T h e Va l u e O f I n n o v a t i o n
C O N M E D C o r p o r a t i o n A n n u a l R e p o r t 2 0 0 3
1
2
6
Financial Highlights
Letter to Shareholders: The Year in Review
Sales and Distribution: The Connection Between
CONMED and the Customer
8
The Power of Integration
10 New Products: A Continuing Tradition of
Innovation
12 Market for CONMED’s Common Stock and
Related Stockholder Matters
12 Five Year Summary of Selected Financial Data
13 Management’s Discussion and Analysis of
Financial Condition and Results of Operations
19 Report of Independent Auditors
20 Consolidated Balance Sheets
21 Consolidated Statements of Income
22 Consolidated Statements of Shareholders’ Equity
23 Consolidated Statements of Cash Flows
24 Notes to Consolidated Financial Statements
36 Board of Directors, Executive and Senior Officers,
Shareholder Information
annual report 2003
1 /36
Financial Highlights
Net Sales (in $ millions)
376.2
395.9
339.3
428.7
453.1
497.1
71.3
94
100.2
126.6
139.6
95
96
97
98
99
00
01
02
03
Net Income1 (in $ millions)
34.2
32.1
27.2
24.4
17.8
19.3
16.3
14.7
10.9
5.4
94
95
96
97
98
99
00
01
02
03
Shareholders’ Equity (in $ millions)
433.5
386.9
283.6
211.3
230.6
158.6
162.7
182.2
75.0
43.1
94
95
96
97
98
99
00
01
02
03
1Excludes $34 million pre-tax in-process research and development charge in 1997 related to the acquisition of Linvatec Corporation.
2 /36
CONMED corporation
Letter to Shareholders:
the Year in Review
aspect of each of our businesses, and our
In 2003, we invested in virtually every
investments produced value: record
revenues and record net income, excluding
We are encouraged not only by the overall level
of our performance, but also by its breadth: all of
our product lines delivered increased revenues
and earnings. Our orthopedics business posted
unusual charges and credits. The investments
an 8.4% jump, with increases in Arthroscopy and
we made came in several forms: new product
Powered Surgical Instruments. Electrosurgery,
introductions; a strategic acquisition that
one of CONMED’s first product lines, generated
brought recognized brands and key technology
double-digit increases, with Endoscopy posting
pipelines; changes in distribution which added
even larger increases. Likewise, the Patient Care
to the number of "feet on the street" representing
line, CONMED’s other legacy product line,
our products, both in the United States and
delivered positive growth even in the face of
internationally; and a strengthened balance
declining prices.
sheet. Not content to limit our attention to any
one of these areas, we worked on all of them—
Even as we focused on growth in revenues and
and experienced success with each.
earnings in 2003, we continued to invest in our
businesses, to position them for further growth
Financial Performance
in the years ahead. On a corporate level, our
By almost any measure of financial performance,
balance sheet is stronger. Though we started
2003 was a record year for CONMED. We
the year with the $47 million Bionx acquisition,
experienced record sales for the sixteenth
we worked throughout 2003 to reduce our debt,
consecutive year, with revenues growing to
and to reduce our cost of borrowings. By the end
$497 million, an increase of $44 million from
of the year, our debt-to-total-capitalization ratio
the $453 million in sales produced during 2002.
was 38%, its lowest level in five years. Likewise,
We also generated record earnings when
we reduced our interest costs in two separate
measured without unusual charges and credits.
refinancings. In the first, which was completed
Diluted earnings per share on a reported GAAP
in June, we reduced the interest rate on
basis were $1.10 in 2003; without the unusual
$130 million of debt from 9% to a floating rate of
charges or credits, the earnings per share reached
LIBOR plus 2.75% or approximately 4%. In the
$1.51. A reconciliation of our reported GAAP
second refinancing, which closed in December,
earnings per share and our earnings per share
we lowered the rates under our senior credit
without the unusual charges or credits is included
facility by 50 basis points to LIBOR plus 2.25%.
Eugene R. Corasanti
Joseph J. Corasanti
on page 5 of this annual report.
These refinancings permitted us to reduce our
annual report 2003
3 /36
interest costs by approximately $3 million during
including the 5.5 mm UltraCut™ Shaver Blade
2003. We expect that our interest costs will be
and the 4.2 mm Straight Tiger™ Shaver Blade.
even lower in 2004, before considering the effects
of reducing our borrowings through debt
In Powered Surgical Instruments, we introduced
payments or any changes in interest rates.
our PowerPro® Electric II System. We now have
both battery-powered and electric systems, and
New Technology and New Products
will follow shortly with a pneumatic system.
Of course, we were very pleased with these results,
The PowerPro® line of powered surgical
but we were not satisfied. So we continued to
instruments is unique in the market because it
put time and effort into developing other areas.
has been designed to allow the accessories to
For example, we continued to introduce new
work across the full spectrum of power offerings:
products in each of our product lines. Continuing
battery, electric and pneumatic. Customers
our tradition of innovation, the orthopedics group
appreciate the efficiencies associated with such
introduced a series of new offerings during 2003.
a standardized offering.
In Arthroscopy, we introduced the Ultrafix™
Knotless Suture Anchor System designed for
We continued to lead with technology in Imaging.
arthroscopic anterior shoulder instability
We are still the pioneer in autoclavable video
procedures. We also added a new line of
systems, and released our fourth generation
interference screws, the Bioscrew XtraLok™,
3CCD Autoclavable Camera Head. Our new
which is specifically intended for tibial fixation of
1/4" Autoclavable Camera Head has a new look,
soft tissue grafts in ACL and PCL reconstruction.
which is significantly smaller in size and lighter
The new Linvatec SE (Stress Equalization) Graft
in weight, and offers nearly three times the light
Tensioning System™ allows the surgeon to tension
sensitivity compared to our first generation
the individual bundles of a hamstring graft in a
product. We also expanded our line of 3CCD
reproducible manner, reducing the occurrence of
Camera Heads to include a head designed
loose ACL grafts. We also released a new ablation
specifically for use in urological procedures.
device, the LightWave™ in 2003. Utilizing our
electrosurgical expertise, this device has been
Another significant product line release was our
well received in the marketplace. A new suction
GS1000 Series™ Insufflator. Adding to our general
version is currently due for full release in the
surgery offering, it has the latest advances in
second quarter of 2004. We also introduced
functionality, cost-effectiveness and patient safety.
a series of new shaver blade improvements,
Putting features like a newly designed in-line gas
The Value of Innovation: One-Port™
CONMED Corporation offers its customers one of
the medical industry’s most diverse selections of
innovative, state-of-the-art orthopedic, specialty,
and general surgical devices and systems.
CONMED’s various business units offer:
• Arthroscopy instruments and implants for the repair
of soft tissue joint injuries.
• Powered Surgical Instruments, including drills and
saws, for orthopedic and other specialty surgery on
bone.
• Patient Care products that include a range of patient
monitoring devices and other critical care products.
• Endoscopy instrumentation for laparoscopic
surgical procedures.
• Electrosurgery systems with disposable, reusable
and reposable products for cutting and coagulation
at the surgical site.
• Integrated Systems covering operating room control
systems and ceiling mounted devices for various
types of surgical equipment.
Surgeons and medical personnel throughout the world
know and trust CONMED products and services.
CONMED’s product lines are the synthesis of a
technology alliance strategy designed to deliver to its
customers innovation, quality and selection with the
added convenience of purchasing from a single source.
4/36
CONMED corporation
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5
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4
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3
2
1
The CONMED Management Team
1 Eugene R. Corasanti
Joseph J. Corasanti
2
3 William W. Abraham
4 Gerald G. Woodard
5 Darko Spoljaric
6 Terence M. Berge
7 Heather L. Cohen
8 Robert D. Shallish, Jr.
9 Russ Gill
10 Luke A. Pomilio
11 Frank R. Williams
12 Daniel S. Jonas
13 Alexander R. Jones
14 Elizabeth A. Bowers
15 John J. Stotts
16 Marc Caron
Our management team has significant
experience in the medical device arena,
in some cases going back to the founding
of CONMED and in others going back equal
periods with other medical device
companies. While each member of the team
has an individual mission—whether to grow
sales of electrosurgery, endoscopy, orthopedic
or patient care products—each member of
the team is also cognizant of the overall
corporate goals.
Our business model requires all members
of the team to work together. Some of our
marketing programs allow a single sales
representative to offer our entire product
offering to a single account. Some of the
technologies we evaluate apply to more than
one product group.
Our management team has been remarkably
stable, and has overseen our growth from
a single-line manufacturer at one site to a
company with revenues expected to exceed
a half billion dollars this year. While we are
pleased with our progress thus far, our
management team sees more opportunity
ahead.
warmer, humidification system and dual port
of the year, we completed a new distribution
access into surgeons’ hands makes performing
agreement which will take the Patient Care
even the most complicated endoscopy procedures
division into the pulse oximetry business.
seem easier. To complement our instruments for
This provides proven technology to our customers
laparoscopic surgery, we also released a line of
at significant savings, and represents an
companion 10mm Extended Length Optical
important opportunity for CONMED.
Scopes.
We are committed to continuing our pace of
Our Electrosurgery group introduced a new
new product introductions in 2004 and beyond,
generator, the System 5000™, which redefined
as evidenced by the introduction of 14 new
the industry standard. Among other features,
products at the American Academy of Orthopedic
it provides a new control system, which we refer
Surgeons Annual Conference in early March 2004.
to as ESP™ or Energy Synchronous Processing™,
new modes and unparalleled electrical control.
Distribution
We worked to improve our distribution in 2003.
Our Endoscopy group introduced the OnePort™,
In our orthopedics business, we increased the
the most ergonomic trocar on the market.
number of domestic sales representatives
It employs the latest in trocar technology to
handling our products from 180 at the beginning
provide surgeons with flexibility and versatility
of the year to 230 by December 2003. Similarly,
and is able to accommodate a variety of
with our Electrosurgery, Endoscopy, and Patient
instruments and procedures. We also introduced
Care sales forces, as well as our international
the Permaclip™ reposable clip applier, which
sales representatives, we continued the extensive
combines the advantages of a reusable handle
training programs we had started in 2002,
with disposable clip cartridge to deliver safety
with the result that more physicians are learning
and effectiveness.
about the products we offer. This training effort
has continued to produce strong results.
Patient Care introduced a collection of new
International sales have increased in absolute
products, including a series of cardiac stimulation
and relative terms. Sales outside the United
electrodes for use with defibrillators, patient
States reached record levels: $164 million
positioners for use during surgery, non-invasive
for 2003, representing 33% of total revenues,
blood pressure cuffs and sterile tape. At the end
the highest level since the company’s founding.
annual report 2003
5 /36
“By almost any measure
of financial performance,
2003 was a record year for CONMED.”
Acquisitions
is fundamentally sound. Our management team
We continued our string of acquisitions, with
is solid, and our focus is sharp.
one significant business purchased during 2003.
Reconciliation of Reported Net Income to Net Income
Before Unusual Items2
(In thousands except per share amounts)
Twelve months ended December 31,
2002
2003
Our acquisition of Bionx Implants improved
We are determined to execute our strategy with
Reported net income
$ 34,151
$ 32,082
our position in the procedure-specific area
persistence and attention to detail. Our best days
of Arthroscopy with the Meniscus Arrow™,
lie before us. As always, we thank you for your
a bioabsorbable implant for meniscal repairs
continued trust and support.
Eugene R. Corasanti
Chairman of the Board of Directors,
Chief Executive Officer
Joseph J. Corasanti
President,
Chief Operating Officer
made with patented self-reinforced polymer
technology, as well as other resorbable polymer
implants, screws, pins and arrows. Bionx also
came with a strong pipeline of products
in development, and a state-of-the-art
manufacturing facility in Finland. We expect to
expand the use of the proprietary manufacturing
and processing techniques into other implantable
products in the future.
Our Employees
Our employees at every level of the Company—
from manufacturing and regulatory affairs to
customer service and sales—have repeatedly
proven their dedication to our corporate goals.
We recognize and applaud their hard work and
efforts throughout 2003. Without them, we could
not have achieved the results we produced
during 2003.
The Outlook
We look forward to the future. We believe our
business model, which produced strong growth
in our revenues and operations during 2003,
Acquisition-related costs included
in costs of sales
Write-off of purchased in-process
research and development assets
—
—
1,253
7,900
Gain on settlement of a contractual dispute
— (9,000)
Pension settlement loss
Other acquisition-related costs
—
—
Loss on settlement of a patent dispute
2,000
2,839
3,244
—
Loss on early extinguishment of debt
Total unusual items
Provision (benefit) for income taxes
on unusual items
Net income before unusual items
1,475
______
8,078
______
3,475
______
14,314
______
(1,251)
______
(2,309)
______
$ 36,375
______
______
$ 44,087
______
______
Per share data:
Reported net income
Basic
Diluted
Net income before unusual items
Basic
Diluted
$
$
$
$
1.25
1.23
1.33
1.31
1.11
1.10
1.52
1.51
2 This table is provided to reconcile certain financial disclosures referenced
in the Letter to Shareholders. Management has provided this
reconciliation of net income before unusual items as an additional
measure that investors can use to evaluate operating performance.
Management believes this reconciliation provides a useful presentation of
operating performance.
6 /36
CONMED corporation
Sales and Distribution:
the Connection Between CONMED and the Customer
Our products do not sell themselves. Our customers know CONMED through the sales
professionals who represent our products. We have a number of sales representatives who focus
on each of our product lines, and the relationship between CONMED and its customers grows and
develops through these individuals. There are over 360 sales professionals in the United States
selling our products: 230 covering Arthroscopy and Powered Surgical Instruments, 12 in Corporate
Sales and Integrated Systems, 30 in Endoscopy, 30 in Patient Care and 60 in Electrosurgery.
Worldwide, including the sales representatives of our distributors, the number is reaching 1,000.
While numbers are important, they are not the only measure of the effectiveness of our sales
efforts. Quality is as important as quantity, and the quality of our sales professionals is first-rate.
