A n n u a l R e p o r t
2 0 0 7
20062005200420032002200120001999199819971996199519941993199219911990198919881987 C O N T E N T S
Financial Highlights 2
Letter to the Shareholders 3
The NASDAQ Opening Bell 6
Lean Manufacturing 7
Market for CONMED’s Common Stock and Related Stockholder Matters 8
Five Year Summary of Selected Financial Data 8
Management’s Discussion and Analysis of Financial Condition and Results of Operations 9
Management’s Report on Internal Control Over Financial Reporting 17
Report of Independent Registered Public Accounting Firm 18
Consolidated Balance Sheets 19
Consolidated Statements of Operations 20
Consolidated Statements of Shareholders’ Equity 21
Consolidated Statements of Cash Flows 22
Notes to Consolidated Financial Statements 23
Board of Directors 34
Officers 35
Shareholder Information, Subsidiaries 36
NET SALES (IN $ mILLIONS)
.
3
4
9
6
.
8
6
4
6
.
3
7
1
6
.
4
8
5
5
.
1
7
9
4
.
9
5
9
3
2
.
6
7
3
.
3
9
3
3
.
1
3
5
4
.
7
8
2
4
.
6
9
3
1
97
98
99
00
01
02
03
04
05
06
07
F I N A N C I A L H I G H L I G H T S
NET INCOmE (IN $ mILLIONS)
2
.
4
3
1
.
2
3
5
.
3
3
0
.
2
3
2
.
7
2
4
.
4
2
8
.
7
1
3
.
9
1
97
)
1
.
7
(
98
99
00
01
02
03
04
05
06
)
5
.
2
1
(
5
.
1
4
07
9
.
4
8
2
RETAINEd EARNINGS (IN $ mILLIONS)
9
.
9
5
2
4
.
7
4
2
9
.
7
2
2
5
.
4
9
1
4
.
2
6
1
2
.
8
2
1
8
.
3
0
1
5
.
4
8
4
.
7
5
6
.
9
3
97
98
99
00
01
02
03
04
05
06
07
2
CONMED Corporation
J o s e p h J. C o r a s a n t i
Dear Shareholders,
I am very pleased to report that CONMED Corporation experienced a
very profitable 2007.
L E T T E R T O T H E S H A R E H O L d E R S
We delivered strong improvements in revenue, margins and profitability. Equally
important, we reduced our year-over-year debt levels, which resulted in lower interest costs.
Our operating divisions accomplished these financial milestones by successfully executing
the strategy we have consistently communicated to you over the past 24 months:
• Grow the Company’s sales through continued top-notch service to our customers, enact
selective price increases and introduce innovative new products throughout each of our
divisions.
• Hold the line on increases in expenses by effectively leveraging our existing infrastructure.
As a result, in 2007, the Company’s sales grew 7.3%, the gross margin expanded, and
selling, administrative and research and development expense grew a nominal 2.0%. The
resulting operating margin, on a non-GAAP basis, grew to 11.3% in 2007 from 9.1% in
2006. On a GAAP basis, the increase was even more substantial, as the 2007 income from
operations equaled $81.0 million compared to a loss of $4.6 million in 2006. Cash from
operations grew to $65.9 million ($2.27 per share—a non-GAAP measurement) and was
primarily used to reduce debt, which in turn reduced interest expense.
It was a year of strong performance that exceeded management’s initial expectations. Of
particular significance:
• Our business outside the United States continued to thrive with a total growth rate
of 16.1% and a constant currency growth rate of 10.0%. Our sales organizations in
the United Kingdom and Canada led the way with growth rates of 39% and 28%,
respectively. International revenue now represents 42% of our business, and we expect
this number to continue growing through 2008.
• The Company’s video imaging products for minimally invasive surgery grew 32% over
2006. In early 2007, we became the first company globally to introduce true High
Definition video imaging to the surgical suite. With 1080p resolution, the highest
presently possible, our imaging systems were, and continue to be, in high demand, and
our first-mover status has provided us with a significant competitive advantage in the
marketplace.
3
2007 Annual Report • We resolved the manufacturing issues encountered in our Endoscopic Technology line
and returned to a full production schedule. Our work in this business segment was
highlighted by a return to positive growth for the fourth quarter of 2007. This is an
excellent indicator for 2008 and beyond.
Leading Technologies and Products
We continued to focus on research and development during the past year, and our efforts
bear the fruits of that labor. In March of 2008, we unveiled 11 new products at the
American Academy of Orthopedic Surgeons Annual Meeting. We believe these products
will further enhance our arthroscopy and powered surgical instrument product offerings,
and our established reputation as an innovator.
Our other divisions are also working on a long list of new products that we envision fueling
the future growth of this Company. One such product is ECOM, which is in our Patient
Care line and has been in clinical trials for several months. This product has the potential to
reduce the risks associated with the invasive nature of traditional cardiac output monitoring
while providing more timely and reliable data to the surgical team. The data generated to
date are very encouraging, and we expect initial sales from this product in 2008.
William D. Matthews
As you all know from this year’s Proxy, Bill Matthews has decided not to stand for
reelection to the Board of Directors. Over his 11 year term, Bill has provided invaluable
counsel to CONMED. From his experience first as a General Counsel, and then as a Chief
Executive Officer at Oneida Limited, he was acutely aware of the challenges involved in
creating and executing an effective corporate strategy, and his meaningful contributions
to this process played an important part in our success to date. His approach to providing
critical oversight and advice allowed management to focus on the day-to-day running of the
business, and his experience and extensive knowledge will be missed.
4
CONMED Corporation The Outlook
During 2007, we recognized our 20th year as a public company, which we celebrated by
ringing the ceremonial NASDAQ opening bell in July. This anniversary provided us with
an opportunity to pause and reflect on our past, and thoughtfully assess our outlook for
the future. We have all witnessed the boom and bust cycles that some industries seem
destined to suffer through: the internet bubble and the subprime meltdown are the most
recent, but certainly not the last, of these excesses.
Our business was not founded on cyclical fads. Our business model is firmly supported by
a long-developing and inescapable demographic fact: as our population ages, and as we
continue to pursue more active lifestyles, there is an ever increasing necessity for surgical
procedures. Not only do we supply products that are essential for these surgeries, we
provide some of the best, most-recognized and innovative products in the medical field that
offer surgeons and patients critical healthcare solutions. Our high-quality product portfolio
is even more attractive when considering the reliable service we provide our customers.
There is nothing trendy in our business model; it is simply a strong dedication to patients,
physicians and shareholders. This is our focus day in and day out, and the key ingredient
to our success over the past 20 years. As we move forward, our goals remain to continue
to grow the Company, enhance our product and service offerings and create long-term
shareholder value.
As always, we thank you for your continued trust and support.
Joseph J. Corasanti
President, Chief Executive Officer
5
2007 Annual Report CONMED Rings The NASDAQ Opening Bell—Again!
To celebrate our 20th anniversary on the NASDAQ Stock Market,
CONMED was invited to ring the ceremonial opening bell on Tuesday,
July 24th at the NASDAQ Marketsite in Times Square, New York, NY.
T H E N A S d A Q O P E N I N G B E L L
CONMED was extremely pleased to be chosen by NASDAQ for a second time for this
prestigious opportunity, having rung the opening bell in August of 2002 as a recognition
of our 15th year of trading on the NASDAQ. CONMED puts a tremendous value on its
association with NASDAQ, which is evidenced by events like this that highlight the long-
term and successful nature of our relationship.
Since our first public offering 20 years ago, CONMED’s initial public market shareholders
have realized an approximately 1,200% overall return as compared to 500% for the overall
NASDAQ market and 400% for the S&P 500 for the same period.
CONMED’s continued innovation and commercialization of new proprietary products
and processes are essential elements of our success to date and long-term growth
strategy. We have pioneered numerous medical devices that improve patient outcomes
while providing cost-efficient solutions for healthcare providers. CONMED’s ability
to access the capital markets through NASDAQ has been a critical component to our
business strategy and growth over the past 20 years. We look forward to our continued
relationship with NASDAQ.
6
CONMED Corporation CONMED’s overall 2007 financial performance was buoyed by
significant efforts to attain operational efficiencies. The cornerstone was
the decision to embrace the concepts of lean manufacturing and employ
the Kaizen method to lead us on this journey.
L E A N m A N U F A C T U R I N G
We established the Continuous Improvement Office in the middle of 2007 and by year’s
end we had hosted 15 very successful Kaizen events. Such events are one week projects
focused on improving the manufacturing process for a specific product line. The 2007
events alone yielded dramatic improvements in productivity, and reductions in both
inventory and square footage needs, ultimately enhancing our responsiveness to customers.
To date, the Kaizen events have been focused on the Central New York facilities where
the process has been embraced. We have developed a very aggressive plan to hold 25
events during 2008. Throughout the initial phase of this process, employees from other
production facilities have systematically been included as team members, and the event
results presentations have been broadcast to CONMED’s other facilities for awareness and
educational purposes.
As we progress into 2008, we have already begun the process of consolidating our
manufacturing and global supply chain efforts and expect to expand our lean manufacturing
process throughout our facilities. Based on our initial success and quantitative results, we
believe the Company will produce further enhancements in each of these areas.
7
2007 Annual Report 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 February 4, 2008, there were
1,008 registered holders of our common stock and approximately 13,196 accounts held in “street name”.
The following table sets forth quarterly high and low sales prices for the years ended December 31, 2006 and 2007, as reported by the NASDAQ
Stock Market.
2006
2007
Period
________________________________________________________________________________________________________
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Low
$ 22.84
28.73
26.61
22.89
High
$ 24.00
22.05
21.29
23.32
High
$ 29.23
31.85
30.00
29.68
Low
$ 18.09
18.75
19.19
21.10
We did not pay cash dividends on our common stock during 2006 or 2007 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 7 to the Consolidated Financial Statements.
Information relating to compensation plans under which equity securities of CONMED Corporation are authorized for issuance is set forth in the section
captioned “Equity Compensation Plans” in CONMED Corporation’s definitive Proxy Statement or other informational filing for our 2008 Annual
Meeting of Stockholders and all such information is incorporated herein by reference.
Five Year Summary of Selected Financial data
(In thousands, except per share data)
Years Ended December 31,
Statements of Operations Data(1):
Net sales
Income (loss) from operations
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
Weighted average number of common shares in calculating:
Basic earnings (loss) per share
Diluted earnings (loss) 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
2003
2004
2005
2006
2007
$
497,130
79,955
32,082
$
558,388
63,161
33,465
$ 617,305
63,748
31,994
$ 646,812
(4,603 )
(12,507 )
$ 694,288
80,991
41,456
$
1.11
1.10
$
1.13
1.11
$
1.09
1.08
$
$
(.45 )
(.45 )
1.46
1.43
$
$
28,930
29,256
24,854
9,309
5,986
805,058
264,591
433,490
$
$
29,523
30,105
26,868
12,419
4,189
872,825
294,522
447,983
$
$
29,300
29,736
30,786
16,242
3,454
903,783
306,851
453,006
$
$
27,966
27,966
28,416
28,965
29,851
21,895
$ 31,534
20,910
3,831
861,571
267,824
440,354
$ 11,695
893,951
222,834
505,002
(1) Results of operations of acquired businesses have been recorded in the financial statements since the date of acquisition.
8
CONMED Corporation
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 medical technology company with an emphasis on surgical devices
and equipment for minimally invasive procedures and monitoring. The
Company’s products serve the clinical areas of arthroscopy, powered
surgical instruments, electrosurgery, cardiac monitoring disposables,
endosurgery and endoscopic technologies. They are used by surgeons and
physicians in a variety of specialties including orthopedics, general surgery,
gynecology, neurosurgery, and gastroenterology. These product lines
and the percentage of consolidated revenues associated with each, are as
follows:
Arthroscopy
Powered Surgical Instruments
Electrosurgery
Patient Care
Endosurgery
Endoscopic Technologies
Consolidated Net Sales
2005
34%
22
14
12
8
10
2006
35%
21
15
12
8
9
______ ______ ______
100%
100%
______ ______ ______
______ ______ ______
2007
38%
21
13
11
9
8
100%
A significant amount of our products are used in surgical procedures with
approximately 75% of our revenues derived from the sale of disposable
products. Our capital equipment offerings also facilitate the ongoing
sale of related disposable products and accessories, thus providing us
with a recurring revenue stream. We manufacture substantially all of our
products in facilities located in the United States, Mexico and Finland.
We market our products both domestically and internationally directly to
customers and through distributors. International sales approximated 37%,
39% and 42% in 2005, 2006 and 2007, respectively.
Business Environment and Opportunities
The aging of the worldwide population along with lifestyle changes,
continued cost containment pressures on healthcare systems and the
desire of clinicians and administrators to use less invasive (or non-
invasive) procedures are important trends which are driving the growth
in our industry. We believe that with our broad product offering of
high quality surgical and patient care products, we can capitalize on this
growth for the benefit of the Company and our shareholders.
In order to further our growth prospects, we have historically used
strategic business acquisitions and exclusive distribution relationships to
continue to diversify our product offerings, increase our market share and
realize economies of scale.
We have a variety of research and development initiatives focused in
each of our principal product lines. Among the most significant of these
efforts is the Endotracheal Cardiac Output Monitor (“ECOM”). Our
ECOM product offering is expected to provide an innovative alternative
to catheter monitoring of cardiac output with a specially designed
endotracheal tube which utilizes proprietary bio-impedance technology.
