C O N M E D C O R P O R AT I O N
2 0 0 4 A N N U A L R E P O R T
G R O W T H
2 Financial Highlights
3 Letter to Shareholders: The Year in Review
6 Endoscopic Technologies
8 2004 Highlights
10 Market for CONMED’s Common Stock and Related Stockholder Matters
10 Five Year Summary of Selected Financial Data
11 Management’s Discussion and Analysis of Financial Condition and Results of Operations
19 Management’s Report on Internal Control Over Financial Reporting
20 Report of Independent Registered Public Accounting Firm
21 Consolidated Balance Sheets
22 Consolidated Statements of Income
23 Consolidated Statements of Shareholders’ Equity
24 Consolidated Statements of Cash Flows
25 Notes to Consolidated Financial Statements
IBC Board of Directors, Executive and Senior Officers, Shareholder Information
FINANCIAL HIGHLIGHTS
NET SALES (IN $ MILLIONS)
100.2
126.6
139.6
558.4
497.1
428.7
453.1
376.2
395.9
339.3
95
96
97
98
99
00
01
02
03
04
NET INCOME1 (IN $ MILLIONS)
2
16.3
14.7
10.9
34.2
32.1
33.5
27.2
24.4
17.8
19.3
95
96
97
98
99
00
01
02
03
04
SHAREHOLDERS’ EQUITY (IN $ MILLIONS)
433.5
448.0
386.9
283.6
211.3
230.6
158.6
162.7
182.2
75.0
95
96
97
98
99
00
01
02
03
04
1Excludes $34 million pre-tax in-process research and development charge in 1997 related to the acquisition of Linvatec Corporation.
LETTER TO SHAREHOLDERS:
The Year in Review
Joseph J. Corasanti, Eugene R. Corasanti
We are pleased to report that CONMED Corporation experienced another strong year in 2004. Revenues
surpassed the $500 million mark for the first time. Internal growth was spread across all of our business
units. In keeping with our strategy of acquiring accretive and strategic product lines and businesses, we
added a new division, CONMED Endoscopic Technologies ("CET") with respected brand recognition in
its field. We increased cash flow, and improved our capital structure. In all of these areas, we passed
important milestones in our Company’s history.
3
Revenues
Revenues reached record levels at $558.4 million, an increase of over 12% from the prior year’s record
revenues of $497.1 million. This growth was seen in all areas of our businesses. We experienced overall
growth in each business unit, in many cases at rates nearly two times the rates from 2003 rates:
2004 Revenues (millions) and Rates of Growth
________________________________________________________________
Arthroscopy
Powered Surgical Instruments
Electrosurgery
Patient Care
EndoSurgery
Endoscopic Technologies
(for 3 months only)
Sales
$ 204.9
128.6
85.9
75.9
47.4
15.7
Growth
Percent
12.6
5.4
11.1
8.4
3.5
—
________________________________________________________________
Total
$ 558.4
12.3%
CET: Growth in the Number of CONMED Divisions
Our growth was more than just an increase in sales of products. Our growth also came in the form of
CONMED Endoscopic Technologies ("CET"), our newest division. Acquired from C.R. Bard as of
September 30, 2004, CET serves the market for gastroenterologists and pulmonologists providing
minimally invasive single-use products for the diagnosis and treatment of conditions of the digestive
tract as well as the lungs. This is a growing market with the aging of the baby boom generation.
4
Financial Performance
New Technology and Products
By almost any measure of financial performance,
2004 was a record year for CONMED. We experienced
record sales for the 17th consecutive year, with
revenues growing to $558.4 million, an increase of
$61.1 million from the $497.1 million in sales
produced during 2003.
Our increases on the top line did not come at the
expense of the bottom line, an area we never stop
focusing on. We generated record earnings when
measured without unusual charges relating to
acquisitions, debt refinancings and a product line
termination. Non-GAAP diluted earnings per share
increased 11.3% to $1.68 in 2004 compared to
$1.51 per share in 2003 on a 2.9% increase in diluted
shares outstanding. A reconciliation of our reported
GAAP earnings per share and our earnings per share
without the unusual charges or credits is included on
page 5 of this Annual Report. While GAAP net income
for 2004 was $33.5 million—an amount which
translates to diluted earnings per share of $1.11,
compared to $32.1 million of net income in 2003 with
diluted earnings per share of $1.10—these figures do
not provide the full story of increasing cash flows.
During 2003, we generated $58.4 million in cash from
operations. In 2004, cash flow from operations, an
important measure of financial strength, increased to
$74.8 million.
Recognizing that interest rates are at historically low
levels, we took advantage of favorable market
conditions to issue convertible notes, the principal
effect of which is to lock in fixed interest rates at
2.5% for $150 million of debt. This serves two
purposes. First, it reduces our interest costs for
$150 million of debt, lowering the interest rate
expense from a variable rate of approximately 4.5%
to 2.5%, resulting in significant interest savings.
Secondly, this also offers some measure of protection
from the possibility that interest rates will rise in the
coming months and years, a probability that seems
increasingly likely according to most economists.
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. Our
orthopedics business posted a 9.7% increase,
with increases in Arthroscopy, Powered Surgical
Instruments and Imaging. Electrosurgery, one of
CONMED’s first product lines, generated 11.1%
increases, its second straight year of double-digit
increases. Likewise, the Patient Care line, CONMED’s
other legacy product line, delivered accelerated
growth as a result of adding new products to the line.
EndoSurgery, likewise, posted increases.
By the end of the year, our debt to capitalization ratio
was 40%, well within our targeted range of 35%-45%.
We continued our string of new product offerings
in 2004. In Powered Surgical Instruments, we
introduced the PowerPro® pneumatic line of powered
surgical handpieces. This complements our full line
of PowerPro® large bone power products by
expanding the power source for the PowerPro® line to
include pneumatic power in addition to our battery
and electric offerings.
We continued to lead with technology in Imaging.
While our second generation 3CCD Autoclavable
Camera Head is still a leader in the field of
autoclavable cameras, our new enhanced definition
(“ED”) camera system fueled 36% growth for the year
in Imaging. Precise video images are required for
minimally invasive surgery in joints (arthroscopy)
as well as in the abdomen (laparoscopy). While we
have always been a leader in arthroscopy imaging,
we increasingly are participating in the larger market
of laparoscopy imaging thanks to the clarity and
precision of our ED cameras.
Pulse oximetry monitoring is the newest product to
be added to our Patient Care line. Pulse oximetry
measures oxygen levels within a patient’s blood
and is an important vital sign measurement used in
operating rooms, emergency rooms and many clinical
care areas of hospitals. Early in 2004 we licensed this
product from a supplier and have found, as we had
expected, that the price/value proposition of our
offering compares favorably to the competition.
As a result, we have seen our sales grow steadily
throughout 2004. We expect further sales increases
for this product in 2005.
We are committed to continuing our pace of new
product introductions in 2005 and beyond, and
believe that this investment in our future will
continue to produce solid returns.
Distribution
We continue to improve our distribution. In our
orthopedics business, we increased the training
for domestic sales representatives handling our
products. In our other businesses, we continued the
extensive training programs we had started in prior
years. As we begin to introduce our new CET sales
professionals to the products now available to them
on a cross-selling basis, we expect our customers to
hear more about CONMED products on a daily basis.
We firmly believe that the more physicians truly
know our products and the value we deliver, the
more they like them.
The increases in domestic sales were not at the
expense of our sales efforts outside the United States.
International sales continue to increase in absolute
and relative terms. Sales outside the United States
reached record levels: $193.6 million for 2004, which
represented 34.7% of total revenues, the highest level
since the Company’s founding.
Robert E. Remmell, Esq.
We note with sadness the passing of Robert Remmell,
Director. Bob served on our board from before we
became a public company in 1987. With a sharp wit,
and as both a lawyer’s lawyer as well as a
businessman’s lawyer, he proved time and time again
an uncanny ability to focus on the salient issues facing
the Company. Losing his companionship and counsel
has brought into sharp relief the importance of taking
the larger perspective; that is, we see the importance
not only of the goals we accomplish, but also of the
road we take to get there.
Outlook
We look forward to the future. Our business model has
proven to be solid: growth through servicing customers
with market-leading, top-notch products and
technologies. We continue to seek acquisitions at
sensible prices with products that match well with
existing businesses, or product lines similar to the
ones we currently offer. Our management team has
never been as strong as it is today. We continue to
adhere to the strategy that has brought us to where
we are today. We are far from finished, and remain
confident that our best days still lie before us.
As always, we thank you for your continued trust
and support.
Eugene R. Corasanti
Chairman of the Board of Directors,
Chief Executive Officer
Joseph J. Corasanti
President,
Chief Operating Officer
Reconciliation of Reported Net Income to
Net Income Before Unusual Items2
(In thousands except per share amounts)
(Unaudited)
Twelve months ended December 31,
2003
2004
Reported net income
$ 32,082 $ 33,465
_______ _______
Acquisition-related costs included
in costs of sales
Write-off of purchased in-process
research and development assets
Gain on settlement of a contractual
dispute net of legal costs
Pension settlement loss
4,429
_______ _______
1,253
16,400
_______ _______
7,900
(9,000)
2,839
—
—
Termination of product offering
— 2,396
Other acquisition-related costs
Total other (income) expense
1,547
_______ _______
3,244
3,943
_______ _______
(2,917)
Acquisition-related interest expense
—
360
Loss on early extinguishment
of debt
Nonrecurring expense before
income taxes
825
_______ _______
8,078
14,314
25,957
Provision (benefit) for income taxes
on nonrecurring expense
(8,955)
_______ _______
(2,309)
Net income before unusual items $ 44,087 $ 50,467
_______ _______
Per share data:
Reported net income
Basic
Diluted
Net income before
nonrecurring items
Basic
Diluted
$
1.11 $
1.10
1.13
1.11
5
$
1.52 $
1.51
1.71
1.68
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.
INTRODUCING CONMED’S NEWEST BUSINESS UNIT...
E N D O S C O P I C T E C H N O L O G I E S
6
CONMED first addressed the needs of the
Gastroenterology market with our RF
electrosurgical technology. Our extensive
line of electrosurgical generators provided
the GI Endoscopist and Surgeon the power
of choice when determining what energy
sources to use for their hemostasis needs
during polypectomy procedures.
Our acquisition of the proprietary argon
beam coagulation technology in 1995
allowed us the opportunity to further
penetrate the GI market. CONMED’s R&D
efforts with argon gas proved to offer
significantly enhanced clinical outcomes
by delivering efficient and rapid
hemostasis for diagnostic and therapeutic
gastrointestinal procedures.
We continued to push into this market
with our addition of the BiCap™ system of
products in 2003. This specialty bipolar
electrosurgical generator enjoys a
tremendous niche position within the GI
marketplace and enhanced our brand
recognition.
While these products, along with some of
our Patient Care offerings, served as our
entrée in the GI market, we were not
positioned to dedicate a sales force to it—
until now.
In October 2004, CONMED acquired the
majority of the innovative gastroenterology
and pulmonology products formerly sold
by C.R. Bard’s Endoscopic Technologies
division. A significant portion of this
transaction was the inclusion of the
approximately 50 highly experienced,
professional and dedicated sales
representatives.
Now known as CONMED Endoscopic
Technologies, our new business unit brings
with it over fifteen years of concentrated
experience in the development of
minimally invasive diagnostic and
therapeutic products that are used in
conjunction with procedures requiring
flexible endoscopy. Our primary customers
are GI endoscopists, pulmonologists,
surgeons and nurses who perform these
procedures in both hospital and outpatient
clinical settings.
The estimates of the GI market are very
attractive and are expected to continue to
grow based on global demographics. What
is considered to be a $900 million market
with approximately 8.4 million procedures
performed annually, it remains in many
ways in its infancy.
Past growth has been within the diagnostic
segment of the market as technology has
driven the single use device business.
Recent and future growth will come via the
specialty therapeutic aspects of the market.
CONMED Endoscopic Technologies has a
leading position in this space with its
differentiated specialty product approach.
Our brand is recognized as being an
innovative developer of new products
that improve a physician’s practice and
procedural cost efficiencies while
enhancing clinical outcomes for the
patient.
An already extensive breadth of product
offerings of biliary devices such as state-
of-the-art metal stents for stricture
management, biopsy forceps, polypectomy
snares and stone removal balloons are all
dramatically enhanced by the synergistic
introduction of CONMED’s electrosurgical
and argon beam coagulation expertise
and product offerings.
CONMED Endoscopic Technologies stands
well positioned to match its strong
position in diagnostic devices with a
continuing stream of technologically
advanced therapeutic products including
energy based solutions for the rapidly
growing GI market through its dedicated
and professional sales force.
“I have had the unique opportunity to
watch CONMED grow from a small
medical device company with a few
quality products to its current status
with a very broad and impressive
product offering. As a practicing
OB/GYN surgeon, I use products
from just about every one of their
businesses during my surgical
procedures. Whether it’s their
ClearSite wound care dressing,
Universal Plus Suction/Irrigation
system, laparoscopic electrodes,
electrosurgical generators or bipolar
Kleppinger forceps, CONMED’s
products have always delivered
quality results and have enhanced my
ability to produce positive clinical
outcomes for patients.”