All our sales representatives participate in an extensive initial training program, and receive
regular courses, seminars and instruction on existing products, new products and how to listen
to customers.
We are committed to this continual investment in our sales professionals. In order for our
relationships with customers to be strong, we must know what our customers need today, and
must anticipate what their needs will be tomorrow.
Our "customer" can be a surgeon, a hospital, a same-day surgery center, a materials manager, a
government, a distributor, a group purchasing organization or any other number of people and
entities. Just as our customers do not fit neatly into a single profile, their needs vary. Our
customers do not expect a one-size-fits-all approach. We strive to offer a complete range of
products that can satisfy any customer preference.
Our product offering reflects the variety of our customers’ needs. For example, in our Powered
Instruments line, we offer all three varieties of power: battery, electric and pneumatic. In
Endoscopy, we offer disposables, reposables and reusables. In Electrosurgery, we offer generators,
pencils, pads and accessories.
annual report 2003
7 /36
The breadth of our product lines is carefully planned and developed by listening to our
customers. It has been the driving force for our research and development efforts, as well as our
acquisitions planning and strategic distribution arrangements.
The quality of the relationship between the customer and the sales professional depends on
the sales professional’s ability to deliver on commitments: the commitment to deliver product on
time, the commitment to provide products of the highest quality, and the commitment to deliver
value, in price and performance. At CONMED, we honor these commitments each and every day
by offering a wide range of solutions to meet the needs of all our customers.
Domestic/International Sales Breakdown
(in $ millions)
International Sales
Domestic Sales
Total
Sales $
500
400
300
200
100
Year
94
95
96
97
98
99
00
01
02
03
8 /36
CONMED corporation
The Power
of Integration
CONMED brings the power of integration to the operating
room, ICU and other critical care patient environments. Our
focus is on greater flexibility, better access, ergonomics, staff
safety and patient care.
The Digital SMART OR™ System is a complete turnkey solution
designed to offer maximum benefit to surgeons,nurses and
administrators.To maximize procedural efficiency,the Digital
SMART OR™ System offers centralized room control including
data management,communication and networking capabilities
via a safe,reliable and easy-to-use interface.
This unique OR solution also offers unequalled flexibility. Based on a truly modular design, the system can
be adapted to the needs of multiple surgeons and procedures at the touch of a button. The Digital SMART
OR™ System is also readily scalable, making future upgrades simple and cost-effective.
At the heart of the Digital SMART OR™ System is the Nurse’s Assistant® Centralized Touch Screen OR Control
System. This unique platform offers centralized control of the entire OR from a single, easy-to-use touch
screen panel. Cameras, insufflators, surgical lighting, electrosurgical generators and video/web conferencing
equipment can be controlled from the nurse’s workstation via an intuitive interface. The Nurse’s Assistant®
system increases OR team efficiency and return on investment.
The CONMED Smart System simplifies, organizes and easily adjusts to the user’s needs and requirements in
the OR, ICU, PACU or any other critical patient care area.
annual report 2003
9 /36
10 /36
CONMED corporation
New Products:
a Continuing Tradition of Innovation
CONMED began selling medical devices in the
products helped make 2003 a year of record
early 1970’s with a single-use ECG monitoring
revenues.
electrode that we developed ourselves. In those
early years, our business grew by developing
innovative products that met customer needs.
In the case of the ECG electrode, our product
helped reduce hospital costs and cross
infections from repeated use of monitoring
electrodes. While we have grown dramatically
since that first product was sold, we still
recognize the value of product innovation for
the continued growth and success of our
business.
For 2004 and beyond, we will continue to invest
in research and development activities.
Although the majority of these research
activities are directed to our orthopedic product
lines, we also devote resources to Electrosurgery,
Endoscopy and Patient Care. Already in early
2004 we have introduced 14 new orthopedic
products at the 2004 American Academy of
Orthopedic Surgeons Conference. These
orthopedic products, and others which
are expected to be available during 2004, will
Several new products helped us grow in 2003.
continue to enhance our already broad product
The PowerPro® Powered Instrument battery
offering and help us maintain our position of
system gained traction in 2003 and was largely
leadership in the medical device industry.
responsible for the improvement in our Powered
Instrument business compared to 2002. The
Electrosurgery product line’s growth in 2003
of 11% was a result of the new System 5000™
electrosurgical generator’s sales. In Arthroscopy,
we experienced higher growth in the fourth
quarter of 2003 as a result of the introduction
of our latest generation of autoclavable video
camera. These and other newly introduced
annual report 2003
11 /36
10K™ Fluid Pump
3CCD Autoclavable Video Camera
PowerPro® Pneumatic
SmartNail®
Pre-Loaded Bio-Anchor®
System 5000™
Impact™ Suture Anchor
PowerPro® Battery
UltraCut® Blade
12 /36
CONMED corporation
Market for CONMED’s Common Stock
and Related Stockholder Matters
Our common stock, par value $.01 per share, is traded on the Nasdaq Stock Market (symbol - CNMD). At December 31, 2003, there were 1,166 registered
holders of our common stock and approximately 6,000 accounts held in "street name".
The following table sets forth quarterly high and low sales prices for the years ended December 31, 2002 and 2003, as reported by the Nasdaq Stock Market.
2002
______________________
2003
______________________
Low
Period
_____________________________________________________________________________________________
$ 13.95
First Quarter
16.69
Second Quarter
18.21
Third Quarter
19.52
Fourth Quarter
High
$ 20.74
20.83
22.00
24.30
Low
$ 19.29
22.25
15.60
18.10
High
$ 25.00
27.00
22.72
21.52
We did not pay cash dividends on our common stock during 2002 and 2003. Our Board of Directors presently intends to retain future earnings to finance the
development of our business and does not intend to declare cash dividends. Should this policy change, the declaration of dividends will be determined by
the Board in light of conditions then existing, including our financial requirements and condition and the limitation on the declaration and payment of cash
dividends contained in debt agreements.
Five Year Summary of Selected Financial Data
(In thousands, except per share data)
1999
Years Ended December 31,
_____________________________________________________________________________________________________________
Consolidated Statement of Income(1):
Net sales
Income from operations
Net income(2)(3)
$ 395,873
64,464
19,314
$ 453,062
79,349
34,151
$ 428,722
68,958
24,406
$ 376,226
74,796
27,159
$ 497,130
79,955
$ 32,082
2001
2000
2003
2002
$
$
$
$
Earnings per share(4)
Basic
Basic adjusted for SFAS 142(3)
Diluted
Diluted adjusted for SFAS 142(3)
Weighted average number of common shares in calculating(4):
Basic earnings per share
Diluted earnings per share
Other Financial Data:
Depreciation and amortization
Capital expenditures
Balance Sheet Data (at period end):
Cash and cash equivalents
Total assets
Long-term debt (including current portion)
Total shareholders’ equity
$
1.19
________
________
$
1.41
________
________
$
1.17
________
________
$
1.39
________
________
$
.84
________
________
$
1.08
________
________
$
.83
________
________
$
1.07
________
________
$
1.02
________
________
$
1.25
________
________
$
1.00
________
________
$
1.23
________
________
$
1.25
________
________
$
1.25
________
________
$
1.23
________
________
$
1.23
________
________
22,862
________
________
23,145
________
________
22,967
________
________
23,271
________
________
24,045
________
________
24,401
________
________
27,337
________
________
27,827
________
________
$
1.11
_______
_______
$
1.11
_______
_______
$
1.10
_______
_______
$
1.10
_______
_______
28,930
_______
_______
29,256
_______
_______
$
$
26,291
9,352
3,747
662,161
394,669
211,261
$
$
29,487
14,050
3,470
679,571
378,748
230,603
$
$
30,148
14,443
1,402
701,608
335,929
283,634
$
$
22,370
13,384
$ 24,854
9,309
5,626
742,140
257,387
386,939
$
5,986
805,058
264,591
433,490
(1) Includes, based on the purchase method of accounting, the results of operations of acquired businesses from the date of acquisition. See additional discussion in Note 2 to the consolidated financial
statements.
(2) Includes acquisition, debt refinancing and other unusual charges and credits. See additional discussion in Notes 2, 6 and 12 to the consolidated financial statements.
(3) Effective January 1, 2002, the provisions of SFAS 142 were adopted relative to the cessation of amortization for goodwill and certain intangibles. Had we accounted for goodwill and certain intangibles
in accordance with SFAS 142 for all periods presented, net income would have been $32.2 million in 1999, $24.9 million in 2000 and $30.1 million in 2001.
(4) Earnings per share and the number of shares used in the calculation of earnings per share have been restated to retroactively reflect a three-for-two split of our common stock effected in the form of a
common stock dividend and paid on September 7, 2001.
annual report 2003
13 /36
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion should be read in conjunction with the Five Year
Summary of Selected Financial Data and our consolidated financial
statements, which are included elsewhere in this Annual Report.
Overview of CONMED Corporation
CONMED Corporation ("CONMED", the "Company", "we" or "us") is a
medical technology manufacturing company with six major product lines.
These product lines and the percentage of consolidated revenues associated
with each of them, are as follows:
Arthroscopy
Powered Surgical Instruments
Electrosurgery
Patient Care
Endoscopy
Integrated Operating Room Systems
Consolidated Net Sales
2001
36%
27
16
16
5
—
_____
100%
_____
_____
2002
36%
25
15
16
8
—
_____
100%
_____
_____
2003
36%
25
15
14
9
1
_____
100%
_____
_____
Most of our products are used in surgeries with about 75% of our sales
coming from sales of disposable products. We manufacture most of our
products in plants in the United States. We sell in the United States and
internationally both direct to customers and through distributors.
International sales approximated 29% of total net sales in 2001 and 2002
and 33% of total net sales in 2003.
Business Environment, Opportunities and Challenges
As a result of an aging population and improved surgical procedures, we
believe the overall market for our products is growing. We intend to
increase our overall market share by leveraging our entire portfolio of
products to increase sales and profits. An example of this is our entry in
2002 into the business of integrated operating room systems and
equipment. We can now offer "one-stop shopping" to our customers by
designing and installing integrated operating rooms and then providing the
capital and disposable products for use in them.
Where we believe it makes sense, we plan to continue to pursue
acquisitions which enable us to fill gaps in or strengthen our product lines.
In addition, we may enter into agreements which enable us to quickly and
inexpensively expand our product lines and leverage our distribution
channels without an acquisition. An example of this is the agreement which
we entered in December 2003 with OSI Systems, Inc., and its subsidiary,
Dolphin Medical, Inc., under which we are now the exclusive North
American distributor for a full line of pulse oximetry products. These
products will become part of our Patient Care product line.
Certain of our products, particularly our line of surgical suction instruments
and tubing and our line of ECG electrodes, are more commodity in nature,
with limited opportunity for product differentiation. These products
compete in very mature, price sensitive markets. As a result, while sales
volumes are increasing, we have experienced and expect we will continue to
experience pricing and margin pressures in these product lines. We believe
we can continue to profitably compete in these product lines by maintaining
and improving upon our low cost manufacturing structure. In addition, we
expect to continue to use the cash generated from sales of these relatively
low margin, low investment products to invest in, improve and expand our
higher margin product lines.
Critical Accounting Estimates
Preparation of our financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Note 1 to the consolidated financial statements describes
the 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.
Revenue Recognition
We recognize revenue upon shipment of product and passage of title to our
customers. Factors considered in our revenue recognition policy are as
follows:
• 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. 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 terms of the commitment agreements.
• Product returns are only accepted at the discretion of the Company and in
keeping with our "Returned Goods Policy". Product returns have not
been significant historically. We accrue for sales returns, rebates and
allowances based upon analysis of historical customer returns and
credits, rebates, discounts and current market conditions.
• The terms of the Company's sales to customers do not involve any
obligations for the Company to perform future services. Limited
warranties are generally provided for capital equipment sales and
provisions for warranty are provided at the time of product shipment
based upon analysis of historical data.
• Amounts billed to customers related to shipping and handling are
included in net sales. Shipping and handling costs of $8.6 million,
$7.5 million and $8.3 million for the years ended December 31, 2001,
2002 and 2003, respectively, 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 the allowance for doubtful accounts of $1.7 million
at December 31, 2003 is adequate to provide for any probable losses
from accounts receivable.
Inventory Reserves
We maintain reserves for excess and obsolete inventory resulting from the
potential 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 cause our products to become obsolete. We
make estimates regarding the future recoverability of the costs of our
14 /36
CONMED corporation
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.
Business Acquisitions
We completed several acquisitions in 2003, including the Bionx acquisition
with a purchase price of $47.0 million, and have a history of growth
through acquisitions. The assets and liabilities of acquired businesses are
recorded under the purchase method at their estimated fair values at the
dates 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 $290.6 million and other intangible assets of $194.0 million as
of December 31, 2003.
In accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," ("SFAS 142"), goodwill and
intangible assets deemed to have indefinite lives are not amortized, but are
subject to at least annual impairment testing. The identification and
measurement of goodwill impairment involves the estimation of the fair
value of our business. The 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 contemplate other valuation techniques. Future cash flows can 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.
Intangible assets with a finite life are amortized over the estimated useful life
of the asset. Intangible assets which continue to be subject to amortization
are also evaluated to determine whether events and circumstances warrant a
revision to the remaining period of amortization. An intangible asset is
determined to be impaired when estimated future cash flows indicate the
carrying amount of the asset may not be recoverable. Although no goodwill
or other intangible asset impairment has been recorded to date, there can be
no assurances that future impairment will not occur.
In connection with the Bionx acquisition, significant estimates were made in
the $7.9 million valuation of the purchased in-process research and
development assets. The purchased in-process research and development
value relates to next generation arthroscopy products, which have been or
are expected to be released between the second quarter of 2003 and fourth
quarter of 2004. The acquired projects include enhancements and
upgrades to existing device technology, introduction of new device
functionality and the development of new materials technology for
arthroscopic applications.