Also of significance are our research and development efforts in the area
of tissue-sealing for electrosurgery.
Continued innovation and commercialization of new proprietary
products and processes are essential elements of our long-term growth
strategy. In March 2008, we expect to be unveiling several new products
at the American Academy of Orthopedic Surgeons Annual Meeting
which we believe will further enhance our arthroscopy and powered
surgical instrument product offerings. Our reputation as an innovator is
exemplified by these product introductions, which include the following:
the Spectrum® MVP™ Shoulder Suture Passer, an innovative suture
passing device for arthroscopic shoulder repair; the Sentinel™ Drill Bits
which allows for safe and accurate drilling into the femoral tunnels during
anterior cruciate ligament, or ACL, surgery; the Shutt® Series 210™
Instruments for Hip Arthroscopy, which include nine manual instruments
allowing for working in deep joints such as the hip; EL Microfracture
Awls and Sterilization Tray which is for easier access in difficult-to-reach
areas and use in hip arthroscopy; Smart Screw® II, a comprehensive line
of bioabsorbable bone fixation implants; ThRevo® with HiFi, a shoulder
anchor that incorporates the advantage of the HiFi high strength suture;
Cordless Revision Attachment for Battery Handpieces, which are the
only cordless revision attachments on the market and are used for cement
removal in orthopedic revision surgery; Intrex™ Blade Line, a blade
system composed of six blade profiles in seven different thicknesses for
a comprehensive system of large bone saw blades; HD Arthroscope,
the first high definition, or HD, arthroscope on the market ensures
maximized transmission of high contrast light from the arthroscope into
the True HD camera head; and the Single Chip Enhanced Definition
Camera System, which incorporates a camera and image capture in the
same device.
Business Challenges
In September 2004, we acquired the business operations of the
Endoscopic Technologies Division of C.R. Bard, Inc. (the “Endoscopic
Technologies acquisition”) for aggregate consideration of $81.3 million
in cash. The acquired business has enhanced our product offerings by
adding a comprehensive line of single-use medical devices employed by
gastrointestinal and pulmonary physicians to diagnose and treat diseases
of the digestive tract and lungs using minimally invasive endoscopic
techniques. The transfer of the Endoscopic Technologies production
lines from C.R. Bard facilities to CONMED facilities proved to be more
time-consuming, costly and complex than was originally anticipated.
Operational issues associated with the transfer of production lines resulted
in backorders, which, combined with increased competition and pricing
pressures in the marketplace, have resulted in decreased sales, lower
than anticipated gross margins and operating losses. As a result of these
factors, during our fourth quarter 2006 goodwill impairment testing, we
determined that the goodwill of our Endoscopic Technologies business
was impaired and consequently we recorded an impairment charge of
$46.7 million to reduce the carrying amount of this business to its fair
value. We have taken corrective action to resolve the operational issues
associated with product shortages and now believe we have a stable supply
of product to meet customer demand. Although we experienced a sales
decline of 4.0% for the 2007 full year in the Endoscopic Technologies
product line, fourth quarter 2007 sales grew 6.3%, which we believe
signifies a return to normal growth patterns.
Our facilities are subject to periodic inspection by the United States
Food and Drug Administration (“FDA”) for, among other things,
conformance to Quality System Regulation and Current Good
Manufacturing Practice (“CGMP”) requirements. We are committed to
the principles and strategies of systems-based quality management for
improved CGMP compliance, operational performance and efficiencies
through our Company-wide quality systems initiative. However, there
can be no assurance that our actions will ensure that we will not receive
a warning letter or other regulatory action which may include consent
decrees or fines.
Critical Accounting Policies
Preparation of our financial statements requires us to make estimates
and assumptions which affect the reported amounts of assets, liabilities,
revenues and expenses. Note 1 to the Consolidated Financial Statements
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.
9
2007 Annual Report
Revenue Recognition
Revenue is recognized when title has been transferred to the customer
which is at the time of shipment. The following policies apply to our
major categories of revenue transactions:
• Sales to customers are evidenced by firm purchase orders. Title and the
risks and rewards of ownership are transferred to the customer when
product is shipped under our stated shipping terms. Payment by the
customer is due under fixed payment terms.
• We place certain of our capital equipment with customers in return
for commitments to purchase disposable products over time periods
generally ranging from one to three years. In these circumstances,
no revenue is recognized upon capital equipment shipment and we
recognize revenue upon the disposable product shipment. The cost of
the equipment is amortized over the term of individual commitment
agreements.
• Product returns are only accepted at the discretion of the Company and
in accordance with our “Returned Goods Policy”. Historically the level
of product returns has not been significant. We accrue for sales returns,
rebates and allowances based upon an analysis of historical customer
returns and credits, rebates, discounts and current market conditions.
• Our terms of sale to customers generally do not include any obligations
to perform future services. Limited warranties are provided for capital
equipment sales and provisions for warranty are provided at the time of
product sale based upon an analysis of historical data.
• Amounts billed to customers related to shipping and handling have been
included in net sales. Shipping and handling costs included in selling
and administrative expense were $11.2 million, $14.3 million and
$14.1 million for 2005, 2006 and 2007, 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
$0.8 million at December 31, 2007 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. 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 $289.5 million and other
intangible assets of $191.8 million at December 31, 2007.
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 businesses. 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. It is our policy to
perform annual impairment tests in the fourth quarter.
During the fourth quarter of 2006, after completing our annual goodwill
impairment analysis, we determined that the goodwill of our CONMED
Endoscopic Technologies business was impaired and consequently we
recorded a goodwill impairment charge of $46.7 million.
See Note 4 to the Consolidated Financial Statements for further
discussion of goodwill and other intangible assets.
Pension Plan
We sponsor a defined benefit pension plan covering substantially all our
employees. Major assumptions used in accounting for the plan include the
discount rate, expected return on plan assets, rate of increase in employee
compensation levels and expected mortality. Assumptions are determined
based on Company data and appropriate market indicators, and are
evaluated annually as of the plan’s measurement date. A change in any
of these assumptions would have an effect on net periodic pension costs
reported in the consolidated financial statements.
The discount rate was determined by using the Citigroup Pension
Liability Index rate which, we believe, is a reasonable indicator of our
plan’s future benefit payment stream. This rate, which increased from
5.90% in 2007 to 6.48% in 2008, is used in determining pension expense.
This change in assumption will result in lower pension expense during
2008.
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.
Based on these and other factors, 2008 pension expense is estimated at
approximately $6.3 million compared to $6.9 million in 2007. Actual
expense may vary significantly from this estimate.
We expect to contribute approximately $12.0 million to our pension plan
in 2008.
See Note 9 to the Consolidated Financial Statements for further
discussion.
Stock-Based Compensation
We adopted Statement of Financial Accounting Standards No. 123
(revised 2004), “Share-Based Payment” (“SFAS 123R”) effective
January 1, 2006. SFAS 123R requires that all share-based payments
to employees, including grants of employee stock options, restricted
stock units, and stock appreciation rights be recognized in the financial
statements based on their fair values. Prior to January 1, 2006, we
10
CONMED Corporation accounted for stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25 “Accounting for Stock Issued to
Employees” (“APB 25”). No compensation expense was recognized for
stock options under the provisions of APB 25 since all options granted had
an exercise price equal to the market value of the underlying stock on the
grant date.
SFAS 123R was adopted using the modified prospective transition method.
Under this method, the provisions of SFAS 123R apply to all awards
granted or modified after the date of adoption. In addition, compensation
expense must be recognized for any nonvested stock option awards
outstanding as of the date of adoption. We recognize such expense using
a straight-line method over the vesting period. Prior periods have not
been restated.
We elected to adopt the alternative transition method, as permitted by
FASB Staff Position No. FAS 123R-3 “Transition Election Related to
Accounting for Tax Effects of Share-Based Payment Awards,” to calculate
the tax effects of stock-based compensation pursuant to SFAS 123R for
those employee awards that were outstanding upon adoption of SFAS
123R. The alternative transition method allows the use of a simplified
method to calculate the beginning pool of excess tax benefits available
to absorb tax deficiencies recognized subsequent to the adoption of
SFAS 123R.
See Note 7 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 $24.9 million at
December 31, 2007. 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 operate in multiple taxing jurisdictions, both within and outside the
United States. We face audits from these various tax authorities regarding
the amount of taxes due. Such audits can involve complex issues and
may require an extended period of time to resolve. Our Federal income
tax returns have been examined by the Internal Revenue Service (“IRS”)
for calendar years ending through 2006. During 2007, Internal Revenue
Service examinations were settled for tax years 2005 and 2006. The net
effect of the settlement of these examinations, was a $0.6 million reduction
in income tax expense in 2007.
We have established a valuation allowance to reflect the uncertainty
of realizing the benefits of certain net operating loss carryforwards
recognized in connection with an acquisition. Any subsequently
recognized tax benefits associated with the valuation allowance would
be allocated to reduce goodwill. However, upon adoption of Statement
of Financial Accounting Standards No. 141 (revised 2007), “Business
Combinations” (“SFAS 141R”) on January 1, 2009, changes in deferred
tax valuation allowances and income tax uncertainties after the acquisition
date, including those associated with acquisitions that closed prior to the
effective date of SFAS 141R, generally will affect income tax expense. In
assessing the need for a valuation allowance, we estimate future taxable
income, considering the feasibility of ongoing tax planning strategies and
the realizability of tax loss carryforwards. Valuation allowances related to
deferred tax assets may be impacted by changes to tax laws, changes to
statutory tax rates and future taxable income levels.
On January 1, 2007 we adopted the provisions of FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”). FIN
48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. The impact of this pronouncement
was not material to the Company’s consolidated financial statements. See
Note 6 to the Consolidated Financial Statements for further discussion.
Consolidated Results of Operations
The following table presents, as a percentage of net sales, certain
categories included in our consolidated statements of income (loss) for the
periods indicated:
Years Ended December 31,
Net sales
Cost of sales
Gross margin
Selling and administrative expense
Research and development expense
Goodwill impairment
Other expense (income), net
Income (loss) from operations
Loss on early extinguishment of debt
Interest expense
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
2007 Compared to 2006
2005 2006 2007
49.7
49.3
50.7
35.1
4.1
—
1.0
50.3
34.6
4.4
—
(0.4)
100.0% 100.0% 100.0%
51.6
_______ _______ _______
48.4
36.3
4.7
7.2
0.8
_______ _______ _______
(0.6)
0.1
3.0
_______ _______ _______
(3.7)
(1.8)
_______ _______ _______
_______ _______ _______
_______ _______ _______
10.5
—
2.6
11.7
—
2.3
7.9
2.7
(1.9)%
9.4
3.4
6.0%
5.2%
Sales for 2007 were $694.3 million, an increase of $47.5 million (7.3%)
compared to sales of $646.8 million in 2006 with the increase occurring
in all product lines except Electrosurgery and Endoscopic Technologies.
Favorable foreign currency exchange rates in 2007 compared to 2006
accounted for $15.2 million of the increase.
Cost of sales increased to $345.2 million in 2007 compared to
$334.0 million in 2006, primarily as a result of the increased sales volumes
discussed above. Gross profit margins increased 1.9 percentage points
from 48.4% in 2006 to 50.3% in 2007. The increase of 1.9 percentage
points is comprised of improved gross margins in our Endoscopic
Technologies product lines (0.9 percentage points) as a result of the
completion of the transfer of production lines from C.R. Bard to
CONMED during 2006 and improved gross margins in our Patient Care,
Electrosurgery and Endosurgery product lines as a result of higher selling
prices (0.9 percentage points) offsetting a decline in our Arthroscopy
and Powered Instrument product lines (0.2 percentage points) caused by
higher production variances. Improved product mix also contributed to
the increase in gross profit margins (0.3 percentage points).
Selling and administrative expense increased to $240.5 million in 2007
compared to $234.8 million in 2006. Selling and administrative expense
as a percentage of net sales decreased to 34.6% in 2007 from 36.3% in
2006. This decrease of 1.7 percentage points is primarily attributable to
greater leveraging of our cost structure as benefit costs (0.5 percentage
points), selling expense related to our Endoscopic Technologies division
(0.5 percentage points), distribution expense (0.1 percentage points) and
other administrative costs (0.6 percentage points) declined as a percentage
of net sales.
Research and development expense was $30.4 million in 2007 compared
to $30.7 million in 2006. As a percentage of net sales, research and
development expense decreased to 4.4% in 2007 from 4.7% in 2006.
The decrease of 0.3 percentage points results from lower spending in our
Endoscopic Technologies division as certain biliary and other projects near
completion (0.3 percentage points).
During our fourth quarter 2006 goodwill impairment testing, we
determined that the goodwill of our Endoscopic Technologies business
was impaired and consequently we recorded an impairment charge of
$46.7 million to reduce the carrying amount of this business to its fair
value.
As discussed in Note 11 to the Consolidated Financial Statements, other
expense in 2007 consisted of the following: $1.8 million charge related
to the closing of our manufacturing facility in Montreal, Canada and a
sales office in France, a $0.1 million charge related to the termination of
our surgical lights product offering, $6.1 million in income related to the
11
2007 Annual Report
settlement of the antitrust case with Johnson & Johnson, and a
$1.3 million charge related to the settlement of a product liability
claim and defense related costs. Other expense in 2006 consisted of the
following: $0.6 million in costs related to the closing of our manufacturing
facility in Montreal, Canada; $0.6 million in costs related to the write-off
of inventory in settlement of a patent dispute; a $1.4 million charge
related to the termination of our surgical lights product offering; and
$2.6 million in Endoscopic Technologies acquisition and transition-
integration related charges.
