form10q-108474_cnmd.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the quarterly period ended
|
Commission
File Number 0-16093
|
March
31, 2010
|
|
CONMED
CORPORATION
(Exact
name of registrant as specified in its charter)
New
York
(State
or other jurisdiction of
incorporation
or organization)
|
16-0977505
(I.R.S.
Employer
Identification
No.)
|
525
French Road, Utica, New York
(Address
of principal executive offices)
|
13502
(Zip
Code)
|
(315)
797-8375
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for shorter period that the
registrant was required to submit and post such files). x
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of “accelerated filer”, “large accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check
one).
Large
accelerated filer ¨ Accelerated
filer x Non-accelerated
filer ¨ Smaller
reporting company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
The
number of shares outstanding of registrant's common stock, as of April 30, 2010
is 29,180,524 shares.
CONMED
CORPORATION
QUARTERLY
REPORT ON FORM 10-Q
FOR
THE QUARTER ENDED MARCH 31, 2010
PART
I FINANCIAL INFORMATION
Item
Number
|
|
Page
|
|
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
-
Consolidated Condensed Statements of Income for the three months ended
March 31, 2009 and 2010
|
1
|
|
|
|
|
-
Consolidated Condensed Balance Sheets as of December 31, 2009 and
March 31,
2010
|
2
|
|
|
|
|
-
Consolidated Condensed Statements of Cash Flows for the three months ended
March 31, 2009 and 2010
|
3
|
|
|
|
|
-
Notes to Consolidated Condensed Financial Statements
|
4
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
14
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
28
|
|
|
|
Item
4.
|
Controls
and Procedures
|
28
|
|
|
|
PART
II OTHER INFORMATION
|
|
|
|
Item
1.
|
Legal
Proceedings
|
29
|
|
|
|
|
|
|
Item
6.
|
Exhibits
|
30
|
|
|
|
|
|
|
Signatures
|
|
31
|
|
|
|
PART
I FINANCIAL INFORMATION
Item
1.
CONMED
CORPORATION
CONSOLIDATED
CONDENSED STATEMENTS OF INCOME
(Unaudited,
in thousands except per share amounts)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
164,062 |
|
|
$ |
176,365 |
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
87,710 |
|
|
|
84,570 |
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
76,352 |
|
|
|
91,795 |
|
|
|
|
|
|
|
|
|
|
Selling
and administrative expense
|
|
|
61,853 |
|
|
|
70,552 |
|
|
|
|
|
|
|
|
|
|
Research
and development expense
|
|
|
8,489 |
|
|
|
7,682 |
|
|
|
|
|
|
|
|
|
|
Other
expense (income)
|
|
|
(1,336 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
69,006 |
|
|
|
78,234 |
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
7,346 |
|
|
|
13,561 |
|
|
|
|
|
|
|
|
|
|
Gain
on early extinguishment of debt
|
|
|
1,083 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Amortization
of debt discount
|
|
|
1,045 |
|
|
|
1,052 |
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
1,488 |
|
|
|
1,749 |
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
5,896 |
|
|
|
10,760 |
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
1,411 |
|
|
|
3,441 |
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
4,485 |
|
|
$ |
7,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
.15 |
|
|
$ |
.25 |
|
Diluted
|
|
|
.15 |
|
|
|
.25 |
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
|
|
|
|
|
|
|
|
|
Basic
|
|
|
29,030 |
|
|
|
29,165 |
|
Diluted
|
|
|
29,061 |
|
|
|
29,409 |
|
See notes
to consolidated condensed financial statements.
CONMED
CORPORATION
CONSOLIDATED
CONDENSED BALANCE SHEETS
(Unaudited,
in thousands except share and per share amounts)
|
|
December
31,
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2010
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
10,098 |
|
|
$ |
9,970 |
|
Accounts
receivable, net
|
|
|
126,162 |
|
|
|
148,578 |
|
Inventories
|
|
|
164,275 |
|
|
|
168,619 |
|
Deferred
income taxes
|
|
|
14,782 |
|
|
|
14,741 |
|
Prepaid
expenses and other current assets
|
|
|
10,293 |
|
|
|
11,221 |
|
Total
current assets
|
|
|
325,610 |
|
|
|
353,129 |
|
Property,
plant and equipment, net
|
|
|
143,502 |
|
|
|
142,615 |
|
Deferred
income taxes
|
|
|
1,953 |
|
|
|
1,738 |
|
Goodwill
|
|
|
290,505 |
|
|
|
294,823 |
|
Other
intangible assets, net
|
|
|
190,849 |
|
|
|
194,385 |
|
Other
assets
|
|
|
5,994 |
|
|
|
5,676 |
|
Total
assets
|
|
$ |
958,413 |
|
|
$ |
992,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
2,174 |
|
|
$ |
35,174 |
|
Accounts
payable
|
|
|
26,210 |
|
|
|
27,582 |
|
Accrued
compensation and benefits
|
|
|
25,955 |
|
|
|
22,291 |
|
Income
taxes payable
|
|
|
677 |
|
|
|
81 |
|
Other
current liabilities
|
|
|
24,091 |
|
|
|
20,726 |
|
Total
current liabilities
|
|
|
79,107 |
|
|
|
105,854 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
182,195 |
|
|
|
173,910 |
|
Deferred
income taxes
|
|
|
97,916 |
|
|
|
103,355 |
|
Other
long-term liabilities
|
|
|
22,680 |
|
|
|
24,934 |
|
Total
liabilities
|
|
|
381,898 |
|
|
|
408,053 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, par value $.01 per share;
|
|
|
|
|
|
|
|
|
authorized
500,000 shares; none outstanding
|
|
|
- |
|
|
|
- |
|
Common
stock, par value $.01 per share;
|
|
|
|
|
|
|
|
|
100,000,000
shares authorized; 31,299,203 shares
|
|
|
|
|
|
|
|
|
issued
in 2009 and 2010, respectively
|
|
|
313 |
|
|
|
313 |
|
Paid-in
capital
|
|
|
317,366 |
|
|
|
318,130 |
|
Retained
earnings
|
|
|
325,370 |
|
|
|
332,574 |
|
Accumulated
other comprehensive loss
|
|
|
(12,405 |
) |
|
|
(13,160 |
) |
Less:
2,149,832 and 2,126,596 shares of common stock
|
|
|
|
|
|
|
|
|
in
treasury, at cost in 2009 and 2010, respectively
|
|
|
(54,129 |
) |
|
|
(53,544 |
) |
Total
shareholders’ equity
|
|
|
576,515 |
|
|
|
584,313 |
|
Total
liabilities and shareholders’ equity
|
|
$ |
958,413 |
|
|
$ |
992,366 |
|
See notes
to consolidated condensed financial statements.
CONMED
CORPORATION
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited,
in thousands)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
4,485 |
|
|
$ |
7,319 |
|
Adjustments
to reconcile net income
|
|
|
|
|
|
|
|
|
to
net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
4,011 |
|
|
|
4,147 |
|
Amortization
of debt discount
|
|
|
1,045 |
|
|
|
1,052 |
|
Amortization,
all other
|
|
|
4,395 |
|
|
|
5,083 |
|
Stock-based
compensation
|
|
|
974 |
|
|
|
940 |
|
Deferred
income taxes
|
|
|
2,535 |
|
|
|
3,598 |
|
Gain
on early extinguishment of debt
|
|
|
(1,083 |
) |
|
|
- |
|
Sale
of accounts receivable to (collections on
|
|
|
|
|
|
|
|
|
behalf
of) purchaser (Note 13)
|
|
|
(2,000 |
) |
|
|
(29,000 |
) |
Increase
(decrease) in cash flows
|
|
|
|
|
|
|
|
|
from
changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
5,472 |
|
|
|
5,378 |
|
Inventories
|
|
|
(3,391 |
) |
|
|
(8,002 |
) |
Accounts
payable
|
|
|
(4,643 |
) |
|
|
3,836 |
|
Income
taxes payable
|
|
|
(2,141 |
) |
|
|
(620 |
) |
Accrued
compensation and benefits
|
|
|
41 |
|
|
|
(3,509 |
) |
Other
assets
|
|
|
(133 |
) |
|
|
(865 |
) |
Other
liabilities
|
|
|
(2,851 |
) |
|
|
(2,289 |
) |
Net
cash provided by (used in)
|
|
|
|
|
|
|
|
|
operating
activities
|
|
|
6,716 |
|
|
|
(12,932 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Payments
related to business acquisitions
|
|
|
(112 |
) |
|
|
(5,083 |
) |
Purchases
of property, plant and equipment
|
|
|
(7,441 |
) |
|
|
(3,333 |
) |
Net
cash used in investing activities
|
|
|
(7,553 |
) |
|
|
(8,416 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
proceeds from common stock issued under
|
|
|
|
|
|
|
|
|
employee
plans
|
|
|
110 |
|
|
|
267 |
|
Proceeds
of long term debt
|
|
|
12,000 |
|
|
|
- |
|
Payments
on long term debt
|
|
|
(7,913 |
) |
|
|
(9,337 |
) |
Proceeds
from secured borrowings, net (Note 13)
|
|
|
- |
|
|
|
33,000 |
|
Net
change in cash overdrafts
|
|
|
(3,164 |
) |
|
|
(2,531 |
) |
Net
cash provided by financing activities
|
|
|
1,033 |
|
|
|
21,399 |
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes
|
|
|
|
|
|
|
|
|
on
cash and cash equivalents
|
|
|
171 |
|
|
|
(179 |
) |
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
367 |
|
|
|
(128 |
) |
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
11,811 |
|
|
|
10,098 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
12,178 |
|
|
$ |
9,970 |
|
See notes
to consolidated condensed financial statements.