Prabhat Ahluwalia, MD
• Director, Gynecological Minimal
Invasive Surgery, St. Elizabeth
Medical Center, Utica, NY
• Preceptor, Gynecologic Endoscopic
Fellowship, American Association of
Gynecologic Laparoscopists
• Adjunct Assistant Professor,
Albany Medical College,
Dept. of OB/GYN
• Fellow, American College of
Obstetrics & Gynecology
• Inventor, Patent Holder for
VCARE®—Vaginal Cervical
Ahluwalia Retractor and Elevator
7
2 0 0 4 H I G H L I G H T S
8
Pulse Oximetry
CONMED kicked off 2004 with the
announcement of an agreement with
Dolphin Medical, Inc. to distribute a full
line of pulse oximetry products. Pulse
oximeters are used to continuously
monitor a patient’s arterial blood oxygen
saturation and pulse rate in critical care
situations. Our sales expectations were
exceeded due to the quality of this
product line and the tremendous efforts
of our Patient Care sales force.
4th Generation Autoclavable
Video Systems
As a recognized leader in Autoclavable
Video Systems, our CONMED Linvatec
business unit introduced our 4th
generation of these state-of-the-art
products during 2004. This new release
was designed to further address the
individual and unique needs of the
multitude of surgical specialties that
share the use of medical video systems
in today’s modern surgical suites. Our
successful results with the introduction
of this new enhanced definition video
camera system throughout 2004 have
allowed CONMED to further establish
our brand across these various
specialties, thereby opening up
opportunities for all of our business units.
Orthopedics
Our broad line of Arthroscopy and
Powered Surgical Instrument products
enjoyed fine growth during 2004. One of
the highlights of this performance was
the balanced nature that fueled it. Our
new fluid management system called the
10k® Pump has been favorably received
by the market and was joined by our
release of the PowerPro® Pneumatic
System for both large and small bone
orthopedic procedures. In addition,
the continuing introduction of highly
specialized bioabsorbable implants such
as suture anchors and interference screws
for Sports Medicine knee and shoulder
procedures allowed our focused field
sales force to enhance their relationships
with key arthroscopic surgeons resulting
in increased revenues.
“I am a sports medicine orthopedic
surgeon in academic practice. I have
been involved with Concept/Linvatec/
CONMED for over 20 years.
During this period of time, I have
been very satisfied with the
professional business association.
The company has every product
necessary to practice arthroscopic
surgery.”
9
Electrosurgery System 5000™
The continued strong performance of
our Electrosurgery business unit was
evidenced by the growth within our array
of single use devices. This particular
growth was clearly driven by the presence
of our System 5000™ electrosurgical
generator. The state-of-the-art technology
within this unit continues to penetrate
the highly specialized surgical markets
with its performance characteristics
thereby pulling through our accessories
and enhancing our brand.
Donald Johnson, MD
• Director Sports Medicine Clinic
Carleton University, Ottawa
• Assistant Professor of Orthopedic
Surgery, University of Ottawa
• Chief of the Sports Medicine Service,
University of Ottawa
• President of the Arthroscopy
Association of North America
• Attending Staff Surgeon,
The Ottawa Hospital
• Author, The ACL Made Simple
• Secretary, Board of Directors,
International Society of
Arthroscopy, Knee Surgery,
and Orthopedic Sports Medicine
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 under the symbol “CNMD.” At March 9, 2005,
there were 1,142 registered holders of our common stock and approximately 10,433 accounts held in “street name.”
The following table sets forth quarterly high and low sales prices for the years ended December 31, 2003 and 2004, as reported by the
NASDAQ Stock Market.
2003
_________________________
2004
___________________________
Low
Low
Period
________________________________________________________________________________________________________
$ 23.72
$ 13.95
First Quarter
24.00
16.69
Second Quarter
20.73
18.21
Third Quarter
25.47
19.52
Fourth Quarter
High
$ 29.54
30.89
27.92
30.02
High
$ 20.74
20.83
22.00
24.30
We did not pay cash dividends on our common stock during 2003 or 2004 and do not currently intend to pay dividends for the
foreseeable future. Future decisions as to the payment of dividends will be at the discretion of the Board of Directors, subject to
conditions then existing, including our financial requirements and condition and the limitation and payment of cash dividends
contained in debt agreements.
Our Board of Directors has authorized a share repurchase program; See Note 8 to the Consolidated Financial Statements for further
discussion.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
10
(In thousands, except per share data)
Years Ended December 31,
Consolidated Statements of Income(1):
Net sales
Income from operations
Net income(2)(3)
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
2000
2001
2002
2003
2004
$ 395,873
64,464
19,314
$ 428,722
68,958
24,406
$
453,062
79,349
34,151
$ 497,130
79,955
32,082
$ 558,388
63,161
33,465
$
$
$
.84
1.08
.83
1.07
22,967
23,271
29,487
14,050
3,470
679,571
378,748
230,603
$
$
$
1.02
1.25
1.00
1.23
24,045
24,401
30,148
14,443
1,402
701,608
335,929
283,634
$
$
$
1.25
1.25
1.23
1.23
27,337
27,827
22,370
13,384
5,626
742,140
257,387
386,939
$
$
$
1.11
1.11
1.10
1.10
$
1.13
1.13
1.11
1.11
28,930
29,256
29,523
30,105
24,854
9,309
$ 26,868
12,419
5,986
805,058
264,591
433,490
$
4,189
872,825
294,522
447,983
(1)Results of operations of acquired businesses have been recorded in the financial statements since 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 Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (“SFAS 142”) were adopted
relative to the cessation of amortization for goodwill and certain intangible assets. Had we accounted for goodwill and certain intangibles in accordance with SFAS 142 for
all periods presented, net income would have been $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.
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 and related notes contained
elsewhere in this Annual Report.
Overview of CONMED Corporation
CONMED Corporation (“CONMED,” the “Company,” “we” or “us”)
is a worldwide developer, manufacturer and distributor of a
broad portfolio of advanced surgical instruments and medical
devices with an emphasis on minimally invasive procedures and
monitoring. Our products are used by surgeons and physicians
in a variety of specialties including orthopedics, general surgery,
gynecology, neurosurgery and gastroenterology. We offer surgical
products and technologies to our customers through six
principal product lines. These product lines and the percentage
of consolidated revenues associated with each, are as follows:
Arthroscopy
Powered Surgical Instruments
Electrosurgery
Patient Care
Endoscopy
Endoscopic Technologies
Consolidated Net Sales
2003
2002
37%
36%
25
25
15
15
14
16
9
8
—
—
______ ______ ______
100%
100% 100%
______ ______ ______
______ ______ ______
2004
37%
23
15
14
8
3
A significant amount of our products are used in surgical
procedures with approximately 75% of our revenues derived
from the sale of disposable products. We manufacture
substantially all of our products in facilities located in the
United States. We market our products both domestically and
internationally directly to customers and through distributors.
International sales approximated 29%, 33% and 35% in 2002,
2003 and 2004, respectively.
Business Environment, Opportunities and Challenges
The aging of the worldwide population along with lifestyle
changes, continued cost containment pressures on healthcare
systems and the desire of clinicians and administrators to use less
invasive (or non-invasive) procedures are important trends which
are driving the growth for our surgical and patient care products.
We have historically used strategic business acquisitions and
exclusive distribution relationships to diversify our product
offerings, increase our market share in certain product lines and
realize economies of scale. In 2003, we made important progress
in broadening our Arthroscopy product line with the acquisition
of Bionx Implants, Inc. (the “Bionx acquisition”—See Note 2 to
the Consolidated Financial Statements). In January 2004, we
announced an agreement with Dolphin Medical, Inc., a
subsidiary of OSI Systems, Inc., under which we became the
exclusive North American distributor for a full line of Dolphin®
pulse oximetry products. These products are included in our
Patient Care product line.
On September 30, 2004 we completed the acquisition of certain
products of the Endoscopic Technologies Division of C.R. Bard,
Inc. (the “Bard Endoscopic Technologies acquisition”—See Note
2 to the Consolidated Financial Statements). The acquired
product line consists of various disposable products used by
gastroenterologists to diagnose and treat diseases of the
digestive tract. Several of the products are used in conjunction
with electrosurgical devices to cause hemostasis following the
removal of diseased tissue. It is anticipated that these products
will complement our current Electrosurgery product offerings.
Manufacturing of the products is currently being conducted in
various C.R. Bard facilities under a transition agreement. It is
anticipated that future manufacturing will be shifted to our
facilities during the third quarter of 2005.
Continued innovation and commercialization of new proprietary
products and processes are essential elements of our long-term
growth strategy. In February 2005, we unveiled several new
products at the American Academy of Orthopedic Surgeons
Annual Meeting which will enhance our arthroscopy and
powered instrument product offerings. Our reputation as an
innovator is exemplified by these recent product introductions,
which include an Advantage® Turbo Arthroscopic Shaver System;
PINN-ACL® cross pin device; Lightwave™ suction ablator;
PowerProMax™ powered instrument handpieces, batteries and
attachments; ThRevo™ triple-loaded suture anchor; and
SuperRevo®/Bio-Anchor®/Duet™/Impact™ suture anchors pre-
threaded with Herculine™.
Our current research initiatives include the development of
reflectance technology products. This technology permits non-
invasive analysis of blood oxygen levels in clinical situations
which previously could not be accomplished using traditional
non-invasive techniques (“Pro2®”). We anticipate a 2005 product
launch in the United States and Europe.
Additionally, in 2003 we acquired technology for a product referred
to as Endotracheal Cardiac Output Monitor (“ECOM”). Our ECOM
product offering is expected to replace catheter monitoring of
cardiac output with a specially designed endotracheal tube which
utilizes proprietary bio-impedance technology. A large portion of
the development of this product, as well as future product
enhancements, will be conducted in our newly created research
subsidiary in Israel. In June 2004, CONMED and our Israeli
subsidiary were awarded a $1 million grant from the Israel-U.S.
Binational Industrial Research and Development Foundation to
assist in product development. We anticipate a 2006 product
launch in the United States and Europe.
Certain of our products, particularly our line of surgical suction
instruments, tubing and ECG electrodes, are more commodity in
nature, with limited opportunity for product differentiation.
These products compete in mature, price sensitive markets. As a
result, while sales volumes have continued to increase, we have
experienced and expect that we will continue to experience
pricing and margin pressures in these product lines. We believe
that we may continue to profitably compete in these product
lines by maintaining and improving our low cost manufacturing
structure. In addition, we expect to continue to use cash
generated from these low margin, low capital intensive products
to invest in, improve and expand higher margin product lines.
Critical Accounting Estimates
Preparation of our financial statements requires us to make
estimates and assumptions which affect the reported amounts
of assets, liabilities, revenues and expenses. Note 1 to the
Consolidated Financial Statements 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.
11
Revenue Recognition
Revenue is recognized when title has been transferred to the
customer which is generally at the time of shipment. The
following policies apply to our major categories of revenue
transactions:
• Sales to customers are evidenced by firm purchase orders.
Title and the risks and rewards of ownership are transferred
to the customer when product is shipped. Payment by the
customer is due under fixed payment terms.
• We place certain of our capital equipment with customers in
return for commitments to purchase disposable products over
time periods generally ranging from one to three years. In
these circumstances, no revenue is recognized upon capital
equipment shipment and we recognize revenue upon the
disposable product shipment. The cost of the equipment is
amortized over the term of individual commitment
agreements.
• Product returns are only accepted at the discretion of the
Company and in accordance with our “Returned Goods Policy.”
Historically the level of product returns has not been
significant. We accrue for sales returns, rebates and allowances
based upon an analysis of historical customer returns and
credits, rebates, discounts and current market conditions.
• The Company’s terms of sale to customers generally do not
include any obligations to perform future services. Limited
warranties are generally provided for capital equipment sales
and provisions for warranty are provided at the time of product
sale based upon an analysis of historical data.
12
• Amounts billed to customers related to shipping and
handling have been included in net sales. Shipping and
handling costs included in selling and administrative expense
were $7.5 million, $8.3 million and $9.3 million for 2002, 2003
and 2004, respectively.
• We sell to a diversified base of customers around the world
and, therefore, believe there is no material concentration of
credit risk.
• We assess the risk of loss on accounts receivable and adjust
the allowance for doubtful accounts based on this risk
assessment. Historically, losses on accounts receivable have
not been material. Management believes that the allowance
for doubtful accounts of $1.2 million at December 31, 2004 is
adequate to provide for probable losses resulting from
accounts receivable.
Inventory Reserves
We maintain reserves for excess and obsolete inventory resulting
from the inability to sell our products at prices in excess of
current carrying costs. The markets in which we operate are
highly competitive, with new products and surgical procedures
introduced on an on-going basis. Such marketplace changes may
result in our products becoming obsolete. We make estimates
regarding the future recoverability of the costs of our products
and record a provision for excess and obsolete inventories based
on historical experience, expiration of sterilization dates and
expected future trends. If actual product life cycles, product
demand or acceptance of new product introductions are less
favorable than projected by management, additional inventory
write-downs may be required. We believe that our current
inventory reserves are adequate.
Business Acquisitions
We have a history of growth through acquisitions, including
the Bard Endoscopic Technologies acquisition in 2004. Assets
and liabilities of acquired businesses are recorded under the
purchase method of accounting at their estimated fair values
as of the date of acquisition. Goodwill represents costs in excess
of fair values assigned to the underlying net assets of acquired
businesses. Other intangible assets primarily represent
allocations of purchase price to identifiable intangible assets
of acquired businesses. We have accumulated goodwill of
$334.5 million and other intangible assets of $195.2 million
as of December 31, 2004.
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. 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 may be affected by changes in industry or
market conditions or the rate and extent to which anticipated
synergies or cost savings are realized with newly acquired entities.
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 undiscounted future cash flows indicate
that the carrying amount of the asset may not be recoverable.
An impairment loss is recognized by reducing the recorded value
to its current fair value. Although no goodwill or other intangible
asset impairment has been recorded to date, there can be no
assurance that future impairment will not occur. It is our policy
to perform annual impairment tests in the fourth quarter.
