internationally. The Electrosurgery sales decline is a result of a difficult comparison to a strong second quarter last year. Patient Care sales declined, as anticipated, due to the increase in prices on certain commodity lines. Although sales volume declined, profitability increased as a result. The Endoscopic Technologies line has now annualized four quarters of revenue decline due to previously disclosed production matters at an assembly operation in Mexico. Management has taken corrective action to address the issues associated with the product shortages and believes that the product line should begin experiencing quarterly growth in the third quarter of 2007. Following is a summary of the first six months of 2007 sales by product line in millions of dollars: Six Months Ended June 30, Constant Currency 2006 2007 Growth Growth (in millions)   Arthroscopy $ 113.5 $ 127.1 12.0% 9.6%   Powered Surgical Instruments 67.5 73.6 9.0% 6.1%   Electrosurgery 47.5 46.1 -3.2% -3.8%   Endoscopic Technologies 29.4 26.6 -9.5% -10.8%   Endosurgery 25.2 29.1 15.5% 14.3%   Patient Care 38.8 37.8 -2.6% -3.1%   $ 321.9 $ 340.3 5.7% 3.9% Outlook Mr. Corasanti noted, "For the third quarter of 2007, we anticipate revenues in the range of $164-$168 million and non-GAAP diluted earnings per share (excluding unusual charges) of $0.26 - $0.30. For the full year of 2007, we are increasing our earnings guidance based on the better than expected results of the first six months of 2007. Accordingly, we foresee full year 2007 diluted earnings per share approximating $1.27 – $1.32, excluding unusual items, with constant currency sales growing approximately 5% over 2006 sales.” Conference Call The Company will webcast its second quarter 2007 conference call live over the Internet on Thursday, July 26, 2007 at 10:00 a.m. Eastern Time. This broadcast can be accessed from CONMED's web site at www.conmed.com. Replays of the call will be made available through August 2, 2007. CONMED Profile CONMED is a medical technology company with an emphasis on surgical devices and equipment for minimally invasive procedures and monitoring. The Company’s products serve the clinical areas of arthroscopy, powered surgical instruments, electrosurgery, cardiac monitoring disposables, endosurgery and endoscopic technologies. They are used by surgeons and physicians in a variety of specialties including orthopedics, general surgery, gynecology, neurosurgery, and gastroenterology. Headquartered in Utica, New York, the Company’s 3,200 employees distribute its products worldwide from several manufacturing locations. Forward Looking Information This press release contains forward-looking statements based on certain assumptions and contingencies that involve risks and uncertainties. The 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 forward-looking statements in this press release 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. 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. In addition to general industry and economic conditions, factors that could cause actual results to differ materially from those discussed in the forward-looking statements in this press release include, but are not limited to: (i) the failure of any one or more of the assumptions stated above, to prove to be correct; (ii) the risks relating to forward-looking statements discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006; (iii) cyclical purchasing patterns from customers, end-users and dealers; (iv) timely release of new products, and acceptance of such new products by the market; (v) the introduction of new products by competitors and other competitive responses; (vi) the possibility that any new acquisition or other transaction may require the Company to reconsider its financial assumptions and goals/targets; and/or (vii) the Company’s ability to devise and execute strategies to respond to market conditions. CONMED CORPORATION CONSOLIDATED STATEMENTS OF INCOME (in thousands except per share amounts) (unaudited)   Three months ended Six months ended June 30, June 30, 2006 2007 2006 2007   Net sales $ 163,473 $ 169,258 $ 321,939 $ 340,272   Cost of sales 82,939 83,398 161,676 169,187 Cost of sales, acquisition transition - Note A   2,760 -   4,589 -   Gross profit   77,774   85,860   155,674   171,085   Selling and administrative 58,123 58,207 116,497 118,012 Research and development 7,498 7,453 15,323 15,047 Other expense (income) - Note B   1,584   1,312   2,154   (4,102)   67,205   66,972   133,974   128,957   Income from operations 10,569 18,888 21,700 42,128   Loss on early extinguishment of debt 678 - 678 -   Interest expense   4,675   4,329   9,541   8,845   Income before income taxes 5,216 14,559 11,481 33,283   Provision for income taxes   1,802   5,214   3,727   12,016   Net income $ 3,414 $ 9,345 $ 7,754 $ 21,267   Per share data:   Net Income Basic $ .12 $ .33 $ .28 $ .76 Diluted   .12 .32 .27 .74   Weighted average common shares Basic 28,061 28,180 28,068 27,988 Diluted 28,266 28,831 28,312 28,608     Note A - Included in cost of sales in the three and six months ended June 30, 2006 are approximately $2.8 million and $4.6 million, respectively, in acquisition-transition related costs.   Note B - Included in other expense in the three months ended June 30, 2006 are $0.6 million in costs related to the write-off of inventory in settlement of a patent dispute and $1.0 million in acquisition-related costs. Included in other expense in the six months ended June 30, 2006 are $0.6 million in costs related to the write-off of inventory in settlement of a patent dispute, $0.1 million in costs related to the termination of a product offering and $1.5 million in acquisition-related costs.   