CONMED
CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited,
in thousands except share and per share amounts)
Note 1 – Operations and
significant accounting policies
Organization
and operations
CONMED Corporation (“CONMED”, the
“Company”, “we” or “us”) 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.
Note 2 - Interim financial
information
The accompanying unaudited consolidated
condensed financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for annual
financial statements. Results for the period ended March 31, 2010 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2010.
The consolidated condensed financial
statements and notes thereto should be read in conjunction with the financial
statements and notes for the year-ended December 31, 2009 included in our Annual
Report on Form 10-K.
Note 3 – Other comprehensive
income
Comprehensive
income consists of the following:
|
|
Three
months ended
|
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
4,485 |
|
|
$ |
7,319 |
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
Pension
liability, net of income tax
|
|
|
12,349 |
|
|
|
207 |
|
Cash
flow hedging gain, net of income tax
|
|
|
- |
|
|
|
606 |
|
Foreign
currency translation adjustments
|
|
|
(3,396 |
) |
|
|
(1,568 |
) |
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
13,438 |
|
|
$ |
6,564 |
|
|
Accumulated
other comprehensive income (loss) consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Cash
Flow
|
|
|
|
|
|
Cumulative
|
|
|
Other
|
|
|
|
Hedging
|
|
|
Pension
|
|
|
Translation
|
|
|
Comprehensive
|
|
|
|
Gain
|
|
|
Liability
|
|
|
Adjustments
|
|
|
Income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2009
|
|
$ |
76 |
|
|
$ |
(16,282 |
) |
|
$ |
3,801 |
|
|
$ |
(12,405 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
liability,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of income tax
|
|
|
- |
|
|
|
207 |
|
|
|
- |
|
|
|
207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow hedging gain,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of income tax
|
|
|
606 |
|
|
|
- |
|
|
|
- |
|
|
|
606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustments
|
|
|
- |
|
|
|
- |
|
|
|
(1,568 |
) |
|
|
(1,568 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2010
|
|
$ |
682 |
|
|
$ |
(16,075 |
) |
|
$ |
2,233 |
|
|
$ |
(13,160 |
) |
Note 4 – Fair value of financial
instruments
We enter
into derivative instruments for risk management purposes only. We
operate internationally and, in the normal course of business, are exposed to
fluctuations in interest rates, foreign exchange rates and commodity prices.
These fluctuations can increase the costs of financing, investing and operating
the business. We use forward contracts, a type of derivative instrument, to
manage our foreign currency exposures.
By
nature, all financial instruments involve market and credit risks. We enter into
forward contracts with a major investment grade financial institution and have
policies to monitor credit risk. While there can be no assurance, we
do not anticipate any material non-performance by our counterparty.
Foreign Currency Forward
Contracts. We hedge forecasted intercompany sales denominated
in foreign currencies through the use of forward contracts. We
account for these forward contracts as cash flow hedges. To the
extent these forward contracts meet hedge accounting criteria, changes in their
fair value are not included in current earnings but are included in Accumulated
Other Comprehensive Loss. These changes in fair value will be
recognized into earnings as a component of sales when the forecasted transaction
occurs. The notional contract amounts for forward contracts
outstanding at March 31, 2010 which have been accounted for as cash flow hedges
totaled $51.9 million. Net realized gains recognized for forward
contracts accounted for as cash flow hedges approximated $0.9 million for the
quarter ended March 31, 2010. Net unrealized gains on forward
contracts outstanding which have been accounted for as cash flow hedges and
which have been included in accumulated other comprehensive income (loss)
totaled $0.7 million at March 31, 2010. It is expected these
unrealized gains will be recognized in income in 2010 and 2011.
We also
enter into forward contracts to exchange foreign currencies for United States
dollars in order to hedge our currency transaction exposures on intercompany
receivables denominated in foreign currencies. These forward
contracts settle each month at month-end, at which time we enter into new
forward contracts. We have not designated these forward contracts as
hedges and have not applied hedge accounting to them. The notional
contract amounts for forward contracts outstanding at March 31, 2010 which have
not been designated as hedges totaled $38.4 million. Net realized
gains recognized in connection with those forward contracts not accounted for as
hedges approximated $0.3 million for the quarter ended March 31, 2010,
offsetting losses on our intercompany receivables of $0.6 million for the
quarter ended March 31, 2010. These gains and losses have been
recorded in selling and administrative expense in the consolidated statements of
income.
We record
these forward foreign exchange contracts at fair value; the following table
summarizes the fair value for forward foreign exchange contracts outstanding at
March 31, 2010:
|
Asset
Balance
Sheet
Location
|
|
Fair
Value
|
|
Liabilities
Balance
Sheet
Location
|
|
Fair
Value
|
|
|
Net
Fair
Value
|
|
Derivatives
designated as hedged instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Exchange Contracts
|
Prepaid
Expenses and other current assets
|
|
$ |
2,011 |
|
Prepaid
Expenses and other current assets
|
|
$ |
(929 |
) |
|
$ |
1,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Exchange Contracts
|
Prepaid
Expenses and other current assets
|
|
|
- |
|
Prepaid
Expenses and other current assets
|
|
|
(62 |
) |
|
|
(62 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivatives
|
|
|
$ |
2,011 |
|
|
|
$ |
(991 |
) |
|
$ |
1,020 |
|
Our
forward foreign exchange contracts are subject to a master netting agreement and
qualify for netting in the consolidated balance sheets. Accordingly,
we have recorded the net fair value of $1.0 million in prepaid expenses and
other current assets.
Fair Value Disclosure. FASB
guidance defines fair value, establishes a framework for measuring fair value
and related disclosure requirements. This guidance applies when fair value
measurements are required or permitted. The guidance indicates, among other
things, that a fair value measurement assumes that the transaction to sell an
asset or transfer a liability occurs in the principal market for the asset or
liability or, in the absence of a principal market, the most advantageous market
for the asset or liability. Fair value is defined based upon an exit price
model.
As of
March 31, 2010, we do not have any significant non-recurring measurements of
nonfinancial assets and nonfinancial liabilities.
Valuation Hierarchy. A
valuation hierarchy was established for disclosure of the inputs to the
valuations used to measure fair value. This hierarchy prioritizes the inputs
into three broad levels as follows. Level 1 inputs are quoted prices
(unadjusted) in active markets for identical assets or liabilities. Level 2
inputs are quoted prices for similar assets and liabilities in active markets,
quoted prices for identical or similar assets in markets that are not active,
inputs other than quoted prices that are observable for the asset or liability,
including interest rates, yield curves and credit risks, or inputs that are
derived principally from or corroborated by observable market data through
correlation. Level 3 inputs are unobservable inputs based on our own assumptions
used to measure assets and liabilities at fair value. A financial asset or
liability’s classification within the hierarchy is determined based on the
lowest level input that is significant to the fair value
measurement.
Valuation Techniques.
Liabilities carried at fair value and measured on a recurring basis as of March
31, 2010 consist of forward foreign exchange contracts and two embedded
derivatives associated with our 2.50% convertible senior subordinated notes (the
“Notes”). The value of the forward foreign exchange contract
liabilities was determined within Level 2 of the valuation hierarchy and is
listed in the table above. The value of the two embedded derivatives
associated with the Notes was determined within Level 2 of the valuation
hierarchy and was not material either individually or in the aggregate to our
financial position, results of operations or cash flows.
The carrying amounts reported in our
balance sheets for cash and cash equivalents, accounts receivable, accounts
payable and long-term debt excluding the 2.50% convertible senior subordinated
notes approximate fair value. The fair value of the Notes
approximated $108.3 million and $111.4 million at December 31, 2009 and March
31, 2010, respectively, based on their quoted market price.
Note 5 -
Inventories
Inventories
consist of the following:
|
|
December 31,
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$ |
48,959 |
|
|
$ |
46,783 |
|
|
|
|
|
|
|
|
|
|
Work-in-process
|
|
|
17,203 |
|
|
|
17,045 |
|
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
|
98,113 |
|
|
|
104,791 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
164,275 |
|
|
$ |
168,619 |
|
Note 6 – Earnings per
share
Basic earnings per share (“basic EPS”)
is computed by dividing net income by the weighted average number of common
shares outstanding for the reporting period. Diluted earnings per
share (“diluted EPS”) gives effect to all dilutive potential shares outstanding
resulting from employee share-based awards. The following table sets
forth the computation of basic and diluted earnings per share for the three
month periods ended March 31, 2009 and 2010.
|
|
Three
months ended
|
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
4,485 |
|
|
$ |
7,319 |
|
|
|
|
|
|
|
|
|
|
Basic
– weighted average shares outstanding
|
|
|
29,030 |
|
|
|
29,165 |
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive potential securities
|
|
|
31 |
|
|
|
244 |
|
|
|
|
|
|
|
|
|
|
Diluted
– weighted average shares outstanding
|
|
|
29,061 |
|
|
|
29,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$ |
.15 |
|
|
$ |
.25 |
|
Diluted
EPS
|
|
|
.15 |
|
|
|
.25 |
|
The shares used in the calculation of
diluted EPS exclude options and stock appreciation rights where the exercise
price was greater than the average market price of common shares for the
period. Such shares aggregated approximately 2.5 million and 1.4
million for the three months ended March 31, 2009 and 2010,
respectively. The shares used in the calculation of diluted EPS also
exclude potential shares issuable under the Notes. Upon conversion of
the Notes, the holder of each Note will receive the conversion value of the Note
payable in cash up to the principal amount of the Note and CONMED common stock
for the Note's conversion value in excess of such principal
amount. As of March 31, 2010, our share price has not exceeded the
conversion price of the Notes, therefore the conversion value was less than the
principal amount of the Notes. Accordingly, under the net share
settlement method, there were no potential shares issuable under the Notes to be
used in the calculation of diluted EPS. The maximum number of shares
we may issue with respect to the Notes is 5,750,000.