In connection with the Bard Endoscopic Technologies
acquisition, significant estimates were made in the $16.4 million
valuation of purchased in-process research and development
assets. The purchased in-process research and development
value relates to next generation gastro-intestinal products,
which are expected to be released between the fourth quarter of
2005 and second quarter of 2006. The acquired projects include
enhancements and upgrades to existing device technology,
introduction of new device functionality and the development
of new technology for gastro-intestinal 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. Estimated future net
cash flows were discounted back to their present values using a
discount rate of 17%, which was based on the weighted-average
cost of capital for publicly-traded companies within the medical
device industry, 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 commercial feasibility. In total, these projects
were approximately 40% complete as of the acquisition date.
The total budgeted costs for the projects were approximately
$8.5 million and the remaining costs to complete these projects
were approximately $5.0 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 may be
made that the underlying assumptions used to forecast the
future 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
estimated results.
See Note 2 to the Consolidated Financial Statements for further
discussion.
Pension Plan
We sponsor a defined benefit pension plan covering
substantially all our employees. Overall benefit levels provided
under the plan were reduced effective January 1, 2004 resulting in
a reduction in the projected benefit obligation of approximately
$6.4 million. Major assumptions used in accounting for the plan
include the discount rate, expected return on plan assets, rate
of increase in employee compensation levels and expected
mortality. Assumptions are determined based on Company data
and appropriate market indicators, and are evaluated annually
as of the plan’s measurement date. A change in any of these
assumptions would have an effect on net periodic pension costs
reported in the Consolidated Financial Statements.
Lower market interest rates have resulted in us lowering the
discount rate used in determining pension expense from 6.25%
in 2004 to 5.75% in 2005. This change in assumption will result in
higher pension expense during 2005.
We have used an expected rate of return on pension plan assets of
8.0% for purposes of determining the net periodic pension benefit
cost. In determining the expected return on pension plan assets,
we consider the relative weighting of plan assets, the historical
performance of total plan assets and individual asset classes and
economic and other indicators of future performance. In addition,
we consult with financial and investment management
professionals in developing appropriate targeted rates of return.
We have estimated our rate of increase in employee compensation
levels at 3.0% consistent with our internal budgeting.
As of December 31, 2004, the Company changed from the 1984
Unisex Pension mortality table to the 1994 Group Annuity
Reserving mortality table for purposes of determining expected
mortality. This change in assumption will result in higher
pension expense during 2005.
Based on these and other factors, 2005 pension expense is
estimated at approximately $4.5 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
$22.7 million at December 31, 2004. 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. Any subsequently recognized tax benefits associated
with the valuation allowance would be allocated to reduce
goodwill. In assessing the need for a valuation allowance, we
estimate future taxable income, considering the feasibility of
ongoing tax planning strategies and the realizability of tax loss
carryforwards. Valuation allowances related to deferred tax assets
may be impacted by changes to tax laws, changes to statutory
tax rates and future taxable income levels.
See Note 7 to the Consolidated Financial Statements for
further discussion.
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,
2002
2003
2004
Net sales
Cost of sales
Gross margin
Selling and administrative expense
Research and development expense
Write-off of purchased in-process
research and development assets
Other expense (income), net
Income from operations
Loss on early extinguishment of debt
Interest expense
Income before income taxes
Provision for income taxes
Net income
100.0% 100.0% 100.0%
47.8
______ ______ ______
52.2
31.7
3.4
47.7
52.3
30.8
3.6
48.6
51.4
32.8
3.6
—
0.4
17.5
0.3
5.5
11.7
4.2
7.5%
1.7
2.9
(0.6)
0.8
______ ______ ______
16.0
11.3
1.6
0.1
3.7
2.3
______ ______ ______
10.7
8.9
2.9
4.2
______ ______ ______
6.0%
6.5%
______ ______ ______
______ ______ ______
13
2004 Compared to 2003
Sales for 2004 were $558.4 million, an increase of $61.3 million
(12.3%) compared to sales of $497.1 million in 2003. The Bionx
acquisition and Bard Endoscopic Technologies acquisition
accounted for $3.3 million and $15.7 million of the increase,
respectively, and favorable foreign currency exchange rates
accounted for $9.7 million. The Bionx acquisition and Bard
Endoscopic Technologies acquisition are described more fully
in Note 2 to the Consolidated Financial Statements.
• Arthroscopy sales increased $22.9 million (12.6%) in 2004 to
$204.9 million from $182.0 million in 2003, principally as a
result of the Bionx acquisition and increased sales of our
procedure specific, knee reconstruction, soft tissue fixation and
video imaging products for arthroscopy and general surgery.
This increase was offset in part by reduced sales of integrated
operating room systems and equipment.
• Powered surgical instrument sales increased $6.6 million
(5.4%) in 2004 to $128.6 million from $122.0 million in 2003,
principally as a result of increased sales of our PowerPro® line
of large bone instruments. This increase was partially offset by
decreased sales of our small bone instruments and specialty
product offerings.
• Patient care sales increased $5.9 million (8.4%) in 2004 to
$75.9 million from $70.0 million in 2003, principally as a result
of increased sales of our pulse oximetry monitoring devices,
ECG electrodes, surgical suction instruments and other patient
care products.
14
• Electrosurgery sales increased $8.6 million (11.1%) in 2004 to
$85.9 million from $77.3 million in 2003, principally as a result
of increased sales of electrosurgical disposable ground pads
and pencils.
• EndoSurgery sales increased $1.6 million (3.5%) in 2004 to
$47.4 million from $45.8 million in 2003, as a result of
increased sales of our various laparoscopic instrument
products and systems.
• Endoscopic Technologies sales for 2004 were $15.7 million
representing the inclusion of results of operations for the
former Endoscopic Technologies Division of C.R. Bard since
the date of acquisition.
Cost of sales increased to $271.5 million in 2004 compared to
$237.4 million in 2003, primarily as a result of increased sales
volumes in each of our principal product lines as described
above. Gross profit margins decreased from 52.2% in 2003 to
51.4% in 2004. We incurred $4.4 million and $1.3 million of
acquisition-related expenses during 2004 and 2003, respectively,
which have been included in cost of sales. The decrease in gross
margin percentage in 2004 as compared to 2003 is principally
due to the increase in acquisition-related expenses.
The $4.4 million of acquisition-related charges included in cost
of sales in 2004, consists of the following: $2.3 million of
expense which represents a portion of the step-up to fair value
recorded relating to the sale of inventory acquired through the
Bard Endoscopic Technologies acquisition; and $2.1 million in
charges representing the incremental costs we are incurring
during a transition period in which we are continuing to
purchase the acquired products from C.R. Bard. During 2005,
we expect to continue to experience higher incremental costs
until manufacturing of the acquired products is integrated into
our facilities during the third quarter of 2005.
Selling and administrative expense increased to $183.2 million
in 2004 as compared to $157.5 million in 2003. Selling and
administrative expense as a percentage of net sales increased to
32.8% in 2004 from 31.7% in 2003. This increase of 1.1 percentage
points is attributable to increased selling expenses primarily
associated with the transition to a larger, independent sales
agent based sales force in our arthroscopy and powered surgical
instrument product lines (0.6 percentage points) and increased
administrative expenses associated with litigation against
Johnson & Johnson (See Note 11 to the Consolidated Financial
Statements) and our Sarbanes-Oxley compliance program
(0.5 percentage points).
Research and development expense was $20.2 million in 2004
compared to $17.3 million in 2003. As a percentage of net sales,
research and development expense increased to 3.6% in 2004
from 3.4% in 2003. The increase in research and development
expense as a percentage of sales is principally a result of
increased spending on the development of our Pro2® reflectance
pulse oximetry system and endotracheal cardiac output monitor
for our Patient Care business. The addition of the Endoscopic
Technologies business in September 2004 also contributed to
the increase in research and development expense.
As discussed in Note 2 to the Consolidated Financial
Statements, we wrote-off $16.4 million and $7.9 million of
purchased in-process research and development assets
associated with the Bard Endoscopic Technologies acquisition
and Bionx acquisition in 2004 and 2003, respectively.
As discussed in Note 12 to the Consolidated Financial
Statements, other expense in 2004 consisted primarily of
$2.4 million of expenses associated with the termination of our
surgical lights product offering and $1.5 million of expenses
related to the Bard Endoscopic Technologies acquisition.
We expect to incur an additional $1.6 million in expenses
associated with the termination of our surgical lights product
offering in 2005. As discussed in Note 12 to the Consolidated
Financial Statements, other income in 2003 consisted of a
$9.0 million net gain on the settlement of a contractual dispute,
$2.8 million in pension settlement costs associated with the
restructuring of our orthopedic sales force and $3.2 million in
acquisition costs related primarily to the acquisition of CORE
Dynamics, Inc. (the “CORE acquisition” – See Note 2 to the
Consolidated Financial Statements) and Bionx acquisition.
During 2004, we recorded $0.8 million in losses on the early
extinguishment of debt related to the refinancing of a portion of
the term loans under our senior credit agreement through the
issuance of 2.50% convertible senior subordinated notes. See
additional discussion under Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations—
Liquidity and Capital Resources and Note 6 to the Consolidated
Financial Statements.
Interest expense in 2004 was $12.8 million compared to
$18.9 million in 2003. The decrease in interest expense is
primarily a result of lower weighted average borrowings
outstanding in 2004 as compared to 2003 and lower weighted
average interest rates on our borrowings (4.17% in 2004 as
compared to 5.99% in 2003) inclusive of the implicit finance
charge on our accounts receivable sale facility. The decrease in
weighted average interest rates on our borrowing is primarily a
result of our redemption of $130.0 million in 9% senior
subordinated notes in 2003 (See Note 6 to the Consolidated
Financial Statements) in favor of lower cost bank debt.
A provision for income taxes has been recorded at an effective
rate of 32.5% in 2004 and 39.5% in 2003. The effective rate for
2004 was lower than that recorded in 2003 and the United States
statutory rate of 35.0% as a result of an increase in the estimated
benefits to be realized from the Extraterritorial Income Exclusion
(“ETI”) tax rules on foreign sales. The effective rate in 2003
increased from the statutory rate as a result of the non-
deductibility for income tax purposes of the Bionx in-process
research and development charge discussed above.
On October 22, 2004, the President signed the American Jobs
Creation Act of 2004 (the “Act”). The Act provides a deduction for
income from qualified domestic production activities, which will
be phased in from 2005 through 2010. In return, the Act also
provides for a two-year phase-out of the existing ETI for foreign
sales that was viewed to be inconsistent with international trade
protocols by the European Union. We expect the net effect of the
phase out of the ETI and the phase in of this new deduction to
result in an increase in the effective rate of approximately two
percentage points for 2005 compared to the 2004 effective tax
rate of 32.5%. See additional discussion and a reconciliation of
the United States statutory income tax rate to our effective tax
rate in Note 7 to the Consolidated Financial Statements.
2003 Compared to 2002
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 CORE
acquisition and Bionx acquisition accounted for $7.2 million and
$12.6 million of the increase, respectively, and favorable foreign
currency exchange rates accounted for $10.8 million. The Bionx
and CORE acquisitions are described more fully in Note 2 to the
Consolidated Financial Statements.
research and development spending is principally as a result of
the Bionx acquisition and represents continued research and
development efforts focused primarily on product development in
the arthroscopy and powered surgical instrument product lines.
• Arthroscopy sales increased $19.4 million (11.9%) in 2003 to
$182.0 million from $162.6 million in 2002. This increase was
primarily attributable to the Bionx acquisition and inclusion
of full year results from two businesses acquired during 2002
engaged in the design, manufacture and installation of
integrated operating room systems and equipment.
• Powered surgical instrument sales increased $7.7 million
(6.7%) in 2003 to $122.0 million from $114.3 million in 2002,
primarily as a result of increased sales of our new PowerPro®
line of powered instrument products.
• 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 continued 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, primarily as a result of
increased sales of our new System 5000® electrosurgical
generator.
• EndoSurgery sales increased $9.0 million (24.5%) in 2003 to
$45.8 million from $36.8 million in 2002, principally as a result
of the inclusion of full year sales from the CORE acquisition.
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 in each of our principal product lines as described
above. Gross profit margins decreased from 52.3% in 2002 to
52.2% in 2003. As discussed in Note 2 to the Consolidated
Financial Statements, during 2003, we incurred $1.3 million of
acquisition-related charges which have been 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 lower gross margins for 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 increased to 31.7% in
2003 from 30.8% in 2002. This increase of 0.9 percentage points
is primarily attributable to the transition to a larger, independent
sales agent based sales force in 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 of the sales force and 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 was $17.3 million in 2003
compared to $16.1 million in 2002. As a percentage of sales,
research and development expense decreased to 3.4% in 2003
from 3.6% in 2002 due to higher net sales. The increase in
As discussed in Note 2 to the Consolidated Financial
Statements, during the first quarter of 2003 we wrote-off
purchased in-process research and development assets of
$7.9 million associated with the Bionx acquisition.
As discussed in Note 12 to the Consolidated Financial
Statements, other income in 2003 consisted primarily of a
$9.0 million net gain on the settlement of a contractual dispute,
$2.8 million in pension settlement costs associated with the
restructuring of our orthopedic sales force and $3.2 million in
costs related primarily to the CORE acquisition and Bionx
acquisition. Other expense in 2002 consisted of a $2.0 million
loss on the settlement of a patent dispute.
As discussed in Note 6 to the Consolidated Financial
Statements, we repurchased $130.0 million of our 9% senior
subordinated notes during 2003 and recorded a loss on the early
extinguishment of debt in the amount of $8.1 million. This
amount represents call premium and unamortized deferred
financing costs associated with the purchase. During 2002, we
recorded an expense in the amount of $1.5 million related to the
refinancing of our debt agreements.