During 2006, we recorded $0.7 million in losses on the early
extinguishment of debt in connection with the refinancing of our
senior credit agreement. See additional discussion under Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources and Note 5 to the
Consolidated Financial Statements.
Interest expense in 2007 was $16.2 million compared to $19.1 million
in 2006. The decrease in interest expense is primarily a result of lower
weighted average borrowings outstanding in 2007 as compared to 2006.
The weighted average interest rates on our borrowings (inclusive of the
finance charge on our accounts receivable sale facility) decreased to 5.51%
in 2007 as compared to 5.53% in 2006.
A provision for income taxes was recorded at an effective rate of 36.0%
in 2007 and (48.7)% in 2006 as compared to the Federal statutory rate
of 35.0%. The effective tax rate was lower in 2006 than in 2007 as a
result of certain adjustments to income tax expense. In 2006, we settled
our 2001 through 2004 income taxes as a result of IRS examinations.
We adjusted our reserves to consider positions taken in our income tax
returns for periods subsequent to 2004. The settlement and adjustment to
our reserves resulted in a $1.5 million reduction in income tax expense in
2006. During the third quarter of 2006, we filed our United States federal
income tax return for 2005. As a result of the filing, we identified a greater
benefit than was originally anticipated associated with the extraterritorial
income exclusion rules and research and development tax credit resulting
in a $0.7 million reduction in income tax expense in 2006. The net effect
of these adjustments was a $2.2 million reduction in income tax expense
in 2006. A reconciliation of the United States statutory income tax rate
to our effective tax rate is included in Note 6 to the Consolidated
Financial Statements.
2006 Compared to 2005
Sales for 2006 were $646.8 million, an increase of $29.5 million (4.8%)
compared to sales of $617.3 million in 2005 with the increase occurring
in all product lines except Endoscopic Technologies. Favorable foreign
currency exchange rates in 2006 compared to 2005 accounted for
$4.5 million of the increase.
Cost of sales increased to $334.0 million in 2006 compared to
$304.3 million in 2005, primarily as a result of the increased sales volumes
discussed above. Gross profit margins decreased 2.3 percentage points
from 50.7% in 2005 to 48.4% in 2006. The total decrease of
2.3 percentage points is comprised of 1.2 percentage points attributable
to decreased gross margins in our Endoscopic Technologies business,
0.7 percentage points attributable to decreased gross margins in our
Patient Care business with the remaining 0.4 percentage point decrease
attributable to decreased gross margins in our Endosurgery business.
The Endoscopic Technologies business was acquired as a result of
the Endoscopic Technologies acquisition and involved the transfer of
substantially all of the Endoscopic Technologies production lines from
C.R. Bard facilities to CONMED facilities. This transfer proved to be
more time-consuming, costly and complex than was originally anticipated.
In addition, production and operational issues at an assembly operation
in Mexico under contract to CONMED resulted in product shortages
and backorders. These operational issues, in combination with increased
competition and pricing pressures in the marketplace resulted in decreased
sales and gross margins. The decreases in gross margin percentage
attributable to Patient Care and Endosurgery are primarily a result of
significant cost increases experienced in the second half of 2005 and in
2006 with respect to certain commodity and petroleum-based raw materials
such as plastic resins and polymers used in the production of many of our
products as well as higher spending related to quality assurance.
Selling and administrative expense increased to $234.8 million in 2006
compared to $216.7 million in 2005. Selling and administrative expense
as a percentage of net sales increased to 36.3% in 2006 from 35.1% in
2005. This increase of 1.2 percentage points is primarily attributable to
expensing stock options and other share-based payments in 2006
(0.6 percentage points) due to the adoption of SFAS 123R (see Note 7 to
the Consolidated Financial Statements); increased administrative expenses
associated with higher distribution costs (0.2 percentage points) due in
part to higher petroleum prices; higher pension costs (0.2 percentage
points) due primarily as a result of a decrease in the pension discount rate;
increased spending on corporate quality systems and management
(0.1 percentage points) in order to continue to maintain appropriate
regulatory compliance; and other increases in selling and administrative
costs (0.1 percentage points).
Research and development expense was $30.7 million in 2006 compared
to $25.5 million in 2005. As a percentage of net sales, research and
development expense increased to 4.7% in 2006 from 4.1% in 2005.
The increase of 0.6 percentage points reflects an increased emphasis on
new product development across all of our product lines with the most
significant increases occurring in the areas of arthroscopy and powered
instruments (0.3 percentage points).
As discussed above, the transfer of the Endoscopic Technologies
production lines from C.R. Bard facilities to CONMED facilities proved
to be more time-consuming, costly and complex than was originally
anticipated. In addition, production and operational issues at an assembly
operation in Mexico under contract to CONMED resulted in product
shortages and backorders. These operational issues, in combination with
increased competition and pricing pressures in the marketplace resulted
in decreased sales and gross margins and operating losses. As a result
of these factors, during our fourth quarter 2006 goodwill impairment
testing, we determined that the goodwill of our Endoscopic Technologies
business was impaired and consequently we recorded an impairment
charge of $46.7 million to reduce the carrying amount of this business to
its fair value. We estimated the fair value of the Endoscopic Technologies
business using a discounted cash flow valuation methodology and
measured the goodwill impairment in accordance with SFAS 142.
As discussed in Note 11 to the Consolidated Financial Statements, other
expense in 2006 consisted of the following: $0.6 million in costs related to
the closing of our manufacturing facility in Montreal, Canada; $0.6 million
in costs related to the write-off of inventory in settlement of a patent
dispute; a $1.4 million charge related to the termination of our surgical
lights product offering; and $2.6 million in Endoscopic Technologies
acquisition and transition-integration related charges. Other expense in
2005 consisted of $1.5 million of expenses associated with the termination
of our surgical lights product offering; $4.1 million in Endoscopic
Technologies acquisition and transition-integration related charges;
$0.7 million in environmental settlement costs; and $0.8 million of
expense related to the loss on an equity investment.
During 2006, we recorded $0.7 million in losses on the early
extinguishment of debt in connection with the refinancing of our
senior credit agreement. See additional discussion under Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources and Note 5 to the
Consolidated Financial Statements.
Interest expense in 2006 was $19.1 million compared to $15.6 million
in 2005. The increase in interest expense is primarily a result of higher
weighted average borrowings outstanding in 2006 as compared to 2005
and higher weighted average interest rates on our borrowings (5.53% in
2006 as compared to 4.69% in 2005) inclusive of the finance charge on
our accounts receivable sale facility. The increase in weighted average
interest rates on our borrowings is primarily a result of market increases in
interest rates on our variable rate debt.
12
CONMED Corporation A provision for income taxes was recorded at an effective rate of (48.7)%
in 2006 and 33.6% in 2005 as compared to the Federal statutory rate of
35.0%. The effective tax rate was lower in 2006 than in 2005 as a result
of certain adjustments to income tax expense. In 2006, we settled our
2001 through 2004 income taxes as a result of IRS examinations. We
adjusted our reserves to consider positions taken in our income tax returns
for periods subsequent to 2004. The settlement and adjustment to our
reserves resulted in a $1.5 million reduction in income tax expense in
2006. During the third quarter of 2006, we filed our United States federal
income tax return for 2005. As a result of the filing, we identified a greater
benefit than was originally anticipated associated with the extraterritorial
income exclusion rules and research and development tax credit resulting
in a $0.7 million reduction in income tax expense. The net effect of these
adjustments was a $2.2 million reduction in income tax expense in 2006
as compared to the same period a year ago. A reconciliation of the United
States statutory income tax rate to our effective tax rate is included in
Note 6 to the Consolidated Financial Statements.
Operating Segment Results
Segment information is prepared on the same basis that we review
financial information for operational decision-making purposes. We
conduct our business through five principal operating segments:
CONMED Endoscopic Technologies, CONMED Endosurgery,
CONMED Electrosurgery, CONMED Linvatec and CONMED Patient
Care. Based upon the aggregation criteria for segment reporting under
Statement of Financial Accounting Standards No. 131 “Disclosures about
Segments of an Enterprise and Related Information” (“SFAS 131”), we
have grouped our CONMED Endosurgery, CONMED Electrosurgery
and CONMED Linvatec operating segments into a single reporting
segment. The economic characteristics of CONMED Patient Care
and CONMED Endoscopic Technologies do not meet the criteria
for aggregation due to the lower overall operating income (loss) of
these segments.
The following tables summarize the Company’s results of operations by
segment for 2005, 2006 and 2007:
CONMED Endosurgery, CONMED Electrosurgery and
CONMED Linvatec
2006
______________________________
2005
2007
Net sales
$ 482,591 $ 515,937 $ 564,834
Income from operations
69,295
70,193
87,569
Operating margin
14.4%
13.6%
15.5%
Product offerings include a complete line of endo-mechanical
instrumentation for minimally invasive laparoscopic procedures,
electrosurgical generators and related surgical instruments, arthroscopic
instrumentation for use in orthopedic surgery and small bone, large bone
and specialty powered surgical instruments.
• Arthroscopy sales increased $36.3 million (15.9%) in 2007 to
$264.5 million from $228.2 million in 2006, on increased sales of our
procedure specific, resection and video imaging products for arthroscopy
and general surgery; Arthroscopy sales increased $16.8 million (7.9%) in
2006 to $228.2 million from $211.4 million in 2005, on increased sales
of our resection and video imaging products for arthroscopy and general
surgery, and our integrated operating room systems and equipment.
• Powered Surgical Instrument sales increased $12.1 million (8.8%) in
2007 to $149.3 million from $137.2 million in 2006, on increased sales
of small bone and large bone powered instrument products; Powered
Surgical Instrument sales increased $5.1 million (3.9%) in 2006 to
$137.2 million from $132.0 million in 2005, on increased sales of small
bone and large bone powered instrument products offset by slight
decreases in our specialty powered instrument products.
• Electrosurgery sales decreased $5.7 million (5.8%) in 2007 to
$92.1 million from $97.8 million in 2006 principally as a result of
decreased sales of our System 5000™ electrosurgical generators and
pencils offset by increased sales of our ABC® handpieces; Electrosurgery
sales increased $9.3 million (10.6%) in 2006 to $97.8 million from
$88.5 million in 2005, on increased sales of our System 5000™
electrosurgical generator, ABC® and UltraClean™ disposable
surgical products.
• Endosurgery sales increased $6.1 million (11.6%) in 2007 to
$58.9 million from $52.8 million in 2006, as a result of increased sales
of our hand held instruments and suction/irrigation products;
Endosurgery sales increased $2.1 million (4.1%) in 2006 to $52.8
million from $50.7 million in 2005, as a result of increased sales of our
hand held instruments, skin staplers, suction/irrigation products and
various laparoscopic instrument products and systems.
• Operating margins as a percentage of net sales increased 1.9 percentage
points to 15.5% in 2007 compared to 13.6% in 2006. The increase
in operating margins are due to higher gross margins (0.3 percentage
points) as result of higher selling prices, lower costs in 2007 associated
with the termination of our surgical lights product offering and closing
of a manufacturing facility in Montreal, Canada as discussed in
Note 11 to the Consolidated Financial Statements (0.3 percentage
points), lower benefit costs (0.4 percentage points), lower selling
costs in our Electrosurgery division (0.5 percentage points) and lower
administrative expenses (0.4 percentage points).
• Operating margins as a percentage of net sales decreased 0.8 percentage
points to 13.6% in 2006 compared to 14.4% in 2005 largely as a result
of increased research and development spending (0.6 percentage points)
in the CONMED Linvatec product lines. The remaining 0.2 percentage
point decline in operating margin is due to decreased gross margins
in the CONMED Endosurgery product lines as a result of significant
cost increases experienced in the second half of 2005 and in 2006 with
respect to certain commodity and petroleum-based raw materials such as
plastic resins and polymers used in the production of the Endosurgery
product lines as well as higher spending related to quality assurance.
CONMED Patient Care
______________________________
2006
2005
2007
Net sales
$ 75,879 $ 75,883 $ 76,711
Income (loss) from operations
Operating margin
5,734
7.6%
(759 )
2,003
(1.0% )
2.6%
Product offerings include a line of vital signs and cardiac monitoring
products including pulse oximetry equipment & sensors, ECG electrodes
and cables, cardiac defibrillation & pacing pads and blood pressure cuffs.
We also offer a complete line of reusable surgical patient positioners and
suction instruments & tubing for use in the operating room, as well as a
line of IV products.
• Patient Care sales increased $0.9 million (1.2%) in 2007 to $76.8 million
compared to $75.9 million in 2006 on increased sales of defibrillator
pads. Patient Care net sales and the net sales of its principal ECG and
suction instruments product lines remained flat in 2006 when compared
to 2005 while increased sales of defibrillator pads and blood pressure
cuffs have offset decreases in other patient care products.
• Operating margins as a percentage of net sales increased 3.6 percentage
points to 2.6% in 2007 compared to (1.0%) in 2006. The increases in
operating margins are primarily due to increases in gross margins of 4.0
percentage points in 2007 compared to 2006 as a result of higher selling
prices. In addition, lower costs in 2007 are associated with the write-off
of inventory in settlement of a patent dispute (0.8 percentage points)
in 2006, offset by higher distribution costs (0.2 percentage points) and
higher selling and administrative expenses (1.0 percentage points).