Note 7 – Goodwill and other
intangible assets
The changes in the net carrying amount
of goodwill for the three months ended March 31, 2010 are as
follows:
Balance
as of January 1, 2010
|
|
$ |
290,505 |
|
|
|
|
|
|
Adjustments
to goodwill resulting from
|
|
|
|
|
business
acquisitions finalized
|
|
|
4,168 |
|
|
|
|
|
|
Foreign
currency translation
|
|
|
150 |
|
|
|
|
|
|
Balance
as of March 31, 2010
|
|
$ |
294,823 |
|
Total accumulated impairment losses
(associated with our CONMED Endoscopic Technologies operating unit) aggregated
$46,689 at December 31, 2009 and March 31, 2010.
Goodwill associated with each of our
principal operating units is as follows:
|
|
December
31,
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
CONMED
Electrosurgery
|
|
$ |
16,645 |
|
|
$ |
16,645 |
|
|
|
|
|
|
|
|
|
|
CONMED
Endosurgery
|
|
|
42,439 |
|
|
|
42,439 |
|
|
|
|
|
|
|
|
|
|
CONMED
Linvatec
|
|
|
171,397 |
|
|
|
175,647 |
|
|
|
|
|
|
|
|
|
|
CONMED
Patient Care
|
|
|
60,024 |
|
|
|
60,092 |
|
|
|
|
|
|
|
|
|
|
Balance
|
|
$ |
290,505 |
|
|
$ |
294,823 |
|
Other intangible assets consist
of the following:
|
|
December 31, 2009
|
|
|
March 31, 2010
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
Amortized
intangible assets:
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$ |
127,594 |
|
|
$ |
(36,490 |
) |
|
$ |
127,594 |
|
|
$ |
(37,562 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
and other intangible assets
|
|
|
41,809 |
|
|
|
(30,408 |
) |
|
|
46,868 |
|
|
|
(30,859 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
and tradenames
|
|
|
88,344 |
|
|
|
- |
|
|
|
88,344 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
257,747 |
|
|
$ |
(66,898 |
) |
|
$ |
262,806 |
|
|
$ |
(68,421 |
) |
Other intangible assets primarily
represent allocations of purchase price to identifiable intangible assets of
acquired businesses. The weighted average amortization period for
intangible assets which are amortized is 25 years. Customer
relationships are being amortized over a weighted average life of 34
years. Patents and other intangible assets are being amortized over a
weighted average life of 15 years.
Amortization expense related to
intangible assets which are subject to amortization totaled $1,553 and $1,523 in
the three months ended March 31, 2009 and 2010, respectively. These
amounts have been included in selling and administrative expense on the
Consolidated Condensed Statements of Income.
The estimated amortization expense for
the year ending December 31, 2010, including the quarterly period ended March
31, 2010, and for each of the five succeeding years, is as follows:
2010
|
|
|
6,089 |
|
2011
|
|
|
5,892 |
|
2012
|
|
|
5,838 |
|
2013
|
|
|
5,624 |
|
2014
|
|
|
5,099 |
|
2015
|
|
|
4,541 |
|
Note 8 —
Guarantees
We provide warranties on certain of our
products at the time of sale. The standard warranty period for our
capital and reusable equipment is generally one year. Liability under
service and warranty policies is based upon a review of historical warranty and
service claim experience. Adjustments are made to accruals as claim
data and historical experience warrant.
Changes in the carrying amount of
service and product warranties for the three months ended March 31, are as
follows:
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
Balance
as of January 1,
|
|
$ |
3,341 |
|
|
$ |
3,383 |
|
|
|
|
|
|
|
|
|
|
Provision
for warranties
|
|
|
850 |
|
|
|
345 |
|
|
|
|
|
|
|
|
|
|
Claims
made
|
|
|
(888 |
) |
|
|
(547 |
) |
|
|
|
|
|
|
|
|
|
Balance
as of March 31,
|
|
$ |
3,303 |
|
|
$ |
3,181 |
|
Note 9 – Pension
plan
Net periodic pension costs consist of
the following:
|
|
Three
months ended
|
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
1,747 |
|
|
$ |
44 |
|
|
|
|
|
|
|
|
|
|
Interest
cost on projected
|
|
|
|
|
|
|
|
|
benefit
obligation
|
|
|
1,139 |
|
|
|
1,006 |
|
|
|
|
|
|
|
|
|
|
Expected
return on plan assets
|
|
|
(999 |
) |
|
|
(1,003 |
) |
|
|
|
|
|
|
|
|
|
Net
amortization and deferral
|
|
|
599 |
|
|
|
328 |
|
|
|
|
|
|
|
|
|
|
Curtailment
gain
|
|
|
(4,368 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net
periodic pension cost (gain)
|
|
$ |
(1,882 |
) |
|
$ |
375 |
|
During the first quarter of 2009, the
Company announced the freezing of benefit accruals under the defined benefit
pension plan for United States employees (“the Plan”) effective May 14,
2009. As a result, the Company recorded a curtailment gain of $4.4
million and a reduction in accrued pension (included in other long term
liabilities) of $11.4 million.
We are required and expect to make $3.0
million in contributions to our pension plan in 2010. We did not make
any contributions in the quarter ended March 31, 2010.
Note 10 — Other expense
(income)
Other expense (income) consists of the
following:
|
|
Three
months ended
|
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
plant/facility consolidation costs
|
|
$ |
546 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Net
pension gain
|
|
|
(1,882 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
$ |
(1,336 |
) |
|
$ |
- |
|
During the first quarter of 2009 we
incurred $3.5 million in restructuring costs of which $0.5 million have been
recorded in other expense and include charges related to the consolidation of
our distribution centers. The remaining $3.0 million in restructuring
costs have been charged to cost of goods sold and represent startup activities
associated with a new manufacturing facility in Chihuahua, Mexico and the
closure of two Utica, New York area manufacturing facilities.
During the first quarter of 2009, we
elected to freeze benefit accruals under the defined benefit pension plan for
United States employees, effective May 14, 2009. As a result, we
recorded a net pension gain of $1.9 million associated with the elimination of
future benefit accruals under the pension plan (see Note 9).
Note 11 — Business Segments
and Geographic Areas
CONMED conducts its business through
five principal operating segments, CONMED Endoscopic Technologies, CONMED
Endosurgery, CONMED Electrosurgery, CONMED Linvatec and CONMED Patient
Care. We believe each of our segments are similar in the nature of
their products, production processes, customer base, distribution methods and
regulatory environment. Our CONMED Endosurgery, CONMED Electrosurgery
and CONMED Linvatec operating segments also have similar economic
characteristics and therefore qualify for aggregation. Our CONMED
Patient Care and CONMED Endoscopic Technologies operating units do not qualify
for aggregation since their economic characteristics do not meet the criteria
for aggregation as a result of the lower overall operating income (loss) in
these segments.
CONMED Endosurgery, CONMED
Electrosurgery and CONMED Linvatec consist of a single aggregated segment
comprising a complete line of endo-mechanical instrumentation for minimally
invasive laparoscopic procedures, electrosurgical generators and related
surgical instruments, arthroscopic instrumentation for use in orthopedic surgery
and small bone, large bone and specialty powered surgical
instruments. CONMED Patient Care product offerings include a line of
vital signs and cardiac monitoring products as well as suction instruments &
tubing for use in the operating room. CONMED Endoscopic Technologies
product offerings include a comprehensive line of minimally invasive endoscopic
diagnostic and therapeutic instruments used in procedures which require
examination of the digestive tract.
The following is net sales information
by product line and reportable segment:
|
|
Three
months ended
|
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arthroscopy
|
|
$ |
63,832 |
|
|
$ |
72,253 |
|
Powered
Surgical Instruments
|
|
|
32,823 |
|
|
|
34,990 |
|
CONMED
Linvatec
|
|
|
96,655 |
|
|
|
107,243 |
|
CONMED
Electrosurgery
|
|
|
22,380 |
|
|
|
23,083 |
|
CONMED
Endosurgery
|
|
|
14,526 |
|
|
|
17,080 |
|
CONMED
Endosurgery, Electrosurgery
|
|
|
|
|
|
|
|
|
and
Linvatec
|
|
|
133,561 |
|
|
|
147,406 |
|
CONMED
Patient Care
|
|
|
18,465 |
|
|
|
17,159 |
|
CONMED
Endoscopic Technologies
|
|
|
12,036 |
|
|
|
11,800 |
|
Total
|
|
$ |
164,062 |
|
|
$ |
176,365 |
|
Total assets, capital expenditures,
depreciation and amortization information are impracticable to present by
reportable segment because the necessary information is not
available.
