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24 Mar 2006
MOODY'S INVESTORS SERVICE ASSIGNED A Ba2 RATING TO CONMED CORPORATION'S $250 MILLION SENIOR SECURED CREDIT FACILITY; MOODY'S AFFIRMED EXISTING RATINGS AND CHANGED OUTLOOK TO NEGATIVE FROM STABLE
Approximately $250 million of affected debt
New York, March 24, 2006 -- Moody's Investors Service ("Moody's") today assigned
a rating of Ba2 to ConMed Corporation's proposed $250 million
senior secured credit facility. Proceeds of the offering will be
used to refinance its existing senior secured credit facility.
Moody's will withdraw the ratings on the existing facility at the
completion of the proposed financing transaction. Moody's
also affirmed the Ba3 Corporate Family Rating and the B2 rating on ConMed's
$150 million senior subordinated convertible notes. The
ratings outlook was changed to negative from stable
The negative ratings outlook reflects deterioration in ConMed's
results in the second half of 2005. Same store revenue fell by
2% in the second half of 2005 compared to a 7.5%
increase in the first half of 2005. As a result, cash flow
from operations declined from $75 million in 2004 to $51
million in 2005, while free cash flow dropped from $62 million
to $35 million during this same time period. Cash flow was
negatively affected by a $33 million increase in inventories and
a decline in the sale of receivables.
Moody's believes the recent deterioration in ConMed's financial
results is caused primarily by the following factors: lower than
anticipated single-use products sales because of lower surgical
procedures; lower than anticipated capital equipment sales as hospitals
delayed concluding capital purchases; higher material costs for plastic-based
products due to higher oil prices and an increase in legal costs in a
suit against a larger competitor alleging unfair marketing practices;
and, an increase in-bound and out-bound freight costs.
Moody's believes that ConMed has maintained market share in its
key segments and that it has not lost any major customers.
The ratings also consider the operational and financial risk of the company's
strategy in supplementing internal growth with the acquisition of smaller
companies and product divisions from other companies. Moody's
notes that ConMed has completed nine acquisitions in the past ten years
in order to diversify its core product line while penetrating new markets.
In September 2004, ConMed acquired an Endoscopic Technology product
from C.R Bard, which added approximately $60 million
in annualized revenue and provided the company with a sixth business unit.
ConMed has funded these acquisitions through a combination of both equity
Price increases in raw materials may pressure the company's operating
costs while affecting the competitive position of ConMed's products.
As mentioned earlier, the recent increase in raw material costs,
particularly in oil related products such as resin, has pressured
gross margins over the past few quarters. The ratings also consider
the risk of operating abroad, including foreign exchange risk,
as 37% of 2005 revenues came from outside of the United States.
Lastly, Moody's is concerned that ConMed may have to accelerate
research spending in order to remain competitive as the company only spends
approximately 4% of its revenue on research and development.
Research and Development expenditures increased by 26% to $25.5
million in 2005 and the company introduced 14 new products.
The ratings also consider the stability of the company's revenue
because of its geographic diversity, as well as customer and product
diversification. The company sells and distributes its products
on a global basis in over 100 countries. The company has six major
product segments: Arthroscopy, Powered Instruments,
Electro surgery, Patient Care, Endo Surgery and Endoscopic
Technology. The stability of the company's revenue is also
enhanced by the fact that over 75% of the companies products are
single-use disposable products, which provide an annuity-like
stream of revenues.
ConMed manufactures most of its products and components, which allows
it to contain costs, control quality, maintain the security
of proprietary processes and react quickly to changes in demand.
Moody's also notes that none of the critical raw materials are sourced
from one single supplier. The company is able to capture the majority
of the economics and value-added feature of its products as it
has a direct sales-force of almost 400 people in the U.S
and 50 sales representatives internationally. The company sells
directly to hospitals in ten countries and uses dealers for its two major
product lines, arthroscopy and powered instruments (55% of
sales). ConMed also sells direct in the UK and Canada for its other
four product lines.