• Operating margins as a percentage of net sales decreased 8.6 percentage
points to (1.0%) in 2006 compared to 7.6% in 2005 primarily as a result
of decreased gross margins. Gross margins declined 6.1 percentage
points in 2006 as compared to 2005 as a result of significant cost
increases experienced in the second half of 2005 and in 2006 with
respect to certain commodity and petroleum-based raw materials such
13
2007 Annual Report
as plastic resins and polymers as well as higher spending related to
quality assurance. In addition, as a percentage of net sales, research and
development expense increased 0.9 percentage points in 2006 compared
to 2005 as a result of increased spending on the development of our
Pro2® reflectance pulse oximetry system and ECOM endotracheal
cardiac output monitor. Selling and administrative expenses increased
1.6 percentage points in 2006 compared to 2005 as a result of higher
distribution costs (0.5 percentage points), a charge to write-off inventory
in settlement of a patent dispute (0.8 percentage points) and other
increases (0.3 percentage points).
CONMED Endoscopic Technologies
2005
______________________________
2006
2007
Net sales
$ 58,835 $ 54,992 $ 52,743
Income (loss) from operations
(5,513)
(63,399 )
(6,250 )
Operating margin
(9.4%) (115.3% )
(11.8% )
Product offerings include a comprehensive line of minimally invasive
endoscopic diagnostic and therapeutic instruments used in procedures
which require examination of the digestive tract.
• Endoscopic Technologies net sales declined $2.2 million (4.0%) in
2007 to $52.7 million from $54.9 million in 2006, principally due to
decreased sales of forceps and biliary products as a result of increased
competition and pricing pressures as well as production and operational
issues which resulted in product shortages and backorders during the
first half of 2007. Endoscopic Technologies net sales declined
$3.8 million (6.5%) in 2006 to $54.9 million from $58.8 million in
2005, principally due to lower sales in our forceps products as a result of
increased competition and pricing pressures as well as production and
operational issues which resulted in product shortages and backorders.
In addition, we experienced lower sales as a result of the discontinuation
of our agreement with Xillix Technologies Corporation to distribute the
ONCO-Life™ product.
• Operating margins as a percentage of net sales increased to (11.8%)
in 2007 from (115.3%) in 2006. The increase in operating margins
of 103.5 percentage points in 2007 is primarily a result of the $46.7
million goodwill impairment charge (85.0 percentage points) in 2006.
In addition, gross margins increased 12.2 percentage points as a result
of the completion of the transfer of production lines from C.R. Bard
to CONMED during 2006. The remaining increases in operating
margins of 6.3 percentage points are attributable to lower costs in
2007 associated with acquisition-related costs (4.6 percentage points),
lower research and development expenses as certain biliary and other
projects near completion (2.0 percentage points) and other selling and
administrative expenses (2.6 percentage points) offset by charges related
to closure of a sales office in France (2.9 percentage points).
• Operating margins as a percentage of net sales declined to (115.3%)
in 2006 from (9.4%) in 2005. Selling and administrative and research
and development expenses increased 5.0 and 1.4 percentage points,
respectively, as expenses increased while net sales declined. Additionally,
as discussed above, production and operational issues associated with the
transfer of production lines from C.R. Bard to CONMED resulted in
product shortages and backorders, reduced sales and a decrease in gross
margin of 14.5 percentage points. As a result of these factors and the
resulting operating losses, we determined during our testing of goodwill
in the fourth quarter of 2006, that the goodwill of our Endoscopic
Technologies business was impaired, resulting in an impairment charge
of $46.7 million (85.0 percentage points).
Liquidity and Capital Resources
Our liquidity needs arise primarily from capital investments, working
capital requirements and payments on indebtedness under our senior
credit agreement. We have historically met these liquidity requirements
with funds generated from operations, including sales of accounts
receivable and borrowings under our revolving credit facility. In addition,
we use term borrowings, including borrowings under our senior credit
14
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. We generally attempt to minimize
our cash balances on-hand and use available cash to pay down debt or
repurchase our common stock.
Operating Cash Flows
Our net working capital position was $201.7 million at
December 31, 2007. Net cash provided by operating activities was
$42.4 million, $64.7 million and $65.9 million for 2005, 2006 and
2007, respectively.
Net cash provided by operating activities increased $1.2 million in 2007
as compared to 2006. The increase in net income in 2007 did not translate
directly into a significant increase in operating cash flows given the
non-cash nature of the goodwill impairment charge recognized in 2006.
The increase in net income was further offset by increases in inventory
levels from their 2006 levels mainly in our arthroscopy and powered
instrument product lines in anticipation of continued sales growth and
to accommodate sales orders for new products as well as a $7.0 million
increase in funding of the pension plan in 2007.
Investing Cash Flows
Capital expenditures were $16.2 million, $21.9 million and $20.9 million
for 2005, 2006 and 2007, respectively. Capital expenditures in 2007
were consistent with 2006 levels and higher than 2005 primarily due
to technology upgrades including the ongoing implementation of an
enterprise business software application. Capital expenditures are expected
to approximate $21.0 million in 2008.
The purchase of a business resulted in a $4.6 million payment while
a purchase price adjustment resulted in a payment of $1.3 million in
additional consideration in 2007. The sale of an equity investment resulted
in proceeds of $1.2 million in 2006. The purchase of a distributor’s
business resulted in a $2.5 million payment in 2006. Payments related
to business acquisitions in 2005 totaled $0.4 million and are additional
cash consideration paid for a business acquisition as a result of a purchase
price adjustment.
Financing Cash Flows
Net cash provided by (used in) financing activities during 2007 consisted
of the following: $11.4 million in proceeds from the issuance of common
stock under our equity compensation plans and employee stock purchase
plan (See Note 7 to the Consolidated Financial Statements), $44.0 million
in repayments of term borrowings under our senior credit agreement, a
$1.8 million net change in cash overdrafts and $1.0 million in payments on
mortgage notes.
During 2006, we entered into an amended and restated $235.0 million
senior credit agreement (the “amended and restated senior credit
agreement”). The amended and restated senior credit agreement consists
of a $100.0 million revolving credit facility and a $135.0 million term
loan. There were no borrowings outstanding on the revolving credit
facility as of December 31, 2007. Our available borrowings on the
revolving credit facility at December 31, 2007 were $95.0 million with
approximately $5.0 million of the facility set aside for outstanding letters
of credit. There were $59.0 million in borrowings outstanding on the
term loan at December 31, 2007. The proceeds of the term loan portion
of the amended and restated senior credit agreement were used to repay
borrowings outstanding on the term loan and revolving credit facility of
$142.5 million under the previously existing senior credit agreement. In
connection with the refinancing, we recorded a $0.7 million loss on early
extinguishment of debt of which $0.2 million related to the write-off of
unamortized deferred financing costs under the previously existing senior
credit agreement and $0.5 million related to financing costs associated
with the amended and restated senior credit agreement.
CONMED Corporation
The scheduled principal payments on the term loan portion of the
senior credit agreement are $1.4 million annually through
December 2011, increasing to $53.6 million in 2012 with the remaining
balance outstanding due and payable on April 12, 2013. We may also
be required, under certain circumstances, to make additional principal
payments based on excess cash flow as defined in the senior credit
agreement. Interest rates on the term loan portion of the senior credit
agreement are at LIBOR plus 1.50% (6.34% at December 31, 2007) or an
alternative base rate; interest rates on the revolving credit facility portion
of the senior credit agreement are at LIBOR plus 1.375% or an alternative
base rate. For those borrowings where the Company elects to use the
alternative base rate, the base rate will be the greater of the Prime Rate or
the Federal Funds Rate in effect on such date plus 0.50%, plus a margin
of 0.50% for term loan borrowings or 0.375% for borrowings under the
revolving credit facility.
The senior credit agreement is collateralized by substantially all of
our personal property and assets, except for our accounts receivable
and related rights which are pledged in connection with our accounts
receivable sales agreement. The senior credit agreement contains
covenants and restrictions which, among other things, require the
maintenance of certain financial ratios, and restrict dividend payments
and the incurrence of certain indebtedness and other activities, including
acquisitions and dispositions. We were in full compliance with these
covenants and restrictions as of December 31, 2007. We are also required,
under certain circumstances, to make mandatory prepayments from net
cash proceeds from any issue of equity and asset sales.
Mortgage notes outstanding in connection with the property and facilities
utilized by our CONMED Linvatec subsidiary consist of a note bearing
interest at 7.50% per annum with semi-annual payments of principal
and interest through June 2009 (the “Class A note”); and a note bearing
interest at 8.25% per annum compounded semi-annually through
June 2009, after which semi-annual 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 $3.4 million and $10.4 million, respectively, at
December 31, 2007. These mortgage notes are secured by the
CONMED Linvatec property and facilities.
We have outstanding $150.0 million in 2.50% convertible senior
subordinated notes (the “Notes”) due 2024. The Notes represent
subordinated unsecured obligations and are convertible under certain
circumstances, as defined in the bond indenture, into a combination of
cash and CONMED common stock. Upon conversion, the holder of each
Note will receive the conversion value of the Note payable in cash up to
the principal amount of the Note and CONMED common stock for the
Note’s conversion value in excess of such principal amount. Amounts in
excess of the principal amount are at an initial conversion rate, subject to
adjustment, of 26.1849 shares per $1,000 principal amount of the Note
(which represents an initial conversion price of $38.19 per share). As of
December 31, 2007, there was no value assigned to the conversion feature
because the Company’s share price was below the conversion price. The
Notes mature on November 15, 2024 and are not redeemable by us prior
to November 15, 2011. Holders of the Notes will be able to require that
we repurchase some or all of the Notes on November 15, 2011, 2014
and 2019.
The Notes contain two embedded derivatives. The embedded derivatives
are recorded at fair value in other long-term liabilities and changes in their
value are recorded through the consolidated statements of operations. The
embedded derivatives have a nominal value, and it is our belief that any
change in their fair value would not have a material adverse effect on our
business, financial condition, results of operations or cash flows.
Our Board of Directors has authorized a share repurchase program under
which we may repurchase up to $50.0 million of our common stock in any
calendar year. We did not repurchase any shares during 2007. In the past,
we have financed the repurchases and may finance additional repurchases
through the proceeds from the issuance of common stock under our stock
option plans, from operating cash flow and from available borrowings
under our revolving credit facility.
Management believes that cash flow from operations, including accounts
receivable sales, cash and cash equivalents on hand and available
borrowing capacity under our senior credit agreement will be adequate to
meet our anticipated operating working capital requirements, debt service,
funding of capital expenditures and common stock repurchases in the
foreseeable future. See Business Forward Looking Statements.
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, 2006 and
2007, the undivided percentage ownership interest in receivables sold
by CRC to the purchaser aggregated $44.0 million and $45.0 million,
respectively, which has been accounted for as a sale and reflected in the
balance sheet as a reduction in accounts receivable. Expenses associated
with the sale of accounts receivable, including the purchaser’s financing
costs to purchase the accounts receivable, were $1.9 million, $2.3 million
and $2.9 million, in 2005, 2006 and 2007, 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”) from the
purchaser to fund the purchase of our accounts receivable. The purchaser
commitment was amended effective December 28, 2007 whereby it was
extended through October 31, 2009 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, 2007.
15
2007 Annual Report
Payments Due by Period
1-3
Years
Less than
1 Year
3-5 More than
Years
Total
5 Years
$ 222,834 $ 3,349 $ 5,359 $ 56,801 $ 157,325
54,697 54,021
676
—
—
16,558
3,490
_______ _______ _______ _______ _______
3,824
5,260
3,984
$ 294,089 $ 61,354 $ 11,295 $ 60,625 $ 160,815
_______ _______ _______ _______ _______
_______ _______ _______ _______ _______
Long-term debt
Purchase
obligations
Operating lease
obligations
Total contractual
obligations
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 5 to the Consolidated
Financial Statements). The above table does not include required
contributions to our pension plan in 2008, which are expected to be in
the range of $1.6 million to $7.1 million. (See Note 9 to the Consolidated
Financial Statements). The above table also does not include unrecognized
tax benefits of approximately $0.4 million, the timing and certainty of
recognition for which is uncertain. (See Note 6 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, share-based compensation
plans (the “Plans”). The Plans provide for grants of options, stock
appreciation rights (“SARs”), dividend equivalent rights, restricted stock,
restricted stock units (“RSUs”), and other equity-based and equity-related
awards. The exercise price on all outstanding options and SARs is equal
to the quoted fair market value of the stock at the date of grant. RSUs are
valued at the market value of the underlying stock on the date of grant.
Stock options, SARs and RSUs are non-transferable other than on death
and generally become exercisable over a five year period from date of
grant. Stock options and SARs expire ten years from date of grant. SARs
are only settled in shares of the Company’s stock. (See Note 7 to the
Consolidated Financial Statements).
New Accounting Pronouncements
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, 2007, we had approximately $59.0 million of variable
rate long-term debt outstanding under our senior credit agreement and
an additional $45.0 million in accounts receivable sold under our accounts
receivable sales agreement; we are not a party to any interest rate swap
agreements as of December 31, 2007. Assuming no repayments other
than our 2008 scheduled term loan payments, if market interest rates for
similar borrowings and accounts receivable sales averaged 1.0% more in
2008 than they did in 2007, interest expense would increase, and income
(loss) before income taxes would decrease by $1.0 million. Comparatively,
if market interest rates for similar borrowings average 1.0% less in 2008
than they did in 2007, our interest expense would decrease, and income
(loss) before income taxes would increase by $1.0 million.