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 and lower weighted
average interest rates on our borrowings (5.99% in 2003 as
compared to 7.45% in 2002) inclusive of the implicit finance
charge on our accounts receivable sale facility. The decrease
in weighted average interest rates on our borrowing is primarily
a result of our redemption of $130.0 million in 9% senior
subordinated notes in 2003 (See Note 6 to the Consolidated
Financial Statements) in favor of lower cost bank debt.
A provision for income taxes has been recorded at an effective rate
of 39.5% in 2003 and 36.0% in 2002. The effective rate for 2003 was
substantially higher than that recorded in 2002 and the United
States statutory rate of 35.0% as a result of the non-deductibility
for income tax purposes of the Bionx in-process research and
development charge discussed above. 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
Our liquidity needs arise primarily from capital investments,
working capital requirements and payments on indebtedness
under the senior credit agreement. We have historically met these
liquidity requirements with funds generated from operations,
including sales of accounts receivable and borrowings under
our revolving credit facility. In addition, we use term borrowings,
including borrowings under our senior credit agreement and
borrowings under separate loan facilities, in the case of real
property purchases, to finance our acquisitions. We also have the
ability to raise funds through the sale of stock or we may issue
debt through a private placement or public offering.
Operating cash flows
Our net working capital position was $159.9 million at
December 31, 2004. Net cash provided by operating activities was
15
16
$48.4 million, $58.4 million and $74.8 million for 2002, 2003
and 2004, respectively.
Net cash provided by operating activities in 2004 was favorably
impacted by the following noncash charges to income:
depreciation, amortization, deferred income taxes, pension
costs in excess of pension contributions, the write-off of
purchased in-process research and development assets and
the write-off of unamortized deferred financing costs. Also
benefiting cash flow from operations were the income tax
benefit of stock option exercises, increased sales of accounts
receivable, increases in accounts payable and accrued
compensation and decreases in inventory.
Net cash provided by operating activities in 2004 was unfavorably
impacted principally by increases in other assets and decreases in
other liabilities as a result of timing of cash payments, increased
cash payments for income taxes and increases in accounts
receivable as a result of increased sales levels.
Investing cash flows
Capital expenditures were $13.4 million, $9.3 million and
$12.4 million for 2002, 2003 and 2004, respectively. These capital
expenditures represent the ongoing capital investment
requirements of our business and are expected to continue
at the same approximate rate during 2005.
Net cash flow used in investing activities in 2004 consisted
primarily of $81.3 million in payments related to the Bard
Endoscopic Technologies acquisition.
Financing cash flows
Net cash provided by (used in) financing activities during 2004
consisted of the following: $15.2 million in proceeds from the
issuance of common stock under our stock option plans and
employee stock purchase plan (See Note 8 to the Consolidated
Financial Statements); $114.9 million in net repayments under
the senior credit agreement; $5.1 million in net repayments on
mortgage notes; $150.0 million in gross proceeds from the
issuance of 2.50% convertible senior subordinated notes;
$5.8 million in payments related to the offering of the 2.50%
convertible senior subordinated notes; $6.2 million net change
in cash overdrafts; and the repurchase of 1.1 million shares of
our common stock at an aggregate cost of approximately
$30.0 million.
Our senior credit agreement consists of a $100 million revolving
credit facility and a $260 million term loan. At December 31, 2004
there were no amounts outstanding on the revolving credit
facility. The aggregate amount outstanding on the term loan was
$128.1 million at December 31, 2004. The term loan is scheduled
to be repaid in quarterly installments over a period of
approximately 5 years, with scheduled principal payments of
$2.6 million annually through December 2007 increasing to
$60.3 million in 2008 and the remaining balance outstanding
due in December 2009. We have made all scheduled term loan
repayments as they have come due. We may also be required,
under certain circumstances, to make additional principal
payments based on excess annual cash flow as defined in the
senior credit agreement. No such payments were required during
2004. Interest rates on the term facility and the revolving credit
facility are at the London Interbank Offered Rate (“LIBOR”) plus
2.25% (4.65% at December 31, 2004).
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 (See Note 1 to the
Consolidated Financial Statements). 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 which could limit our
ability to access additional funding under our revolving credit
facility 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.
Outstanding debt assumed in connection with the 2001 purchase
of property in Largo, Florida utilized by our CONMED Linvatec
subsidiary 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”).
The principal balances outstanding on the Class A note and
Class C note aggregated $8.3 million and $8.2 million,
respectively, at December 31, 2004. These loans are secured by
our Largo, Florida property.
On November 11, 2004, we completed an offering, in a private
placement, of $150.0 million in 2.50% convertible senior
subordinated notes (the "Notes") due 2024. This offering has
allowed us to fix interest rates on $150.0 million of our total
outstanding long-term debt at 2.50%. The Notes represent our
subordinated unsecured obligations and are convertible under
the following circumstances, as defined in the bond indenture,
into a combination of cash and CONMED common stock:
when the closing price of our common stock for each of 20 or
more consecutive trading days in a period of 30 consecutive
trading days exceeds 130% of the applicable conversion price;
after any 10 consecutive trading day period in which the average
trading price per $1,000 principal amount of the Notes was equal
to or less than 97% of the average conversion value of the Notes;
if we call a Note for redemption; and based on certain corporate
transactions such as if we are party to a consolidation, merger or
binding share exchange in which over 50% of our outstanding
shares of common stock would be converted into cash, securities
or other property, or if another fundamental change (as defined
in the bond indenture) occurs. Upon conversion, the holder of
each Note will receive the conversion value of the Note payable
in cash up to the principal amount of the Note and CONMED
common stock for the Note’s conversion value in excess of such
principal amount. Amounts in excess of the principal amount
are at an initial conversion rate, subject to adjustment, of
26.1849 shares per $1,000 principal amount of the Note (which
represents an initial conversion price of $38.19 per share). The
Notes mature on November 15, 2024 and are not redeemable by
us prior to November 15, 2011. Holders of the Notes will be able
to require that we repurchase some or all of the Notes on
November 15, 2011, 2014 and 2019.
We have determined that the Notes contain two embedded
derivatives. The embedded derivatives are recorded at fair value in
other long-term liabilities and changes in their value are recorded
through the consolidated statement of income. The embedded
derivatives have a nominal value, and it is our belief that any
change in their fair value would not have a material adverse effect
on our business, financial condition or results of operations.
The Notes offering resulted in gross proceeds of $150.0 million,
less $5.8 million in initial purchaser’s discount and other offering
related payments which are being amortized to interest expense
over a 7 year period through November 15, 2011 (the earliest
date at which we may be required to repurchase some or all of
the Notes). Net proceeds from the offering and cash on hand
were used to repay $82.2 million on the term loan and a further
$45.0 million in borrowings then outstanding on the revolving
credit facility under our senior credit agreement. (The revolving
credit facility borrowings were used to finance a portion of the
Bard Endoscopic Technologies acquisition—See Note 2 to the
Consolidated Financial Statements). Additionally, in conjunction
with the Notes offering, we repurchased $30.0 million of our
common stock in privately negotiated transactions. As a result of
the $82.2 million prepayment on the term loan, we recorded
$0.8 million in losses on the early extinguishment of debt related
to the write-off of unamortized deferred financing fees.
Initial purchasers for the Notes included UBS Securities LLC,
Banc of America Securities LLC, Citigroup Global Markets Inc.
and JP Morgan Securities Inc. (the "initial purchasers"). The
Notes were resold by the initial purchasers to qualified
institutional buyers within the meaning of Rule 144A under the
Securities Act of 1933, as amended. The Notes and the
underlying common stock issuable upon conversion have not
been registered under the Securities Act or any applicable state
securities laws and may not be offered or sold in the United
States, absent registration or an applicable exemption from such
registration requirements. We have filed a registration statement
with the Securities and Exchange Commission on Form S-3,
which is not yet effective, which will enable the qualified
institutional buyers to resell their holdings in the Notes.
On February 15, 2005, we announced that our Board of Directors
has authorized a share repurchase program under which we may
repurchase up to $50.0 million of our common stock, although
no more than $25.0 million may be purchased in any calendar
year. The repurchase program calls for shares to be purchased in
the open market or in private transactions from time to time.
We may suspend or discontinue the share repurchase program
at any time. We expect to repurchase shares to offset the
dilutive effect of the issuance of shares under our employee
stock option and employee stock purchase plans, but we may
also repurchase shares depending upon market conditions and
the market price of our common stock. We expect to finance
repurchases from cash-on-hand and amounts available under
our senior credit agreement.
Management believes that cash flow from operations,
including accounts receivable sales, cash and cash equivalents
on hand and available borrowing capacity under our senior
credit agreement will be adequate to meet our anticipated
operating working capital requirements, debt service, funding
of capital expenditures and common stock repurchases in the
foreseeable future.
Off-Balance Sheet Arrangements
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 bank (the
“purchaser”). The purchaser’s share of collections on accounts
receivable are calculated as defined in the accounts receivable
sales agreement, as amended. Effectively, collections on the pool
of receivables flow first to the purchaser and then to CRC, but to
the extent that the purchaser’s share of collections may be less
than the amount of the purchaser’s asset interest, there is no
recourse to CONMED or CRC for such shortfall. For receivables
which have been sold, CONMED Corporation and its subsidiaries
retain collection and administrative responsibilities as agent for
the purchaser. As of December 31, 2003 and 2004, the undivided
percentage ownership interest in receivables sold by CRC to the
purchaser aggregated $44.0 million and $49.0 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 $0.8 million and $1.0 million, in
2003 and 2004, 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 meet the
requirements for sale under the accounts receivables sales
agreement. In the event that new accounts receivable arising in
the normal course of business do not qualify for sale, then
collections on sold receivables will flow to the purchaser rather
than being used to fund new receivable purchases. To the extent
that such collections would not be available to CONMED in the
form of new receivables purchases, we would need to access an
alternate source of working capital, such as our $100 million
revolving credit facility. Our accounts receivable sales agreement,
as amended, also requires us to obtain a commitment (the
“purchaser commitment”), on an annual basis, from the
purchaser to fund the purchase of our accounts receivable. The
purchaser commitment was amended effective October 20, 2004
whereby it was extended for an additional year under
substantially the same terms and conditions.
Contractual Obligations
The following table summarizes our contractual obligations for
the next five years and thereafter (amounts in thousands).
Purchase obligations represent purchase orders for goods and
services placed in the ordinary course of business. There were no
capital lease obligations as of December 31, 2004.
Payments Due by Period
17
Long-term debt
Purchase
obligations
Operating lease
obligations
Total contractual
obligations
Less than 1-3
Years
$ 294,522 $ 4,037 $ 8,601 $124,112 $157,772
3-5 More than
Years
5 Years
1 Year
Total
73,059 72,783
255
21
—
2,191
5,208
________ _______ ______ _______ ________
13,990
3,795
2,796
$ 381,571 $79,616 $14,064 $127,928 $159,963
________ _______ ______ _______ ________
________ _______ ______ _______ ________
In addition to the above contractual obligations, we are required
to make periodic interest payments on our long-term debt
obligations. (See additional discussion under “Quantitative and
Qualitative Disclosures About Market Risk—Interest Rate Risk”
and Note 6 to the Consolidated Financial Statements). We may
also be required to make contributions to our pension plan
which are not expected to exceed $4.5 million in 2005. (See Note
10 to the Consolidated Financial Statements).
Stock-based Compensation
We have reserved shares of common stock for 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 (See Note 8
to the Consolidated Financial Statements).
New Accounting Pronouncements
See Note 14 to the Consolidated Financial Statements for a
discussion of new accounting pronouncements.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from adverse changes in
market rates and prices such as commodity prices, foreign
currency exchange rates and interest rates. In the normal course
of business, we are exposed to various market risks, including
changes in foreign currency exchange rates and interest rates.
We manage our exposure to these and other market risks
through regular operating and financing activities and as
necessary through the use of derivative financial instruments.
Foreign Currency Risk
A significant portion of our operations consist of sales activities
in foreign jurisdictions. As a result, our financial results may be
affected by factors such as changes in foreign currency exchange
rates or weak economic conditions in the markets in which we
distribute products. As of December 31, 2004, we have not
entered into any foreign exchange forward or option contracts
designed to hedge the effect of foreign currency transactions.
We have mitigated the effect of foreign currency exchange rate
risk by transacting a significant portion of our foreign sales in
United States dollars. During 2004, changes in currency exchange
rates increased sales by approximately $9.7 million and income
before income taxes by approximately $6.4 million. In the future,
we will continue to evaluate our foreign currency exposure and
assess the need to enter into derivative contracts which hedge
foreign currency transactions.
Interest Rate Risk
At December 31, 2004, we had approximately $128.1 million of
variable rate long-term debt under our senior credit agreement;
we are not a party to any interest rate swap agreements as of
December 31, 2004. Assuming no repayments other than our
2005 scheduled term loan payments, if market interest rates for
similar borrowings average 1.0% more in 2005 than they did in
2004, interest expense would increase, and income before
income taxes would decrease by $1.3 million. Comparatively, if
market interest rates for similar borrowings average 1.0% less in
2005 than they did in 2004, our interest expense would decrease,
and income before income taxes would increase by $1.3 million.