The value of the in-process research and development was calculated using
a discounted cash flow analysis of the anticipated net cash flow stream
associated with the in-process technology of the related product sales. The
estimated net cash flows were discounted using a discount rate of 22%,
which was based on the weighted-average cost of capital for publicly-traded
companies within the medical device industry and adjusted for the stage of
completion of each of the in-process research and development projects.
The risk and return considerations surrounding the stage of completion
were based on costs, man-hours and complexity of the work completed
versus to be completed and other risks associated with achieving
technological feasibility. In total, these projects were approximately 40%
complete as of the acquisition date. The total budgeted costs for the
projects were approximately $5.5 million and the remaining costs to
complete these projects were approximately $3.3 million as of the
acquisition date.
The major risks and uncertainties associated with the timely and successful
completion of these projects consist of the ability to confirm the safety and
efficacy of the technologies and products based on the data from clinical
trials and obtaining the necessary regulatory approvals. In addition, no
assurance can be given that the underlying assumptions used to forecast
the cash flows or the timely and successful completion of such projects will
materialize, as estimated. For these reasons, among others, actual results
may vary significantly from the estimated results.
See Note 2 to the consolidated financial statements for further discussion.
Pension Plans
We sponsor three defined benefit pension plans covering substantially all
our employees. These pension plans were merged effective January 1,
2004. Major assumptions used in the accounting for the plans include the
discount rate, expected return on plan assets and rate of increase in
employee compensation levels. Assumptions are determined based on
Company data and appropriate market indicators, and are evaluated each
year as of the plan’s measurement date. A change in any of these
assumptions would have an effect on net periodic pension benefit costs
reported in the consolidated financial statements.
Lower market interest rates have caused us to lower the discount rate used
in determining pension expense from 6.75% in 2003 to 6.25% in 2004.
This change in assumption will result in higher pension expense in 2004.
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. As a result of funding the maximum deductible pension
contributions in 2003, pension plan assets have increased substantially,
which will result in higher expected returns and decreased pension expense
in 2004.
Based on these and other factors, 2004 pension expense is estimated at
approximately $5.0 million. Actual expense may vary significantly from
this estimate.
See Note 10 to the consolidated financial statements for further discussion.
Income Taxes
The recorded future tax benefit arising from net deductible temporary
differences and tax carryforwards is approximately $15.5 million at
December 31, 2003. Management believes that our earnings during the
periods when the temporary differences become deductible will be sufficient
to realize the related future income tax benefits.
We have established a valuation allowance to reflect the uncertainty of
realizing the benefits of certain net operating loss carryforwards recognized
in connection with the Bionx acquisition. 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 can be
impacted by changes to tax laws, changes to statutory tax rates and future
taxable income levels. In the event we were to determine that we would not
be able to realize all or a portion of our deferred tax assets in the future, we
would reduce such amounts through a charge to income in the period that
such determination was made.
See Note 7 to the consolidated financial statements for further discussion.
annual report 2003
15 /36
Results of Operations
The following table presents, as a percentage of net sales, certain categories
included in our consolidated statements of income for the periods indicated:
Years Ended December 31,
2001
2002
2003
Net sales
Cost of sales
Gross margin
Selling and administrative expense
Research and development expense
Write-off of purchased IPRD
Other expense (income)
Income from operations
Loss on early extinguishment of debt
Interest expense
Income before income taxes
Provision for income taxes
Net income
2003 Compared to 2002
100.0% 100.0% 100.0%
47.7
52.3
32.8
3.5
—
—
16.0
—
7.2
8.8
3.1
5.7%
47.8
47.7
______ ______ ______
52.2
52.3
31.7
30.8
3.4
3.6
1.7
—
(0.6)
0.4
______ ______ ______
16.0
17.5
1.6
0.3
3.7
5.5
______ ______ ______
10.7
11.7
4.2
4.2
______ ______ ______
6.5%
7.5%
______ ______ ______
______ ______ ______
Sales for 2003 were $497.1 million, an increase of $44.0 million (9.7%)
compared to sales of $453.1 million in 2002. The acquisition of Bionx
Implants, Inc. in March 2003 (the "Bionx acquisition") accounted for
$12.6 million of the increase, the acquisition of CORE Dynamics, Inc. in
December 2002 (the "CORE acquisition") accounted for $7.2 million of the
increase and favorable foreign currency exchange rates accounted for
$10.8 million of the increase. The Bionx and CORE acquisitions are
described more fully in Note 2 to the consolidated financial statements.
• Arthroscopy sales increased $15.5 million (9.6%) in 2003 to
$177.4 million from $161.9 million in 2002, largely as a result of the
Bionx acquisition.
• Powered surgical instrument sales increased $7.7 million (6.7%) in 2003
to $122.0 million from $114.3 million in 2002, largely on increased sales
of our new PowerPro® battery-powered instrument product line.
• Patient care sales increased $0.3 million (0.4%) in 2003 to $70.0 million
from $69.7 million in 2002 as sales of our ECG and surgical suction
product lines continue to face significant competition and pricing
pressures.
• Electrosurgery sales increased $7.6 million (10.9%) in 2003 to
$77.3 million from $69.7 million in 2002, as a result of strong sales of
our new System 5000® electrosurgical generator.
• Endoscopy sales increased $9.0 million (24.5%) in 2003 to $45.8 million
from $36.8 million in 2002, largely as a result of the CORE acquisition.
• Integrated operating room systems sales for 2003 were $4.6 million as a
result of a full year of the two acquisitions comprising this product line as
compared to $0.7 million for the last two months of 2002.
Cost of sales increased to $237.4 million in 2003 compared to
$215.9 million in 2002, primarily as a result of the increased sales volumes
described above. Gross margin percentage decreased slightly to 52.2%
in 2003 as compared to 52.3% in 2002. As discussed in Note 2 to our
consolidated financial statements, during 2003, we incurred $1.3 million in
acquisition-related charges which are included in cost of sales. Additionally,
as noted above, our ECG and surgical suction product lines continue to face
significant competition and pricing pressures resulting in a lower gross
margin in these product lines.
Selling and administrative expense increased to $157.5 million in 2003 as
compared to $139.7 million in 2002. As a percentage of sales, selling and
administrative expense totaled 31.7% in 2003 compared to 30.8% in 2002.
The increase in selling and administrative expense as a percentage of sales
is due largely to the transition to a larger, independent sales agent based
sales force for our arthroscopy and powered surgical instrument product
lines. During 2003, we restructured our arthroscopy and powered surgical
instrument sales force by increasing our domestic sales force from 180 to
230 sales representatives. The increase is part of our integration plan for the
Bionx acquisition. As part of the sales force restructuring, we converted 90
direct employee sales representatives into nine independent sales agent
groups. As a result of this restructuring, we now have 18 exclusive sales
agent groups managing 230 arthroscopy and powered surgical instrument
sales representatives. The transition in the sales force and its greater
number of sales staff is expected to result in higher future sales growth in
our arthroscopy and powered surgical instrument product lines.
Research and development expense totaled $17.3 million in 2003 compared
to $16.1 million in 2002. This increase is largely due to the Bionx
acquisition and represents continued research and development efforts
focused primarily on product development in the arthroscopy and powered
surgical instrument product lines. As a percentage of sales, research and
development was 3.4%, consistent with 3.6% in 2002.
We wrote off purchased in-process research and development assets of
$7.9 million in connection with the Bionx acquisition in the first quarter of
2003. This item is explained in further detail in Note 2 to the consolidated
financial statements.
Other income in 2003 consists of a $9.0 million gain on settlement of a
contractual dispute offset by pension settlement losses of $2.8 million and
acquisition-related charges of $3.2 million. Other expense incurred during
2002 consists of a $2.0 million loss on the settlement of a patent dispute.
These items are explained in further detail in Note 12 to the consolidated
financial statements.
Losses on early extinguishment of debt of $8.1 million in 2003 and
$1.5 million in 2002 are related to the refinancing of our debt agreements.
These items are explained in further detail in Note 6 to the consolidated
financial statements.
Interest expense in 2003 was $18.9 million compared to $24.5 million in
2002. The decrease in interest expense is primarily a result of lower
weighted average borrowings outstanding in 2003 as compared to 2002 as
well as lower weighted average interest rates on our borrowings, (inclusive of
the implicit finance charge on our accounts receivable sale facility), which
decreased to 5.96% in 2003 as compared to 7.55%, in 2002, as the 9.0%
Senior Subordinated Notes (the "Notes") were retired in favor of lower cost
bank debt as discussed in Note 6 to the consolidated financial statements.
Provision for income taxes has been recorded at an effective rate of 39.5%
in 2003 and 36.0% in 2002. The increase in effective rate is due to the
nondeductibility of the in-process research and development charge.
A reconciliation of the United States statutory income tax rate to our effective
tax rate is included in Note 7 to the consolidated financial statements.
2002 Compared to 2001
Sales for 2002 were $453.1 million, an increase of $24.4 million (5.7%)
compared to sales of $428.7 million in 2001. The acquisition of Imagyn
Medical Technologies, Inc. in July 2001 (the "Imagyn acquisition")
accounted for $10.4 million of the increase and favorable foreign currency
exchange rates accounted for $2.0 million of the increase. The Imagyn
acquisition is described more fully in Note 2 to the consolidated financial
statements.
16 /36
CONMED corporation
• Arthroscopy sales increased $6.3 million (4.0%) in 2002 to
$161.9 million from $155.6 million in 2001, on strong sales of
disposable products and video equipment.
well as lower weighted average interest rates on our borrowings, (inclusive of
the implicit finance charge on our accounts receivable sale facility), which
decreased to 7.55% in 2002 as compared to 8.08% in 2001.
• Powered surgical instrument sales remained flat at $114.3 million in 2002
and 2001. We believe the weakness in sales in the powered surgical
instrument product line is a result of our aging battery-powered product
offering which was replaced in March 2002 with our new PowerPro®
battery-powered instrument product line. We believe that as PowerPro® is
established in the marketplace, as was evidenced in 2003, it will enable us
to resume overall growth in powered surgical instrument sales.
• Patient care sales increased $0.6 million (0.9%) in 2002 to $69.7 million
from $69.1 million in 2001 as increases in sales of our ECG and other
patient care product lines offset declines in sales of our surgical suction
product lines which continue to face significant competition and pricing
pressures.
• Electrosurgery sales increased $2.8 million (4.2%) in 2002 to
$69.7 million from $66.9 million in 2001, driven by increases in
disposable product sales.
• Endoscopy sales increased $14.0 million (61.4%) in 2002 to $36.8 million
from $22.8 million in 2001. The increase is largely a result of the Imagyn
acquisition.
• Integrated operating room systems sales for 2002 were $0.7 million as a
result of two acquisitions in the fourth quarter of 2002.
Cost of sales increased to $215.9 million in 2002 compared to
$204.4 million in 2001, primarily as a result of the increased sales volumes
described above. Gross margin percentage remained consistent at 52.3%
in 2002 as compared with 2001. As discussed in Note 2 to our consolidated
financial statements, during 2001 we incurred $1.6 million in acquisition-
related charges which are included in cost of sales. During 2002, we sold
sample PowerPro® product, pursuant to a distribution agreement, at gross
margins lower than the margins realized for units sold to end-user
customers. In addition, during 2002 we experienced certain unfavorable
production variances.
Selling and administrative expense decreased to $139.7 million in 2002
as compared to $140.6 million in 2001. During 2002, selling and
administrative expense decreased by approximately $8.8 million,
before income taxes, as a result of the adoption of SFAS 142 and the
discontinuation of amortization of goodwill and certain intangibles. As a
percentage of sales, selling and administrative expense totaled 30.8% in
2002 compared to 32.8% in 2001. The decrease in selling and
administrative expense as a percentage of sales is due to reduced
amortization expense as a result of the adoption of SFAS 142.
Research and development expense totaled $16.1 million in 2002 compared
to $14.8 million in 2001. This increase represents continued research and
development efforts primarily focused on product development in the
electrosurgery, arthroscopy and powered surgical instrument product lines.
As a percentage of sales, research and development was 3.6%, consistent
with 3.5% in 2001.
Other expense incurred during 2002 consists of a $2.0 million loss on the
settlement of a patent dispute. This charge is explained in further detail in
Note 12 to the consolidated financial statements.
Losses on early extinguishment of debt of $1.5 million in 2002 are related to
the refinancing of our debt agreements. These items are explained in further
detail in Note 6 to the consolidated financial statements.
Interest expense in 2002 was $24.5 million compared to $30.8 million in
2001. The decrease in interest expense is primarily a result of lower
weighted average borrowings outstanding in 2002 as compared to 2001 as
Provision for income taxes has been recorded at an effective rate of 36% for
2002 and 2001. A reconciliation of the United States statutory income tax
rate to our effective tax rate is included in Note 7 to the consolidated financial
statements.
Liquidity and Capital Resources
Cash generated from our operations, including sales of accounts receivable
and borrowings under our revolving credit facility, provide the working
capital for our operations, debt service under our senior credit agreement
and the funding of our capital expenditures. In addition, we use term
borrowings, including:
• borrowings under our senior credit agreement;
• borrowings under separate loan facilities, in the case of real property
acquisitions, to finance our acquisitions.
Cash Provided by Operations
Our net working capital position was $146.3 million at December 31, 2003.
Net cash provided by operations increased to $58.0 million in the year ended
December 31, 2003 compared to $44.9 million in 2002.
Net cash provided by operations in 2003 was positively impacted by the
following: depreciation, amortization and deferred income taxes; the non-
cash write-off of the remaining unamortized deferred financing costs related
to the extinguishment of our 9% senior subordinated notes; the non-cash
write-off of purchased in-process research and development assets; and
increased sales of accounts receivable and an increase in income taxes
payable.
Net cash provided by operations in 2003 was negatively impacted by the
following: $11.1 million in pension contributions in excess of the
$8.4 million in net periodic pension benefit cost recognized in the
consolidated statement of income made to reduce the underfunding of our
pension plans; the increase in working capital as a result of the Bionx
acquisition (discussed in Note 2 to the consolidated financial statements);
increases in accounts receivable and inventory as a result of growth in our
business; and decreases in accounts payable and accrued interest, primarily
related to the timing of the payment of these liabilities.