The following is a reconciliation
between segment operating income (loss) and income (loss) before income
taxes:
|
|
Three
months ended
|
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
CONMED
Linvatec, Electrosurgery
|
|
|
|
|
|
|
and
Endosurgery
|
|
$ |
12,511 |
|
|
$ |
17,256 |
|
CONMED
Patient Care
|
|
|
(440 |
) |
|
|
346 |
|
CONMED
Endoscopic Technologies
|
|
|
(1,842 |
) |
|
|
199 |
|
Corporate
|
|
|
(2,883 |
) |
|
|
(4,240 |
) |
Income
from operations
|
|
|
7,346 |
|
|
|
13,561 |
|
|
|
|
|
|
|
|
|
|
Gain
on early extinguishment of debt
|
|
|
1,083 |
|
|
|
- |
|
Amortization
of debt discount
|
|
|
1,045 |
|
|
|
1,052 |
|
Interest
expense
|
|
|
1,488 |
|
|
|
1,749 |
|
Income
before income taxes
|
|
$ |
5,896 |
|
|
$ |
10,760 |
|
Note 12 – Legal
proceedings
From time
to time, we are a defendant in certain lawsuits alleging product liability,
patent infringement, or other claims incurred in the ordinary course of
business. Likewise, from time to time, the Company may receive a subpoena from a
government agency such as the Equal Employment Opportunity Commission,
Occupational Safety and Health Administration, the Department of Labor, the
Treasury Department, and other federal and state agencies or foreign governments
or government agencies. These subpoena may or may not be routine
inquiries, or may begin as routine inquiries and over time develop into
enforcement actions of various types. The product liability claims
are generally covered by various insurance policies, subject to certain
deductible amounts, maximum policy limits and certain exclusions in the
respective policies or required as a matter of law. In some cases we
may be entitled to indemnification by third parties. When there is no
insurance coverage, as would typically be the case primarily in lawsuits
alleging patent infringement or in connection with certain government
investigations, or indemnification obligation of a third party we establish
reserves sufficient to cover probable losses associated with such
claims. We do not expect that the resolution of any pending claims or
investigations will have a material adverse effect on our financial condition,
results of operations or cash flows. There can be no assurance,
however, that future claims or investigations, or the costs associated with
responding to such claims or investigations, especially claims and
investigations not covered by insurance, will not have a material adverse effect
on our results of operations.
Manufacturers
of medical products may face exposure to significant product liability claims.
To date, we have not experienced any product liability claims that are material
to our financial statements or condition, but any such claims arising in the
future could have a material adverse effect on our business or results of
operations. We currently maintain commercial product liability insurance of $25
million per incident and $25 million in the aggregate annually, which we believe
is adequate. This coverage is on a claims-made basis. There can be no
assurance that claims will not exceed insurance coverage, that the carriers will
be solvent or that such insurance will be available to us in the future at a
reasonable cost.
Our
operations are subject, and in the past have been subject, to a number of
environmental laws and regulations governing, among other things, air emissions,
wastewater discharges, the use, handling and disposal of hazardous substances
and wastes, soil and groundwater remediation and employee health and safety. In
some jurisdictions environmental requirements may be expected to become more
stringent in the future. In the United States certain environmental laws can
impose liability for the entire cost of site restoration upon each of the
parties that may have contributed to conditions at the site regardless of fault
or the lawfulness of the party’s activities. While we do not believe
that the present costs of environmental compliance and remediation are material,
there can be no assurance that future compliance or remedial obligations would
not have a material adverse effect on our financial condition, results of
operations or cash flows.
On April
7, 2006, CONMED received a copy of a complaint filed in the United States
District for the Northern District of New York on behalf of a purported class of
former CONMED Linvatec sales representatives. The complaint alleges
that the former sales representatives were entitled to, but did not receive,
severance in 2003 when CONMED Linvatec restructured its distribution
channels. The range of loss associated with this complaint ranges
from $0 to $3.0 million, not including any interest, fees or costs that might be
awarded if the five named plaintiffs were to prevail on their own behalf as well
as on behalf of the approximately 70 (or 90 as alleged by the plaintiffs) other
members of the purported class. CONMED Linvatec did not
generally pay severance during the 2003 restructuring because the former sales
representatives were offered sales positions with CONMED Linvatec’s new
manufacturer’s representatives. Other than three of the five named
plaintiffs in the class action, nearly all of CONMED Linvatec’s former sales
representatives accepted such positions.
The
Company’s motions to dismiss and for summary judgment, which were heard at a
hearing held on January 5, 2007, were denied by a Memorandum Decision and Order
dated May 22, 2007. The District Court also granted the plaintiffs’
motion to certify a class of former CONMED Linvatec sales representatives whose
employment with CONMED Linvatec was involuntarily terminated in 2003 and who did
not receive severance benefits. With discovery essentially
completed, on July 21, 2008, the Company filed motions seeking summary judgment
and to decertify the class. In addition, on July 21, 2008, Plaintiffs
filed a motion seeking summary judgment. These motions were submitted
for decision on August 26, 2008. There is no fixed time frame within which the
Court is required to rule on the motions. The Company believes there
is no merit to the claims asserted in the Complaint, and plans to vigorously
defend the case. There can be no assurance, however, that the Company
will prevail in the litigation.
Note 13 – New accounting
pronouncements
In June 2009, the FASB issued guidance
which requires additional disclosures about the transfer and derecognition of
financial assets, eliminates the concept of qualifying special-purpose entities,
creates more stringent conditions for reporting a transfer of a portion of a
financial asset as a sale, clarifies other sale-accounting criteria, and changes
the initial measurement of a transferor’s interest in transferred financial
assets. Our accounts receivable sales agreement under which a
wholly-owned, bankruptcy-remote, special purpose subsidiary of CONMED
Corporation sells an undivided percentage ownership interest in receivables to a
bank is no longer permitted to be accounted for as a sale and reduction in
accounts receivable. We adopted this guidance effective January 1,
2010 and as a result, accounts receivable sold under the agreement ($33.0
million at March 31, 2010) have been recorded as additional borrowings rather
than as a reduction in accounts receivable.
Note 14 –
Restructuring
During the first quarter of 2010, we
began the second phase of our operational restructuring plan which includes the
transfer of additional production lines from Utica, New York to our
manufacturing facility in Chihuahua, Mexico.
As of March 31, 2010, we have incurred
$0.6 million in costs associated with the restructuring. These costs
were charged to cost of goods sold and include severance and other charges
associated with the transfer of production to Mexico.
We estimate the total cost of the
second phase of our restructuring plan will approximate $3.0 million during
2010, including $1.5 million related to employee termination costs and $1.5
million in other restructuring related activities. We expect to
include these restructuring costs in cost of goods sold. The second
phase of the restructuring plan impacts Corporate manufacturing facilities which
support multiple reporting segments. As a result, costs associated
with the second phase of our restructuring plan will be reflected in the
Corporate line within our business segment reporting.
Note 15 – Business
Acquisition
During the first quarter of 2010, the
Company acquired the stock of a business for a cash purchase price of $5.0
million. The fair value of this acquisition included assets of $5.0
million related to in-process research and development and $4.1 million in
goodwill, and liabilities of $2.4 million related to contingent consideration
and $1.7 million in deferred income tax liabilities. The in-process
research and development and goodwill associated with the acquisition are not
deductible for income tax purposes.
Item
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
|
|
|
AND
RESULTS OF OPERATIONS
|
|
Forward-looking
statements
In this Report on Form 10-Q, we make
forward-looking statements about our financial condition, results of operations
and business. Forward-looking statements are statements made by us concerning
events that may or may not occur in the future. These statements may
be made directly in this document or may be “incorporated by reference” from
other documents. Such statements may be identified by the use of words such as
“anticipates”, “expects”, “estimates”, “intends” and “believes” and variations
thereof and other terms of similar meaning.
Forward-looking
statements are not guarantees of future performance
Forward-looking statements involve
known and unknown risks, uncertainties and other factors, including those that
may cause our actual results, performance or achievements, or industry results,
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors
include those identified under “Risk Factors” in our Annual Report on Form 10-K
for the year-ended December 31, 2009 and the following, among
others:
·
|
general
economic and business conditions;
|
·
|
changes
in foreign exchange and interest
rates;
|
·
|
cyclical
customer purchasing patterns due to budgetary and other
constraints;
|
·
|
changes
in customer preferences;
|
·
|
the
introduction and acceptance of new
products;
|
·
|
the
ability to evaluate, finance and integrate acquired businesses, products
and companies;
|
·
|
changes
in business strategy;
|
·
|
the
availability and cost of materials;
|
·
|
the
possibility that United States or foreign regulatory and/or administrative
agencies may initiate enforcement actions against us or our
distributors;
|
·
|
future
levels of indebtedness and capital
spending;
|
·
|
quality
of our management and business abilities and the judgment of our
personnel;
|
·
|
the
availability, terms and deployment of
capital;
|
·
|
the
risk of litigation, especially patent litigation as well as the cost
associated with patent and other litigation;
and
|
·
|
changes
in regulatory requirements.
|
See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” below and “Risk
Factors” and “Business” in our Annual Report on Form 10-K for the year-ended
December 31, 2009 for a further discussion of these factors. You are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. We do not undertake any obligation to publicly
release any revisions to these forward-looking statements to reflect events or
circumstances after the date of this Quarterly Report on Form 10-Q or to reflect
the occurrence of unanticipated events.
Overview:
CONMED Corporation (“CONMED”, the
“Company”, “we” or “us”) is a medical technology company with six principal
product lines. These product lines and the percentage of consolidated
revenues associated with each, are as follows:
|
|
Three
months ended
|
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2010
|
|
Arthroscopy
|
|
|
38.9 |
% |
|
|
41.0 |
% |
Powered
Surgical Instruments
|
|
|
20.0 |
|
|
|
19.8 |
|
Electrosurgery
|
|
|
13.6 |
|
|
|
13.1 |
|
Patient
Care
|
|
|
11.3 |
|
|
|
9.7 |
|
Endosurgery
|
|
|
8.9 |
|
|
|
9.7 |
|
Endoscopic
Technologies
|
|
|
7.3 |
|
|
|
6.7 |
|
Consolidated
Net Sales
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
A significant amount of our products
are used in surgical procedures with the majority of our revenues derived from
the sale of disposable products. We manufacture substantially all of
our products in facilities located in the United States, Mexico, and
Finland. We market our products both domestically and internationally
directly to customers and through distributors. International sales
represent a significant portion of our business. During the three
months ended March 31, 2010, sales to purchasers outside of the United States
accounted for 48.2% of total net sales.
Business
Environment and Opportunities
The aging of the worldwide population
along with lifestyle changes, continued cost containment pressures on healthcare
systems and the desire of clinicians and administrators to use less invasive (or
noninvasive) procedures are important trends which are driving the long-term
growth in our industry. We believe that with our broad product
offering of high quality surgical and patient care products, we can capitalize
on this growth for the benefit of the Company and our shareholders.