Business Forward-Looking Statements
This Annual Report for the Fiscal Year Ended December 31, 2007
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 (“CONMED,” the “Company,” “we” or “us”
— references to “CONMED,” the “Company,” “we” or “us” shall be
deemed to include our direct and indirect subsidiaries unless the context
otherwise requires) 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
See Note 13 to the Consolidated Financial Statements for a discussion of
new accounting pronouncements.
constraints;
• changes in customer preferences;
Quantitative and Qualitative Disclosures About Market Risk
• competition;
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, 2007, we had entered into foreign exchange forward
contracts to exchange Canadian dollars for United States dollars to hedge
our intercompany exposure related to our Canadian subsidiary. These
forward contracts settle each month at month-end, at which time we
enter into new forward contracts. We have not designated these forward
contracts as hedges and have not entered into any other foreign exchange
forward or option contracts. 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 2007, changes in foreign
currency exchange rates increased sales by approximately $15.2 million
and income (loss) before income taxes by approximately $12.2 million.
16
• 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 availability and cost of materials;
• the possibility that United States or foreign regulatory and/or
administrative agencies may initiate enforcement actions against us or
our distributors;
• future levels of indebtedness and capital spending;
• changes in foreign exchange and interest rates;
• 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;
• changes in regulatory requirements.
CONMED Corporation
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, 2007. 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, 2007. The effectiveness of the Company’s
internal control over financial reporting as of December 31, 2007 has been audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears herein.
Joseph J. Corasanti
President and
Chief Executive Officer
Robert D. Shallish, Jr.
Vice President-Finance and
Chief Financial Officer
17
2007 Annual Report Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of CONMED Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, 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, 2007 and December
31, 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity
with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial
statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying “Management’s Report On Internal Control Over Financial Reporting”. Our responsibility is to express opinions
on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances.
We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 7 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation
in 2006. As discussed in Note 9 to the consolidated financial statements, the Company changed the manner in which it accounts for its defined benefit
pension plan in 2006.
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.
PricewaterhouseCoopers LLP
Buffalo, New York
February 26, 2008
18
CONMED Corporation Consolidated Balance Sheets
December 31, 2006 and 2007
(In thousands except share and per share amounts)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful
accounts of $1,210 in 2006 and $787 in 2007
Inventories
Income taxes receivable
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
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:
2006
2007
$
3,831
$ 11,695
75,120
151,687
747
10,008
8,490
_________
249,883
_________
116,480
290,512
191,135
13,561
_________
$ 861,571
_________
_________
$
3,148
41,823
17,712
727
11,795
_________
75,205
_________
264,676
51,004
30,332
_________
421,217
_________
80,642
164,969
1,425
11,697
8,594
_________
279,022
_________
123,679
289,508
191,807
9,935
_________
$ 893,951
_________
_________
$
3,349
38,987
19,724
695
14,529
_________
_________
77,284
219,485
71,188
20,992
_________
388,949
_________
Preferred stock, par value $.01 per share; authorized
500,000 shares, none outstanding
Common stock, par value $.01 per share; 100,000,000 authorized;
31,304,203 and 31,299,203, issued in 2006 and 2007, respectively
Paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Less: Treasury stock, at cost; 3,321,545 and 2,684,163 shares in
2006 and 2007, respectively
Total shareholders’ equity
Total liabilities and shareholders’ equity
See notes to consolidated financial statements.
—
—
313
284,858
247,425
(8,612 )
(83,630 )
_________
440,354
_________
$ 861,571
_________
_________
313
287,926
284,850
(505 )
(67,582 )
_________
505,002
_________
$ 893,951
_________
_________
19
2007 Annual Report
Consolidated Statements of Operations
Years Ended December 31, 2005, 2006 and 2007
(In thousands except per share amounts)
Net sales
Cost of sales
Gross profit
Selling and administrative expense
Research and development expense
Impairment of goodwill
Other expense (income)
Income (loss) from operations
Loss on early extinguishment of debt
Interest expense
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
Earnings (loss) per share
Basic
Diluted
2005
$ 617,305
304,284
_________
313,021
_________
216,685
25,469
—
7,119
_________
249,273
_________
63,748
—
15,578
_________
48,170
16,176
_________
$ 31,994
_________
_________
2006
$ 646,812
333,966
_________
312,846
_________
234,832
30,715
46,689
5,213
_________
317,449
_________
(4,603 )
678
19,120
_________
(24,401 )
(11,894 )
_________
$ (12,507 )
_________
_________
2007
$ 694,288
345,163
_________
349,125
_________
240,541
30,400
—
(2,807)
_________
268,134
_________
80,991
—
16,234
_________
64,757
23,301
_________
$ 41,456
_________
_________
$
1.09
1.08
$
(.45 )
(.45 )
$
1.46
1.43
See notes to consolidated financial statements.
20
CONMED Corporation
Consolidated Statements of Shareholders’ Equity
Years Ended December 31, 2005, 2006 and 2007
(In thousands)
Balance at December 31, 2004
Accumulated
Other
Common Stock
____________________
Amount
Shares
Paid-in Retained Comprehensive Treasury Shareholders’
Capital Earnings Income (Loss) Stock
Equity
30,136
________
________
$
301
_______
_______
$ 256,551 $ 227,938 $
(6,399 ) $ (30,408 ) $ 447,983
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
Common stock issued under employee plans
1,001
10
16,988
Common stock issued under employee plans
167
2
2,729
________
_______
28,657
_________ _________ _________ _________ _________
31,137 $
________
________
311
_______
_______
$ 278,281 $ 259,932 $ (9,736) $ (75,782) $ 453,006
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
16,998
4,742
(45,374 )
(45,374 )
4,742
(3,657 )
320
31,994
139
3,709
3,375
3,092
(12,507 )
2,731
139
3,709
(7,848 )
(7,848 )
(6,040 )
Tax benefit arising from common stock issued
under employee plans
Repurchase of common stock
Comprehensive income:
Foreign currency translation adjustments
Minimum pension liability (net of income tax
benefit of $172)
Net income
Total comprehensive income
Balance at December 31, 2005
Tax benefit arising from common stock issued
under employee plans
Stock-based compensation
Repurchase of common stock
Comprehensive income:
Foreign currency translation adjustments
Minimum pension liability (net of income tax
expense of $1,330)
Net income
Total comprehensive income (loss)
Adjustment to initially apply SFAS No. 158
(net of income tax benefit of $3,132)
Balance at December 31, 2006
________
_______
(5,343 )
_________ _________ _________ _________ _________
(5,343 )
31,304 $
________
________
313
_______
_______
(8,612 ) $ (83,630 ) $ 440,354
$ 284,858 $ 247,425 $
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
Common stock issued under employee plans
(5 )
(662)
(4,031)
16,048
11,355
Tax benefit (expense) arising from common stock issued
under employee plans
Stock-based compensation
Comprehensive income (loss):
Foreign currency translation adjustments
Minimum pension liability (net of income tax
expense of $1,654)
Net income (loss)
Total comprehensive income (loss)
Balance at December 31, 2007
See notes to consolidated financial statements.
(41)
3,771
(41)
3,771
5,284
2,823
41,456
________
_______
49,563
_________ _________ _________ _________ _________
31,299 $
________
________
_______
_______
313 $ 287,926 $ 284,850 $
(505 ) $ (67,582 ) $ 505,002
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
21
2007 Annual Report
Consolidated Statements of Cash Flows
Years Ended December 31, 2005, 2006 and 2007
(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation
Amortization
Stock-based compensation
Goodwill impairment
Deferred income taxes
Income tax benefit of stock option exercises
Contributions to pension plans less than (in excess of) net pension cost
Loss on extinguishment of debt
Loss on sale of equity investment
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 receivable
Accrued compensation and benefits
Accrued interest
Other assets
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Payments related to business acquisitions, net of cash acquired
Proceeds from sale of equity investment
Purchases of property, plant and equipment, net
Net cash used in investing activities
Cash flows from financing activities:
Net proceeds from common stock issued under employee plans
Repurchase of common stock
Payments on senior credit agreement
Proceeds of senior credit agreement
Payments on mortgage 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
2005
2006
2007
$ 31,994
_________
$ (12,507 )
_________
$ 41,456
_________
12,466
18,320
—
—
10,128
4,742
2,062
—
794
(9,000 )
266
(33,620 )
8,273
675
(194 )
347
(4,402 )
(417 )
_________
10,440
_________
42,434
_________
(372 )
—
(16,242 )
_________
(16,614 )
_________
16,998
(45,374 )
(29,917 )
43,000
(754 )
(185 )
(6,102 )
_________
(22,334 )
_________
(4,221 )
_________
(735 )
4,189
_________
3,454
$
_________
_________
11,738
18,113
3,709
46,689
(12,164 )
139
1,877
203
—
4,000
(126 )
(9,380 )
7,016
(2,069 )
5,251
(368 )
(1,582 )
4,172
_________
77,218
_________
64,711
_________
(2,466 )
1,205
(21,895 )
_________
(23,156 )
_________
2,731
(7,848 )
(173,160 )
135,000
(867 )
(1,260 )
1,166
_________
(44,238 )
_________
3,060
_________
377
3,454
_________
3,831
$
_________
_________
13,101
18,433
3,771
—
16,714
—
(5,112 )
—
—
1,000
(6,301 )
(22,621 )
(2,414 )
3,118
2,012
(32 )
(83 )
2,852
_________
24,438
_________
65,894
_________
(5,933 )
—
(20,910 )
_________
(26,843 )
_________
11,355
—
(44,000)
—
(990)
—
(1,770 )
_________
(35,405 )
_________
4,218
_________
7,864
3,831
_________
11,695
$
_________
_________
$ 13,794
3,921
$
18,247
2,168
$
14,386
4,172
See notes to consolidated financial statements.
22
CONMED Corporation
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 with an emphasis on surgical devices
and equipment for minimally invasive procedures and monitoring. The
Company’s products serve the clinical areas of arthroscopy, powered
surgical instruments, electrosurgery, cardiac monitoring disposables,
endosurgery and endoscopic technologies. They are used by surgeons and
physicians in a variety of specialties including orthopedics, general surgery,
gynecology, neurosurgery, and gastroenterology.
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 doubtful 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
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, 2006 and
2007, the undivided percentage ownership interest in receivables sold
by CRC to the purchaser aggregated $44.0 million and $45.0 million,
respectively, which has been accounted for as a sale and reflected in the
balance sheet as a reduction in accounts receivable. Expenses associated
with the sale of accounts receivable, including the purchaser’s financing
costs to purchase the accounts receivable, were $1.9 million, $2.3 million
and $2.9 million, in 2005, 2006 and 2007, 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”) from the
purchaser to fund the purchase of our accounts receivable. The purchaser
commitment was amended effective December 28, 2007 whereby it was
extended through October 31, 2009 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
Leasehold improvements
Machinery and equipment
40 years
Shorter of life of asset or life of lease
2 to 15 years
Goodwill and other intangible assets
Goodwill represents the excess of purchase price over fair value of
identifiable net assets of acquired businesses. Other intangible assets
primarily represent allocations of purchase price to identifiable intangible
assets of acquired businesses. Because of our history of growth through
acquisitions, goodwill and other intangible assets comprise a substantial
portion (53.8% at December 31, 2007) of our total assets.
Goodwill and intangible assets deemed to have indefinite lives are not
amortized. All other intangible assets are amortized over their estimated
useful lives. 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 Statement of Financial Accounting Standards No. 142
“Goodwill and Other Intangible Assets” (“SFAS 142”). It is our policy
to perform annual impairment tests in the fourth quarter. These tests
resulted in an impairment charge of $46.7 million in the fourth quarter
ending December 31, 2006. See Note 4 for additional discussion.
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.
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
$133.7 million and $134.8 million at December 31, 2006 and 2007,
respectively, based on their quoted market price.
23
2007 Annual Report 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 (loss).
Forward Foreign Exchange Contracts
We have a forward contract program to exchange Canadian dollars for
United States dollars in order to hedge our intercompany exposure related
to our Canadian subsidiary. These forward contracts settle each month
at month-end, at which time we enter into new forward contracts.
We have not designated these forward contracts as hedges. We have
a forward contract with a notional contract amount of $14.7 million
outstanding at December 31, 2007. Net realized losses in connection with
these forward contracts approximated $1.1 million for the year ended
December 31, 2007 and is recorded in selling and administrative expense
in the Consolidated Statements of Operations. We mark outstanding
forward contracts to market. The market value for forward foreign
exchange contracts outstanding at December 31, 2007 was not material.
Income taxes
We provide for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards 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 and operating
loss and tax credit carryforwards as measured by the enacted tax rates that
are anticipated to be in effect in the respective jurisdictions 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 not likely.
Deferred taxes are not provided on the unremitted earnings of subsidiaries
outside of the United States when it is expected that these earnings are
permanently reinvested. Such earnings may become taxable upon the sale
or liquidation of these subsidiaries or upon the remittance of dividends.
Deferred taxes are provided when the Company no longer considers
subsidiary earnings to be permanently invested, such as in situations where
the Company’s subsidiaries plan to make future dividend distributions.
On January 1, 2007 we adopted the provisions of FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”). FIN
48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. The impact of this pronouncement
was not material to the Company’s consolidated financial statements. See
Note 6 to the Consolidated Financial Statements for further discussion.