Investing Cash Flows
Net cash used by investing activities in 2003 included $55.1 million in
payments related to business acquisitions, net of cash acquired, most of
which is related to the Bionx acquisition and the remainder related to several
smaller acquisitions as discussed in Note 2 to the consolidated financial
statements.
Capital expenditures in 2003 were $9.3 million compared to $13.4 million in
2002. The decrease in capital expenditures compared to a year ago is a
result of the completion of several large capital projects. Capital
expenditures representing the ongoing capital investment requirements of
our business are expected to continue at the rate of approximately $9.0 to
$12.0 million annually.
Financing Cash Flows
Financing activities in 2003 consist primarily of $160.0 million in
borrowings under the senior credit agreement and the retirement, primarily in
June 2003, of $130.0 million in 9.0% senior subordinated notes (discussed
in Note 6 to the consolidated financial statements). In addition to the
retirement of the $130.0 million in Notes, the Company repaid an additional
$22.8 million in borrowings originating largely as a result of the Bionx
acquisition (discussed in Note 2 to the consolidated financial statements).
Annual savings in interest costs based on December 31, 2003 borrowing
and interest rate levels as a result of the retirement of the Notes is estimated
at approximately $6.0 million.
Our senior credit agreement consists of a $100 million revolving credit
facility and a $260 million term loan. There were no borrowings outstanding
on the revolving credit facility as of December 31, 2003. The balance
outstanding on the term loan facility at December 31, 2003 was
$243.0 million. The term loan facility extends for approximately 6 years,
with scheduled principal payments of $2.6 million annually through
December 2007 increasing to $71.0 million in 2008 and the remaining
balance outstanding due in December 2009. We may be required, under
certain circumstances, to make additional principal payments based on
excess cash flow as defined in the amended senior credit agreement.
No such payments were required for the year ended December 31, 2003.
Interest rates on the term facility are LIBOR plus 2.25% (3.41% at
December 31, 2003). Interest rates on the revolving credit facility are LIBOR
plus 2.50% (3.66% at December 31, 2003).
The senior credit agreement is collateralized by substantially all of our
personal property and assets, except for our accounts receivable and related
rights which have been sold in connection with our accounts receivable
sales agreement. The senior credit agreement contains covenants and
restrictions which, among other things, require maintenance of certain
working capital levels and financial ratios, prohibit dividend payments and
restrict the incurrence of certain indebtedness and other activities, including
acquisitions and dispositions. The senior credit agreement contains a
material adverse effect clause that could limit our ability to access additional
funding under our senior credit agreement should a material adverse change
in our business occur. We are also required, under certain circumstances, to
make mandatory prepayments from net cash proceeds from any issue of
equity and asset sales.
We used term loans to purchase the property in Largo, Florida utilized by
our Linvatec subsidiary. The debt assumed in 2001 in connection with the
purchase consists of a note bearing interest at 7.50% per annum with
semiannual payments of principal and interest through June 2009 (the
"Class A note"); and a note bearing interest at 8.25% per annum
compounded semiannually through June 2009, after which semiannual
payments of principal and interest will commence, continuing through June
2019 (the "Class C note"). Additionally, there is a seller-financed note which
bears interest at 6.50% per annum with monthly payments of principal and
interest through July 2013 (the "Seller note"). The principal balances
assumed on the Class A note, Class C note and Seller note aggregated
$12.3 million, $6.2 million and $4.2 million, respectively, at the date of
acquisition. The principal balances outstanding on the Class A note, Class
C note and seller-financed note aggregate $9.6 million, $7.5 million and
$3.8 million, respectively, at December 31, 2003. These loans are secured
by our Largo, Florida property.
annual report 2003
17 /36
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 were less than the amount of the
purchaser’s asset interest, there is no recourse to CONMED or CRC for such
shortfall. For receivables that have been sold, CONMED Corporation and its
subsidiaries retain collection and administrative responsibilities as agent for
the purchaser. As of December 31, 2002 and 2003, the undivided
percentage ownership interest in receivables sold by CRC to the purchaser
aggregated $37.0 million and $44.0 million, respectively, which has been
accounted for as a sale and reflected in the balance sheet as a reduction in
accounts receivable. Expenses associated with the sale of accounts
receivable, including the purchaser’s financing costs to purchase the
accounts receivable, were $1.2 million and $0.8 million, in 2002 and 2003,
respectively 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 full 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 qualify for sale under the
accounts receivable 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"), on an annual basis, from the
purchaser to fund the purchase of our accounts receivable. The purchaser
commitment expires October 21, 2004. In the event we are unable to renew
our purchaser commitment, we would need to access an alternate source of
working capital, such as our $100 million revolving credit facility.
Contractual Obligations
The following table summarizes our contractual obligations for the next five
years and thereafter (amounts in thousands). There were no capital lease
obligations as of December 31, 2003:
Payments Due by Period
Long-term debt
Purchase obligations
Operating lease
obligations
Total contractual
obligations
Total
Less than
1 Year
1-3
Years
$ 264,591 $ 4,143 $ 8,862 $ 78,171 $ 173,415
—
5,500
More than
5 Years
3-5
Years
19,700
13,000
1,200
2,727
3,571
_______ _____ _____ ______ _______
11,832
2,127
3,407
$ 296,123 $ 7,470 $17,933 $ 94,578 $ 176,142
_______ _____ _____ ______ _______
_______ _____ _____ ______ _______
Off-Balance Sheet Arrangements
Stock-based Compensation
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 $50.0 million undivided percentage
ownership interest in such receivables (the "asset interest") to a commercial
paper conduit. The accounts receivable sales agreement was amended and
restated on substantially the same terms and conditions on October 23, 2003
but replaced the commercial paper conduit with a bank. The commercial
paper conduit or the bank’s (the "purchaser") share of collections on
We have reserved shares of common stock issuance to employees and
directors under three shareholder-approved stock option plans. The exercise
price on all outstanding options is equal to the quoted fair market value of the
stock at the date of grant. Stock options are non-transferable other than on
death and generally become exercisable over a five year period from date of
grant and expire ten years from date of grant.
Quantitative and Qualitative Disclosures About Market Risk
Our principal market risks involve foreign currency exchange rates, interest
rates and credit risk.
different from any future results, performance or achievements expressed
or implied by such forward-looking statements. Such factors include,
among others, the following:
• general economic and business conditions;
• cyclical customer purchasing patterns due to budgetary and other
constraints;
• changes in customer preferences;
• competition;
• changes in technology;
• the introduction and acceptance of new products;
• the ability to evaluate, finance and integrate acquired businesses,
products and companies;
• changes in business strategy;
• 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.
You are cautioned not to place undue reliance on these forward-looking
statements. We do not undertake any obligation to publicly release any
revisions to these forward-looking statements or to reflect the occurrence
of unanticipated events.
18 /36
CONMED corporation
Foreign Currency Risk
We manufacture our products primarily in the United States and distribute
our products throughout the world. As a result, our financial results could
be significantly affected by factors such as changes in foreign currency
exchange rates or weak economic conditions in foreign markets. As of
December 31, 2003, we have not entered into any forward foreign currency
exchange contracts to hedge the effect of foreign currency exchange
fluctuations. During 2003, changes in foreign currency exchange rates
increased our sales by approximately $10.8 million and income before
income taxes by approximately $7.8 million. We will continue to monitor
and evaluate our foreign currency exposure and the need to enter into a
forward foreign currency exchange contract or other hedging arrangement.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates to our
borrowings. Interest rate swaps, a form of derivative, are used to manage
interest rate risk. As of December 31, 2003, we had entered into an interest
rate swap with a $50.0 million notional amount expiring in June 2004
which effectively converts $50.0 million of the approximate $243.0 million
of floating rate borrowings under our senior credit agreement into fixed rate
borrowings with a base interest rate of 3.63%. Assuming we make our
2004 scheduled term loan payments, if market interest rates for similar
borrowings average 1% more in 2004 than they did in 2003, our interest
expense, after considering the effects of our interest rate swap, would
increase, and income before income taxes would decrease by $2.3 million.
Comparatively, if market interest rates averaged 1% less in 2004 than they
did during 2003, our interest expense, after considering the effects of our
interest rate swap, would decrease, and income before income taxes would
increase by $2.3 million. These amounts are determined by considering the
impact of hypothetical interest rates on our borrowing cost and interest rate
swap agreement and do not consider any actions by management to
mitigate our exposure to such a change.
Credit Risk
A substantial portion of our accounts receivable are due from hospitals and
other healthcare providers. We generally do not receive collateral for these
receivables. Although the concentration of these receivables with
customers in a similar industry poses a risk of non-collection, we believe
this risk is mitigated somewhat by the large number and geographic
dispersion of these customers and by frequent monitoring of the
creditworthiness of the customers to whom credit is granted in the normal
course of business.
Exposure to credit risk is controlled through credit approvals, credit limits
and monitoring procedures, and we believe that reserves for losses are
adequate. There is no significant net exposure due to any individual
customer or other major concentration of credit risk.
Forward-Looking Statements
This Annual Report contains certain forward-looking statements (as such
term is defined in the Private Securities Litigation Reform Act of 1995) and
information relating to CONMED Corporation that is based on the beliefs of
our management, as well as assumptions made by and information
currently available to our management.
When used in this Annual Report, the words “estimate,” “project,” “believe,”
“anticipate,” “intend,” “expect” and similar expressions are intended to
identify forward-looking statements. These statements involve known and
unknown risks, uncertainties and other factors, that may cause our actual
results, performance or achievements, or industry results, to be materially
annual report 2003
19 /36
Report of Independent Auditors
To the Board of Directors and Shareholders of CONMED Corporation
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of cash flows
and of shareholders’ equity present fairly, in all material respects, the financial position of CONMED Corporation and its
subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets".
Syracuse, New York
February 27, 2004
20 /36
CONMED corporation
Consolidated Balance Sheets
December 31, 2002 and 2003
(In thousands except share amounts)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful
accounts of $922 in 2002 and $1,672 in 2003
Inventories
Deferred income taxes
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Goodwill, net
Other intangible assets, net
Other assets
Total assets
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt
Accounts payable
Accrued compensation
Income taxes payable
Accrued interest
Other current liabilities
Total current liabilities
Long-term debt
Deferred income taxes
Other long-term liabilities
Total liabilities
Commitments and contingencies
Shareholders’ equity:
2002
2003
$
5,626
$
5,986
58,093
120,443
6,304
3,200
__________
193,666
__________
95,608
262,394
180,271
10,201
__________
$
742,140
__________
__________
$
2,631
22,074
10,463
5,885
3,794
13,127
__________
__________
57,974
254,756
28,446
14,025
__________
355,201
__________
60,449
120,945
10,188
3,538
_________
201,106
_________
97,383
290,562
193,969
22,038
_________
$ 805,058
_________
_________
$
4,143
18,320
10,685
10,877
279
10,551
_________
54,855
_________
260,448
46,143
10,122
_________
371,568
_________
Preferred stock, par value $.01 per share; authorized
500,000 shares, none outstanding
Common stock, par value $.01 per share; 100,000,000 authorized;
28,808,105 and 29,140,644, issued in 2002 and 2003, respectively
Paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Less 37,500 shares of common stock in treasury, at cost
Total shareholders’ equity
Total liabilities and shareholders’ equity
See notes to consolidated financial statements.
—
—
288
231,832
162,391
(7,153)
(419)
__________
386,939
__________
$
742,140
__________
__________
291
237,076
194,473
2,069
(419)
_________
433,490
_________
$ 805,058
_________
_________
Consolidated Statements of Income
Years Ended December 31, 2001, 2002 and 2003
(In thousands except per share amounts)
Net sales
Cost of sales
Gross profit
Selling and administrative expense
Research and development expense
Write-off of purchased in-process research and development assets
Other expense (income)
Income from operations
Loss on early extinguishment of debt
Interest expense
Income before income taxes
Provision for income taxes
Net income
Earnings per share
Basic
Diluted
annual report 2003
21 /36
2001
2002
2003
$
428,722
$
453,062
$ 497,130
204,374
_________
224,348
_________
215,891
_________
237,433
__________
237,171
_________
259,697
__________
140,560
14,830
—
—
_________
155,390
_________
68,958
—
139,735
16,087
—
157,453
17,306
7,900
2,000
_________
(2,917)
__________
157,822
_________
179,742
__________
79,349
1,475
79,955
8,078
30,824
_________
24,513
_________
18,868
__________
38,134
53,361
53,009
13,728
_________
$
24,406
_________
_________
19,210
_________
20,927
__________
$
34,151
_________
_________
$
32,082
__________
__________
$
1.02
1.00
$
1.25
1.23
$
1.11
1.10
See notes to consolidated financial statements.