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 which are 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, which may cause our actual results, performance or
achievements, or industry results, to be materially different from
any future results, performance or achievements expressed
or implied by such forward-looking statements. Such factors
include, 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
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of CONMED Corporation is responsible for establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted
accounting principles. Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances
that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with
authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management
assessed the effectiveness of CONMED’s internal control over financial reporting as of December 31, 2004. In making its assessment,
management utilized the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
“Internal Control-Integrated Framework.” Management has concluded that based on its assessment, CONMED’s internal control over
financial reporting was effective as of December 31, 2004. Management’s assessment of the effectiveness of CONMED’s internal control
over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears on page 20.
Eugene R. Corasanti
Chairman of the Board and
Chief Executive Officer
Robert D. Shallish, Jr.
Vice President-Finance and
Chief Financial Officer
19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of CONMED Corporation
We have completed an integrated audit of CONMED Corporation’s 2004 consolidated financial statements and of its internal control over
financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of shareholders’
equity and of cash flows present fairly, in all material respects, the financial position of CONMED Corporation and its subsidiaries at
December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2004 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit of financial statements 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.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in “Management’s Report on Internal Control over Financial Reporting,”
appearing on page 19, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based
on criteria established in “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control - Integrated Framework issued by the COSO. The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s
internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
20
Syracuse, New York
March 15, 2005
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2004
(In thousands except share amounts)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful
accounts of $1,672 in 2003 and $1,235 in 2004
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 and benefits
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:
Preferred stock, par value $.01 per share; authorized
500,000 shares, none outstanding
Common stock, par value $.01 per share; 100,000,000 authorized;
29,140,644 and 30,135,835, issued in 2003 and 2004, respectively
Paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Less: Treasury stock, at cost; 37,500 and 1,156,500 shares in
2003 and 2004, respectively
Total shareholders’ equity
Total liabilities and shareholders’ equity
21
2003
2004
$
5,986
$
4,189
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
__________
74,593
127,935
13,733
2,492
_________
222,942
101,465
334,483
195,234
18,701
_________
$ 872,825
_________
_________
$
4,037
28,913
12,655
5,870
748
10,838
_________
63,061
290,485
51,433
19,863
_________
424,842
_________
—
—
291
237,076
194,473
2,069
301
256,551
227,938
(6,399)
(419)
__________
433,490
__________
$ 805,058
__________
__________
(30,408)
_________
447,983
_________
$ 872,825
_________
_________
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2002, 2003 and 2004
(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
22
Basic
Diluted
2002
2003
2004
$ 453,062
$ 497,130
$ 558,388
215,891
_________
237,171
_________
237,433
_________
271,496
_________
259,697
_________
286,892
_________
139,735
16,087
—
2,000
_________
157,822
_________
79,349
1,475
157,453
17,306
7,900
183,183
20,205
16,400
(2,917)
_________
3,943
_________
179,742
_________
223,731
_________
79,955
8,078
63,161
825
24,513
_________
18,868
_________
12,774
_________
53,361
53,009
49,562
19,210
_________
$ 34,151
_________
_________
20,927
_________
16,097
_________
$ 32,082
_________
_________
$ 33,465
_________
_________
$
1.25
1.23
$
1.11
1.10
$
1.13
1.11
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years Ended December 31, 2002, 2003 and 2004
(In thousands)
Common Stock
___________________
Shares
Amount
Paid-in
Capital
Accumulated
Other
Retained Comprehensive Treasury Shareholders’
Earnings Income (Loss)
Equity
Stock
Balance at December 31, 2001
253
________ _______
25,262 $
$ 160,757 $128,240
(419) $ 283,634
$ (5,197) $
________ ________ _________ ________ _________
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:
Foreign currency translation adjustments
Cash flow hedging (net of income tax benefit of $596)
Minimum pension liability (net of income tax benefit
3,000
30
1,970
66,093
(2,000)
5,017
1,970
66,123
(2,000)
1,010
1,058
(4,024)
34,151
________ _______
32,195
________ ________ _________ ________ _________
288
________ _______
28,808 $
$ 231,832 $162,391
$ 386,939
________ ________ _________ ________ _________
$ (7,153) $ (419)
of $2,264)
Net income
Total comprehensive income
Balance at December 31, 2002
Common stock issued under employee plans
248
Tax benefit arising from common stock issued
under employee plans
Common stock issued in connection with
business acquisitions
Comprehensive income:
Foreign currency translation adjustments
Cash flow hedging (net of income tax expense of $593)
Minimum pension liability (net of income tax expense
85
2
1
3,198
390
1,656
3,200
390
1,657
23
3,082
1,054
5,086
32,082
Common stock issued under employee plans
995
10
15,578
________ _______
41,304
________ ________ _________ ________ _________
291
________ _______
29,141 $
$ 237,076 $194,473
(419) $ 433,490
________ ________ _________ ________ _________
2,069 $
$
of $2,861)
Net income
Total comprehensive income
Balance at December 31, 2003
Tax benefit arising from common stock issued
under employee plans
Repurchase of common stock
Comprehensive income:
Foreign currency translation adjustments
Cash flow hedging (net of income tax benefit of $82)
Minimum pension liability (net of income tax benefit
of $5,630)
Net income
Total comprehensive income
Balance at December 31, 2004
15,588
3,897
(29,989)
(29,989)
3,897
2,133
(146)
(10,455)
33,465
________ _______
24,997
________ ________ _________ ________ _________
30,136 $
301
________ _______
________ _______
$ 256,551 $227,938
$ (6,399) $(30,408) $ 447,983
________ ________ _________ ________ _________
________ ________ _________ ________ _________
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2003 and 2004
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation
Amortization
Deferred income taxes
Income tax benefit of stock option exercises
Contributions to pension plans less than (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 and benefits
Accrued interest
Other assets
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
24
Payments related to business acquisitions, net of cash acquired
Purchases of property, plant and equipment, net
Other investing activities
Cash flows from financing activities:
Net cash used in investing activities
Net proceeds from issuance of common stock
Net proceeds from common stock issued under employee plans
Repurchase of common stock
Repurchase of warrant on common stock
Redemption of 9.0% senior subordinated notes
Payments on senior credit agreement
Proceeds of senior credit agreement
Payments on mortgage notes
Proceeds from issuance of 2.5% convertible senior subordinated notes
Payments related to issuance of debt
Net change in cash overdrafts
Net cash provided by (used in) 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
2002
2003
2004
$ 34,151
_________
$ 32,082
_________
$ 33,465
_________
9,203
13,167
10,664
1,970
(1,999)
—
1,475
(3,000)
(2,151)
(15,213)
4,641
4,217
(1,584)
(1,160)
(3,790)
(2,184)
_________
14,256
_________
48,407
_________
(17,375)
(13,384)
—
_________
(30,759)
_________
66,123
5,017
—
(2,000)
—
(182,997)
105,138
(683)
—
(1,513)
(3,484)
_________
(14,399)
_________
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)
(4,732)
2,188
(338)
(3,515)
(3,138)
694
_________
26,301
_________
58,383
_________
(55,079)
(9,309)
(4,085)
_________
(68,473)
_________
—
3,200
—
—
(130,000)
(22,000)
160,000
(796)
—
(1,950)
(373)
_________
8,081
_________
2,369
_________
360
5,626
_________
$
5,986
_________
_________
10,962
15,906
4,301
3,897
3,619
16,400
825
5,000
(19,144)
1,441
4,350
(2,532)
1,626
469
(3,884)
(1,861)
_________
41,375
_________
74,840
_________
(81,645)
(12,419)
—
_________
(94,064)
_________
—
15,200
(29,989)
—
—
(114,937)
—
(5,132)
150,000
(5,848)
6,209
_________
15,503
_________
1,924
_________
(1,797)
5,986
_________
$
4,189
_________
_________
$ 24,453
5,478
$ 21,698
5,507
$ 12,680
11,994
Supplemental disclosures of non-cash investing and financing activities:
As more fully described in Note 2, we assumed $3.4 million, $12.1 million and $3.5 million in liabilities in connection with business acquisitions in
2002, 2003 and 2004, respectively.
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 purchase of several businesses in 2002.
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, endosurgery
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 newest product
line, CONMED Endoscopic Technologies offers a portfolio of
innovative disposable products used by gastroenterologists to
diagnose and treat diseases of the digestive tract. 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
significant 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 judgments
which affect the reported amounts of assets, liabilities, related
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amount of revenues and
expenses during the reporting period. Estimates are used in
accounting for, among other things, allowances for uncollectible
accounts, rebates and sales allowances, inventory allowances,
purchased in-process research and development, pension
benefits, goodwill and intangible assets, contingencies and other
accruals. We base our estimates on historical experience and on
various other assumptions which are believed to be reasonable
under the circumstances. Due to the inherent uncertainty
involved in making estimates, actual results reported in future
periods may differ from those estimates. Estimates and
assumptions are reviewed periodically, and the effect of revisions
are reflected in the consolidated financial statements in the
period they are determined to be necessary.
Cash and cash equivalents
We consider all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
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 bank (the “purchaser”). The
purchaser’s share of collections on accounts receivable are
calculated as defined in the accounts receivable sales agreement,
as amended. Effectively, collections on the pool of receivables
flow first to the purchaser and then to CRC, but to the extent
that the purchaser’s share of collections may be less than the
amount of the purchaser’s asset interest, there is no recourse to
CONMED or CRC for such shortfall. For receivables which have
been sold, CONMED Corporation and its subsidiaries retain
collection and administrative responsibilities as agent for the
purchaser. As of December 31, 2003 and 2004, the undivided
percentage ownership interest in receivables sold by CRC to the
purchaser aggregated $44.0 million and $49.0 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 $0.8 million and $1.0 million, in
2003 and 2004, 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 meet the
requirements 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 was amended effective October 20, 2004
whereby it was extended for an additional year under
substantially the same terms and conditions.
Inventories
Inventories are valued at the lower of cost or market. Cost is
determined on the FIFO (first-in, first-out) method of accounting.
Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated
using the straight-line method over the following estimated
useful lives:
Building and improvements 40 years
Leasehold improvements
Machinery and equipment 2 to 15 years
Shorter of life of asset or life of lease
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
(60.7% at December 31, 2004) of our total assets.
In June 2001, the Financial Accounting Standards Board issued
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.
25
We perform impairment tests of goodwill and indefinite-lived
intangible assets and evaluate the useful lives of acquired
intangible assets subject to amortization. These tests and
evaluations are 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
annual impairment tests in the fourth quarter.
Other long-lived assets
We review asset carrying amounts for impairment (consisting of
intangible assets subject to amortization and property, plant and
equipment) whenever events or circumstances indicate that such
carrying amounts 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 its current fair value.
Equity investments
We have several investments in the common stock of other
companies in our industry which represent 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. We review these
investments for impairment whenever events or circumstances
indicate that the carrying amounts of these investments may not
be recoverable. If the sum of the expected future undiscounted
cash flows is less than the carrying amount of the investment, an
impairment loss is recognized by reducing the recorded value to
its current fair value.
26
Fair value of financial instruments
The carrying amounts reported in our balance sheets for cash
and cash equivalents, accounts receivable, accounts payable
and long-term debt excluding the 2.50% convertible senior
subordinated notes (the “Notes”) approximate fair value.
The fair value of the Notes approximated $156.0 million at
December 31, 2004, based on their quoted market price.
Translation of foreign currency financial statements
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.
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
Revenue is recognized when title has been transferred to
the customer, which is generally at the time of shipment.
The following policies apply to our major categories of revenue
transactions:
• Sales to customers are evidenced by firm purchase orders. Title
and the risks and rewards of ownership are transferred to the
customer when product is shipped. Payment by the customer
is due under fixed payment terms.
• We place certain of our capital equipment with customers in
return for commitments to purchase disposable products over
time periods generally ranging from one to three years. In
these circumstances, no revenue is recognized upon capital
equipment shipment and we recognize revenue upon the
disposable product shipment. The cost of the equipment is
amortized over the term of individual commitment
agreements.
• Product returns are only accepted at the discretion of the
Company and in accordance with our “Returned Goods Policy.”
Historically, the level of product returns has not been
significant. We accrue for sales returns, rebates and allowances
based upon an analysis of historical customer returns and
credits, rebates, discounts and current market conditions.
• The Company’s terms of sale to customers generally do not
include any obligations to perform future services. Limited
warranties are generally provided for capital equipment sales
and provisions for warranty are provided at the time of product
sale based upon an analysis of historical data.
• Amounts billed to customers related to shipping and handling
have been included in net sales. Shipping and handling costs
included in selling and administrative expense were
$7.5 million, $8.3 million and $9.3 million for 2002, 2003 and
2004, respectively.
• We sell to a diversified base of customers around the world
and, therefore, believe there is no material concentration of
credit risk.
• We assess the risk of loss on accounts receivable and adjust
the allowance for doubtful accounts based on this risk
assessment. Historically, losses on accounts receivable have
not been material. Management believes that the allowance for
doubtful accounts of $1.2 million at December 31, 2004 is
adequate to provide for probable losses resulting from
accounts receivable.
Earnings per share
We compute basic earnings per share (“basic EPS”) by dividing net
income by the weighted average number of shares outstanding for
the reporting period. Diluted earnings per share (“diluted EPS”)
gives effect to all dilutive potential shares outstanding resulting
from employee stock options during the period. The following
table sets forth the calculation of basic and diluted earnings per
share at December 31, 2002, 2003 and 2004, respectively:
Net income
Basic-weighted average
shares outstanding
Effect of dilutive potential securities
Diluted-weighted average
shares outstanding
Basic EPS
Diluted EPS
2002
2003
2004
$ 34,151 $ 32,082 $ 33,465
_______ _______ _______
_______ _______ _______
28,930
29,523
_______ _______ _______
27,337
582
_______ _______ _______
326
490
27,827
29,256
30,105
_______ _______ _______
_______ _______ _______
$
1.13
_______ _______ _______
_______ _______ _______
1.25 $
1.11 $
$
1.11
_______ _______ _______
_______ _______ _______
1.23 $
1.10 $
The shares used in the calculation of diluted EPS exclude
options to purchase shares where the exercise price was greater
than the average market price of common shares for the year.