Revenue recognition
Revenue is recognized when title has been transferred to the customer
which is at the time of shipment. The following policies apply to our
major categories of revenue transactions:
• Sales to customers are evidenced by firm purchase orders. Title and the
risks and rewards of ownership are transferred to the customer when
product is shipped under our stated shipping terms. Payment by the
customer is due under fixed payment terms.
• We place certain of our capital equipment with customers in return
for commitments to purchase disposable products over time periods
generally ranging from one to three years. In these circumstances,
no revenue is recognized upon capital equipment shipment and we
recognize revenue upon the disposable product shipment. The cost of
the equipment is amortized over the term of individual commitment
agreements.
24
• Product returns are only accepted at the discretion of the Company and
in accordance with our “Returned Goods Policy”. Historically the level
of product returns has not been significant. We accrue for sales returns,
rebates and allowances based upon an analysis of historical customer
returns and credits, rebates, discounts and current market conditions.
• Our terms of sale to customers generally do not include any obligations
to perform future services. Limited warranties are provided for capital
equipment sales and provisions for warranty are provided at the time of
product sale based upon an analysis of historical data.
• Amounts billed to customers related to shipping and handling have been
included in net sales. Shipping and handling costs included in selling
and administrative expense were $11.2 million, $14.3 million and
$14.1 million for 2005, 2006 and 2007, 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
$0.8 million at December 31, 2007 is adequate to provide for probable
losses resulting from accounts receivable.
Earnings (loss) per share
Basic earnings per share (“basic EPS”) is computed by dividing net
income (loss) 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, restricted stock units and stock appreciation rights during
the period. In the 2006 period, incremental shares are not included in
computing diluted EPS because to do so would have reduced the net loss
per share. The following table sets forth the calculation of basic and diluted
earnings per share at December 31, 2005, 2006 and 2007, respectively:
Net income (loss)
Basic-weighted average
shares outstanding
Effect of dilutive potential securities
Diluted-weighted average
shares outstanding
Basic EPS
Diluted EPS
2005
2006
2007
$ 31,994 $ (12,507) $ 41,456
_______ _______ _______
_______ _______ _______
29,300 27,966 28,416
549
_______ _______ _______
436 —
29,736 27,966 28,965
_______ _______ _______
_______ _______ _______
$
1.46
_______ _______ _______
_______ _______ _______
$
1.43
_______ _______ _______
_______ _______ _______
1.09 $
1.08 $
(.45) $
(.45) $
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 0.6 million at December 31, 2005 and 2007, respectively.
Upon conversion of our 2.50% convertible senior subordinated notes
(the “Notes”), the holder of each Note will receive the conversion value
of the Note payable in cash up to the principal amount of the Note and
CONMED common stock for the Note’s conversion value in excess of
such principal amount. As of December 31, 2007, our share price has not
exceeded the conversion price of the Notes, therefore the conversion value
was less than the principal amount of the Notes. Under the net share
settlement method and in accordance with Emerging Issues Task Force
(“EITF”) Issue 04-8, “The Effect of Contingently Convertible Debt on
Diluted Earnings per Share”, there were no potential shares issuable under
the Notes to be used in the calculation of diluted EPS. The maximum
number of shares we may issue with respect to the Notes is 5,750,000. See
Note 5 for further discussion of the Notes.
Stock-based compensation
We adopted Statement of Financial Accounting Standards No. 123 (revised
2004), “Share-Based Payment” (“SFAS 123R”) effective
January 1, 2006. SFAS 123R requires that all share-based payments
CONMED Corporation
to employees, including grants of employee stock options, restricted
stock units, and stock appreciation rights be recognized in the financial
statements based on their fair values. Prior to January 1, 2006, we
accounted for stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25 “Accounting for Stock Issued to
Employees” (“APB 25”). No compensation expense was recognized for
stock options under the provisions of APB 25 since all options granted had
an exercise price equal to the market value of the underlying stock on the
grant date.
SFAS 123R was adopted using the modified prospective transition method.
Under this method, the provisions of SFAS 123R apply to all awards
granted or modified after the date of adoption. In addition, compensation
expense must be recognized for any nonvested stock option awards
outstanding as of the date of adoption. We recognize such expense using
a straight-line method over the vesting period. Prior periods have not
been restated.
We elected to adopt the alternative transition method, as permitted by
FASB Staff Position No. FAS 123R-3 “Transition Election Related to
Accounting for Tax Effects of Share-Based Payment Awards,” to calculate
the tax effects of stock-based compensation pursuant to SFAS 123R for
those employee awards that were outstanding upon adoption of SFAS
123R. The alternative transition method allows the use of a simplified
method to calculate the beginning pool of excess tax benefits available to
absorb tax deficiencies recognized subsequent to the adoption of SFAS
123R. The Company’s policy for intra-period tax allocation is the with and
without approach for utilization of tax attributes.
During 2007, we began issuing shares under our stock-based compensation
plans out of treasury stock whereby treasury stock is reduced by the
weighted average cost of such treasury stock. To the extent there is a
difference between the cost of the treasury stock and the exercise price of
shares issued under stock-based compensation plans, we record gains to
paid in capital; losses are recorded to paid in capital to the extent any gain
was previously recorded, otherwise the loss is recorded to retained earnings.
Accumulated other comprehensive income (loss)
Accumulated other comprehensive income (loss) consists of the following:
Cumulative Accumulated Other
Pension Translation Comprehensive
Liability Adjustments
$ 3,774
Income (loss)
(8,612 )
$
Balance, December 31, 2006 $ (12,386)
Foreign currency
translation adjustments
Minimum pension liability
(net of income taxes)
_______
Balance, December 31, 2007 $ (9,563 )
_______
_______
—
2,823
5,284
5,284
—
_______
$ 9,058
_______
_______
2,823
________
(505 )
$
________
________
Note 2 — Inventories
Inventories consist of the following at December 31,:
Raw materials
Work in process
Finished goods
2006
2007
17,815
83,647
$ 50,225 $ 60,081
18,669
86,219
________ ________
$ 151,687 $ 164,969
________ ________
________ ________
Note 3 — 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
$
84,944
2006
4,200 $
2007
4,200
88,564
101,218 109,368
14,103
________ ________
201,643 216,235
(92,556)
________ ________
$ 116,480 $ 123,679
________ ________
________ ________
(85,163 )
11,281
We lease various manufacturing facilities, office facilities and equipment
under operating leases. Rental expense on these operating leases was
approximately $2,727, $3,269 and $3,724 for the years ended
December 31, 2005, 2006 and 2007, respectively. The aggregate future
minimum lease commitments for operating leases at December 31, 2007
are as follows:
2008
2009
2010
2011
2012
Thereafter
$ 3,984
3,012
2,248
2,094
1,730
3,490
Note 4 — Goodwill and Other Intangible Assets
The changes in the net carrying amount of goodwill for the years ended
December 31, are as follows:
Balance as of January 1,
Goodwill impairment
Adjustments to goodwill resulting from
tax benefits recognized
Adjustments to goodwill resulting from
business acquisitions finalized
Foreign currency translation
Balance as of December 31,
2006
2007
$ 335,651 $ 290,512
—
(46,689 )
—
(2,192 )
1,705
(155 )
671
517
________ ________
$ 290,512 $ 289,508
________ ________
________ ________
In September 2004, we acquired the business operations of the Endoscopic
Technologies Division of C.R. Bard, Inc. (the “Endoscopic Technologies
acquisition”) for aggregate consideration of $81.3 million in cash. The
Endoscopic Technologies acquisition involved the transfer of substantially
all of the Endoscopic Technologies production lines from C.R. Bard
facilities to CONMED facilities. This transfer proved to be more time-
consuming, costly and complex than was originally anticipated. In addition,
production and operational issues at an assembly operation in Mexico
under contract to CONMED resulted in product shortages and backorders.
These operational issues, in combination with increased competition
and pricing pressures in the marketplace resulted in decreased sales and
gross margins and operating losses. As a result of these factors, during our
fourth quarter 2006 goodwill impairment testing, we determined that the
goodwill of our Endoscopic Technologies operating unit was impaired and
consequently we recorded a goodwill impairment charge of $46.7 million
to reduce the carrying amount of the unit to its fair value. We estimated the
fair value of the Endoscopic Technologies operating unit using a discounted
cash flow valuation methodology and measured the goodwill impairment in
accordance with SFAS 142.
25
2007 Annual Report
Goodwill associated with each of our principal operating units at
December 31, is as follows:
2006
2007
Amortization expense related to intangible assets for the year ending
December 31, 2007 and estimated amortization expense for each of the five
succeeding years is as follows:
CONMED Electrosurgery
CONMED Endosurgery
CONMED Linvatec
CONMED Patient Care
Balance as of December 31,
Other intangible assets consist of the following:
42,419
$ 16,645 $ 16,645
42,439
173,007 171,332
59,092
________ ________
$ 290,512 $ 289,508
________ ________
________ ________
58,441
______________________________________________
Dec. 31, 2006
Dec. 31, 2007
2007
2008
2009
2010
2011
2012
$ 5,647
5,893
5,893
5,547
5,094
5,037
Gross
Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
Note 5 — Long-Term Debt
Long-term debt consists of the following at December 31,:
Amortized
intangible assets:
Customer
relationships
Patents and other
intangible assets
Unamortized
intangible assets:
Trademarks and
tradenames
$ 113,376 $ (24,498 )
$ 118,124 $ (28,000 )
39,609
(24,696 )
39,812
(26,473 )
87,344
—
________ ________
$ 240,329 $ (49,194 )
________ ________
________ ________
88,344
—
________ ________
$ 246,280 $ (54,473 )
________ ________
________ ________
Other intangible assets primarily represent allocations of purchase price to
identifiable intangible assets of acquired businesses. The weighted average
amortization period for intangible assets which are amortized is 25 years.
Customer relationships are being amortized over a weighted average life
of 36 years. Patents and other intangible assets are being amortized over a
weighted average life of 11 years.
Customer relationship assets were acquired primarily in connection with
the 1997 acquisition of Linvatec Corporation, the 2003 acquisition of
Bionx Implants, Inc. and the 2004 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
36 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 36 year life.
Trademarks and tradenames were recognized primarily in connection with
the 1997 acquisition of Linvatec Corporation, the 2003 acquisition of
Bionx Implants, Inc. and the 2004 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.
26
Revolving line of credit
Term loan borrowings on senior credit facility
2.50% Convertible senior subordinated notes
Mortgage notes
Total long-term debt
Less: Current portion
2006
— $
2007
$
—
102,988
58,988
150,000 150,000
13,846
________ ________
267,824 222,834
3,349
________ ________
$ 264,676 $ 219,485
________ ________
________ ________
14,836
3,148
During 2006, we entered into an amended and restated $235.0 million
senior credit agreement (the “amended and restated senior credit
agreement”). The amended and restated senior credit agreement consists
of a $100.0 million revolving credit facility and a $135.0 million term loan.
There were no borrowings outstanding on the revolving credit facility as
of December 31, 2007. Our available borrowings on the revolving credit
facility at December 31, 2007 were $95.0 million with approximately
$5.0 million of the facility set aside for outstanding letters of credit.
There were $59.0 million in borrowings outstanding on the term loan
at December 31, 2007. The proceeds of the term loan portion of the
amended and restated senior credit agreement were used to repay
borrowings outstanding on the term loan and revolving credit facility of
$142.5 million under the previously existing senior credit agreement. In
connection with the refinancing, we recorded a $0.7 million loss on early
extinguishment of debt of which $0.2 million related to the write-off of
unamortized deferred financing costs under the previously existing senior
credit agreement and $0.5 million related to financing costs associated with
the amended and restated senior credit agreement.
The scheduled principal payments on the term loan portion of the senior
credit agreement are $1.4 million annually through December 2011,
increasing to $53.6 million in 2012 with the remaining balance outstanding
due and payable on April 12, 2013. We may also be required, under certain
circumstances, to make additional principal payments based on excess cash
flow as defined in the senior credit agreement. Interest rates on the term
loan portion of the senior credit agreement are at LIBOR plus 1.50%
(6.34% at December 31, 2007) or an alternative base rate; interest rates
on the revolving credit facility portion of the senior credit agreement are
at LIBOR plus 1.375% or an alternative base rate. For those borrowings
where the Company elects to use the alternative base rate, the base rate
will be the greater of the Prime Rate or the Federal Funds Rate in effect on
such date plus 0.50%, plus a margin of 0.50% for term loan borrowings or
0.375% for borrowings under the revolving credit facility.
The senior credit agreement is collateralized by substantially all of our
personal property and assets, except for our accounts receivable and related
rights which are pledged in connection with our accounts receivable sales
agreement. The senior credit agreement contains covenants and restrictions
which, among other things, require the maintenance of certain financial
ratios, and restrict dividend payments and the incurrence of certain
indebtedness and other activities, including acquisitions and dispositions.
We were in full compliance with these covenants and restrictions as of
December 31, 2007. We are also required, under certain circumstances,
CONMED Corporation
to make mandatory prepayments from net cash proceeds from any issue of
equity and asset sales.
Mortgage notes outstanding in connection with the property and facilities
utilized by our CONMED Linvatec subsidiary consist of a note bearing
interest at 7.50% per annum with semi-annual payments of principal and
interest through June 2009 (the “Class A note”); and a note bearing interest
at 8.25% per annum compounded semi-annually through June 2009, after
which semi-annual 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 $3.4 million
and $10.4 million, respectively, at December 31, 2007. These mortgage
notes are secured by the CONMED Linvatec property and facilities.