22 /36
CONMED corporation
Consolidated Statements of Shareholders’ Equity
Years Ended December 31, 2001, 2002 and 2003
(In thousands)
Common Stock
_______________
Amount
Shares
Paid-in
Capital
Accumulated
Other
Retained Comprehensive Treasury
Shareholders’
Earnings
Income (Loss)
Stock
Equity
Balance at December 31, 2000
23,029
______
$ 230
_____
$ 127,985 $ 103,834
(1,027)
_______ ________ _________
$
$ (419)
______
$ 230,603
_________
Common stock issued under employee plans
259
3
1,827
Tax benefit arising from common stock issued
under employee plans
Common stock issued in connection with
business acquisitions
Comprehensive income:
Foreign currency translation adjustments
604
1,974
20
30,341
Cash flow hedging (net of income tax benefit of $1,106)
Minimum pension liability (net of income tax benefit of $597)
1,830
604
30,361
(1,142)
(1,966)
(1,062)
24,406
Net income
Total comprehensive income
______
_____
_______ ________ _________
______
20,236
_________
Balance at December 31, 2001
25,262
______
253
_____
160,757
(5,197)
128,240
_______ ________ _________
(419)
______
283,634
_________
Common stock issued under employee plans
546
5
5,012
Tax benefit arising from common stock issued
under employee plans
Common stock issuance
Repurchase of common stock warrant
Comprehensive income:
3,000
30
1,970
66,093
(2,000)
Foreign currency translation adjustments
Cash flow hedging (net of income tax benefit of $596)
Minimum pension liability (net of income tax benefit of $2,264)
5,017
1,970
66,123
(2,000)
1,010
1,058
(4,024)
34,151
______
_____
_______ ________ _________
______
32,195
_________
Net income
Total comprehensive income
Balance at December 31, 2002
28,808
______
288
_____
231,832
(7,153)
162,391
_______ ________ _________
(419)
______
386,939
_________
Common stock issued under employee plans
Tax benefit arising from common stock issued
under employee plans
Common stock issued in connection with
business acquisitions
Comprehensive income:
Foreign currency translation adjustments
248
85
2
1
3,198
390
1,656
Cash flow hedging (net of income tax expense of $593)
Minimum pension liability (net of income tax expense of $2,861)
3,200
390
1,657
3,082
1,054
5,086
32,082
Net income
Total comprehensive income
______
_____
_______ ________ _________
______
41,304
_________
Balance at December 31, 2003
29,141
______
______
$ 291
_____
_____
$ 237,076 $ 194,473
2,069
_______ ________ _________
_______ ________ _________
$
$ (419)
______
______
$ 433,490
_________
_________
See notes to consolidated financial statements.
annual report 2003
23 /36
Consolidated Statements of Cash Flows
Years Ended December 31, 2001, 2002 and 2003
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operations:
Depreciation
Amortization
Deferred income taxes
Income tax benefit of stock option exercises
Contributions to pension plans in excess of net pension cost
Write-off of purchased in-process research and development assets
Write-off of deferred financing costs
Increase (decrease) in cash flows from changes in assets and liabilities,
net of effects from acquisitions:
Sale of accounts receivable
Accounts receivable
Inventories
Accounts payable
Income taxes payable
Accrued compensation
Accrued interest
Other assets/liabilities, net
Net cash provided by operations
Cash flows from investing activities:
Payments related to business acquisitions, net of cash acquired
Purchases of property, plant and equipment, net
Other investing activities
Net cash used by investing activities
Cash flows from financing activities:
Net proceeds from issuance of common stock
Net proceeds from common stock issued under employee plans
Repurchase of warrant on common stock
Redemption of 9.0% Senior Subordinated Notes
Payments on debt
Proceeds of debt
Payments related to issuance of debt
Net cash provided (used) by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest
Income taxes
2001
2002
2003
$
24,406
_________
$
34,151
_________
$
32,082
__________
9,055
21,093
8,562
604
(2,297)
—
—
40,000
(12,508)
(4,235)
(516)
(281)
1,950
(290)
(8,394)
_________
52,743
_________
77,149
_________
—
(14,443)
—
_________
(14,443)
_________
—
1,830
—
—
(76,423)
11,000
—
_________
(63,593)
_________
(1,181)
_________
(2,068)
3,470
_________
$
1,402
_________
_________
9,203
13,167
10,664
1,970
(1,999)
—
1,475
(3,000)
(2,151)
(15,213)
1,157
4,217
(1,584)
(1,160)
(5,974)
_________
10,772
_________
44,923
_________
(17,375)
(13,384)
—
_________
(30,759)
_________
66,123
5,017
(2,000)
—
(183,680)
105,138
(1,513)
_________
(10,915)
_________
975
_________
4,224
1,402
_________
$
5,626
_________
_________
10,539
14,315
13,715
390
(11,082)
7,900
2,181
7,000
(6,405)
(3,411)
(5,105)
2,188
(338)
(3,515)
(2,444)
__________
25,928
__________
58,010
__________
(55,079)
(9,309)
(4,085)
__________
(68,473)
__________
—
3,200
—
(130,000)
(22,796)
160,000
(1,950)
__________
8,454
__________
2,369
__________
360
5,626
__________
5,986
__________
__________
$
$
31,135
2,098
$
24,453
5,478
$
21,698
5,507
Supplemental disclosures of non-cash investing and financing activities:
As more fully described in Note 2, we acquired businesses in 2001 through the exchange of approximately 2.0 million shares of our common stock valued at $30.4 million.
As more fully described in Note 6, we acquired certain property in 2001 through the assumption of approximately $22.7 million of debt and accrued interest.
As more fully described in Note 2, during 2003 we issued approximately 85,000 shares of our common stock valued at approximately $1.7 million as part of the consideration for
the purchases of several businesses in 2002.
See notes to consolidated financial statements.
24 /36
CONMED corporation
Notes to Consolidated Financial Statements
(In thousands except 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 specializing in instruments, implants and
video equipment for arthroscopic sports medicine and powered surgical
instruments, such as drills and saws, for orthopedic, ENT, neurosurgery
and other surgical specialties. We are a leading developer, manufacturer
and supplier of RF electrosurgery systems used routinely to cut and
cauterize tissue in nearly all types of surgical procedures worldwide,
endoscopy products such as trocars, clip appliers, scissors and surgical
staplers, and a full line of ECG electrodes for heart monitoring and other
patient care products. We also offer integrated operating room systems and
equipment. Our products are used in a variety of clinical settings, such as
operating rooms, surgery centers, physicians’ offices and hospitals.
Principles of Consolidation
The consolidated financial statements include the accounts of CONMED
Corporation and its controlled subsidiaries. All intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
accounted for as a sale and reflected in the balance sheet as a reduction
in accounts receivable. Expenses associated with the sale of accounts
receivable, including the purchaser’s financing costs to purchase the
accounts receivable, were $1.2 million and $0.8 million, in 2002 and 2003,
respectively, 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 full 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 qualify for sale under
the accounts receivable 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"), on an annual basis,
from the purchaser to fund the purchase of our accounts receivable. The
purchaser commitment expires October 21, 2004. In the event we are
unable to renew our purchaser commitment, we would need to access an
alternate source of working capital, such as our $100 million revolving
credit facility.
Inventories
Inventories are stated at the lower of cost or market, cost being determined
on the first-in, first-out basis.
Cash Equivalents
Property, Plant and Equipment
We consider all highly liquid investments with an original maturity of three
months or less to be cash equivalents.
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over the following estimated useful lives:
Accounts Receivable Sale
On November 1, 2001, we entered into a five-year 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 $50.0 million undivided percentage ownership interest in such
receivables (the "asset interest") to a commercial paper conduit. On
October 23, 2003 the accounts receivable sales agreement was amended
and restated on substantially the same terms and conditions with the
exception of replacing the commercial paper conduit with a bank. The
commercial paper conduit or the bank’s (the "purchaser") 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 were less than the amount of the
purchaser’s asset interest, there is no recourse to CONMED or CRC for such
shortfall. For receivables that have been sold, CONMED Corporation and
its subsidiaries retain collection and administrative responsibilities as agent
for the purchaser. As of December 31, 2002 and 2003, the undivided
percentage ownership interest in receivables sold by CRC to the purchaser
aggregated $37.0 million and $44.0 million, respectively, which has been
Building and improvements
Leasehold improvements
Machinery and equipment
40 years
Remaining life of lease
2 to 15 years
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over fair value of
identifiable net assets of acquired businesses. Other intangible assets
primarily represent allocations of purchase price to identifiable intangible
assets of acquired businesses. Goodwill and other intangible assets had
been amortized over periods ranging from 5 to 40 years through December
31, 2001. Because of our history of growth through acquisitions, goodwill
and other intangible assets comprise a substantial portion (60.2% at
December 31, 2003) of our total assets.
In June 2001, the Financial Accounting Standards Board approved
Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" ("SFAS 142"). We adopted SFAS 142 effective January
1, 2002. As a result of the adoption of this standard, amortization of
goodwill and certain intangibles has been discontinued.
During 2002 and 2003, we performed impairment tests of goodwill and
indefinite-lived intangible assets and evaluated the useful lives of acquired
intangibles assets subject to amortization. These tests and evaluations
annual report 2003
25 /36
were performed in accordance with SFAS 142. No impairment losses or
adjustments to useful lives have been recognized as a result of these tests.
It is our policy to perform our annual impairment tests in the fourth quarter.
Other Long-Lived Assets
We review for impairment of long-lived assets (consisting of intangible
assets subject to amortization and property, plant and equipment) whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. If the sum of the expected future
undiscounted cash flows is less than the carrying amount of the asset, an
impairment loss is recognized by reducing the recorded value to fair value.
Equity Investments
We have several investments in the common stock of other companies in
our industry which are less than 20% of the voting stock of these
companies and in which we do not have the ability to exercise significant
influence. We have accounted for these investments under the cost method.
Hedging Activity
Our hedging activity consists of an interest rate swap which we have
designated as a cash-flow hedge, and which effectively converts $50 million
of the $243 million in LIBOR-based floating rate debt under our senior
credit agreement into fixed rate debt with a base interest rate of 3.63%.
The interest rate swap expires in June 2004 and is included in other current
liabilities at a fair value of $0.6 million in our consolidated balance sheet at
December 31, 2003.
Fair Value of Financial Instruments
The fair values of cash and cash equivalents, accounts receivable, accounts
payable, and long-term debt approximates their carrying amount.
product is shipped. 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 terms of the commitment agreements.
• Product returns are only accepted at the discretion of the Company and in
keeping with our "Returned Goods Policy". Product returns have not
been significant historically. We accrue for sales returns, rebates and
allowances based upon analysis of historical customer returns, credits,
rebates, discounts and current market conditions.
• The terms of the Company's sales to customers do not involve any
obligations for the Company to perform future services. Limited
warranties are generally provided for capital equipment sales and
provisions for warranty are provided at the time of product shipment
based upon analysis of historical data.
• Amounts billed to customers related to shipping and handling are
included in net sales. Shipping and handling costs of $8.6 million,
$7.5 million and $8.3 million for the years ended 2001, 2002 and 2003,
respectively, 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 the allowance for doubtful accounts of $1.7 million
at December 31, 2003 is adequate to provide for any probable losses
from accounts receivable.
Translation of Foreign Currency Financial Statements
Earnings Per Share
Assets and liabilities of foreign subsidiaries have been translated into
United States dollars at the applicable rates of exchange in effect at the end
of the period reported. Revenues and expenses have been translated at the
applicable weighted average rates of exchange in effect during the period
reported. Translation adjustments are reflected in accumulated other
comprehensive income (loss). Transaction gains and losses are included in
net income.
Basic earnings per share ("basic EPS") is computed based on the weighted
average number of common shares outstanding for the period. Diluted
earnings per share ("diluted EPS") gives effect to all dilutive potential shares
outstanding (i.e., options and warrants) during the period. The following is
a reconciliation of the weighted average shares used in the calculation of
basic and diluted EPS:
2001
2002
2003
Income Taxes
We provide for income taxes in accordance with the provisions of SFAS No.
109, "Accounting for Income Taxes" ("SFAS 109"). Under the liability
method specified by SFAS 109, deferred tax assets and liabilities are based
on the difference between the financial statement and tax basis of assets and
liabilities as measured by the tax rates that are anticipated to be in effect
when these differences reverse. The deferred tax provision generally
represents the net change in the assets and liabilities for deferred tax. A
valuation allowance is established when it is necessary to reduce deferred
tax assets to amounts for which realization is more likely than not.
Revenue Recognition
We recognize revenue upon shipment of product and passage of title to our
customers. Factors considered in our revenue recognition policy are as
follows:
• Sales to customers are evidenced by firm purchase orders. Title and the
risks and rewards of ownership are transferred to the customer when
Shares used in the calculation of
basic EPS (weighted average
shares outstanding)
Effect of dilutive potential securities
Shares used in the calculation of
diluted EPS
28,930
27,337
326
490
_______ _______ _______
24,045
356
24,401
29,256
_______ _______ _______
_______ _______ _______
27,827
The shares used in the calculation of diluted EPS exclude warrants and
options to purchase shares where the exercise price was greater than the
average market price of common shares for the year. Such shares aggregated
2.8 million, 0.7 million and 1.3 million at December 31, 2001, 2002 and
2003, respectively.
Stock-based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") defines a fair value based
method of accounting for an employee stock option whereby compensation
cost is measured at the grant date based on the fair value of the award and
is recognized over the service period. A company may elect to adopt SFAS
26 /36
CONMED corporation
123 or elect to continue accounting for its stock option or similar equity
awards using the method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), where compensation cost is measured at the date
of grant based on the excess of the market value of the underlying stock
over the exercise price. We have elected to continue to account for our
stock-based compensation plans under the provisions of APB No. 25. No
compensation expense has been recognized in the accompanying financial
statements relative to our stock option plans.
Pro forma information regarding net income and earnings per share is
required by SFAS 123 and has been determined as if we had accounted for
our employee stock options under the fair value method of that statement.
The weighted average fair value of options granted in 2001, 2002 and 2003
was $7.39, $9.32 and $5.81, respectively. The fair value of these options
was estimated at the date of grant using a Black-Scholes options pricing
model with the following weighted-average assumptions for options granted
in 2001, 2002 and 2003, respectively: Risk-free interest rates of 4.38%,
2.70% and 3.13%; volatility factors of the expected market price of the
Company's common stock of 48.04%, 41.10% and 32.08%; a weighted-
average expected life of the option of five years; and that no dividends
would be paid on common stock.
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
Net income—as reported
Pro forma stock-based employee
compensation expense, net of related
income tax effect
Net income—pro forma
EPS—as reported:
Basic
Diluted
EPS—pro forma:
Basic
Diluted
2001
2002
2003
$ 24,406 $ 34,151 $ 32,082
_______ _______ _______
(2,845)
(2,156)
(2,383)
_______ _______ _______
$ 21,561 $ 31,995 $ 29,699
_______ _______ _______
_______ _______ _______
$
1.02 $
$ 1.00 $
1.25 $
1.23 $
$
$
.90 $
.88 $
1.17 $
1.15 $
1.11
1.10
1.03
1.02
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) consists of the following:
Cash
Minimum Cumulative
Pension
Flow Comprehensive
Translation
Liability Adjustments Hedges Income (loss)
Accumulated
Other
Balance,
December 31, 2002
Foreign currency
translation adjustments
Cash flow hedging
(net of income taxes)
Minimum pension liability
(net of income taxes)
Balance,
December 31, 2003
$ (5,086)
$ (1,159)
$ (908)
$ (7,153)
—
—
3,082
—
— 1,054
3,082
1,054
5,086
______
—
_____
—
____
5,086
_____
$ — $ 1,923
_____
______
_____
______
$ 146
____
____
$ 2,069
_____
_____
Reclassifications
Certain prior year amounts have been reclassified to conform with the
presentation used in 2003.