Such shares aggregated approximately 0.7 million, 1.3 million
and 0.1 million at December 31, 2002, 2003 and 2004,
respectively. In accordance with EITF (Emerging Issues Task
Force) Issue 04-8, “The Effect of Contingently Convertible Debt
on Diluted Earnings per Share,” the shares used in the
calculation of diluted EPS exclude the potential shares
contingently issuable under our 2.50% convertible senior
subordinated notes because they are not dilutive. The maximum
number of shares we may issue with respect to the Notes is
5,750,000. See Note 6 for further discussion of the Notes.
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 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 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 2002, 2003 and 2004 was $9.32, $5.81 and
$14.59, respectively. The fair value of these options was
estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions
for options granted in 2002, 2003 and 2004, respectively: Risk-
free interest rates of 2.70%, 3.13% and 4.04%; volatility factors of
the expected market price of the Company’s common stock of
41.10%, 32.08% and 51.20%; a weighted-average expected life of
the option of 5.0 years in 2002 and 2003, and 7.3 years in 2004;
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 following table illustrates the effect on net
earnings as if the fair value provisions of SFAS 123 had been
applied to stock-based employee compensation:
Net income—as reported
Pro forma stock-based employee
compensation expense, net of
related income tax effect
2002
2003
$ 34,151 $ 32,082 $ 33,465
_______ _______ _______
2004
( 2,156)
(4,598)
_______ _______ _______
(2,383)
Net income—pro forma
$ 31,995 $ 29,699 $ 28,867
_______ _______ _______
_______ _______ _______
Earnings per share—as reported:
Basic
Diluted
Earnings per share—pro forma:
Basic
Diluted
$
1.25 $ 1.11 $
$ 1.23 $ 1.10 $
1.13
1.11
$
$
1.17 $
1.15 $
1.03 $
1.02 $
0.98
0.96
In December 2004, SFAS 123 was revised to require that all
share-based payments be recognized in the financial statements
based on their fair values. We will be required to adopt revised
SFAS 123 in the third quarter of 2005 (See additional discussion
in Note 14).
Accumulated other comprehensive income (loss)
Accumulated other comprehensive income (loss) consists of the
following:
Minimum Cumulative
Pension
Translation
Liability Adjustments Hedges
Cash
Flow Comprehensive
Income (loss)
Accumulated
Other
27
Balance,
December 31, 2003
— $ 1,923
$ 146
$
2,069
Foreign currency
translation
adjustments
Cash flow hedging
(net of income taxes)
—
—
2,133
—
2,133
—
(146 )
(146)
Minimum pension
liability (net of
income taxes)
Balance,
—
(10,455)
_______ ________
—
______
(10,455)
________
December 31, 2004 (10,455)
$ 4,056
_______ ________
_______ ________
$ — $ (6,399)
________
______
________
______
Reclassifications
Certain prior year amounts have been reclassified to conform
with the presentation used in 2004.
Note 2 — Business Acquisitions
Assets and liabilities of acquired businesses are recorded under
the purchase method of accounting at their estimated fair values
as of the date of acquisition. Goodwill represents costs in excess
of fair values assigned to the underlying net assets of acquired
businesses. The results of operations of acquired businesses
have been included in the consolidated statements of income
since the date of acquisition.
In 2002, we completed the acquisition of several businesses
relating to our Patient Care and Endoscopy product lines,
including the December 31, 2002 acquisition of CORE Dynamics,
Inc. (the “CORE acquisition”). During the same period, we also
completed the acquisition of two businesses engaged in the
design, manufacture and installation of integrated operating
room systems and equipment. Consideration for acquisitions
completed during 2002 aggregated $17.4 million in cash,
$1.7 million in CONMED common stock and 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 into our
facilities. Any future consideration paid will be recorded in
goodwill and is not expected to be material. Goodwill recorded
in 2002 approximated $16.2 million and was deductible for
income tax purposes.
In 2003, we completed several acquisitions relating to our
Patient Care and Electrosurgery product lines totaling
$6.1 million in cash and recorded additional contingent
consideration related to 2002 acquisitions of $2.0 million.
Goodwill recorded in 2003 related to these acquisitions
approximated $5.9 million and was 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.
28
In March 2003, we also completed the acquisition of Bionx
Implants, Inc. (the “Bionx acquisition”) relating to our
Arthroscopy product line, for $47.0 million in cash plus the
assumption of approximately $12.1 million in liabilities. The
Bionx acquisition was funded primarily through borrowings on
our revolving credit facility (See Note 6). Included in cost of sales
during 2003 are $1.3 million of 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 incurred in 2003 not
related to cost of sales have been recorded in other expense as
discussed in Note 12.
Based on a third-party valuation, $7.9 million of the Bionx
acquisition purchase price represents the estimated fair value of
projects for which the related products, as of the acquisition date
had not reached technological feasibility and had no future use.
Accordingly, the purchased in-process research and development
assets were 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 was recorded on the write-off of
purchased IPRD as these costs were not deductible for income
tax purposes. Goodwill recorded in 2003 related to the Bionx
acquisition approximated $25.2 million and was not deductible
for income tax purposes.
In September 2004, we acquired the business operations of the
Endoscopic Technologies Division of C.R. Bard, Inc. (the “Bard
Endoscopic Technologies acquisition”) for aggregate consideration
of $81.3 million in cash. We funded the Bard Endoscopic
Technologies acquisition through available cash on hand of
$31.3 million with an additional $50.0 million drawn under our
revolving credit facility (See Note 6). The acquired business
included various tangible and intangible assets associated with
a comprehensive line of single-use medical devices employed by
gastro-intestinal and pulmonary physicians to diagnose and treat
diseases of the digestive tract and lungs using minimally invasive
endoscopic techniques. The acquired business operations had
2003 revenues approximating $54.0 million and is the third largest
domestic supplier of these products to the market.
Manufacturing of the acquired products is currently being
conducted in various C.R. Bard facilities under a transition
agreement. It is anticipated that future manufacturing will be
integrated into our facilities during the third quarter of 2005.
Included in cost of sales during 2004 is $2.3 million of expense
which represents a portion of the step-up to fair value recorded
relating to the sale of inventory acquired through the Bard
Endoscopic Technologies acquisition.
Unaudited pro forma statements of income for the years ended
December 31, 2002, 2003 and 2004, assuming the Bionx
acquisition occurred as of January 1, 2002 and 2003 and
assuming the Bard Endoscopic Technologies acquisition
occurred as of January 1, 2003 and 2004 are presented below.
These pro forma statements of income have been prepared for
comparative purposes only and do not purport to be indicative
of the results of operations which actually would have resulted
had the Bionx acquisition and Bard Endoscopic Technologies
acquisition occurred on the dates indicated, or which may result
in the future.
Net sales
Net income
Net income per share
Basic
Diluted
2002
2003
$ 471,530 $ 555,084 $ 604,566
33,749
28,090
31,746
2004
$
$
1.16 $
1.14 $
0.97 $
0.96 $
1.14
1.12
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed in the Bard Endoscopic
Technologies acquisition as of the date of acquisition. Goodwill
and identifiable intangible assets associated with the Bard
Endoscopic Technologies acquisition are deductible for income
tax purposes.
Inventory
Property, plant and equipment
Identifiable intangible assets
In-process research and development
Goodwill
Total assets acquired
Current liabilities assumed
Net assets acquired
$ 15,544
2,371
6,600
16,400
43,876
_________
84,791
_________
(3,492)
_________
$ 81,299
_________
_________
Based on a third-party valuation, $16.4 million of the purchase
price represents the fair value of development-stage projects for
which the related products, as of the acquisition date had not
reached technological feasibility, had not received regulatory
approval and had no alternative future use. Accordingly, the entire
amount of in-process research and development assets were
written-off in accordance with FASB Interpretation No. 4,
“Applicability of FASB Statement No. 2 to Business Combinations
Accounted for by the Purchase Method.” The $16.4 million write-
off of purchased in-process research and development assets is
deductible for income tax purposes.
Approximately 62% of the aggregate purchased in-process
research and development value relates to next generation
gastro-intestinal products, which are expected to be released
between the fourth quarter of 2005 and second quarter of 2006.
The remaining two acquired projects include enhancements and
upgrades to existing device technology, introduction of new
device functionality and the development of new technology for
gastro-intestinal 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. Estimated net cash flows
were discounted back to their present values using a discount
rate of 17%, which was based on the weighted-average cost of
capital for publicly-traded companies within the medical device
industry, 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
commercial feasibility. In total, these projects were
approximately 40% complete as of the acquisition date. The total
budgeted costs for the projects were approximately $8.5 million
and the remaining costs to complete these projects were
approximately $5.0 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 may be made 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 estimated results.
The $6.6 million of identifiable intangible assets consists of
trademarks and tradenames, customer-related intangibles and
patents. Components of the fair value of acquired intangible
assets are as follows:
Goodwill associated with each of our principal operating units at
December 31, is as follows:
CONMED Electrosurgery
CONMED Endoscopic Technologies
CONMED EndoSurgery
CONMED Linvatec
CONMED Patient Care
Balance as of December 31,
2003
2004
$ 15,961 $ 16,249
— 43,876
42,388
175,120
56,850
_________ ________
$ 290,562 $ 334,483
_________ ________
_________ ________
42,367
175,594
56,640
Other intangible assets consist of the following:
Weighted
Average
Useful Life
(Years)
Fair Value
_________ ________ ___________
20
$ 4,900
9
$ 1,300
400
$
Asset
Finite-lived
Finite-lived
Indefinite-lived
Customer relationships
Patents
Trademarks and tradenames
Note 3 — Inventories
Inventories consist of the following at December 31:
2003
2004
Raw materials
Work in process
Finished goods
14,583
71,010
$ 35,352 $ 40,781
13,427
73,727
_________ ________
$ 120,945 $ 127,935
_________ ________
_________ ________
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)
2004
4,200
78,637
92,789
3,675
_________ ________
179,301
(77,836)
_________ ________
$ 97,383 $ 101,465
_________ ________
_________ ________
We lease various manufacturing facilities, office facilities and
equipment under operating leases. Rental expense on these
operating leases was approximately $2,064, $1,959 and $2,649 for
the years ended December 31, 2002, 2003 and 2004, respectively.
The aggregate future minimum lease commitments for operating
leases at December 31, 2004 are as follows:
Year ending December 31:
2005
2006
2007
2008
2009
Thereafter
$ 2,796
2,701
2,507
2,261
1,534
2,191
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,
2003
2004
$ 262,394 $ 290,562
43,876
31,210
(3,285)
243
176
(131)
_________ ________
$ 290,562 $ 334,483
_________ ________
_________ ________
Dec. 31, 2003
___________________ ___________________
Gross
Dec. 31, 2004
Gross
29
Amortized
intangible assets:
Customer
relationships
Patents and other
intangible assets
Unamortized
intangible assets:
Trademarks and
tradenames
Carrying Accumulated Carrying Accumulated
Amortization Amount Amortization
Amount
$105,712
$ (15,447)
$110,612
$ (18,290)
33,258
(16,498)
35,444
(19,876)
86,944
—
________ ________
$ (31,945)
$225,914
________ ________
________ ________
87,344
—
________ _________
$ (38,166)
$233,400
________ _________
________ _________
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 22 years. Customer
relationships are being amortized over a weighted average life of
37 years. Patents and other intangible assets are being
amortized over a weighted average life of 10 years.
Customer relationship assets were acquired in connection with
the 1997 acquisition of Linvatec Corporation, 2003 Bionx
acquisition and 2004 Bard Endoscopic Technologies acquisition.
These assets represent the value associated with business
expected to be generated from acquired customers as of the
acquisition date. Asset values were determined by measuring
the present value of the projected future earnings attributable to
these assets. Additionally, while the useful lives of these assets
are not limited by contract or any other economic, regulatory or
other known factors, the weighted average useful life of 37 years
was determined as of acquisition date by historical customer
attrition. In accordance with SFAS 142 and as clarified by EITF
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 weighted
average 37 year life.
Trademarks and tradenames were recognized in connection with
the 1997 acquisition of Linvatec Corporation, 2003 Bionx
acquisition and 2004 Bard Endoscopic Technologies acquisition.
We continue to market products, release new product and
product extensions and maintain and promote these trademarks
and tradenames in the marketplace through legal registration
and such methods as advertising, medical education and trade
shows. It is our belief that these trademarks and tradenames will
generate cash flow for an indefinite period of time. Therefore, in
accordance with SFAS 142, our trademarks and tradenames
intangible assets are not amortized.
Amortization expense related to intangible assets for the year
ending December 31, 2004 and estimated amortization expense
for each of the five succeeding years is as follows:
2004
2005
2006
2007
2008
2009
$ 6,221
5,646
5,077
5,064
4,950
4,556
Note 6 — Long Term Debt
Long term debt consists of the following at December 31:
2003
2004
Revolving line of credit
Term loan borrowings on senior credit facility
2.5% Convertible senior subordinated notes
Mortgage notes
Total long-term debt
Less: Current portion
$
— $
243,000
—
128,063
— 150,000
16,459
_________ ________
294,522
4,037
_________ ________
$ 260,448 $ 290,485
_________ ________
_________ ________
21,591
264,591
4,143
30
Effective August 28, 2002 we entered into a $200.0 million
credit agreement (the “senior credit agreement”) with JP Morgan
Chase Bank and other financial institutions from time to time
party thereto. The senior credit agreement consisted of a
$100.0 million revolving credit facility and a $100.0 million term
loan. During 2002, deferred financing costs in the amount of
$1.5 million which related to the approximately three years
remaining on the prior credit agreement were written-off as a
loss on the early extinguishment of debt.