We have outstanding $150.0 million in 2.50% convertible senior
subordinated notes (the “Notes”) due 2024. The Notes represent
subordinated unsecured obligations and are convertible under certain
circumstances, as defined in the bond indenture, into a combination of
cash and CONMED common stock. Upon conversion, the holder of each
Note will receive the conversion value of the Note payable in cash up to
the principal amount of the Note and CONMED common stock for the
Note’s conversion value in excess of such principal amount. Amounts in
excess of the principal amount are at an initial conversion rate, subject to
adjustment, of 26.1849 shares per $1,000 principal amount of the Note
(which represents an initial conversion price of $38.19 per share). As of
December 31, 2007, there was no value assigned to the conversion feature
because the Company’s share price was below the conversion price. The
Notes mature on November 15, 2024 and are not redeemable by us prior
to November 15, 2011. Holders of the Notes will be able to require that
we repurchase some or all of the Notes on November 15, 2011, 2014 and
2019.
The Notes contain two embedded derivatives. The embedded derivatives
are recorded at fair value in other long-term liabilities and changes in their
value are recorded through the consolidated statements of operations. The
embedded derivatives have a nominal value, and it is our belief that any
change in their fair value would not have a material adverse effect on our
business, financial condition, results of operations, or cash flows.
Tax provision at statutory rate based
on income (loss) before income taxes
Extraterritorial income exclusion
State income taxes
Stock-based compensation
Research and development credit
Settlement of taxing authority
examinations
Other nondeductible permanent
differences
Other, net
2005
2006
2007
35.00%
(2.78)
0.66
—
(.53)
(35.00)% 35.00%
(5.39)
(3.24)
3.49
(3.87)
—
1.78
0.56
(1.23)
—
(6.08)
(0.97)
0.85
0.38
1.81
(0.46)
________ ________ ________
35.98%
(48.74)%
________ ________ ________
________ ________ ________
0.63
0.21
33.58%
The tax effects of the significant temporary differences which comprise
the deferred tax assets and liabilities at December 31, 2006 and 2007 are
as follows:
2006
2007
Assets:
Inventory
Net operating losses
Deferred compensation
Accounts receivable
Accrued pension
Research and development credit
State taxes
Other
Valuation allowance
Liabilities:
Goodwill and intangible assets
Depreciation
Employee benefits
State taxes
Contingent interest
$
5,695 $
4,817
6,903
3,162
2,960
5,604
2,200
—
3,495
(4,209 )
________ ________
24,932
________ ________
13,707
2,680
3,134
7,259
1,980
156
2,043
(6,892 )
29,762
70,653
59,969
4,949
5,329
287
103
360
—
8,174
5,357
________ ________
84,423
________ ________
$ (40,996 ) $ (59,491 )
________ ________
________ ________
70,758
The scheduled maturities of long-term debt outstanding at
December 31, 2007 are as follows:
Net liability
2008
2009
2010
2011
2012
$ 3,349
3,185
2,174
2,244
54,557
Thereafter
157,325
Note 6 — Income Taxes
The provision for income taxes for the years ended December 31, 2005,
2006 and 2007 consists of the following:
Current tax expense:
Federal
State
Foreign
Deferred income tax expense
Provision for income taxes
2005
2006
2007
$ 3,083 $ (2,582 ) $
2,634
795
1,006
1,102
2,170
2,851
________ ________ ________
6,587
1,846
6,048
270
10,128
(12,164 )
16,714
________ ________ ________
$ 16,176 $ (11,894 ) $ 23,301
________ ________ ________
________ ________ ________
A reconciliation between income taxes computed at the statutory
federal rate and the provision for income taxes for the years ended
December 31, 2005, 2006 and 2007 follows:
Earnings before income (loss) taxes consists of the following U.S. and
foreign income (loss):
U.S. income (loss)
Foreign income
Total income (loss)
2005
2006
2007
$ 42,653 $ (29,659 ) $ 57,664
5,517
7,093
_______ _______
_______
$ 48,170 $ (24,401 ) $ 64,757
_______ _______ _______
_______ _______ _______
5,258
The net operating loss carryforwards of acquired subsidiaries begin to
expire in 2008. These net operating loss carryforwards are subject to
pre-existing ownership change limitations under IRC section 382 as a result
of the purchase of stock of these acquired subsidiaries. We have established
a valuation allowance to reflect the uncertainty of realizing the benefits of
certain net operating loss carryforwards recognized in connection with an
acquisition. Any subsequently recognized tax benefits associated with the
valuation allowance would be allocated to reduce goodwill. However, upon
adoption of Statement of Financial Accounting Standards No. 141 (revised
2007), “Business Combinations” (“SFAS 141R”) on January 1, 2009,
changes in deferred tax valuation allowances and income tax uncertainties
after the acquisition date, including those associated with acquisitions that
closed prior to the effective date of SFAS 141R, generally will affect income
tax expense.
During 2007, we reduced our valuation allowance for the portion of the
net operating loss carryforward for which we determined utilization is
more likely than not. This amount totaled $2.2 million. See Note 4 for
additional discussion.
27
2007 Annual Report
The gross amount of Federal net operating loss carryforwards available
is $17.7 million. This includes $6.7 million of net operating loss
carryforwards from acquired subsidiaries as discussed above. The remaining
$11.0 million begins to expire in 2026. Approximately $5.7 million of the
gross Federal net operating loss is attributable to stock-based compensation
windfall tax deductions. In accordance with SFAS 123R, the $2.0 million
windfall tax benefit on the $5.7 million net operating loss carryforward has
not been recorded as a deferred tax asset. The $2.0 million tax benefit will
be recorded in additional paid-in capital when realized.
We operate in multiple taxing jurisdictions, both within and outside the
United States. We face audits from these various tax authorities regarding
the amount of taxes due. Such audits can involve complex issues and may
require an extended period of time to resolve. Our Federal income tax
returns have been examined by the Internal Revenue Service (“IRS”)
for calendar years ending through 2006. During 2007, Internal Revenue
Service examinations were settled for tax years 2005 and 2006. The net
effect of the settlement of these examinations, was a $0.6 million reduction
in income tax expense in 2007.
We have not provided for federal income taxes on undistributed earnings of
our foreign subsidiaries as it remains our intention to permanently reinvest
such earnings (approximately $24.9 million at December 31, 2007.) It is not
practicable given the complexities of the foreign tax credit calculation to
estimate the tax due upon any possible repatriation.
On January 1, 2007 we adopted the provisions of FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”). FIN
48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. The impact of this pronouncement
was not material to the Company’s consolidated financial statements.
The following table summarizes the activity related to our unrecognized
tax benefits:
Balance as of January 1,
Decrease for positions taken in
prior periods
Increases for positions taken in
current periods
Decreases in unrecorded tax positions related
to settlement with the taxing authorities
Balance as of December 31,
2007
$1,359
(164)
1,410
(739)
__________
$1,866
__________
__________
Included in the unrecognized tax benefits of $1.9 million at
December 31, 2007 was $0.5 million of tax benefits that, if recognized,
would reduce our annual effective tax rate. The amount of interest accrued
in 2007 related to these unrecognized tax benefits was not material and is
included in the provision for income taxes in the Consolidated Statements
of Operations. It is reasonably possible that the amount of unrecognized tax
benefits could change in the next 12 months as a result of the anticipated
completion of the 2007 IRS examination and expiration of statutes of
limitations on prior tax returns. A reasonable estimate of the range of
change in unrecognized tax benefits cannot be made at this time.
Note 7 — Shareholders’ Equity
Our 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, 2006 and 2007, no preferred stock had been issued.
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 could be
purchased in any calendar year. The Board subsequently amended this
program on December 2, 2005 to authorize repurchases up to $100.0
million of our common stock, although no more than $50.0 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. Through December 31, 2006, we have repurchased a total of 2.2
million shares of common stock. No stock repurchases were made in 2007
under this authorization.
We have reserved 4.7 million shares of common stock for issuance to
employees and directors under three shareholder-approved share-based
compensation plans (the “Plans”) of which approximately 639,000 shares
remain available for grant at December 31, 2007. The exercise price on all
outstanding options and SARs is equal to the quoted fair market value of
the stock at the date of grant. RSUs are valued at the market value of the
underlying stock on the date of grant. Stock options, SARs and RSUs are
non-transferable other than on death and generally become exercisable over a
five year period from date of grant. Stock options and SARs expire ten years
from date of grant. SARs are only settled in shares of the Company’s stock.
The issuance of shares pursuant to the exercise of stock options and SARs
and vesting of RSUs are from the Company’s treasury stock.
Total pre-tax stock-based compensation expense recognized in the
Consolidated Statements of Operations was $3.7 million and $3.8 million
for the year ended December 31, 2006 and 2007, respectively. This amount
is included in selling and administrative expenses on the Consolidated
Statements of Operations. Tax related benefits of $0.4 million and
$0.8 million were also recognized for the years ended December 31, 2006
and 2007. Cash received from the exercise of stock options and SARs was
$15.9 million, $1.7 million and $11.3 million for the years ended
December 31, 2005, 2006 and 2007, respectively and is reflected in cash
flows from financing activities in the Consolidated Statements of Cash Flows.
The weighted average fair value of awards of options and SARs granted in
the years ended December 31, 2005, 2006 and 2007 was $16.51, $8.92 and
$11.88, respectively. The fair value of these options and SARs was estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for options and SARs granted in
the years ended December 31, 2005, 2006 and 2007, respectively: risk-free
interest rate of 4.16%, 5.13% and 4.56%; volatility factor of the expected
market price of the Company’s common stock of 53.26%, 37.79% and
32.61%; a weighted-average expected life of the option and SAR of 5.7
years for all three years; and that no dividends would be paid on common
stock. The risk free interest rate is based on the option and SAR grant date
for a traded zero-coupon U.S. Treasury bond with a maturity date equal to
the expected life. Expected volatilities are based upon historical volatility of
the Company’s stock over a period equal to the expected life of each option
and SAR grant. The expected life selected for options and SARs granted
during the year ended December 31, 2007 represents the period of time that
the options and SARs are expected to be outstanding based on a study of
historical data of option holder exercise and termination behavior.
The following table illustrates the stock option and SAR activity for the year
ended December 31, 2007. There were no SARs granted prior to 2006.:
Outstanding at December 31, 2006
Granted
Forfeited
Exercised
Outstanding at December 31, 2007
Exercisable at December 31, 2007
Number
of Shares Weighted-Average
(in 000’s)
3,166
194
(71 )
(600 )
________
2,689
________
________
1,949
________
________
Exercise Price
$ 22.23
29.96
26.56
18.60
_________
$ 23.46
_________
_________
$ 22.66
_________
_________
The weighted average remaining contractual term for stock options and
SARs outstanding and exercisable at December 31, 2007 was 5.8 years
and 5.0 years, respectively. The aggregate intrinsic value of stock options
and SARs outstanding and exercisable at December 31, 2007 was
$5.8 million and $4.8 million, respectively. The aggregate intrinsic
value of stock options and SARs exercised during the year ended
December 31, 2005, 2006 and 2007 was $12.9 million, $0.7 million and
$6.7 million, respectively.
28
CONMED Corporation
The following table illustrates the RSU activity for the year ended
December 31, 2007. There were no RSUs granted prior to 2006.
Outstanding at December 31, 2006
Granted
Vested
Forfeited
Outstanding at December 31, 2007
Number Weighted-Average
of Shares
(in 000’s)
144
155
(28 )
(6 )
_________
265
_________
_________
Grant-Date
Fair Value
$ 20.22
29.13
20.19
23.10
_________
$ 25.20
_________
_________
The total fair value of shares vested was $0 and $0.6 million for the years
ended December 31, 2006 and 2007, respectively.
As of December 31, 2007, there was $12.0 million of total unrecognized
compensation cost related to nonvested stock options, SARs and RSUs
granted under the Plan which is expected to be recognized over 5.0 years
(weighted average period of 1.9 years).
The following table illustrates the effect on net earnings and earnings per
share as if we had applied the fair value recognition provisions of SFAS
123R to stock-based employee compensation for the year ended
December 31, 2005. The pro forma disclosures are based on the fair value
of awards at the grant date, amortized to expense over the service period.
Net income — as reported
Pro forma stock-based employee
compensation expense, net of related
income tax effect
Net income — pro forma
Earnings per share — as reported:
Basic
Diluted
Earnings per share — pro forma:
Basic
Diluted
2005
$
31,994
__________
(4,075 )
__________
$
27,919
__________
__________
$
$
$
$
1.09
1.08
0.95
0.94
We offer to our employees 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 95% of the fair market value of the
common stock on the exercise date. During 2007, we issued approximately
19,000 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 8 — Business Segments and Geographic Areas
CONMED conducts its business through five principal operating
segments, CONMED Endoscopic Technologies, CONMED Endosurgery,
CONMED Electrosurgery, CONMED Linvatec and CONMED
Patient Care. We believe each of our segments are similar in the nature
of products, production processes, customer base, distribution methods
and regulatory environment. In accordance with Statement of Financial
Accounting Standards No. 131 “Disclosures About Segments of an
Enterprise and Related Information” (“SFAS 131”), our CONMED
Endosurgery, CONMED Electrosurgery and CONMED Linvatec
operating segments also have similar economic characteristics and therefore
qualify for aggregation under SFAS 131. Our CONMED Patient Care and
CONMED Endoscopic Technologies operating units do not qualify for
aggregation under SFAS 131 since their economic characteristics do not
meet the criteria for aggregation as a result of the lower overall operating
income (loss) in these segments.