Note 2 — Business Acquisitions
Assets and liabilities of acquired businesses have been accounted for under
the purchase method of accounting and recorded at their fair values at the
date of acquisition. The excess of the purchase price over the estimated fair
values of the net assets acquired has been recorded as goodwill. The
results of operations of acquired businesses have been included in the
consolidated statements of income as of the date of acquisition.
In 2001 we completed the acquisition of certain assets of Imagyn Medical
Technologies, Inc. (the "Imagyn acquisition") related to our Endoscopy
product line for $29.9 million in CONMED common stock. Goodwill
associated with the Imagyn acquisition totaled approximately $26.7 million
and is deductible for income tax purposes. We incurred $1.6 million in
acquisition-related charges during 2001 to transition manufacturing of the
Imagyn product to our facilities. These charges are included in cost of sales.
In 2002 we completed acquisitions of several businesses related to our
Patient Care and Endoscopy product lines, including the December 31,
2002 acquisition of CORE Dynamics, Inc. (the "CORE acquisition"), as well
as two businesses engaged in the design, manufacture and installation of
integrated operating room systems and equipment. Consideration for
acquisitions completed in 2002 aggregated $17.4 million in cash and
$1.7 million in CONMED common stock plus the assumption of
approximately $3.4 million in liabilities. Under the terms of certain of the
acquisition agreements, we agreed to pay additional consideration
dependent upon future sales or profitability and the satisfactory execution of
a plan to transition and consolidate manufacturing of an acquired business
to our facilities. Any future consideration paid will be recorded in goodwill.
Goodwill recorded in 2002 totaled approximated $16.2 million and is
deductible for income tax purposes.
In 2003 we completed several smaller acquisitions related to our Patient
Care and Electrosurgery product lines totaling $6.1 million and recorded
additional contingent consideration related to 2002 acquisitions of
$2.0 million. Goodwill recorded in 2003 related to these acquisitions
totaled $5.9 million and is deductible for income tax purposes. These
acquisitions did not have a material effect on our results of operations for
the year ended December 31, 2003.
In March 2003 we also completed the acquisition of Bionx Implants, Inc.
(the "Bionx acquisition") related to our arthroscopy product line, for
$47.0 million in cash plus the assumption of approximately $12.1 million
in liabilities. Included in cost of sales in 2003 are $1.3 million in
acquisition-related charges, consisting principally of the following:
$0.5 million in charges as a result of the step-up to fair value recorded
related to the sale of inventory acquired as a result of the Bionx acquisition
and the CORE acquisition; $0.5 million in inventory charges as a result of
the discontinuation of certain of our arthroscopy product lines in favor of
those acquired as a result of the Bionx acquisition; and $0.3 million in other
transition-related charges. An additional $3.2 million in acquisition-related
costs not related to cost of sales which were incurred during 2003 are
included in other expense as discussed in Note 12.
Bionx develops and manufactures self-reinforced resorbable polymer
implants including screws, pins and meniscal implants for use in a variety
of arthroscopic applications, including sports medicine and fracture fixation.
The Bionx product lines complement CONMED’s existing arthroscopy
product line.
Unaudited pro forma statements of income for the years ended December
31, 2002 and 2003, assuming the Bionx acquisition occurred as of January
1, 2002 are presented below.
Net sales
Net income
Basic EPS
Diluted EPS
2002
$ 471,530
31,746
1.16
1.14
2003
$ 500,812
31,492
1.09
1.08
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition based on a third-
party valuation. Goodwill and identifiable intangible assets associated with
the Bionx acquisition are not deductible for income tax purposes.
Cash
Other current assets
Property, plant and equipment
In-process research and development
Identifiable intangible assets
Goodwill
Total assets acquired
Current liabilities
Deferred income taxes
Other long-term liabilities
Total liabilities assumed
Net assets acquired
$
517
7,284
2,459
7,900
15,700
25,222
_______
59,082
_______
(7,647)
(3,898)
(521)
_______
(12,066)
_______
$
47,016
_______
_______
Based on the third-party valuation, $7.9 million of the purchase price
represents the estimated fair value of projects that, as of the acquisition date
had not reached technological feasibility and had no alternative future use.
Accordingly, this amount of purchased in-process research and development
assets was written-off in accordance with FASB Interpretation No. 4,
"Applicability of FASB Statement No. 2 to Business Combinations Accounted
for by the Purchase Method". No benefit for income taxes has been recorded
on the write-off of purchased in-process research and development assets as
these costs are not deductible for income tax purposes.
The purchased in-process research and development value relates to next
generation arthroscopy products, which have been or are expected to be
released between the second quarter of 2003 and fourth quarter of 2004.
The acquired projects include enhancements and upgrades to existing
device technology, introduction of new device functionality and the
development of new materials technology for arthroscopic applications.
The value of the in-process research and development was calculated using
a discounted cash flow analysis of the anticipated net cash flow stream
associated with the in-process technology of the related product sales. The
estimated net cash flows were discounted using a discount rate of 22%,
which was based on the weighted-average cost of capital for publicly-traded
companies within the medical device industry and adjusted for the stage of
completion of each of the in-process research and development projects.
The risk and return considerations surrounding the stage of completion
were based on costs, man-hours and complexity of the work completed
versus to be completed and other risks associated with achieving
technological feasibility. In total, these projects were approximately 40%
complete as of the acquisition date. The total budgeted costs for the
projects were approximately $5.5 million and the remaining costs to
complete these projects were approximately $3.3 million as of the
acquisition date.
The major risks and uncertainties associated with the timely and successful
completion of these projects consist of the ability to confirm the safety and
annual report 2003
27 /36
efficacy of the technologies and products based on the data from clinical
trials and obtaining the necessary regulatory approvals. In addition, no
assurance can be given that the underlying assumptions used to forecast
the cash flows or the timely and successful completion of such projects will
materialize, as estimated. For these reasons, among others, actual results
may vary significantly from the estimated results.
Of the $15.7 million of acquired intangible assets, $0.8 million were
assigned to registered trademarks and are not subject to amortization.
The remaining $14.9 million of acquired intangible assets have a weighted
average useful life of 20 years. The intangible assets that make up that
amount include $9.0 million of customer relationships (38 year weighted
average useful life), $5.4 million of core technology (12 year weighted
average useful life) and $0.5 million of distributor relationships (7 year
weighted average useful life).
Note 3 — Inventories
Inventories consist of the following at December 31,:
Raw materials
Work in process
Finished goods
$
$
2003
2002
35,352
44,701
14,583
12,869
71,010
62,873
_________ _________
$ 120,443
$ 120,945
_________ _________
_________ _________
Note 4 — Property, Plant and Equipment
Property, plant and equipment consist of the following at December 31,:
Land
Building and improvements
Machinery and equipment
Construction in progress
Less: Accumulated depreciation
$
$
2003
4,200
75,224
83,105
3,768
_________ _________
166,297
(68,914)
_________ _________
$
97,383
_________ _________
_________ _________
2002
4,196
70,100
74,838
5,038
154,172
(58,564)
95,608
$
We lease various manufacturing and office facilities and equipment
under operating leases. Rental expense on these operating leases was
approximately $2,756, $2,064 and $1,959 for the years ended
December 31, 2001, 2002 and 2003, respectively. The aggregate future
minimum lease commitments for operating leases at December 31, 2003
are as follows:
Year ending December 31,:
2004
2005
2006
2007
2008
Thereafter
$ 2,127
1,815
1,756
1,727
1,680
2,727
Note 5 — Goodwill and Other Intangible Assets
The changes in the net carrying amount of goodwill for the year ended
December 31, are as follows:
Balance as of January 1,
Goodwill acquired
Adjustments to goodwill resulting from
business acquisitions finalized
Foreign currency translation
Balance as of December 31,
2002
$ 251,140
16,194
2003
$ 262,394
31,210
(4,940)
(3,285 )
—
243
_________ _________
$ 262,394
$ 290,562
_________ _________
_________ _________
28 /36
CONMED corporation
Other intangible assets consist of the following:
____________________ ___________________
Dec. 31, 2002
Dec. 31, 2003
Gross
Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
Amortized
intangible assets:
Customer
relationships
Patents and
other intangible
assets
$ 96,712
$ (12,725)
$105,712
$ (15,447)
23,674
(13,534)
33,258
(16,498)
Unamortized
intangible assets:
Trademarks and
tradenames
86,144
_______
$ 206,530
_______
_______
—
________
$ (26,259)
________
________
86,944
_______
$225,914
_______
_______
—
________
$ (31,945)
________
________
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 23 years.
Customer relationships are being amortized over 38 years. Patents and other
intangible assets are being amortized over a weighted average life of 9 years.
Our customer relationship assets were acquired in connection with the 1997
acquisition of Linvatec Corporation and the 2003 Bionx acquisition. These
intangible assets represent the value associated with business expected to be
generated from existing customers as of the acquisition date. The value of
these assets was determined by measuring the present value of the projected
future earnings attributable to these assets. Additionally, while the useful life of
these customer relationship assets is not limited by contract or any other
economic, regulatory or other known factors, the useful life of 38 years was
determined at the acquisition date by historical customer attrition. In
accordance with SFAS 142 and as clarified by EITF (Emerging Issues Task
Force) Issue 02-17, "Recognition of Customer Relationship Intangible Assets
Acquired in a Business Combination", customer relationships evidenced by
customer purchase orders are contractual in nature and therefore continue to
be recognized separate from goodwill and are amortized over their 38 year life.
The trademarks and tradenames intangible asset was recognized in
conjunction with the 1997 acquisition of Linvatec Corporation and the 2003
Bionx acquisition. We continue to market products under the acquired
trademarks and tradenames of "Linvatec", "Hall", "Shutt", "Envision" and
"Bionx". We continue to release new product and product extensions under
the above trademarks and tradenames and continue to maintain and promote
these trademarks and tradenames in the market through legal registration and
such methods as advertising, medical education and trade shows. It is our
belief that the trademarks and tradenames intangible asset will generate cash
flow for an indefinite period of time. Therefore, in accordance with SFAS 142,
our trademarks and tradenames intangible asset is not amortized.
The amortization expense related to intangible assets for the year ending
December 31, 2003 and the estimated amortization expense for each of the
five succeeding years is as follows:
2003
2004
2005
2006
2007
2008
$ 5,686
5,721
4,816
4,248
4,236
4,236
The following is a reconciliation assuming goodwill and other intangible
assets had been accounted for in accordance with SFAS 142 in the year
ended December 31, 2001, 2002 and 2003:
Net income—as reported
Adjustments (net of income taxes)
Add back: Goodwill amortization
Add back: Trademarks and trade
names amortization
Net income—adjusted
Basic EPS
Net income—as reported
Adjustments (net of income taxes)
Add back: Goodwill amortization
Add back: Trademarks and trade
names amortization
Net income—adjusted
Diluted EPS
Net income—as reported
Adjustments (net of income taxes)
Add back: Goodwill amortization
Add back: Trademarks and trade
names amortization
Net income—adjusted
Note 6 — Long Term Debt
2001
2003
$ 24,406 $ 34,151 $ 32,082
_______ _______ _______
2002
4,120
—
—
1,532
—
_______ _______ _______
$ 30,058 $ 34,151 $ 32,082
_______ _______ _______
_______ _______ _______
—
$
1.11
_______ _______ _______
1.25 $
1.02 $
.17
—
—
—
_______ _______ _______
$
1.11
_______ _______ _______
_______ _______ _______
.06
1.25 $
—
1.25 $
$
1.10
_______ _______ _______
1.23 $
1.00 $
.17
—
—
—
_______ _______ _______
$
1.10
_______ _______ _______
_______ _______ _______
.06
1.23 $
—
1.23 $
Long term debt consists of the following at December 31,:
Revolving line of credit
Term loan borrowings on senior credit facility
9.0% senior subordinated notes
Mortgage notes
Total long term debt
Less: current portion
$
$
2003
2002
—
5,000
243,000
100,000
—
130,000
21,591
22,387
_________ _________
264,591
257,387
4,143
2,631
_________ _________
$ 254,756
$ 260,448
_________ _________
_________ _________
We entered into a $200 million senior credit agreement (the "senior credit
agreement") during the year ended December 31, 2002. Deferred financing
costs of $1.5 million related to the approximately three years remaining on
the former senior credit agreement were written off as an extraordinary
charge in 2002 but have been reclassified to ordinary income on our
consolidated statement of income as a result of our 2003 adoption of
Statement of Financial Accounting Standards No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections".
At December 31, 2002, the senior credit agreement consisted of a
$100 million revolving credit facility and a $100 million term loan.
During the year ended December 31, 2003 we amended the senior credit
agreement, expanding the existing term loan facility under the senior credit
agreement by $160.0 million (the "expanded term loan facility").
The proceeds of the expanded term loan facility were used to reduce
borrowings outstanding on the revolving credit facility, to fund the
redemption of $130.0 million in outstanding 9% senior subordinated notes
(the "Notes"), primarily in June 2003, as well as related accrued interest,
and the 4.5% call premium on the Notes. Proceeds of the expanded term
loan facility were also used to fund payment of bank and legal fees
associated with amending the senior credit agreement. In connection with
the purchase of the Notes, we wrote off $5.9 million in 4.5% call premium
and $2.2 million in unamortized deferred financing costs as a loss on early
extinguishment of debt.