In order to further our growth
prospects, we have historically used strategic business acquisitions and
exclusive distribution relationships to continue to diversify our product
offerings, increase our market share and realize economies of
scale.
We have a variety of
research and development initiatives focused in each of our principal product
lines as continued innovation and commercialization of new proprietary
products and processes are essential elements of our long-term growth
strategy. Our reputation as an innovator is exemplified by recent new
product introductions such as the CONMED Linvatec Shoulder Restoration System, a
comprehensive system for rotator cuff repair.
Business
Challenges
Given significant volatility in the
financial markets and foreign currency exchange rates and depressed economic
conditions in both domestic and international markets, 2009 presented
significant business challenges. While we are cautiously optimistic
that the overall global economic environment is improving and are therefore
forecasting a return to revenue growth in 2010, sales of capital equipment
remain weak as seen in our first quarter results and there can be no assurance
that the improvement in the economic environment will be sustained or that
revenue growth will be achieved for the full year of 2010. We will
continue to monitor and manage the impact of the overall economic environment on
the Company.
During 2009 we successfully completed
the first phase of our operational restructuring plan which we had previously
announced in the second quarter of 2008. In the first quarter of
2010, we began the second phase of our operational restructuring plan which
involves further expanding our lower cost Mexican operations
by transferring additional production lines to our Chihuahua, Mexico
facility which we believe will yield additional cost savings. We
expect the second phase of our restructuring plan to be largely completed by the
fourth quarter of 2010. However, we cannot be certain such activities
will be completed in the estimated time period or that planned cost savings will
be achieved.
Our facilities are subject to periodic
inspection by the United States Food and Drug Administration (“FDA”) and foreign
regulatory agencies for, among other things, conformance to Quality System
Regulation and Current Good Manufacturing Practice (“CGMP”)
requirements. Our products are also subject to product recall and we
have made product recalls in the past, including $6.0 million in 2009 related to
certain of our powered instrument handpieces. We are committed to the
principles and strategies of systems-based quality management for improved CGMP
compliance, operational performance and efficiencies through our Company-wide
quality systems initiative. However, there can be no assurance that
our actions will ensure that we will not receive a warning letter or other
regulatory action, which may include consent decrees or fines, or that we will
not make product recalls in the future.
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 to the
consolidated financial statements in our Annual Report on Form 10-K for the
year-ended December 31, 2009 describes significant accounting policies used in
preparation of the consolidated financial statements. The most
significant areas involving management judgments and estimates are described
below and are considered by management to be critical to understanding the
financial condition and results of operations of CONMED
Corporation. There have been no significant changes in our critical
accounting estimates during the quarter ended March 31, 2010.
Revenue
Recognition
Revenue is recognized when title has
been transferred to the customer which is at the time of
shipment. The following policies apply to our major categories of
revenue transactions:
|
·
|
Sales
to customers are evidenced by firm purchase orders. Title and the risks
and rewards of ownership are transferred to the customer when product is
shipped under our stated shipping terms. Payment by the
customer is due under fixed payment
terms.
|
|
·
|
We
place certain of our capital equipment with customers in return for
commitments to purchase disposable products over time periods generally
ranging from one to three years. In these circumstances, no
revenue is recognized upon capital equipment shipment and we recognize
revenue upon the disposable product shipment. The cost of the
equipment is amortized over the term of individual commitment
agreements.
|
|
·
|
Product
returns are only accepted at the discretion of the Company and in
accordance with our “Returned Goods Policy”. Historically the
level of product returns has not been significant. We accrue
for sales returns, rebates and allowances based upon an analysis of
historical customer returns and credits, rebates, discounts and current
market conditions.
|
|
·
|
Our
terms of sale to customers generally do not include any obligations to
perform future services. Limited warranties are provided for
capital equipment sales and provisions for warranty are provided at the
time of product sale based upon an analysis of historical
data.
|
|
·
|
Amounts
billed to customers related to shipping and handling have been included in
net sales. Shipping and handling costs are included in selling
and administrative expense.
|
|
·
|
We
sell to a diversified base of customers around the world and, therefore,
believe there is no material concentration of credit
risk.
|
|
·
|
We
assess the risk of loss on accounts receivable and adjust the allowance
for doubtful accounts based on this risk
assessment. Historically, losses on accounts receivable have
not been material. Management believes that the allowance for
doubtful accounts of $1.1 million at March 31, 2010 is adequate to provide
for probable losses resulting from accounts
receivable.
|
Inventory
Reserves
We maintain reserves for excess and
obsolete inventory resulting from the inability to sell our products at prices
in excess of current carrying costs. The markets in which we operate
are highly competitive, with new products and surgical procedures introduced on
an on-going basis. Such marketplace changes may result in our
products becoming obsolete. We make estimates regarding the future
recoverability of the costs of our products and record a provision for excess
and obsolete inventories based on historical experience, expiration of
sterilization dates and expected future trends. If actual product
life cycles, product demand or acceptance of new product introductions are less
favorable than projected by management, additional inventory write-downs may be
required. We believe that our current inventory reserves are
adequate.
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. Other
intangible assets primarily represent allocations of purchase price to
identifiable intangible assets of acquired businesses. We have
accumulated goodwill of $294.8 million and other intangible assets of $194.4
million as of March 31, 2010.
In accordance with Financial Accounting
Standards Board (“FASB”) guidance, 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 reporting
units. Estimates of fair value are based on the best information
available as of the date of the assessment, which primarily incorporate
management assumptions about expected future cash flows and other valuation
techniques. Future cash flows may be affected by changes in industry
or market conditions or the rate and extent to which anticipated synergies or
cost savings are realized with newly acquired entities. We last
completed our goodwill impairment testing as of October 1, 2009 and determined
that no impairment existed at that date. For our CONMED
Electrosurgery, CONMED Endosurgery and CONMED Linvatec operating units, our
impairment testing utilized CONMED Corporation’s EBIT multiple adjusted for a
market-based control premium with the resultant fair values exceeding carrying
values by 55% to 140%. Our CONMED Patient Care operating unit has the
least excess of fair value over carrying value of our reporting units; we
therefore utilized both a market-based approach and an income approach when
performing impairment testing with the resultant fair value exceeding carrying
value by 16%. The income approach contained certain key assumptions
including that revenue would resume historical growth patterns in 2010 while
including certain cost savings associated with the operational restructuring
plan completed during 2009. We continue to monitor events and
circumstances for triggering events which would more likely than not reduce the
fair value of any of our reporting units and require us to perform impairment
testing.
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.
Customer relationship assets arose
principally as a result of the 1997 acquisition of Linvatec
Corporation. These assets represent the acquisition date fair value
of existing customer relationships based on the after-tax income expected to be
derived during their estimated remaining useful life. The useful
lives of these customer relationships were not and are not limited by contract
or any economic, regulatory or other known factors. The estimated
useful life of the Linvatec customer relationship assets was determined as of
the date of acquisition as a result of a study of the observed pattern of
historical revenue attrition during the 5 years immediately preceding the
acquisition of Linvatec Corporation. This observed attrition pattern
was then applied to the existing customer relationships to derive the future
expected retirement of the customer relationships. This analysis
indicated an annual attrition rate of 2.6%. Assuming an exponential
attrition pattern, this equated to an average remaining useful life of
approximately 38 years for the Linvatec customer relationship
assets. Customer relationship intangible assets arising as a result
of other business acquisitions are being amortized over a weighted average life
of 17 years. The weighted average life for customer relationship
assets in aggregate is 34 years.
We evaluate the remaining useful life
of our customer relationship intangible assets each reporting period in order to
determine whether events and circumstances warrant a revision to the remaining
period of amortization. In order to further evaluate the remaining
useful life of our customer relationship intangible assets, we perform an annual
analysis and assessment of actual customer attrition and
activity. This assessment includes a comparison of customer activity
since the acquisition date and review of customer attrition rates. In
the event that our analysis of actual customer attrition rates indicates a level
of attrition that is in excess of that which was originally contemplated, we
would change the estimated useful life of the related customer relationship
asset with the remaining carrying amount amortized prospectively over the
revised remaining useful life.
We test our customer relationship
assets for recoverability whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. Factors specific to
our customer relationship assets which might lead to an impairment charge
include a significant increase in the annual customer attrition rate or
otherwise significant loss of customers, significant decreases in sales or
current-period operating or cash flow losses or a projection or forecast of
losses. We do not believe that there have been events or changes in
circumstances which would indicate the carrying amount of our customer
relationship assets might not be recoverable.
Pension
Plan
We sponsor a defined benefit pension
plan (“the plan”) covering substantially all our United States-based
employees. Major assumptions used in accounting for the plan include
the discount rate, expected return on plan assets, rate of increase in employee
compensation levels and expected mortality. Assumptions are
determined based on Company data and appropriate market indicators, and are
evaluated annually as of the plan’s measurement date. A change in any
of these assumptions would have an effect on net periodic pension costs reported
in the consolidated financial statements.
On March 26, 2009, the Board of
Directors approved a plan to freeze benefit accruals under the plan effective
May 14, 2009. As a result, we recorded a curtailment gain of $4.4
million and a reduction in accrued pension of $11.4 million which is included in
other long term liabilities. See Note 9 to the Consolidated Condensed
Financial Statements.
The weighted-average discount rate used
to measure pension liabilities and costs is set by reference to the Citigroup
Pension Liability Index. However, this index gives only an indication of the
appropriate discount rate because the cash flows of the bonds comprising the
index do not match the projected benefit payment stream of the plan precisely.