Effective June 30, 2003 we entered into an Amended and
Restated Credit Agreement (the “amended senior credit
agreement”) whereby the term loan amount was increased by
$160.0 million. Proceeds of the amended senior credit agreement
were used to reduce outstanding borrowings on the revolving
credit facility, fund the redemption of $130.0 million in 9.0%
senior subordinated notes, including accrued interest, fund
payment of 4.5% call premium on the senior subordinated notes
and fund bank and legal fees associated with the amendment.
During 2003, we recorded a loss on the early extinguishment of
debt in the amount of $8.1 million. This amount represents
$5.9 million of the 4.5% call premium and $2.2 million of
unamortized deferred financing costs associated with the
redemption of the 9.0% senior subordinated notes.
At December 31, 2004 the amended senior credit agreement
consisted of a $100.0 million revolving credit facility and a
$128.1 million term loan. There were no borrowings outstanding
on the revolving credit facility at December 31, 2004. The term
loan is scheduled to be repaid in quarterly installments over a
period of approximately 5 years, with scheduled principal
payments of $2.6 million annually through December 2007
increasing to $60.3 million in 2008 and the remaining balance
outstanding due in 2009. We may also 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 during 2003 and
2004. Interest rates on the term facility and revolving credit
facility are at LIBOR plus 2.25% (4.65% at December 31, 2004).
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 (See
Note 1). 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 which could limit our ability to access
additional funding under our revolving credit facility 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.
Outstanding debt assumed in connection with the 2001 purchase
of property in Largo, Florida utilized by our CONMED Linvatec
subsidiary 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”).
The principal balances outstanding on the Class A note and
Class C note aggregated $8.3 million and $8.2 million,
respectively, at December 31, 2004. These loans are secured by
our Largo, Florida property.
On November 11, 2004, we completed an offering, in a private
placement, of $150.0 million in 2.50% convertible senior
subordinated notes due 2024. The Notes represent our
subordinated unsecured obligations and are convertible under
the following circumstances, as defined in the bond indenture,
into a combination of cash and CONMED common stock: when
the closing price of our common stock for each of 20 or more
consecutive trading days in a period of 30 consecutive trading
days exceeds 130% of the applicable conversion price; after any
10 consecutive trading day period in which the average trading
price per $1,000 principal amount of the Notes was equal to or
less than 97% of the average conversion value of the Notes; if we
call a Note for redemption; and based on certain corporate
transactions such as if we are party to a consolidation, merger or
binding share exchange in which over 50% of our outstanding
shares of common stock would be converted into cash, securities
or other property, or if another fundamental change (as defined
in the bond indenture) occurs. Upon conversion, the holder of
each Note will receive the conversion value of the Note payable
in cash up to the principal amount of the Note and CONMED
common stock for the Note’s conversion value in excess of such
principal amount. Amounts in excess of the principal amount are
at an initial conversion rate, subject to adjustment, of 26.1849
shares per $1,000 principal amount of the Note (which
represents an initial conversion price of $38.19 per share). The
Notes mature on November 15, 2024 and are not redeemable by
us prior to November 15, 2011. Holders of the Notes will be able
to require that we repurchase some or all of the Notes on
November 15, 2011, 2014 and 2019.
We have determined that the Notes contain two embedded
derivatives. The embedded derivatives are recorded at fair value in
other long-term liabilities and changes in their value are recorded
through the consolidated statement of income. The embedded
derivatives have a nominal value, and it is our belief that any
change in their fair value would not have a material adverse effect
on our business, financial condition or results of operations.
The Notes offering resulted in gross proceeds of $150.0 million,
less $5.8 million in initial purchaser’s discount and other offering
related payments which are being amortized to interest expense
over a 7 year period through November 15, 2011 (the earliest date
at which we may be required to repurchase some or all of the
Notes). Net proceeds from the offering and cash on hand were
used to repay $82.2 million on the term loan and a further
$45.0 million in borrowings then outstanding on the revolving
credit facility under our senior credit agreement. (The revolving
credit facility borrowings were used to finance a portion of the Bard
Endoscopic Technologies acquisition—See Note 2). Additionally,
in conjunction with the Notes offering, we repurchased
$30.0 million of our common stock in privately negotiated
transactions. As a result of the $82.2 million prepayment on the
term loan, we recorded $0.8 million in losses on the early
extinguishment of debt related to the write-off of unamortized
deferred financing fees.
The scheduled maturities of long-term debt outstanding at
December 31, 2004 are as follows:
2005
2006
2007
2008
2009
Thereafter
$ 4,037
4,208
4,393
62,342
61,770
157,772
Note 7 — Income Taxes
The provision for income taxes for the years ended December 31,
2002, 2003 and 2004 consists of the following:
Current tax expense:
Federal
State
Foreign
Deferred income tax expense
Provision for income taxes
2002
2003
2004
540
755
8,546
10,664
$ 7,251 $ 5,486 $ 9,138
665
975
1,061
1,683
________ ________ ________
11,796
7,212
4,301
13,715
________ ________ ________
$ 19,210 $ 20,927 $ 16,097
________ ________ ________
________ ________ ________
A reconciliation between income taxes computed at the statutory
federal rate and the provision for income taxes for the years
ended December 31, 2002, 2003 and 2004 follows:
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
2002
2003
2004
35.00%
35.00% 35.00%
(1.78)
.66
(2.36)
.90
(5.30)
2.75
.17
.17
.18
—
5.22
—
differences
Other, net
.40
1.55
36.00%
.36
(.51)
________ ________ ________
39.48% 32.48%
________ ________ ________
________ ________ ________
.51
.04
The tax effects of the significant temporary differences which
comprise the deferred tax assets and liabilities at December 31,
2003 and 2004 are as follows:
Assets:
Inventory
Net operating losses of acquired
subsidiaries
Deferred compensation
Accounts receivable
Additional minimum pension liability
Other
Valuation allowance
Liabilities:
Goodwill and intangible assets
Depreciation
Employee benefits
State taxes
Interest rate swap
Net liability
2003
2004
$
8,948 $ 10,791
8,025
1,602
509
5,630
2,024
(5,887)
_________ ________
22,694
_________ ________
11,025
1,361
262
—
2,390
(8,462)
15,524
43,695
5,721
1,980
—
83
51,479
51,707
6,412
1,530
745
—
_________ ________
60,394
$ (35,955) $ (37,700)
_________ ________
_________ ________
Earnings before income taxes consists of the following U.S. and
foreign income:
U.S. income
Foreign income
Total income
2003
2002
2004
$ 51,198 $ 49,275 $ 45,876
3,686
________ ________ ________
$ 53,361 $ 53,009 $ 49,562
________ ________ ________
________ ________ ________
3,734
2,163
31
The net operating loss carryforwards of acquired subsidiaries
begin to expire in 2008. 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. Any subsequently recognized tax
benefits associated with the valuation allowance would be
allocated to reduce goodwill.
On October 22, 2004, the President signed the American Jobs
Creation Act of 2004 (the “Act”). The Act provides a deduction for
income from qualified domestic production activities, which will be
phased in from 2005 through 2010. In return, the Act also provides
for a two-year phase-out of the existing extra-territorial income
exclusion (ETI) for foreign sales that was viewed to be inconsistent
with international trade protocols by the European Union.
Under the guidance in FASB Staff Position No. FAS 109-1,
Application of FASB Statement No.109, “Accounting for Income
Taxes,” to the Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004, the deduction
will be treated as a “special deduction” as described in FASB
Statement No.109. As such, the special deduction has no effect on
deferred tax assets and liabilities existing at the enactment date.
Rather, the impact of this deduction will be reported in the period
in which the deduction is claimed on our tax return.
The Act creates a temporary incentive for U.S. corporations to
repatriate accumulated income earned abroad by providing an 85
percent dividends received deduction for certain dividends from
controlled foreign corporations. The deduction is subject to a
number of limitations and, as of today, uncertainty remains as to
how to interpret numerous provisions in the Act. We are not yet
in a position to decide on whether, and to what extent, we might
repatriate foreign earnings that have not yet been remitted to the
U.S. We have not provided for federal income taxes on the
undistributed earnings of our foreign operations as it has been
our intention to permanently reinvest undistributed earnings
(approximately $11.1 million as of December 31, 2004).
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, 2003 and 2004, no preferred
stock had been issued.
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 from the offering
approximated $66.1 million and were used to reduce
indebtedness under our credit facility.
In November 2004, we repurchased 1.1 million shares of our
common stock in privately negotiated transactions at an aggregate
cost of $30 million. This repurchase coincided with our 2.50%
convertible senior subordinated notes transaction (See Note 6).
On February 15, 2005, our Board of Directors authorized a share
repurchase program under which we may repurchase up to
$50.0 million of our common stock, although no more than
$25.0 million may be purchased in any calendar year. The
repurchase program calls for shares to be purchased in the open
market or in private transactions from time to time. We may
suspend or discontinue the share repurchase program at any time.
We have reserved 6.7 million shares of common stock for
issuance to employees and directors under three stock option
plans (the “Plans”) of which approximately 696,000 shares remain
available for grant at December 31, 2004. In May 2004, the total
number of shares available for issuance to employees and
directors under the Plans was increased by 1.0 million shares.
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:
32
Number Weighted-Average
Exercise Price
Outstanding at December 31, 2001
Granted
Forfeited
Exercised
Outstanding at December 31, 2002
Granted
Forfeited
Exercised
Outstanding at December 31, 2003
Granted
Forfeited
Exercised
Outstanding at December 31, 2004
Exercisable:
December 31, 2002
December 31, 2003
December 31, 2004
of Options
3,434
742
(40)
(546)
________
3,590
669
(84)
(181)
________
3,994
659
(152)
(940)
________
3,561
________
________
1,875
2,590
2,435
14.69
23.42
15.27
8.88
__________
17.27
17.44
19.49
11.84
__________
17.55
25.03
19.16
15.28
__________
$
19.45
__________
__________
$
15.55
17.19
18.90
Stock
Stock
Outstanding Average
Options Weighted Weighted Options Weighted
Average Exercisable Average
at Dec. 31 Exercise
Range of
Exercise
Prices
$5.89 to $8.84
$8.84 to $11.78
$11.78 to $14.73
$14.73 to $17.67
$17.67 to $20.62
$20.62 to $23.56
$23.56 to $26.50
$26.50 to $29.50
Total
at Dec. 31 Remaining Exercise
Life (Years)
0.4
4.4
5.5
4.6
6.5
7.6
8.6
9.2
Price
$ 8.28
9.90
14.23
16.26
18.90
21.80
25.45
29.45
2004
5
69
566
693
974
383
795
76
_____
3,561
_____
_____
Price
$ 8.28
10.04
14.20
16.36
19.11
21.72
25.48
—
2004
5
51
465
564
661
148
541
—
_____
2,435
_____
_____
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 employees with 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 2004, we issued approximately
55,000 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 five principal operating
units, CONMED Endoscopic Technologies, CONMED EndoSurgery,
CONMED Electrosurgery, CONMED Linvatec and CONMED Patient
Care. 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 and makes resource
allocation decisions for the entire company. All five 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 grouped our operating units into a
single segment comprised of medical instruments and systems
used in surgical and other medical procedures.
2002
The following is net sales information by product line:
2003
$162,532 $182,061 $ 204,887
128,572
122,031
114,302
85,912
77,337
69,674
75,879
69,937
69,753
47,400
36,801
45,764
— 15,738
—
________ ________ ________
$453,062 $497,130 $ 558,388
________ ________ ________
________ ________ ________
Arthroscopy
Powered Surgical Instruments
Electrosurgery
Patient Care
EndoSurgery
Endoscopic Technologies
Total
2004
The following is net sales information for geographic areas:
United States
Canada
United Kingdom
Japan
All other countries
Total
2002
2004
2003
$320,312 $333,473 $ 364,819
27,384
24,620
27,120
19,883
18,265
19,793
100,889 119,272
________ ________ ________
$453,062 $497,130 $ 558,388
________ ________ ________
________ ________ ________
15,980
18,625
18,820
79,325
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, 2003
and 2004. No single customer represented over 10% of our
consolidated net sales for the years ended December 31, 2002,
2003 and 2004.
Note 10 — Employee Benefit Plans
We sponsor an employee savings plan (“401(k) plan”) and a
defined benefit pension plan (the “pension plan”) covering
substantially all our employees. Overall benefit levels provided
under the pension plan were reduced effective January 1, 2004
resulting in a reduction in the projected benefit obligation of
approximately $6.4 million.
Total employer contributions to the 401(k) plan were
$2.0 million, $2.2 million and $1.8 million during the years
ended December 31, 2002, 2003 and 2004, respectively.
We use a December 31, measurement date for our pension plan.
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 plan at December 31:
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
2003
6.25%
8.00%
3.00%
2004
5.75%
8.00%
3.00%
Additionally, as of December 31, 2004, the Company changed
from the 1984 Unisex Pension mortality table to the 1994 Group
Annuity Reserving mortality table for purposes of determining
expected mortality.
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
2002
2003
2004
$ 3,988 $ 4,167 $ 3,144
2,002
(1,595)
350
—
2,419
(1,728)
750
2,839
2,377
(2,562)
660
—
________ ________ ________
$ 4,745 $
8,447 $ 3,619
________ ________ ________
________ ________ ________
2003
2004
$ 32,044 $ 43,337
_________ ________
_________ ________
During the year-ended December 31, 2003, we recognized
settlement losses of $2.8 million. See Note 12 for further
discussion.