The balance outstanding on the expanded term loan facility at December
31, 2003 was $243.0 million. The expanded term loan facility extends for
approximately 6 years, with scheduled principal payments of $2.6 million
annually through December 2007 increasing to $71.0 million in 2008 and
the remaining balance outstanding due in December 2009. We may be
required, under certain circumstances, to make additional principal
payments based on excess cash flow as defined in the amended senior
credit agreement. No such payments were required for the years ended
December 31, 2002 and 2003. There were no borrowings outstanding on
the revolving credit facility under the amended senior credit agreement as
of December 31, 2003. Interest rates on the new term facility are LIBOR
plus 2.25% (3.41% at December 31, 2003). Interest rates on the revolving
credit facility are LIBOR plus 2.50% (3.66% at December 31, 2003).
The amended senior credit agreement is collateralized by substantially all of
our personal property and assets, except for our accounts receivable and
related rights which have been sold in connection with our accounts
receivable sales agreement. The amended senior credit agreement contains
covenants and restrictions which, among other things, require maintenance
of certain working capital levels and financial ratios, prohibit dividend
payments and restrict the incurrence of certain indebtedness and other
activities, including acquisitions and dispositions. The amended senior
credit agreement contains a material adverse effect clause that could limit
our ability to access additional funding under our senior credit agreement
should a material adverse change in our business occur. We are also
required, under certain circumstances, to make mandatory prepayments
from net cash proceeds from any issue of equity and asset sales.
We used term loans to purchase the property in Largo, Florida utilized by
our Linvatec subsidiary. The debt assumed in 2001 in connection with the
purchase consists of a note bearing interest at 7.50% per annum with
semiannual payments of principal and interest through June 2009 (the
"Class A note"); and a note bearing interest at 8.25% per annum
compounded semiannually through June 2009, after which semiannual
payments of principal and interest will commence, continuing through
June 2019 (the "Class C note"). Additionally, there is a seller-financed
note which bears interest at 6.50% per annum with monthly payments of
principal and interest through July 2013 (the "Seller note"). The principal
balances assumed on the Class A note, Class C note and Seller note
aggregated $12.3 million, $6.2 million and $4.2 million, respectively, at
the date of acquisition. The principal balances outstanding on the Class A
note, Class C note and Seller note aggregate $9.6 million, $7.5 million and
$3.8 million, respectively, at December 31, 2003. These loans are
collateralized by our Largo, Florida property.
As discussed in Note 1, we use an interest rate swap to hedge a portion of
our long-term debt. The interest rate swap, which we have designated as a
cash-flow hedge, effectively converts $50 million of LIBOR-based floating
rate debt under our senior credit agreement into fixed rate debt with a base
interest rate of 3.63%. The interest rate swap expires in June 2004.
The scheduled maturities of long-term debt outstanding at
December 31, 2003 are as follows:
2004
2005
2006
2007
2008
Thereafter
$
4,143
4,330
4,532
4,753
73,418
173,415
annual report 2003
29 /36
Note 7 — Income Taxes
The provision for income taxes for the years ended December 31, 2001,
2002 and 2003 consists of the following:
2001
2002
2003
Current tax expense:
Federal
State
Foreign
Deferred income tax expense
Provision for income taxes
$
$
$
5,486
665
1,061
_________ _________ _________
7,212
13,715
_________ _________ _________
$
20,927
_________ _________ _________
_________ _________ _________
7,251
540
755
8,546
10,664
19,210
3,565
400
1,201
5,166
8,562
13,728
$
$
A reconciliation between income taxes computed at the statutory federal rate
and the provision for income taxes for the years ended December 31, 2001,
2002 and 2003 follows:
2001
2002
2003
Tax provision at statutory rate
based on income before income
taxes
$
Extraterritorial income exclusion
State income taxes
Nondeductible intangible
amortization
Nondeductible write-off of
purchased in-process research
and development assets
Other nondeductible permanent
differences
Other, net
$
13,347
(894)
270
18,676
(949)
351
$
18,553
(1,252)
476
320
—
90
—
90
2,765
268
27
_________ _________ _________
$
20,927
_________ _________ _________
_________ _________ _________
220
465
13,728
215
827
19,210
$
$
The tax effects of the significant temporary differences which comprise the
deferred tax assets and liabilities at December 31, 2002 and 2003 are as
follows:
2002
2003
Assets:
Inventory
Net operating losses of acquired subsidiaries
Deferred compensation
Accounts receivable
Employee benefits
Additional minimum pension liability
Interest rate swap
Other
Valuation allowance
$
$
8,948
11,025
1,361
262
—
—
—
2,390
(8,462 )
_________ _________
15,524
_________ _________
2,106
2,986
1,142
94
491
2,861
510
859
—
11,049
Liabilities:
Goodwill and intangible assets
Depreciation
Employee benefits
Interest rate swap
Net liability
28,633
4,558
—
—
33,191
43,695
5,721
1,980
83
_________ _________
51,479
_________ _________
$ (22,142) $ (35,955 )
_________ _________
_________ _________
The net operating loss carryforwards of acquired subsidiaries expire at
various dates through 2023. We have established a valuation allowance to
reflect the uncertainty of realizing the benefits of certain net operating loss
carryforwards recognized in connection with the Bionx acquisition.
30 /36
CONMED corporation
Note 8 — Shareholders’ Equity
The shareholders have authorized 500,000 shares of preferred stock, par
value $.01 per share, which may be issued in one or more series by the
Board of Directors without further action by the shareholders. As of
December 31, 2002 and 2003, no preferred stock had been issued.
On August 8, 2001, our Board of Directors declared a three-for-two split of
our common stock to be effected in the form of a common stock dividend.
This dividend was payable on September 7, 2001 to shareholders of record
on August 21, 2001. Accordingly, common stock, the number of shares
outstanding, earnings per share, incentive stock option activity and the
number of shares used in the calculation of earnings per share have all
been restated to retroactively reflect the split.
In connection with the 1997 acquisition of Linvatec Corporation, we issued
to Bristol-Myers Squibb Company a warrant exercisable in whole or in part
for up to 1.5 million shares of our common stock at a price of $22.82 per
share. On May 6, 2002, we purchased the warrant for $2.0 million in cash
and subsequently cancelled it. The purchase resulted in a $2.0 million
reduction to paid-in capital.
On May 29, 2002, we completed a public offering of 3.0 million shares of
our common stock. Net proceeds to the Company related to the sale of the
shares approximated $66.1 million and were used to reduce indebtedness
under our credit facility.
We have reserved 5.7 million shares of common stock for issuance to
employees and directors under three stock option plans (the "Plans") of
which approximately 263,000 shares remain available for grant at December
31, 2003. The exercise price on all outstanding options is equal to the
quoted fair market value of the stock at the date of grant. Stock options are
non-transferable other than on death and generally become exercisable over
a five year period from date of grant and expire ten years from date of grant.
The following is a summary of incentive stock option activity under the Plans:
Number Weighted-Average
Exercise Price
of Options
Outstanding at December 31, 2000
Granted
Forfeited
Exercised
Outstanding at December 31, 2001
Granted
Forfeited
Exercised
Outstanding at December 31, 2002
Granted
Forfeited
Exercised
Outstanding at December 31, 2003
Exercisable:
December 31, 2001
December 31, 2002
December 31, 2003
3,059
709
(75)
(259)
_________
3,434
742
(40)
(546)
_________
3,590
669
(84)
(181)
_________
3,994
_________
_________
1,954
1,875
2,590
$ 13.91
15.59
18.86
7.07
_______
14.69
23.42
15.27
8.88
________
17.27
17.44
19.49
11.84
_______
$ 17.55
_______
_______
$ 13.59
15.55
17.19
Stock
Options
Outstanding
Range of
at Dec. 31
Exercise
2003
Prices
222
Less than $10
833
$10 to $15
$15 to $17.50
978
$17.50 to $20 1,034
579
$20 to $22.50
348
$22.50 to $26
Weighted Weighted
Average
Average
Exercise
Remaining
Price
Life (Years)
$ 8.97
5.8
13.89
6.0
16.23
5.3
18.64
7.7
21.35
6.5
25.89
8.1
Stock
Options Weighted
Exercisable Average
Exercise
at Dec. 31
2003
Price
$ 8.94
190
13.84
648
16.33
761
19.16
378
20.92
340
25.89
273
During 2002 we adopted a shareholder-approved Employee Stock Purchase
Plan (the "Employee Plan"), under which we have reserved 1.0 million
shares of common stock for issuance to our employees. The Employee Plan
provides to employees the opportunity to invest from 1% to 10% of their
annual salary to purchase shares of CONMED common stock through the
exercise of stock options granted by the Company at a purchase price equal
to the lesser of (1) 85% of the fair market value of the common stock at the
beginning of a semi-annual period and (2) 85% of the fair market value of
the common stock at the end of such semi-annual period. During 2003, we
issued approximately 67,000 shares of common stock under the Employee
Plan. No stock-based compensation expense has been recognized in the
accompanying consolidated financial statements as a result of common
stock issuances under the Employee Plan.
Note 9 — Business Segments and Geographic Areas
CONMED conducts its business through four principal operating units,
CONMED Patient Care, CONMED Endoscopy, CONMED Electrosurgery and
Linvatec Corporation. In accordance with Statement of Financial Accounting
Standards No. 131 "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"), our chief operating decision-maker has been
identified as the President and Chief Operating Officer, who reviews operating
results to make decisions about allocating resources and assessing
performance for the entire company. All four material operating units qualify
for aggregation under SFAS 131 due to their identical customer base and
similarities in economic characteristics, nature of products and services,
procurement, manufacturing and distribution processes. Based upon the
aggregation criteria for segment reporting, we have aggregated our operating
units into a single segment comprised of medical instruments and systems
used in surgical and other medical procedures.
The following is net sales information by product line:
Arthroscopy
Powered Surgical Instruments
Electrosurgery
Patient Care
Endoscopy
Integrated Operating Room
Systems
Total
2001
2002
2003
$
155,650
114,375
66,875
69,067
22,755
$ 161,876
114,302
69,674
69,753
36,801
$ 177,468
122,031
77,337
69,937
45,764
4,593
656
_________ ________ ________
$
$ 497,130
$ 453,062
_________ ________ ________
_________ ________ ________
—
428,722
The following is net sales information for geographic areas:
2001
2002
2003
United States
Canada
United Kingdom
Japan
All other countries
Total
$
$ 333,473
24,620
19,883
18,265
100,889
_________ ________ ________
$ 320,312
15,980
18,625
18,820
79,325
306,306
16,662
15,382
18,234
72,138
$
$ 497,130
$ 453,062
_________ ________ ________
_________ ________ ________
428,722
Sales are attributed to countries based on the location of the customer.
There were no significant investments in long-lived assets located outside
the United States at December 31, 2002 and 2003.
Note 10 — Employee Benefit Plans
We sponsor an employee savings plan ("401(k)") and three defined benefit
pension plans (the "pension plans") covering substantially all our
employees. The three defined benefit pension plans were merged and
overall benefit levels reduced effective January 1, 2004.
Total employer contributions to the 401(k) plan were $1.7 million,
$2.0 million and $2.2 million in the years ended December 31, 2001, 2002
and 2003, respectively.
We use a December 31, measurement date for our pension plans.
Unrecognized gains and losses are amortized on a straight-line basis over
the average remaining service period of active participants. The following
table provides a reconciliation of the projected benefit obligation, plan
assets and funded status of the pension plans at December 31,:
Accumulated Benefit Obligation
2002
$ 27,645
_______
_______
Change in benefit obligation
Projected benefit obligation at beginning of year $ 29,748
3,988
Service cost
2,002
Interest cost
1,178
Actuarial loss
(3,277)
Benefits paid
_______
$ 33,639
_______
Projected benefit obligation at end of year
Change in plan assets
Fair value of plan assets at beginning of year
Actual gain (loss) on plan assets
Employer contribution
Benefits paid
Fair value of plan assets at end of year
Change in funded status
Funded status
Unrecognized net actuarial loss
Unrecognized transition liability
Unrecognized prior service cost
Additional minimum pension liability
Accrued (prepaid) pension cost
$ 16,963
(2,261)
6,744
(3,277)
_______
$ 18,169
_______
$ 15,470
(13,760)
(52)
(129)
7,947
_______
$ 9,476
_______
_______
2003
$ 32,044
_______
_______
$ 33,639
4,167
2,419
6,794
(8,141)
_______
$ 38,878
_______
$ 18,169
4,075
19,529
(8,141)
_______
$ 33,632
_______
$ 5,246
(14,634)
(48)
(118)
—
_______
$ (9,554)
_______
_______
Amounts recognized in the consolidated balance sheets consist of the
following at December 31,:
Accrued pension liability
Prepaid pension asset
Accumulated other comprehensive
income (loss)
Net amount recognized
2002
$ 9,476
—
(7,947)
_______
$ 1,529
_______
_______
2003
$ —
(9,554)
—
_______
$ (9,554)
_______
_______
The following actuarial assumptions were used to determine our
accumulated and projected benefit obligations as of December 31,:
Discount rate
Expected return on plan assets
Rate of compensation increase
2002
6.75%
8.00%
3.00%
2003
6.25%
8.00%
3.00%
annual report 2003
31 /36
Net periodic pension cost for the years ended December 31, consist of the
following:
Service cost—benefits earned
during the period
Interest cost on projected
benefit obligation
Expected return on plan assets
Net amortization and deferral
Settlement loss
Net periodic pension cost
2001
2002
2003
$
3,622
$
3,988
$
4,167
1,785
(1,211)
166
—
2,419
(1,728 )
750
2,839
_________ _________ _________
$
8,447
_________ _________ _________
_________ _________ _________
2,002
(1,595)
350
—
4,745
4,362
$
$
During the years ended December 31, 2001 and 2002, we recognized
comprehensive losses of $1.1 million and $4.0 million, respectively, net of
income taxes, as a result of the changes in the additional minimum pension
liability required to be recognized. During the year ended December 31,
2003, we recognized comprehensive income of $5.1 million, net of income
taxes, as a result of the change in the additional minimum pension liability
required to be recognized.