For this reason, we also consider the individual characteristics of the plan,
such as projected cash flow patterns and payment durations, when setting the
discount rate. This discount rate, which is used in determining
pension expense, was 5.97% for the first quarter of 2009. The
discount rate used for purposes of remeasuring plan liabilities as of the date
the plan freeze was approved and for purposes of measuring pension expense for
the remainder of 2009 was 7.30%. The rate used in determining 2010
pension expense is 5.86%.
We have used an expected rate of return
on pension plan assets of 8.0% for purposes of determining the net periodic
pension benefit cost. In determining the expected return on pension
plan assets, we consider the relative weighting of plan assets, the historical
performance of total plan assets and individual asset classes and economic and
other indicators of future performance. In addition, we consult with
financial and investment management professionals in developing appropriate
targeted rates of return.
We have estimated our rate of increase
in employee compensation levels at 3.5% consistent with our internal
budgeting.
For the three months ending March 31,
2010 we recorded pension expense of $0.4 million. Pension expense for
the full year 2010 is estimated at $1.5 million compared to a net gain of $0.8
million (including a $4.4 million curtailment gain and pension expense of $3.6
million) in 2009. In addition, we will be required to contribute
approximately $3.0 million to the pension plan for the 2010 plan
year.
Stock
Based Compensation
All share-based payments to employees,
including grants of employee stock options, restricted stock units, and stock
appreciation rights are recognized in the financial statements based at their
fair values. Compensation expense is recognized using a straight-line
method over the vesting period.
Income
Taxes
The recorded future tax benefit arising
from net deductible temporary differences and tax carryforwards is approximately
$34.6 million at March 31, 2010. Management believes that earnings
during the periods when the temporary differences become deductible will be
sufficient to realize the related future income tax benefits.
We operate in multiple taxing
jurisdictions, both within and outside the United States. We face
audits from these various tax authorities regarding the amount of taxes
due. Such audits can involve complex issues and may require an
extended period of time to resolve. The Internal Revenue Service
(“IRS”) has completed examinations of our United States federal income tax
returns through 2008. Tax years subsequent to 2008 are subject to
future examination.
We have established a valuation
allowance to reflect the uncertainty of realizing the benefits of certain net
operating loss carryforwards recognized in connection with an
acquisition. Effective January 1, 2009, changes in deferred tax
valuation allowances and income tax uncertainties after the acquisition date,
including those associated with acquisitions that closed prior to this effective
date, generally will affect income tax expense. In assessing the need for a
valuation allowance, we estimate future taxable income, considering the
feasibility of ongoing tax planning strategies and the realizability of tax loss
carryforwards. Valuation allowances related to deferred tax assets
may be impacted by changes to tax laws, changes to statutory tax rates and
ongoing and future taxable income levels.
Results
of operations
Three
months ended March 31, 2010 compared to three months ended March 31,
2009
The following table presents, as a
percentage of net sales, certain categories included in our consolidated
statements of income for the periods indicated:
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost
of sales
|
|
|
53.5 |
|
|
|
48.0 |
|
Gross profit
|
|
|
46.5 |
|
|
|
52.0 |
|
Selling
and administrative expense
|
|
|
37.7 |
|
|
|
40.0 |
|
Research
and development expense
|
|
|
5.2 |
|
|
|
4.3 |
|
Other
expense (income)
|
|
|
(0.8 |
) |
|
|
- |
|
Income from
operations
|
|
|
4.4 |
|
|
|
7.7 |
|
Gain
on early extinguishment of debt
|
|
|
0.7 |
|
|
|
- |
|
Amortization
of debt discount
|
|
|
0.6 |
|
|
|
0.6 |
|
Interest
expense
|
|
|
0.9 |
|
|
|
1.0 |
|
Income before income
taxes
|
|
|
3.6 |
|
|
|
6.1 |
|
Provision
for income taxes
|
|
|
0.9 |
|
|
|
2.0 |
|
Net income
|
|
|
2.7 |
% |
|
|
4.1 |
% |
Sales for the quarterly period ended
March 31, 2010 were $176.4 million, an increase of $12.3 million (7.5%) compared
to sales of $164.1 million in the comparable 2009 period with increases across
all product lines except Endoscopic Technologies and Patient
Care. Favorable foreign currency exchange rates (when compared to the
foreign currency exchange rates in the same period a year ago) accounted for
approximately $7.9 million of the increase. In local currency, sales
increased 2.7%. Sales of capital equipment increased $1.0 million
(2.7%) to $38.1 million in the first quarter of 2010 from $37.1 million in the
first quarter of 2009; sales of disposable products increased $11.3 million
(8.9%) to $138.3 million in the first quarter of 2010 from $127.0 million in the
first quarter of 2009. On a local currency basis, sales of capital
equipment decreased 1.9% while disposable products increased 4.0%. We
believe capital purchasing constraints in hospitals due to depressed economic
conditions is driving the constant currency decline in capital
equipment.
Cost of sales decreased to $84.6
million in the quarterly period ended March 31, 2010 as compared to $87.7
million in the same period a year ago on overall increases in sales volumes as
described above. Gross profit margins increased 5.5 percentage points
to 52.0% in the quarterly period ended March 31, 2010 as compared to 46.5% in
the same period a year ago. The increase in gross profit margins of
5.5 percentage points is primarily a result of the effects of favorable foreign
currency exchange rates on sales (2.3 percentage points), the reduced cost from
restructuring of the Company’s operations (1.4 percentage points) and improved
product mix (1.8 percentage points).
Selling and administrative expense
increased to $70.6 million in the quarterly period ended March 31, 2010 as
compared to $61.9 million in the same period a year ago. Foreign
currency exchange rates (when compared to the foreign currency exchange rates in
the same period a year ago) accounted for approximately $3.3 million of the
increase. Selling and administrative expense as a percentage of net
sales increased to 40.0% in the quarterly period ended March 31, 2010 as
compared to 37.7% in the same period a year ago. This increase of 2.3
percentage points is primarily attributable to higher sales force (0.5
percentage points) and other administrative expenses (1.8 percentage
points).
Research and development expense
totaled $7.7 million in the quarterly period ended March 31, 2010 as compared to
$8.5 million in the same period a year ago. As a percentage of net
sales, research and development expense decreased 0.8 percentage points to 4.4%
in the quarterly period ended March 31, 2010 as compared to 5.2% in the same
period a year ago. The decrease in research and development expense
of 0.8 percentage point is mainly driven by decreased spending on our CONMED
Patient Care products (0.3 percentage points) and decreases in our other
operating units as a percentage of sales (0.5 percentage points).
As discussed in Note 10 to the
Consolidated Condensed Financial Statements, other expense (income) in the
quarterly period ended March 31, 2009 consisted of a $0.5 million charge related
to the restructuring of certain of the Company’s operations and $1.9 million in
income related to the net pension gain resulting from the freezing of future
benefit accruals effective May 14, 2009.
During the first quarter of 2009, we
repurchased and retired $9.9 million of our 2.50% convertible senior
subordinated notes (the “Notes”) for $7.8 million and recorded a gain on the
early extinguishment of debt of $1.1 million net of the write-off of $0.1
million in unamortized deferred financing costs and write-off of the $1.0
million in unamortized Notes discount. See additional discussion
under Item 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Liquidity.
Amortization of debt discount in the
quarterly period ended March 31, 2010 was $1.1 million compared to $1.0 million
in the same period a year ago. This amortization is associated with the
implementation of FASB guidance as of January 1, 2009.
Interest expense in the quarterly
period ended March 31, 2010 was $1.7 million as compared to $1.5 million in the
same period a year ago. The increase in interest expense is due to
higher interest rates in the quarterly period ended March 31, 2010 as compared
to the same period a year ago. The weighted average interest rates on
our borrowings (inclusive of the finance charge on our accounts receivable sale
facility) increased to 3.09% in the quarterly period ended March 31, 2010 as
compared to 2.41% in the same period a year ago.
A provision for income taxes has been
recorded at an effective tax rate of 32.0% for the quarterly period ended March
31, 2010 compared to the 23.9% effective tax rate recorded in the same period a
year ago. The effective tax rate for the quarterly period ended March
31, 2010 is higher than that recorded in the same period a year ago as 2009
included the settlement of our 2007 IRS examination, and the resulting decrease
to our reserves of $1.1 million, reducing income tax expense. A
reconciliation of the United States statutory income tax rate to our effective
tax rate is included in our Annual Report on Form 10-K for the year-ended
December 31, 2009, Note 6 to the Consolidated Financial Statements.
Operating
Segment Results:
Segment information is prepared on the
same basis that we review financial information for operational decision-making
purposes. CONMED conducts its business through five principal
operating segments, CONMED Endoscopic Technologies, CONMED Endosurgery, CONMED
Electrosurgery, CONMED Linvatec and CONMED Patient Care. We believe
each of our segments are similar in the nature of their products, production
processes, customer base, distribution methods and regulatory
environment. Our CONMED Endosurgery, CONMED Electrosurgery and CONMED
Linvatec operating segments also have similar economic characteristics and
therefore qualify for aggregation. Our CONMED Patient Care and CONMED
Endoscopic Technologies operating units do not qualify for aggregation since
their economic characteristics do not meet the criteria for aggregation as a
result of the lower overall operating income (loss) in these
segments.