Included in other expense in the three months ended June 30, 2007 are $1.2 million in facility closure related costs and $0.1 million in costs related to the termination of a product offering. Included in other expense in the six months ended June 30, 2007 are $1.8 million in facility closure related costs, $0.2 million in costs related to the termination of a product offering and a $6.1 million gain on a legal settlement. CONMED CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands) (unaudited)   ASSETS   December 31, June 30, 2006 2007 Current assets: Cash and cash equivalents $ 3,831 $ 3,879 Accounts receivable, net 75,120 77,044 Inventories 151,687 161,819 Deferred income taxes 15,212 15,205 Other current assets   4,033   5,861 Total current assets 249,883 263,808 Property, plant and equipment, net. 116,480 118,959 Goodwill 290,512 291,178 Other intangible assets, net 191,135 188,397 Other assets   13,561   12,768 Total assets $ 861,571 $ 875,110   LIABILITIES AND SHAREHOLDERS' EQUITY   Current liabilities: Current portion of long-term debt $ 3,148 $ 3,247 Other current liabilities   72,057   68,890 Total current liabilities 75,205 72,137 Long-term debt 264,676 237,780 Deferred income taxes 51,004 61,678 Other long-term liabilities   30,332   27,210 Total liabilities   421,217   398,805   Shareholders' equity: Capital accounts 201,541 217,812 Retained earnings 247,425 264,875 Accumulated other comprehensive loss   (8,612)   (6,382) Total equity   440,354   476,305   Total liabilities and shareholders' equity $ 861,571 $ 875,110 CONMED CORPORATION CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (in thousands) (unaudited)   Six months ended June 30, 2006 2007 Cash flows from operating activities: Net income $ 7,754 $ 21,267 Adjustments to reconcile net income to net cash provided by operating activities:   Depreciation and amortization 14,670 15,400 Stock-based payment expense 1,585 1,885 Deferred income taxes 3,650 10,470 Increase (decrease) in cash flows from changes in assets and liabilities: Sale of accounts receivable - 2,000 Accounts receivable 2,407 (3,924) Inventories (6,361) (15,150) Accounts payable 1,373 (2,579) Income taxes receivable (1,979) (1,809) Accrued compensation and benefits 559 (2,388) Other, net   3,807   626 Net cash provided by operating activities   27,465   25,798   Cash flow from investing activities: Purchases of property, plant, and equipment, net (10,247) (9,556) Payments related to business acquisitions (2,458) (1,278) Proceeds from sale of equity investment   1,205   - Net cash used in investing activities   (11,500)   (10,834)   Cash flow from financing activities: Payments on debt (141,896) (26,797) Proceeds of debt 135,000 - Payments related to issuance of debt (1,260) - Net proceeds from common stock issued under employee plans 1,238 10,604 Repurchase of common stock (7,848) - Other, net   (572)   (236) Net cash provided by financing activities   (15,338)   (16,429)   Effect of exchange rate change on cash and cash equivalents   999   1,513   Net increase in cash and cash equivalents 1,626 48   Cash and cash equivalents at beginning of period   3,454   3,831   Cash and cash equivalents at end of period $ 5,080 $ 3,879 CONMED CORPORATION RECONCILIATION OF REPORTED NET INCOME TO NET INCOME BEFORE UNUSUAL ITEMS (In thousands except per share amounts) (unaudited)   Three months ended June 30, 2006 2007   Reported net income $ 3,414 $ 9,345   Acquisition-transition related costs included in cost of sales   2,760 -   Termination of product offering 27 58   Write-off of inventory in settlement of a patent dispute 595 -   Facility closure related costs - 1,254   Other acquisition-related costs   962 -   Total other expense   1,584   1,312   Loss on early extinguishment of debt   678 -   Unusual expense before income taxes 5,022 1,312   Provision (benefit) for income taxes on unusual expense   (1,808)   (472)   Net income before unusual items. $ 6,628 $ 10,185     Per share data:   Reported net income Basic $ 0.12 $ 0.33 Diluted 0.12 0.32   Net income before unusual items Basic $ 0.24 $ 0.36 Diluted 0.23 0.35   Management has provided the above reconciliation of net income before unusual items as an additional measure that investors can use to compare operating performance between reporting periods. Management believes this reconciliation provides a useful presentation of operating performance. CONMED CORPORATIONRECONCILIATION OF REPORTED NET INCOME TO NET INCOMEBEFORE UNUSUAL ITEMS(In thousands except per share amounts)(unaudited)   Six months ended June 30, 2006 2007   Reported net income $ 7,754 $ 21,267   Acquisition-transition related costs included in cost of sales   4,589 -   Termination of product offering 83 148   Write-off of inventory in settlement of a patent dispute 595 -   Other acquisition-related costs 1,476 -   Facility closure related costs - 1,822   Gain on legal settlement -   (6,072)   Total other expense (income)   2,154   (4,102)   Loss on early extinguishment of debt   678 -   Unusual expense (income) before income taxes 7,421 (4,102)   Provision (benefit) for income taxes on unusual expense   (2,672)   1,477   Net income before unusual items. $ 12,503 $ 18,642     Per share data:   Reported net income Basic $ 0.28 $ 0.76 Diluted 0.27 0.74   Net income before unusual items Basic $ 0.45 $ 0.67 Diluted 0.44 0.65   Management has provided the above reconciliation of net income before unusual items as an additional measure that investors can use to compare operating performance between reporting periods. Management believes this reconciliation provides a useful presentation of operating performance.