The following actuarial assumptions were used to determine our net
periodic pension benefit cost for the years ended December 31,:
Discount rate
Expected return on plan assets
Rate of compensation increase
2001
7.50%
8.00%
4.50%
2002
7.00%
8.00%
3.00%
2003
6.75%
8.00%
3.00%
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.
Asset management objectives include maintaining an adequate level of
diversification to reduce interest rate and market risk and providing
adequate liquidity to meet immediate and future benefit payment
requirements.
The allocation of pension plan assets by category is as follows at
December 31,:
Equity securities
Debt securities
Other
Total
Percentage of Pension
Plan Assets
Target
Allocation
2004
2002
56%
28
16
100%
60%
36
4
_________ _________ _________
100%
_________ _________ _________
_________ _________ _________
2003
41%
49
10
100%
As of December 31, 2003, the Plan held 28,000 shares of our common
stock, which had a fair value of $0.7 million. We believe that our long-term
asset allocation on average will approximate the targeted allocation. We
regularly review our actual asset allocation and periodically rebalance the
pension plan’s investments to our targeted allocation when deemed
appropriate.
Our 2004 pension plan funding is not expected to exceed $5.7 million.
Note 11 — Legal Matters
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. These claims are generally covered by various insurance policies,
32 /36
CONMED corporation
subject to certain deductible amounts and maximum policy limits. When
there is no insurance coverage, as would typically be the case primarily in
lawsuits alleging patent infringement, we establish sufficient reserves to cover
probable losses associated with such claims. We do not expect that the
resolution of any pending claims will have a material adverse effect on our
financial condition or results of operations. There can be no assurance,
however, that future claims, the costs associated with claims, especially
claims not covered by insurance, will not have a material adverse effect on
our future performance.
Manufacturers of medical products may face exposure to significant product
liability claims. To date, we have not experienced any material product liability
claims, 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, based on our
experience, believe is adequate. This coverage is on a claims-made basis.
There can be no assurance that claims will not exceed insurance coverage or
that such insurance will be available in the future at a reasonable cost to us.
Our operations are 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 could not have a material adverse effect on our financial condition
or results of operations.
In November 2003, we commenced litigation against Johnson & Johnson
and several of its subsidiaries, including Ethicon, Inc. for violation of federal
and state antitrust laws. The lawsuit claims that Johnson & Johnson
engaged in illegal and anticompetitive conduct with respect to sales of
product used in endoscopic surgery, resulting in higher prices to consumers
and the exclusion of competition. We have sought relief which includes an
injunction restraining Johnson & Johnson from continuing its anticompetitive
practice as well as receiving the maximum amount of damages allowed by
law. While we believe that our claims are well-grounded in fact and law, there
can be no assurance that we will be successful in our claim.
Note 12 — Other Expense (Income)
Other expense (income) for the year ended December 31, consists of the
following:
2002
2003
During 2003, we entered into an agreement with Bristol-Myers Squibb
Company ("BMS") and Zimmer, Inc., ("Zimmer") to settle a contractual
dispute related to the 1997 sale by BMS and its then subsidiary, Zimmer, of
Linvatec Corporation to CONMED Corporation. As a result of the
agreement, BMS paid us $9.5 million in cash, which was recorded as a gain
on settlement of a contractual dispute, net of $0.5 million in legal costs.
During 2003, we announced a plan to restructure our arthroscopy and
powered surgical instrument sales force by increasing our domestic sales
force from 180 to 230 sales representatives. The increase is part of our
integration plan for the Bionx acquisition discussed in Note 2. As part of
the sales force restructuring, we converted 90 direct employee sales
representatives into nine independent sales agent groups. As a result of
this restructuring, we now have 18 exclusive independent sales agent
groups managing 230 arthroscopy and powered surgical instrument sales
representatives. As a result of the termination of the 90 direct employee
sales representatives, we recorded a charge to other expense of
$2.8 million related to settlement losses of pension obligations, pursuant
to Statement of Financial Accounting Standards No. 88, "Employers’
Accounting for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits".
During 2003, we incurred acquisition-related charges of approximately
$4.5 million, of which $1.3 million has been recorded in cost of sales as
discussed in Note 2 and $3.2 million in acquisition and transition-related
costs have been recorded in other expense. The $3.2 million in costs
recorded to other expense are acquisition and transition-related, consisting
of $1.3 million in retention bonuses, travel, severance and other costs
related to acquisitions completed in the fourth quarter of 2002, and
$1.9 million of such costs related to the Bionx acquisition completed in
the first quarter of 2003.
Note 13 — Guarantees
We provide warranties on certain of our products at the time of sale.
The standard warranty on our capital and reusable equipment is for a period
of 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.
The changes in the carrying amount of service and product warranties for
the year ended December 31, are as follows:
Balance as of January 1,
Provision for warranties
Claims made
Warranties acquired
Balance as of December 31,
2002
$ 2,909
_______
4,287
(3,983)
—
_______
$ 3,213
_______
_______
2003
$ 3,213
_______
4,209
(3,934)
100
_______
$ 3,588
_______
_______
Gain on settlement of a contractual dispute
$ —
$ (9,000)
Note 14 — New Accounting Pronouncements
Pension settlement loss
Acquisition-related costs
Loss on settlement of a patent dispute
Other expense (income)
—
—
2,000
_______
$ 2,000
_______
2,839
3,244
—
_______
$ (2,917)
_______
In March 2003, we agreed to settle a patent infringement case filed by
Ludlow Corporation, a subsidiary of Tyco International Ltd., in return for a
one-time $1.5 million payment. We recorded a charge to income in the
fourth quarter of 2002 to recognize a loss of $1.5 million plus legal costs of
approximately $0.5 million.
In November 2002, FASB Interpretation ("FIN") No. 45, "Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" was issued. The interpretation
provides guidance on the guarantor’s accounting and disclosure
requirements for guarantees, including indirect guarantees of indebtedness
of others. We have adopted the disclosure requirements of the
interpretation as of December 31, 2002. The accounting guidelines are
applicable to guarantees issued after December 31, 2002 and require that
we record a liability for the fair value of such guarantees in the balance
sheet. FIN 45 has not had any material accounting impact on our financial
condition or results of operations.
annual report 2003
33 /36
In January 2003, FIN No. 46, "Consolidation of Variable Interest Entities"
was issued and subsequently revised in December 2003. The guidelines of
the interpretation are applicable for us in our first quarter 2004 financial
statements. The interpretation requires variable interest entities to be
consolidated if the equity investment at risk is not sufficient to permit an
entity to finance its activities without support from other parties or the equity
investors lack certain specified characteristics. Adoption of this
pronouncement is not expected to have any material impact on our financial
condition or results of operations during 2004.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections," which updates, clarifies, and simplifies certain
existing accounting pronouncements beginning at various dates in 2002 and
2003. This Statement rescinds SFAS 4 and SFAS 64, which required net
gains or losses from the extinguishment of debt to be classified as an
extraordinary item in the income statement. These gains and losses will now
be classified as extraordinary only if they meet the criteria for such
classification as outlined in Accounting Principles Board ("APB") Opinion 30,
which allows for extraordinary treatment if the item is material and both
unusual and infrequent in nature. We adopted this pronouncement during
2003. As a result we have reclassified the extraordinary loss recognized in
the third quarter of 2002 related to the refinancing of debt to ordinary income.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses financial
accounting and reporting for costs associated with exit or disposal
activities. This Statement supersedes Emerging Issues Task Force Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The provisions of this Statement are effective for exit or
disposal activities that are initiated after December 31, 2002, with early
application encouraged. This pronouncement has not had an impact on our
financial condition or results of operations during 2003.
In April 2003, SFAS No. 149 "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" was issued. SFAS No. 149 amends
and clarifies financial accounting and reporting for derivative instruments
embedded in other contracts and for hedging activities under SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 149 became applicable for us in our third quarter 2003. Adoption of
this pronouncement has not had any material impact on our financial
condition or results of operations during 2003.
In May 2003, SFAS No. 150 "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity" was issued. SFAS No.
150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability, many of which were previously classified as equity. SFAS No.
150 became applicable for us in our third quarter 2003. Adoption of this
pronouncement has not had any material impact on our financial condition
or results of operations during 2003.
In December 2003, SFAS No. 132R "Employers' Disclosures about
Pensions and Other Postretirement Benefits" was issued. SFAS No. 132R
amends the disclosure requirements of SFAS No. 132 to require additional
disclosures about assets, obligations, cash flow and net periodic benefit
cost. The statement is effective in 2003 and the related disclosures have
been included in Note 10 to the consolidated financial statements.
34 /36
CONMED corporation
Note 15 — Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data for 2002 and 2003 are as follows:
Three Months Ended
2002
Net sales
Gross profit
Net income
EPS
Basic
Diluted
2003
Net sales
Gross profit
Net income
EPS
Basic
Diluted
March
113,205
59,101
9,076
.36
.35
March
118,034
61,656
6,668
.23
.23
$
$
$
$
June
111,269
59,558
8,950
.34
.33
June
124,540
65,131
2,763
.10
.09
$
$
$
$
September
December
$
$
$
$
113,332
58,903
8,223
.29
.28
$
$
115,256
59,609
7,902
.28
.27
September
December
120,747
63,231
9,706
.34
.33
$
$
133,809
69,679
12,945
.45
.44
Unusual Items Included In Selected Quarterly Financial Data:
2002
September
In the third quarter of 2002, we recorded a charge of $1.5 million to recognize a loss on the early extinguishment of debt—see Note 6.
December
In the fourth quarter of 2002, we recorded a charge of $2.0 million related to the settlement of a patent dispute—see Note 12.
2003
March
In the first quarter of 2003, we recorded a charge of $7.9 million related to the write-off of purchased in-process research and development. The first quarter
effective tax rate was increased from 36.0% to 55.1% to reflect the nondeductibility of the $7.9 million charge.
In the first quarter of 2003, we recorded a gain of $9.0 million on the settlement of a contractual dispute and acquisition-related charges of $1.3 million to
other expense (income)—see Note 12.
June
In the second quarter of 2003, we recorded pension settlement losses of $2.1 million and acquisition-related charges of $1.2 million to other expense
(income)—see Note 12.
In the second quarter of 2003 we recorded losses on the early extinguishment of debt of $7.9 million—see Note 6.
September
In the third quarter of 2003, we recorded pension settlement losses of $0.7 million to other expense (income)—see Note 12.
December
In the fourth quarter of 2003, we reduced the effective tax rate for the year from 41.4% to 39.5% thereby decreasing income tax expense by $1.0 million.
annual report 2003
35 /36
36 /36
CONMED corporation
Board of Directors
Eugene R. Corasanti
Chairman of the Board and CEO
Joseph J. Corasanti, Esq.
President and COO
Bruce F. Daniels
Management Consultant and Retired Financial Executive,
Chicago Pneumatic Tool Company
Jo Ann Golden, CPA
Partner, Dermody, Burke and Browne, CPA, PLLC
Stephen M. Mandia
President, CEO of East Coast Olive Oil, Inc.
William D. Matthews, Esq.
Retired Chairman of the Board, Oneida Ltd.
Robert E. Remmell, Esq.
Partner in the law firm of Steates, Remmell, Steates and Dziekan
Stuart J. Schwartz, MD
Retired Physician
Executive and Senior Officers
Eugene R. Corasanti
Chairman of the Board and CEO
Joseph J. Corasanti, Esq.
President and COO
William W. Abraham
Senior Vice President
Thomas M. Acey
Treasurer and Secretary
Daniel S. Jonas, Esq.
General Counsel and Vice President – Legal Affairs
Alexander R. Jones
Vice President – Corporate Sales
Luke A. Pomilio
Vice President – Corporate Controller
Robert D. Shallish, Jr.
Vice President – Finance, CFO
John J. Stotts
Vice President – CONMED Patient Care
Frank R. Williams
Vice President – CONMED Endoscopy
Gerald G. Woodard
President – Linvatec Corporation
Shareholder Information
Interested shareholders may obtain a copy of the Company’s Form 10-K
without charge upon written request to:
Investor Relations Department
CONMED Corporation
525 French Road
Utica, NY 13502
Transfer Agent/Registrar
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Stock
The Nasdaq Stock Market®
Stock Symbol: CNMD
Independent Accountants
PricewaterhouseCoopers LLP
One Lincoln Center
Syracuse, NY 13202
General Counsel
Daniel S. Jonas, Esq.
525 French Road
Utica, NY 13502
Special Counsel
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
Corporate Offices
CONMED Corporation
525 French Road
Utica, NY 13502
(315) 797-8375
Fax No. (315) 797-0321
Customer Service 1-800-448-6506
email: info@conmed.com
web site: www.conmed.com
Operating Subsidiaries
CONMED Electrosurgery
CONMED Integrated Systems, Inc.
CONMED Integrated Systems Canada ULC
CONMED Receivables Corporation
Envision Medical Corporation
Linvatec Corporation
Linvatec Austria GmbH
Linvatec Australia Pty. Ltd.
Linvatec Biomaterials, Inc.
Linvatec Biomaterials, Ltd.
Linvatec Belgium S.A.
Linvatec Canada ULC
Linvatec Deutschland GmbH
Linvatec Europe SPRL
Linvatec France S.A.R.L.
Linvatec Korea Ltd.
Linvatec Nederland B.V.
Linvatec Spain, S.L.
Linvatec U.K. Ltd.
Designed by Romanelli
Mission Statement
Our mission is to improve the quality of healthcare
by designing, producing and marketing
innovative, high-quality products. Our emphasis is
on customer satisfaction and sustained growth of
shareholder equity. In pursuit of our goals, we
strive to demonstrate thoughtful leadership,
provide meaningful opportunities for employees,
and be a responsible member of the global and
local communities in which we conduct business.
C M ®
ON ED
C O R P O R A T I O N
525 FRENCH ROAD, UTICA, NY 13502 USA
©CONMED CORPORATION
3/04, 14M, PRINTED IN THE U.S.A.