The
following tables summarize the Company’s results of operations by segment for
the quarterly period ended March 31, 2009 and 2010:
CONMED
Endosurgery, CONMED Electrosurgery and CONMED Linvatec
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
133,561 |
|
|
$ |
147,406 |
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
12,511 |
|
|
|
17,256 |
|
|
|
|
|
|
|
|
|
|
Operating
margin
|
|
|
9.4 |
% |
|
|
11.7 |
% |
Product offerings include a complete
line of endo-mechanical instrumentation for minimally invasive laparoscopic
procedures, electrosurgical generators and related surgical instruments,
arthroscopic instrumentation for use in orthopedic surgery and small bone, large
bone and specialty powered surgical instruments.
|
·
|
Arthroscopy
sales increased $8.3 million (13.0%) in the quarterly period ended March
31, 2010 to $72.2 million from $63.9 million in the comparable 2009 period
mainly due to our new shoulder restoration system and increases in our
resection and video imaging products for arthroscopy and general
surgery. Favorable foreign currency exchange rates (when
compared to the foreign currency exchange rates in the same period a year
ago) accounted for approximately $3.9 million of the
increase. Sales of capital equipment increased $0.3 million
(1.8%) to $17.3 million in the first quarter of 2010 from $17.0 million in
the first quarter of 2009; sales of disposable products increased $8.0
million (17.1%) to $54.9 million in the first quarter of 2010 from $46.9
million in the first quarter of 2009. On a local currency
basis, sales of capital equipment decreased 2.9% while disposable products
increased 10.4%.
|
|
·
|
Powered
surgical instrument sales increased $2.2 million (6.7%) in the quarterly
period ended March 31, 2010 to $35.0 million from $32.8 million in the
comparable 2009 period, as a result of increased sales of our large bone
powered instrument handpieces and small bone burs and
blades. Favorable foreign currency exchange rates (when
compared to the foreign currency exchange rates in the same period a year
ago) accounted for approximately $2.3 million of the
increase. Sales of capital equipment increased $0.1 million
(0.7%) to $14.8 million in the first quarter of 2010 from $14.7 million in
the first quarter of 2009; sales of disposable products increased $2.1
million (11.6%) to $20.2 million in the first quarter of 2010 from $18.1
million in the first quarter of 2009. On a local currency
basis, sales of capital equipment decreased 4.1% while disposable products
increased 2.8%.
|
|
·
|
Electrosurgery
sales increased $0.7 million (3.1%) in the quarterly period ended March
31, 2010 to $23.1 million from $22.4 million in the comparable 2009
period, as a result of increased sales of ABC® equipment and
pencils. Favorable foreign currency exchange rates (when
compared to the foreign currency exchange rates in the same period a year
ago) accounted for approximately $0.6 million of the
increase. Sales of capital equipment increased $0.6 million
(11.1%) to $6.0 million in the first quarter of 2010 from $5.4 million in
the first quarter of 2009; sales of disposable products increased $0.1
million (0.6%) to $17.1 million in the first quarter of 2010 from $17.0
million in the first quarter of 2009. On a local currency
basis, sales of capital equipment increased 7.4% while disposable products
decreased 1.8%.
|
|
·
|
Endosurgery
sales increased $2.6 million (17.9%) in the quarterly period ended March
31, 2010 to $17.1 million from $14.5 million in the comparable 2009 period
as a result of increased sales of VCARE, handheld instruments, suction
irrigation and ligation products. Favorable foreign currency
exchange rates (when compared to the foreign currency exchange rates in
the same period a year ago) accounted for approximately $0.5 million of
the increase. On local currency basis, sales increased
14.5%.
|
|
·
|
Operating
margins as a percentage of net sales increased 2.3 percentage points to
11.7% in 2010 compared to 9.4% in 2009 principally as a result of higher
gross margins (2.9 percentage points) mainly due to favorable foreign
currency exchange rates offset by increases in selling and other
administrative expenses (0.6 percentage
points).
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
18,465 |
|
|
$ |
17,159 |
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
(440 |
) |
|
|
346 |
|
|
|
|
|
|
|
|
|
|
Operating
margin
|
|
|
(2.4 |
%) |
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
|
Product offerings include a line of
vital signs and cardiac monitoring products including pulse oximetry equipment
& sensors, ECG electrodes and cables, cardiac defibrillation & pacing
pads and blood pressure cuffs. We also offer a complete line of
reusable surgical patient positioners and suction instruments & tubing for
use in the operating room, as well as a line of IV products.
|
·
|
Patient
care sales decreased $1.3 million (-7.0%) in the quarterly period ended
March 31, 2010 to $17.2 million from $18.5 million in the comparable 2009
period as a result of decreased sales of defibrillator pads and ECG
electrodes and the discontinuation of the versa stim
product. Favorable foreign currency exchange rates (when
compared to the foreign currency exchange rates in the same period a year
ago) increased sales approximately $0.2 million. On a local
currency basis, sales decreased
8.1%.
|
|
·
|
Operating
margins as a percentage of net sales increased 4.4 percentage points to
2.0% in 2010 compared to -2.4% in 2009. The increase in
operating margins of 4.4 percentage points was driven by higher gross
margins as a result of our operational restructuring (2.1 percentage
points), lower research and development spending (1.9 percentage points)
and lower administrative expenses (0.4 percentage
points).
|
CONMED
Endoscopic Technologies
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
12,036 |
|
|
$ |
11,800 |
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
(1,842 |
) |
|
|
199 |
|
|
|
|
|
|
|
|
|
|
Operating
margin
|
|
|
(15.3 |
%) |
|
|
1.7 |
% |
Product offerings include a
comprehensive line of minimally invasive endoscopic diagnostic and therapeutic
instruments used in procedures which require examination of the digestive
tract.
|
·
|
Endoscopic
Technologies sales of disposable products decreased $0.2 million (-1.7%)
in the quarterly period ended March 31, 2010 to $11.8 million from $12.0
million in the comparable 2009 period as a result of lower forcep
sales. Favorable foreign currency exchange rates (when compared
to the foreign currency exchange rates in the same period a year ago)
increased sales approximately $0.4 million. On a local currency
basis, sales decreased 5.0%.
|
|
·
|
Operating
margins as a percentage of net sales increased 17.0 percentage points to
1.7% in 2010 compared to -15.3% in 2009. This increase is
principally a result of increased gross margins (9.7 percentage points)
mainly due to cost improvements resulting from the operations
restructuring completed in 2009 and effects of favorable currency exchange
rates on sales, lower research and development spending (3.3 percentage
points), and lower overall administrative expenses as a result of the
consolidation of the CONMED Endoscopic Technologies division into the
Corporate facility (4.0 percentage
points).
|
Liquidity
and capital resources
Our
liquidity needs arise primarily from capital investments, working capital
requirements and payments on indebtedness under our senior credit
agreement. We have historically met these liquidity requirements with
funds generated from operations, including sales of accounts receivable and
borrowings under our revolving credit facility. In addition, we use
term borrowings, including borrowings under our senior credit agreement and
borrowings under separate loan facilities, in the case of real property
purchases, to finance our acquisitions. 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.
Cash
provided by operations
Our net working capital position was
$247.3 million at March 31, 2010. Net cash provided by operating
activities was -$12.9 million in the quarterly period ended March 31, 2010 and
$6.7 million in the quarterly period ended March 31, 2009.
Net cash provided by operating
activities decreased by $19.6 million in 2010 as compared to 2009 on a $2.8
million increase in net income in the current quarter as compared to the same
period a year ago. The decline in operating activities is driven by a
new accounting pronouncement effective January 1, 2010, which requires our
accounts receivable sold under our accounts receivable sale agreement be
recorded as additional borrowings rather than as a reduction in accounts
receivable. This change in accounting has been reflected on a
prospective basis. Accordingly, cash collections on behalf of the
purchaser of the $29.0 million undivided percentage ownership interest in
accounts receivable sold prior to January 1, 2010 have been presented as a
reduction in cash from operations while net sales of additional accounts
receivable have been reflected as an increase in cash flows from financing
activities. See Note 13 for further discussion of the change in
accounting for the accounts receivable sales agreement.
Investing
cash flows
Net cash used in investing activities
in the quarterly period ended March 31, 2010 consisted of the purchase of a
business and capital expenditures. The cash purchase price of a
business acquired during the quarter approximated $5.0 million (see Note 15
further discussion). Capital expenditures were $7.4 million and $3.3
million for the quarterly periods ended March 31, 2009 and 2010,
respectively. The decrease in capital expenditures in the quarterly
period ended March 31, 2010 as compared to the same period a year ago is
primarily due to the completion during the second quarter of 2009 of the
implementation of an enterprise business software application as well certain
other infrastructure improvements related to our restructuring efforts as more
fully described in Note 14 and in “Restructuring” below. Capital
expenditures are expected to approximate $22.0 million in 2010.
Financing
cash flows
Net cash provided by financing
activities in the three months ended March 31, 2010 consist principally of $33.0
million in net secured borrowings under our accounts receivable sales agreement
(see Note 13), $9.0 million in payments on our
revolving credit facility under our senior credit agreement, and a $2.5 million
net change in cash overdrafts.
Our $235.0 million senior credit
agreement (the "senior credit agreement") consists of a $100.0 million revolving
credit facility and a $135.0 million term loan. There were $1.0 million in
borrowings outstanding on the revolving credit facility as of March 31,
2010. Our available borrowings on the revolving credit
facility at March 31, 2010 were $90.6 million with approximately $8.4 million of
the facility set aside for outstanding letters of credit. There were
$56.0 million in borrowings outstanding on the term loan at March 31,
2010.
Borrowings outstanding on the revolving
credit facility are due and payable on April 12, 2011. The scheduled
principal payments on the term loan portion of the senior credit agreement are
$1.4 million annually through December 2011, increasing to $53.6 million in 2012
with the remaining balance outstanding due and payable on April 12,
2013. We may also be required, under certain circumstances, to make
additional principal payments based on excess cash flow as defined in the senior
credit agreement. Interest rates on the term loan portion of the
senior credit agreement are at LIBOR plus 1.50% (1.75% at March 31, 2010) or an
alternative base rate; interest rates on the revolving credit facility portion
of the senior credit agreement are at LIBOR plus 1.25% or an alternative base
rate (3.625% at March 31, 2010). For those borrowings where the
Company elects to use the alternative base rate, the base rate will be the
greater of the Prime Rate or the Federal Funds Rate in effect on such date plus
0.50%, plus a margin of 0.50% for term loan borrowings or 0.25% for borrowings
under the revolving credit facility.