Accumulated Benefit Obligation
Change in benefit obligation
Projected benefit obligation at
beginning of year
Adjustment for plan amendment
Service cost
Interest cost
Actuarial loss
Benefits paid
$ 33,639 $ 38,878
(6,352)
3,144
2,377
13,759
(2,934)
_________ ________
—
4,167
2,419
6,794
(8,141)
Projected benefit obligation at end of year
$ 38,878 $ 48,872
_________ ________
Change in plan assets
Fair value of plan assets at beginning
of year
Actual gain 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
$ 18,169 $ 33,632
2,490
—
(2,934)
_________ ________
4,075
19,529
(8,141)
$ 33,632 $ 33,188
_________ ________
$
5,246 $ 15,684
(27,461)
(44)
5,886
— 16,084
_________ ________
(14,634)
(48)
(118)
Accrued (prepaid) pension cost
$ (9,554) $ 10,149
_________ ________
_________ ________
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
2003
2004
$
— $ 10,149
—
(9,554)
— (16,084)
_________ ________
$ (9,554) $ (5,935)
_________ ________
_________ ________
During the year ended December 31, 2002, 2003 and 2004,
respectively, we recognized a comprehensive loss of $4.0 million,
net of income taxes, comprehensive income of $5.1 million, net
of income taxes, and a comprehensive loss of $10.5 million, net
of income taxes, as a result of changes in the additional
minimum pension liability required to be recognized.
33
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
2002
7.00%
8.00%
3.00%
2003
6.75%
8.00%
3.00%
2004
6.25%
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
Net periodic pension cost
Percentage of Pension
Plan Assets
Target
Allocation
2005
55%
35
10
_________ _________ _________
100%
_________ _________ _________
_________ _________ _________
2003
41%
49
10
100%
2004
48%
35
17
100%
As of December 31, 2004, the Plan held 27,562 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 2005 pension plan funding is not expected to exceed
$4.5 million.
The following table summarizes the benefits expected to be paid
by our pension plan in each of the next five years and in
aggregate for the following five years. The expected benefit
payments are estimated based on the same assumptions used to
measure the Company’s projected benefit obligation at
December 31, 2004 and reflect the impact of expected future
employee service.
In November 2003, the Company 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. Our claims against
Johnson & Johnson are currently in the discovery stage. 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. In
addition, the costs associated with pursuing this claim, which
approximated $1.3 million in the year ended December 31, 2004,
may be material.
34
2005
2006
2007
2008
2009
2010-2014
$ 2,570
2,841
2,609
2,194
2,909
19,196
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, 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
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.
Note 12 — Other Expense (Income)
Other expense (income) for the year ended December 31,
consists of the following:
Termination of product offering
Gain on settlement of a contractual
$
dispute, net of legal costs
Pension settlement costs
Acquisition-related costs
Loss on settlement of a
patent dispute
2002
2003
2004
— $
— $ 2,396
— $ (9,000)
2,839
—
3,244
—
—
—
1,547
—
________ ________ ________
2,000
—
Other expense (income)
$ 2,000 $ (2,917) $ 3,943
________ ________ ________
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.
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. Due to 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. An additional
$3.2 million of acquisition and transition-related costs have been
recorded in other expense. The $3.2 million of costs recorded in
other expense consist 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
similar costs related to the Bionx acquisition completed in the
first quarter of 2003.
During 2004, we elected to terminate our surgical lights product
line and we instituted a customer replacement program whereby
all currently installed surgical lights will be replaced by
CONMED. The entire cost of the replacement program, including
the write-off of the remaining surgical lights inventory, purchase
of new surgical lights from an alternative supplier and
installation costs are expected to approximate $4.0 million.
During 2004, we recorded a charge of $2.4 million for the write-
off of surgical lights inventory and the cost of surgical light
replacements performed through December 31, 2004. It is
anticipated that the remaining $1.6 million in costs will be
incurred in 2005 as the replacement program is completed.
During 2004, we incurred $1.5 million of acquisition-related
charges associated with the Bard Endoscopic Technologies
acquisition which have been recorded in other expense. These
expenses principally consist of severance and other transition
related charges.
Note 13 — Guarantees
We provide warranties on certain of our products at the time of
sale. The standard warranty period for our capital and reusable
equipment is generally one year. Liability under service and
warranty policies is based upon a review of historical warranty
and service claim experience. Adjustments are made to accruals
as claim data and historical experience warrant.
Changes in the carrying amount of service and product
warranties for the year ended December 31, are as follows:
2002
2003
2004
Balance as of January 1,
Provision for warranties
Claims made
Warranties acquired
Balance as of December 31,
4,287
(3,983)
—
$ 2,909 $ 3,213 $ 3,588
________ ________ ________
3,961
(4,025)
—
________ ________ ________
$ 3,213 $ 3,588 $ 3,524
________ ________ ________
________ ________ ________
4,209
(3,934)
100
Note 14 — New Accounting Pronouncements
In December 2004, the FASB issued SFAS No.123 (revised 2004),
“Share-Based Payment” (“SFAS 123R”), which replaces SFAS No.
123, “Accounting for Stock-Based Compensation” (“SFAS 123”)
and supercedes APB Opinion No. 25, “Accounting for Stock
Issued to Employees.” SFAS 123R requires that all share-based
payments to employees, including grants of employee stock
options, be recognized in the financial statements based on their
fair values, beginning with the first interim or annual period after
June 15, 2005, with early adoption encouraged. The pro forma
disclosures previously permitted under SFAS 123, no longer will
be an alternative to financial statement recognition. We are
required to adopt SFAS 123R in the third quarter of 2005. Under
SFAS 123R, we must determine the appropriate fair value model
to be used in valuing share-based payments, the amortization
method for compensation cost and the transition method to be
used at the date of adoption. Upon adoption, we may choose
from two transition methods: the modified-prospective transition
approach or the modified-retroactive transition approach. Under
the modified-prospective transition approach we would be
required to recognize compensation cost for awards that were
granted prior to, but not vested as of the date of adoption. Prior
periods remain unchanged and pro forma disclosures previously
required by SFAS No. 123 continue to be required. Under the
modified-retrospective transition method, we would be required
to restate prior periods by recognizing compensation cost in the
amounts previously reported in the pro forma disclosure under
SFAS No. 123. Under this method, we would be permitted to
apply this presentation to all periods presented or to the start of
the fiscal year in which SFAS No. 123R is adopted. We would also
be required to follow the same guidelines as in the modified-
prospective transition method for awards granted subsequent to
adoption and those that were granted and not yet vested. We are
currently evaluating the requirements of SFAS 123R and its
impact on our consolidated results of operations and earnings
per share. We have not yet determined the method of adoption
or the effect of adopting SFAS 123R, and it has not been
determined whether the adoption will result in amounts similar
to the current pro forma disclosures under SFAS 123.
In December 2004, the FASB issued Staff Position (“FSP”)
No. 109-2, “Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs
Creation Act of 2004” (“FSP 109-2”). This position provides
guidance under FASB Statement No. 109 (“SFAS 109”),
“Accounting for Income Taxes,” with respect to recording the
potential impact of the repatriation provisions of the American
Jobs Creation Act of 2004 (the “Jobs Act”) on enterprises’ income
tax expense and deferred tax liability. The Jobs Act was enacted
on October 22, 2004. FSP 109-2 states that an enterprise is
allowed time beyond the financial reporting period of enactment
to evaluate the effect of the Jobs Act on its plan for reinvestment
or repatriation of foreign earnings for purposes of applying SFAS
109. See additional discussion in Note 7.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of
Nonmonetary Assets – An Amendment of APB Opinion No. 29,
Accounting for Nonmonetary Transactions” (“SFAS 153”). SFAS
153 eliminates the exception from fair value measurement for
nonmonetary exchanges of similar productive assets in
paragraph 21(b) of APB Opinion No. 29, “Accounting for
Nonmonetary Transactions,” and replaces it with an exception for
exchanges that do not have commercial substance. SFAS 153
specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS 153 is
effective for fiscal periods beginning after June 15, 2005. We have
considered SFAS 153 and have determined that this
pronouncement is not applicable to our current operations.
In November 2004, the FASB issued SFAS No. 151, “Inventory
Costs – An Amendment of ARB Opinion No. 43, Chapter 4”
(“SFAS 151”). SFAS 151 amends the guidance in ARB No. 43,
Chapter 4, “Inventory Pricing,” to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Among other provisions,
the new rule requires that items such as idle facility expense,
excessive spoilage, double freight, and rehandling costs be
recognized as current period charges regardless of whether they
meet the criterion of “so abnormal” as stated in ARB No. 43.
Additionally, SFAS 151 requires that the allocation of fixed
production overheads to the costs of conversion be based on the
normal capacity of the production facilities. SFAS 151 is effective
for fiscal years beginning after June 15, 2005. We have considered
SFAS 151 and have determined that this pronouncement will not
materially impact our consolidated results of operations.
35
In November 2004, the FASB issued SFAS No. 152, “Accounting
for Real Estate Time-Sharing Transactions – An amendment of
SFAS No. 66 and 67.” This statement amends SFAS No. 66,
“Accounting for Sales of Real Estate,” to reference the financial
accounting and reporting guidance for real estate time-sharing
transactions which is provided in AICPA Statement of Position
(“SOP”) 04-2, “Accounting for Real Estate Time-Sharing
Transactions.” This statement also amends SFAS No. 67,
“Accounting for Costs and Initial Rental Operations of Real
Estate Projects,” to state the guidance for (a) incidental costs
and (b) costs incurred to sell real estate projects does not apply
to real estate time-sharing transactions. The accounting for those
costs is subject to guidance in SOP 04-2. SFAS 152 is effective for
fiscal years beginning after June 15, 2005. We have considered
SFAS 152 and have determined that this pronouncement is not
applicable to our current operations.
Note 15 — Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data for 2003 and 2004 are as follows:
Three Months Ended
2003
Net sales
Gross profit
Net income
EPS
Basic
Diluted
2004
Net sales
Gross profit
Net income
EPS
Basic
Diluted
March
118,034
61,656
6,668
.23
.23
March
133,964
70,359
12,039
.41
.40
$
$
$
$
June
124,540
65,131
2,763
.10
.09
June
130,912
68,714
12,292
.41
.41
$
$
$
$
September
December
$
$
120,747
63,231
9,706
.34
.33
September
$
$
132,289
67,487
1,699
.06
.06
$ 133,809
69,679
12,945
$
.45
.44
December
$ 161,223
80,332
7,435
$
.25
.25
36
Unusual Items Included In Selected Quarterly Financial Data:
2003
First quarter
During 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 associated with the Bionx acquisition
– See Note 2. The first quarter effective tax rate was increased
from 36.0% to 55.1% to reflect the nondeductibility of the
$7.9 million charge.
During 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.
Second quarter
During 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.
During the second quarter of 2003 we recorded losses on the
early extinguishment of debt of $7.9 million—See Note 6.
Third quarter
During the third quarter of 2003, we recorded pension settlement
losses of $0.7 million to other expense (income)—See Note 12.
Fourth quarter
During 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.
2004
Third quarter
During the third quarter of 2004, we recorded a charge in the
amount of $13.7 million related to the write-off of the estimated
purchase in-process research and development associated with
the Bard Endoscopic Technologies acquisition – See Note 2.
During the third quarter of 2004, we recorded a charge in the
amount of $0.9 million in other expense for costs related to the
Bard Endoscopic Technologies acquisition – See Note 12.
Fourth quarter
During the fourth quarter of 2004, we recorded a charge in the
amount of $2.7 million related to the write-off of the finalized
purchased in-process research and development associated with
the Bard Endoscopic Technologies acquisition – See Note 2.
During the fourth quarter of 2004, we recorded $2.3 million of
Bard Endoscopic Technologies acquisition-related charges in cost
of sales – See Note 2.
During the fourth quarter of 2004, we recorded a charge of
$2.4 million related to our termination of our surgical lights
product line and $0.7 million of acquisition-related costs
associated with the Bard Endoscopic Technologies acquisition
to other expense – See Note 12.
During the fourth quarter of 2004, we recorded losses on the early
extinguishment of debt of $0.8 million – See Note 6.
BOARD OF DIRECTORS
SHAREHOLDER INFORMATION
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
Audit Committee Chair
Compensation Committee
Nominating and Corporate Governance Committee
Jo Ann Golden, CPA
Partner, Dermody, Burke and Browne, CPA, PLLC
Audit Committee
Stephen M. Mandia
President, CEO of East Coast Olive Oil, Inc.
Audit Committee
Compensation Committee
Nominating and Corporate Governance Committee
William D. Matthews, Esq.
Retired Chairman of the Board, Oneida Ltd.
Corporate Governance Committee
Audit Committee
Compensation Committee Chair
Stuart J. Schwartz, MD
Retired Physician
Nominating and Corporate Governance Committee
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
David R. Murray
President – CONMED Electrosurgery
Frederick F. Schweitzer
Vice President – Corporate Regulatory Affairs
Robert D. Shallish, Jr.
Vice President – Finance and Chief Financial Officer
John J. Stotts
Vice President – CONMED Patient Care
Frank R. Williams
Vice President – CONMED EndoSurgery
Dennis M. Werger
Vice President, General Manager – CONMED Endoscopic
Technologies
Gerald G. Woodard
President – CONMED Linvatec
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 Registered Public Accounting Firm
PricewaterhouseCoopers LLP
One Lincoln Center
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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
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Available at www.conmed.com
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