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29 May 2003
MOODY'S AFFIRMS THE Ba3 RATING ON CONMED'S $135 MILLION EXPANSION OF ITS $100 MILLION GTD. SR. SEC. TERM LOAN; ALL OTHER RATINGS REMAIN UNCHANGED; RATING OUTLOOK IS STABLE
Approximately $450 million in Debt Securities Affected
New York, May 29, 2003 -- Moody's Investors Service affirmed the Ba3 rating on ConMed Corporation's
('ConMed's') $100 million guaranteed senior secured
term loan, expanded by $135 million, citing the company's
relatively high, albeit declining leverage and the competitive nature
of the segments of the medical device industry in which it operates.
The rating also reflects ConMed's strong position in a growing industry;
and the stability of its cash flow. The company's other ratings
remain unchanged. The outlook for all ratings is stable.
The table below summarizes these rating actions:
(i) Affirm the Ba3 rating on ConMed's $100 million Guaranteed
Senior Secured Term Loan B due in 2009, now expanded by $135
million to $235 million;
(ii) Affirm ConMed's Senior Implied Rating of Ba3;
(iii) Affirm ConMed's Issuer Rating of B1;
(iv) Affirm the Ba3 rating on ConMed's $100.0 million
Guaranteed Senior Secured Revolving Credit facility due 2007; and
(v) Affirm the B2 rating on ConMed's $115 million in 9%
Guaranteed Senior Subordinated Notes due in 2008, followed by its
withdrawal upon completion of the refinancing of the notes.
Moody's will withdraw its B2 rating on ConMed's subordinated
debt once the debt's refinancing with the proceeds of the expanded
Term Loan B is complete.
The rating agency noted that ConMed's product array of orthopedic devices
benefits from demographic trends that include an aging yet more active
population. This creates a need for orthopedic surgery, and
the market for ConMed's instruments, in which ConMed holds a leading
position. The disposable nature of much of its product line generates
recurring revenues, and stable cashflows. In addition to
the organic growth this engenders, ConMed has been making acquisitions,
partly funded with debt, raising debt levels to approximately 45%
of total capital.
The stable rating outlook reflects Moody's expectation that ConMed
will continue to grow revenue and cash flows at a moderate, low-
to mid-single digit rate, using its cash to fund capital
expenditure and gradually reduce debt. It also reflects Moody's
expectation that ConMed will continue to make relatively small,
strategic acquisitions, reducing any temporary increase in debt
needed for the purpose in the short term. If the company grows
cash flows more rapidly than we expect, and uses the excess to retire
debt, the company's outlook could become positive.
ConMed has set its debt/total capitalization target at the 35-45%
range, and is currently operating near the upper limit of that range.
If it lowers its target, issuing equity to retire debt in order
to achieve it, its outlook could also improve. Conversely,
if competitive pressures further retard revenue and cash flow growth,
or additional acquisition financing increases the company's debt
burden materially, its outlook could turn negative.
In Moody's view, ConMed is relatively highly levered,
compatible with its senior implied rating of Ba3. Total Debt/ Book
Capitalization as of YE2002 was a relatively moderate 43%,
but EBIT/Interest Expense was fairly low at 3.2x for the period.
Retained Cash Flow/Debt, at 23% for FY2002, was appropriate
for its rating category in this industry. Assuming that over the
next year to eighteen months ConMed continues to grow revenues and cash
flows at a mid-single digit rate, and that acquisitions remain
relatively small, Moody's expects the company's Total
Debt/Book Capitalization to decline to about 40% over the period
and Retained Cash Flow/Debt to remain about the same. The current
transaction, in which ConMed plans to retire its subordinated debt
with the proceeds of an expanded Term Loan B, should marginally
($5.0 million) increase its debt burden while reducing its
interest expense. EBIT/Interest Expense will, in Moody's
view, improve modestly as a result.
ConMed faces intense competition from larger and better-capitalized
companies in a number of its businesses, Moody's believes.
Stryker (arthroscopy and powered surgical instruments), Tyco (electrosurgery,
endoscopy and patient care), Johnson and Johnson (endoscopy),
and 3M (patient care) all have significant positions in one or more of
the sectors that ConMed serves. Competitive pressures have caused
ConMed's gross margin to decline slightly but progressively,
from 53% at YE1999 to 52.3% at YE2002. Although
ConMed's acquisition of Bionx will add higher margin products to
the company's mix, this is likely to slow rather than reverse
the trend, in Moody's view, not least because the company
plans to expand its sales force from 180 to 230 and convert them to independent
status. A commission-paid sales force is both more effective
and more expensive than a salaried one.
In 4Q2002, ConMed acquired ValMed (Portland, OR) and Nortrex
(Montreal, Canada) for $3.0 million eoach.
Together, they will form ConMed Integrated Systems, providing
engineering design services to hospitals building operating rooms and
intensive care units for endoscopic procedures. A number of ConMed's
competitors have similar units. Having designed the hospital facilities,
they are in an excellent position to bid on equipping them. ConMed
is following suit to defend its market share. While its action
is prompted by necessity, it exposes the company to the risks associated
with entering into a new and very different business. Until now,
ConMed has focused on manufacturing and distribution. Now,
it will be providing consulting services. Again, the fact
that it is willing to do so demonstrates the competitive nature of its
Supporting ConMed's ratings are favorable industry trends.
Moody's expects that, as the populations of developed countries
age, they will need more surgical procedures. Their longer,
more active lives, which give rise to more injuries and hence surgical
interventions, only serve to accentuate the trend. Further,
continued pressure to reduce healthcare costs has increased the demand
for less invasive procedures, such as arthroscopy and endoscopy,
which reduce the length of expensive hospital stays. Finally,
concern with patient safety has augmented demand for disposables.
Taken together, these trends bode well for continued growth in ConMed's
markets, in Moody's opinion.
Lending further support to ConMed's ratings are the company's
strong positions in the most important markets it serves. In arthroscopy,
for example, ConMed is the second largest provider of the equipment
necessary to perform minimally invasive procedures to visualize and repair
joints; it has a 17% market share, behind Smith &
Nephew with a 20% share. Its next largest competitor,
Arthrex, has a 13% share. In the last two years,
it has introduced 15 new arthroscopic products, many of which have
unique features. An example is an autoclavable camera head,
the only one on the market. Likewise, in the area of powered
surgical instruments, ConMed is again the second largest operator,
with a 20% market share, which compares with the 40%
market share of the leader, Stryker.
Like many medical device manufacturers, ConMed has significant recurrent
revenues thanks to its sales of disposables. Disposables accounted
for 75% of total sales in 2002, a proportion that is likely
to hold over the rating horizon, lending stability to its cash flows
and hence additional support to its ratings.
Located in Utica, New York, ConMed Corporation is a medical
device manufacturer specializing in instruments, implants and video
equipment for arthroscopic sports medicine and powered surgical instruments,
such as drills and saws, for orthopedic, neuro-surgery
and other surgical specialities. In 2002, its consolidated
revenues were approximately $453 million.
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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