The senior credit agreement is
collateralized by substantially all of our personal property and assets, except
for our accounts receivable and related rights which are pledged in connection
with our accounts receivable sales agreement. The 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 March 31, 2010. We are also
required, under certain circumstances, to make mandatory prepayments from net
cash proceeds from any issue of equity and asset sales.
We have a mortgage note outstanding in
connection with the property and facilities utilized by our CONMED Linvatec
subsidiary bearing interest at 8.25% per annum with semiannual payments of
principal and interest through June 2019. The principal balance
outstanding on the mortgage note aggregated $11.3 at March 31,
2010. The mortgage note is collaterized by the CONMED Linvatec
property and facilities.
We have outstanding $115.1
million in 2.50% convertible senior subordinated notes due 2024 (“the
Notes”). During the three months ended March 31, 2009, we repurchased
and retired $9.9 million of the Notes for $7.8 million and recorded a gain on
the early extinguishment of debt of $1.1 million net of the write-offs of $0.1
million in unamortized deferred financing costs and $1.0 million in unamortized
debt discount. The Notes represent subordinated unsecured
obligations and are convertible under certain circumstances, as defined in the
bond indenture, into a combination of cash and CONMED common
stock. Upon conversion, the holder of each Note will receive the
conversion value of the Note payable in cash up to the principal amount of the
Note and CONMED common stock for the Note’s conversion value in excess of such
principal amount. Amounts in excess of the principal amount are at an
initial conversion rate, subject to adjustment, of 26.1849 shares per $1,000
principal amount of the Note (which represents an initial conversion price of
$38.19 per share). As of March 31, 2010, there was no value assigned
to the conversion feature because the Company’s share price was below the
conversion price. The Notes mature on November 15, 2024 and are not
redeemable by us prior to November 15, 2011. Holders of the Notes
have the right to put to us some or all of the Notes for repurchase on November
15, 2011, 2014 and 2019 and, provided the terms of the indenture are satisfied,
we will be required to repurchase those Notes.
The Notes contain two embedded
derivatives. The embedded derivatives are recorded at fair value in
other long-term liabilities and changes in their value are recorded through the
consolidated statements of operations. The embedded derivatives have
a nominal value, and it is our belief that any change in their fair value would
not have a material adverse effect on our business, financial condition, results
of operations or cash flows.
We have an accounts receivable sales
agreement pursuant to which we and certain of our subsidiaries sell on an
ongoing basis certain accounts receivable to CONMED Receivables Corporation
(“CRC”), a wholly-owned, bankruptcy-remote, special-purpose subsidiary of CONMED
Corporation. CRC may in turn sell up to an aggregate $40.0 million
undivided percentage ownership interest in such receivables (the “asset
interest”) to a bank (the “purchaser”). The purchaser’s share of
collections on accounts receivable are calculated as defined in the accounts
receivable sales agreement, as amended. Effectively, collections on
the pool of receivables flow first to the purchaser and then to CRC, but to the
extent that the purchaser’s share of collections may be less than the amount of
the purchaser’s asset interest, there is no recourse to CONMED or CRC for such
shortfall. For receivables which have been sold, CONMED Corporation
and its subsidiaries retain collection and administrative responsibilities as
agent for the purchaser. As of March 31, 2010, the undivided
percentage ownership interest in receivables sold by CRC to the purchaser
aggregated $33.0 million. Effective January 1, 2010, new accounting guidance
requires such receivables sales to be accounted for as additional borrowings and
recorded in the current portion of long term debt rather than as previously
treated as a sale and reflected in the balance sheet as a reduction in accounts
receivable. This guidance is required to be applied on a prospective
basis, therefore the December 31, 2009 balance sheet reflects accounts
receivable sold under the accounts receivable sales agreement as a reduction in
accounts receivable, not as additional borrowings--see Note 13 for further
discussion. Expenses associated with the sale of accounts receivable,
including the purchaser’s financing costs to purchase the accounts receivable
were $0.1 million in the three month period ended March 31, 2010 and are
included in interest expense.
There are certain statistical ratios,
primarily related to sales dilution and losses on accounts receivable, which
must be calculated and maintained on the pool of receivables in order to
continue selling to the purchaser. The pool of receivables is in
compliance with these ratios. Management believes that additional
accounts receivable arising in the normal course of business will be of
sufficient quality and quantity to meet the requirements for sale under the
accounts receivables sales agreement. In the event that new accounts
receivable arising in the normal course of business do not qualify for sale,
then collections on sold receivables will flow to the purchaser rather than
being used to fund new receivable purchases. To the extent that such
collections would not be available to CONMED in the form of new receivables
purchases, we would need to access an alternate source of working capital, such
as our $100 million revolving credit facility. Our accounts
receivable sales agreement, as amended, also requires us to obtain a commitment
(the “purchaser commitment”) from the purchaser to fund the purchase of our
accounts receivable. The purchaser commitment
currently extends through October 29, 2010.
Our Board of Directors has authorized a
share repurchase program under which we may repurchase up to $100.0 million of
our common stock, although no more than $50.0 million in any calendar
year. We did not repurchase any shares during the first quarter of
2010. In the past, we have financed the repurchases and may finance
additional repurchases through the proceeds from the issuance of common stock
under our stock option plans, from operating cash flow and from available
borrowings under our revolving credit facility.
Management believes that cash flow from
operations, including accounts receivable sales, cash and cash equivalents on
hand and available borrowing capacity under our senior credit agreement will be
adequate to meet our anticipated operating working capital requirements, debt
service, funding of capital expenditures and common stock repurchases, if any,
in the foreseeable future.
Restructuring
During the first quarter of 2010, we
began the second phase of our restructuring plan which includes the transfer of
additional production lines from Utica, New York to our manufacturing facility
in Chihuahua, Mexico. We expect the completion of the second phase of
our operational restructuring plan to yield cost savings of approximately $1.0
million to $2.0 million annually beginning in 2011.
As of March 31, 2010, we have incurred
$0.6 million in costs associated with the restructuring. These costs
were charged to cost of goods sold and include severance and other charges
associated with the transfer of production to Mexico.
We estimate the total cost of the
second phase of our restructuring plan will approximate $3.0 million during
2010, including $1.5 million related to employee termination costs and $1.5
million in other restructuring related activities. We expect to include these
restructuring costs in cost of goods sold. The second phase of the
restructuring plan impacts Corporate manufacturing facilities which support
multiple reporting segments. As a result, costs associated with the
second phase of our restructuring plan will be reflected in the Corporate line
within our business segment reporting.
New
accounting pronouncements
See Note 13 to the Consolidated
Condensed Financial Statements for a discussion of new accounting
pronouncements.
Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes
in our primary market risk exposures or in how these exposures are managed
during the three month period ended March 31, 2010. Reference is made
to Item 7A. of our Annual Report on Form 10-K for the year-ended December 31,
2009 for a description of Qualitative and Quantitative Disclosures About Market
Risk.
Item
4. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of
the design and operation of the Company’s disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (“Exchange Act”)) was carried out under the supervision and
with the participation of the Company’s management, including the President and
Chief Executive Officer and the Vice President-Finance and Chief Financial
Officer (“the Certifying Officers”) as of March 31, 2010. Based on
that evaluation, the Certifying Officers concluded that the Company’s disclosure
controls and procedures are effective. There have been no changes in
the Company’s internal control over financial reporting (as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter
ended March 31, 2010 that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
PART
II OTHER INFORMATION
Item
1. LEGAL PROCEEDINGS
Reference is made to Item 3 of the
Company’s Annual Report on Form 10-K for the year-ended December 31, 2009 and to
Note 12 of the Notes to Consolidated Condensed Financial Statements included in
Part I of this Report for a description of certain legal matters.
Item
6. EXHIBITS
Exhibit No.
|
Description of Exhibit
|
|
|
|
|
10.1
|
Change
in Control Severance Agreement for Joseph G. Darling
|
|
|
10.2
|
Change
in Control Severance Agreement for Greg Jones
|
|
|
31.1
|
Certification
of Joseph J. Corasanti pursuant to Rule 13a-14(a) or Rule 15d-14(a), of
the Securities Exchange Act, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
31.2
|
Certification
of Robert D. Shallish, Jr. pursuant to Rule 13a-14(a) or Rule 15d-14(a),
of the Securities Exchange Act, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
32.1
|
Certification
of Joseph J. Corasanti and Robert D.Shallish, Jr. pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
CONMED
CORPORATION
|
|
(Registrant)
|
|
|
|
|
|
|
|
|
Date: May
3, 2010
|
|
|
|
|
|
|
|
|
|
|
/s/
Robert D. Shallish, Jr.
|
|
Robert
D. Shallish, Jr.
|
|
Vice
President – Finance and
|
|
Chief
Financial Officer
|
|
(Principal
Financial Officer)
|
Exhibit
Index
|
|
Sequential
Page
|
Exhibit
|
|
Number
|
|
|
|
10.1
|
Change
in Control Severance Agreement for Joseph G. Darling
|
E-1
|
|
|
|
|
|
|
10.2
|
Change
in Control Severance Agreement for Greg Jones
|
E-11
|
|
|
|
|
|
|
31.1
|
Certification
of Joseph J. Corasanti pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
E-22
|
|
|
|
|
|
|
31.2
|
Certification
of Robert D. Shallish, Jr. pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
the Securities Exchange Act, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
E-23
|
|
|
|
32.1
|
Certification
of Joseph J. Corasanti and Robert D. Shallish, Jr. pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
E-24
|
|
|
|
32