Moody's expects that ConMed will continue to grow revenue between
4% and 6% over the next few years, benefiting from
new product introductions, increased market share, and international
growth of 7% to 9%. As a result, Moody's
expects that operating cash flow should improve to a range of $60
million to $70 million in 2006 and a range of $70 million
to $85 million in 2007 because of stable operating margins,
modest working capital requirements, and capital spending of $15
million to $25 million a year. After adjusting for operating
leases, Moody's anticipates that operating and free cash flow to
debt will rebound from 10% to 13% and 6% to 8%,
respectively, in 2005, to 25% to 28% and 20%
to 22% in 2006.
If the company grows cash flows more rapidly than Moody's expects,
and uses the excess cash flows to retire debt, the company's outlook
could become stable. ConMed has set its debt to total capitalization
target at the 35%-45% range, and is currently
operating on the high end of that range. If it lowers its debt
to total capitalization by issuing equity to retire debt in order to achieve
the lower limit of its debt to total capitalization target, its
outlook could also improve. Moody's would also like to see
the company sustain free cash flow to debt ratios of 13% to 16%
on a sustained basis.
Conversely, if competitive pressures further retard revenue and
cash flow growth, or additional acquisition financing increases
the company's debt burden materially, the ratings could be lowered.
The ratings could also face downward pressure if recent results do not
stabilize and cash flow continues to deteriorate. The ratings could
be downgraded if the adjusted free cash flow to adjusted debt remains
in the 6% to 8% range as was the case in 2005.
ConMed intends to issue a new $150 million Term Loan Facility and
$100 million Revolving Credit Facility. As noted earlier,
proceeds from the new facility will be used to refinance its existing
$141 million senior secured credit facility as well as for general
corporate purposes. As a result of the refinancing, total
leverage does not increase much, assuming the revolver remains at
full, or nearly full, capacity over the next twelve months.
In fact, Moody's rating incorporates our expectation that availability
under the company's $100 million proposed revolving credit facility
will remain virtually in tact. Under the terms of the proposed
transaction, ConMed will have a maximum total leverage ratio,
a minimum fixed charge coverage ratio and maximum total senior leverage
ratio of 4.5 to 1 (steps down to 4.0 to 1 for quarter ended
December 31, 2006), 2.25 to 1 and 3.0 to 1,
respectively, in 2006. Moody's expects that the company will
have sufficient cushion and remain in compliance with these financial
covenants under its credit facility for the next twelve months.
The company has more cushion in the covenants of the new credit facility
compared to those in the existing facility
Moody's rated the senior credit facility one notch above the Corporate
Family Rating because Moody's believes there is sufficient collateral
coverage in a distressed scenario. That belief is based on the
bank debt's seniority, guarantees from subsidiaries, and a
collateral package consisting of substantially all assets of the company.
The rating reflects a lower expected loss for the senior secured class
of debt relative to the senior subordinated debt class and any potential
senior secured debt.
The B2 rating on the senior subordinated convertible notes reflects the
contractual subordination to senior debt at the issuing entity,
ConMed. The rating also incorporates an effective subordination
to total obligations at the operating subsidiaries. The senior
subordinated convertible notes are not guaranteed.
Moody's assigned the following ratings:
(i) $100 million Senior Secured Revolver, due 2011,
(ii) $150 million Senior Secured Term Loan B, due 2013,
Moody's affirmed the following ratings:
(i) Corporate Family Rating, at Ba3
(ii) $150 million senior subordinated convertible notes,
due 2024, at B2.
The ratings outlook was changed to negative from stable.
After the close of the proposed transaction, Moody's will withdraw
the following ratings assigned to ConMed:
(i) $100 million revolving credit facility, due 2007,
(ii) $140 million Term Loan B, due in 2009, rated Ba3
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, otolaryngology,
neuro-surgery and other surgical specialties. In 2005,
its consolidated revenues were approximately $617 million.
Corporate Finance Group
Moody's Investors Service
Paul D. Bienstock
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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