CONMED Endosurgery, CONMED Electrosurgery and CONMED
Linvatec consist of a single aggregated segment comprising a complete line
of endo-mechanical instrumentation for minimally invasive laparoscopic
procedures, electrosurgical generators and related surgical instruments,
arthroscopic instrumentation for use in orthopedic surgery and small bone,
large bone and specialty powered surgical instruments. CONMED Patient
Care product offerings include a line of vital signs and cardiac monitoring
products as well as suction instruments & tubing for use in the operating
room. CONMED Endoscopic Technologies product offerings include
a comprehensive line of minimally invasive endoscopic diagnostic and
therapeutic instruments used in procedures which require examination
of the digestive tract.
The following is net sales information by product line and reportable
segment:
Arthroscopy
Powered Surgical Instruments
CONMED Linvatec
CONMED Electrosurgery
CONMED Endosurgery
CONMED Linvatec,
Electrosurgery, and Endosurgery
CONMED Patient Care
CONMED Endoscopic
Technologies
Total
2005
2006
2007
$ 211,397 $ 228,195 $ 264,637
137,150 149,261
132,045
_________ _________ _________
365,345 413,898
343,442
92,107
88,455
58,829
50,694
_________ _________ _________
97,809
52,783
482,591
75,879
515,937 564,834
76,711
75,883
58,835
52,743
_________ _________ _________
$ 617,305 $ 646,812 $ 694,288
_________ _________ _________
_________ _________ _________
54,992
Total assets, capital expenditures, depreciation and amortization
information are not available by reportable segment.
The following is a reconciliation between segment operating income
(loss) and income (loss) before income taxes. The Corporate line includes
corporate related items not allocated to operating units:
2005
2006
2007
CONMED Linvatec,
Electrosurgery, and Endosurgery
CONMED Patient Care
CONMED Endoscopic Technologies
Corporate
Income (loss) from operations
Loss on early extinguishment of debt
Interest expense
Income (loss) before income taxes
5,734
(5,513 )
(5,768 )
(759 )
(63,399 )
(10,638 )
$ 69,295 $ 70,193 $ 87,569
2,003
(6,250 )
(2,331 )
_________ _________ _________
80,991
—
16,234
_________ _________ _________
$ 48,170 $ (24,401 ) $ 64,757
_________ _________ _________
_________ _________ _________
(4,603 )
678
19,120
63,748
—
15,578
Net sales information for geographic areas consists of the following:
United States
Canada
United Kingdom
Japan
Australia
All other countries
Total
2005
2006
2007
$ 390,050 $ 396,953 $ 404,434
36,111
55,313
30,117
45,335
22,073
26,274
23,237
30,199
115,717
121,513 132,733
_________ _________ _________
$ 617,305 $ 646,812 $ 694,288
_________ _________ _________
_________ _________ _________
43,104
32,542
25,451
27,249
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, 2006 and 2007. No single customer
represented over 10% of our consolidated net sales for the years ended
December 31, 2005, 2006 and 2007.
Note 9 — 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.
29
2007 Annual Report
The total amounts reclassified from accumulated other comprehensive
income (loss) and recognized in 2007 as a component of net periodic
pension cost included net actuarial losses of $1,382, transition obligation
of $4 and prior service cost (credit) of $(351).
Net periodic pension cost for the years ended December 31, consists of
the following:
2005
2006
2007
Service cost—benefits earned
during the period
Interest cost on projected
benefit obligation
Return on plan assets
Transition amount
Prior service cost
Amortization of loss
Net periodic pension cost
$ 4,503 $ 5,444 $
5,863
2,651
(2,548 )
4
(351 )
1,303
3,216
(3,226 )
4
(351 )
1,382
________ ________ ________
6,888
________ ________ ________
________ ________ ________
2,905
(2,694 )
4
(351 )
1,569
$ 5,562 $ 6,877 $
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
2005
5.75%
8.00%
3.00%
2006
5.55%
8.00%
3.00%
2007
5.90%
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
Total
Percentage of Pension Target
Plan Assets
2006
71%
29
_____
100%
_____
_____
2007
64%
36
______
100%
______
______
Allocation
2008
75%
25
_____
100%
_____
_____
As of December 31, 2007, the Plan held 27,562 shares of our common
stock, which had a fair value of $0.6 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.
We expect to contribute approximately $12.0 million to our pension plan
in 2008.
The estimated portion of net actuarial loss, net prior service cost, and
transition obligation in accumulated other comprehensive income (loss)
that is expected to be recognized as a component of net periodic pension
cost in 2008 is $917, ($351) and $4, respectively.
Total employer contributions to the 401(k) plan were $2.2 million,
$2.3 million and $2.5 million during the years ended December 31, 2005,
2006 and 2007, respectively.
We use a December 31, measurement date for our pension plan. 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,:
Accumulated Benefit Obligation
Change in benefit obligation
Projected benefit obligation at
beginning of year
Service cost
Interest cost
Actuarial gain
Benefits paid
Projected benefit obligation at end of year
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
Funded status
2006
2007
$ 46,066 $ 47,991
________ ________
________ ________
5,444
2,905
(1,176 )
(4,052 )
$ 51,420 $ 54,541
5,863
3,216
(3,834 )
(3,194 )
________ ________
$ 54,541 $ 56,592
________ ________
2,694
5,000
(4,052 )
$ 33,252 $ 36,894
2,832
12,000
(3,194 )
________ ________
$ 36,894 $ 48,532
________ ________
$ 17,647 $
8,059
________ ________
________ ________
Amounts recognized in the consolidated balance sheets consist of the
following at December 31,:
Accrued long-term pension liability
Accumulated other comprehensive
income (loss)
2006
$ 17,647 $
2007
8,059
(19,644 )
(15,167 )
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
2006
5.90%
8.00%
3.00%
2007
6.48%
8.00%
3.00%
The following table illustrates the effects of adopting Statement of Financial
Accounting Standards No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans – an amendment of FASB
Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”) on each of the balance
sheet line items in 2006:
Accrued pension liability
Deferred income taxes
Total liabilities
Accumulated other
comprehensive income (loss)
Shareholders’ equity
After
Before
Application
Application
of SFAS 158 Adjustment of SFAS 158
$ 17,647
$ 8,475
$
51,004
(3,132 )
421,217
5,343
9,172
54,136
415,874
(3,269 )
445,697
(5,343 )
(5,343 )
(8,612 )
440,354
Accumulated other comprehensive income (loss) for the years ended
December 31, 2006 and 2007 consists of the following items not yet
recognized in net periodic pension cost (before income taxes):
Net actuarial loss
Transition liability
Prior service cost
Accumulated other
2006
2007
$ (24,792 ) $ (19,969 )
(36 )
(32 )
4,834
________ ________
5,184
comprehensive income (loss)
$ (19,644 ) $ (15,167 )
________ ________
________ ________
30
CONMED Corporation
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, 2007 and reflect the impact of expected future
employee service.
2008
2009
2010
2011
2012
2013-2017
$
2,225
2,216
2,972
2,586
3,985
16,431
Note 10 — 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. Likewise, from time to time, the Company may receive
a subpoena from a government agency such as the Equal Employment
Opportunity Commission, Occupational Safety and Health Administration,
the Department of Labor, the Treasury Department, and other federal
and state agencies or foreign governments or government agencies. These
subpoenae may or may not be routine inquiries, or may begin as routine
inquiries and over time develop into enforcement actions of various types.
The product liability claims are generally covered by various insurance
policies, subject to certain deductible amounts and maximum policy
limits. When there is no insurance coverage, as would typically be the
case primarily in lawsuits alleging patent infringement or in connection
with certain government investigations, we establish reserves sufficient to
cover probable losses associated with such claims. We do not expect that
the resolution of any pending claims or investigations will have a material
adverse effect on our financial condition, results of operations or cash flows.
There can be no assurance, however, that future claims or investigations,
or the costs associated with responding to such claims or investigations,
especially claims and investigations not covered by insurance, will not have
a material adverse effect on our future performance.
Manufacturers of medical products may face exposure to significant
product liability claims. To date, we have not experienced any product
liability claims that are material to our financial statements or condition,
but any such claims arising in the future could have a material adverse
effect on our business or results of operations. We currently maintain
commercial product liability insurance of $25 million per incident and
$25 million in the aggregate annually, which we believe is adequate. This
coverage is on a claims-made basis. There can be no assurance that claims
will not exceed insurance coverage or that such insurance will be available
in the future at a reasonable cost to us.
Our operations are subject, and in the past have been subject, to a number
of environmental laws and regulations governing, among other things,
air emissions, wastewater discharges, the use, handling and disposal of
hazardous substances and wastes, soil and groundwater remediation
and employee health and safety. In some jurisdictions environmental
requirements may be expected to become more stringent in the future.
In the United States certain environmental laws can impose liability for
the entire cost of site restoration upon each of the parties that may have
contributed to conditions at the site regardless of fault or the lawfulness
of the party’s activities. While we do not believe that the present costs of
environmental compliance and remediation are material, there can be no
assurance that future compliance or remedial obligations could not have a
material adverse effect on our financial condition, results of operations or
cash flows.
On April 7, 2006, CONMED received a copy of a complaint filed in the
United States District for the Northern District of New York on behalf
of a purported class of former CONMED Linvatec sales representatives.
The complaint alleges that the former sales representatives were entitled
to, but did not receive, severance in 2003 when CONMED Linvatec
restructured its distribution channels. Although we do not believe it is
probable a loss has been incurred, it is reasonably possible. The range of
loss associated with this complaint ranges from $0 to $3.0 million, not
including any interest, fees or costs that might be awarded if the five named
plaintiffs were to prevail on their own behalf as well as on behalf of the
approximately 70 (or 90 as alleged by the plaintiffs) other members of
the purported class. CONMED Linvatec did not generally pay severance
during the 2003 restructuring because the former sales representatives
were offered sales positions with CONMED Linvatec’s new manufacturer’s
representatives. Other than three of the five named plaintiffs in the class
action, nearly all of CONMED Linvatec’s former sales representatives
accepted such positions.
The Company’s motions to dismiss and for summary judgment, which
were heard at a hearing held on January 5, 2007, were denied by a
Memorandum Decision and Order dated May 22, 2007. The District
Court also granted the plaintiffs’ motion to certify a class of former
CONMED Linvatec sales representatives whose employment with
CONMED Linvatec was involuntarily terminated in 2003 and who did
not receive severance benefits. Although the Court’s ruling on the motions
to dismiss, for summary judgment and the motion to certify the class do
not represent final rulings on the merits, the Company had filed a motion
seeking reconsideration of the motions to dismiss, and sought to appeal
to the United State Court of Appeals for the Second Circuit from the
class certification ruling. The Second Circuit declined to consider the
appeal by Order dated August 28, 2007. In an order dated February 25,
2008, the United States District for the Northern District of New York
granted the Company’s motion to reconsider the Company’s motions to
dismiss portions of the complaint and, upon reconsideration, reaffirmed
its previous ruling denying the aforementioned motions. The Company
believes there is no merit to the claims asserted in the Complaint, and plans
to vigorously defend the case. There can be no assurance, however, that the
Company will prevail in the litigation.
The Company had been defending a product liability claim asserted against
it and several of the Company’s subsidiaries in a case captioned Wehner
v. Linvatec Corp., et al (the “Wehner Case”). Two of the Company’s
subsidiaries settled the case and accrued the expenses, including both the
settlement and certain defense costs, in the fourth quarter of 2007 in the
amount of $1.3 million. As a result of the settlement, all of the claims
against all of the Company’s entities will be dismissed with prejudice.
As the occurrence giving rise to the Wehner Case occurred in 2002 prior to
the Company’s 2003 acquisition of Bionx Implants, Inc., the Wehner Case
is not covered by the Company’s current product liability insurance policy.
The former product liability insurance carrier has denied coverage, and the
Company and its subsidiaries commenced suit in the United States District
Court for the Eastern District of Pennsylvania seeking a declaration that
the underlying claim is covered by the policy. The Company and its
subsidiaries plan to vigorously pursue the claims for insurance coverage
(i.e., for reimbursement of the costs of defending and settling the Wehner
Case), although there can be no assurance that the Company and its
subsidiaries will prevail.
Note 11 — Other Expense (income)
Other expense (income) for the year ended December 31, consists of the
following:
Acquisition-transition related costs
Termination of product offering
Environmental settlement costs
Loss on equity investment
Write-off of inventory in
settlement of a patent dispute
Facility closure costs
Gain on litigation settlement
Product liability settlement
Other expense (income)
2005
2006
2007
$ 4,108 $ 2,592 $
1,519
698
794
1,448
—
—
—
148
—
—
—
—
—
—
—
1,822
(6,072 )
1,295
________ ________ ________
(2,807 )
________ ________ ________
________ ________ ________
595
578
—
—
$ 7,119 $ 5,213 $
31
2007 Annual Report
On September 30, 2004, we completed the Endoscopic Technologies
acquisition. As part of the acquisition, manufacturing of the acquired
products was conducted in various C.R. Bard facilities under a transition
agreement. The transition of the manufacturing of these products from
C.R. Bard facilities to CONMED facilities was completed during 2006.
During the years ended December 31, 2005 and 2006, we incurred
$4.1 million and $2.6 million, respectively, of acquisition and transition-
integration related charges associated with the Endoscopic Technologies
acquisition which have been recorded in other expense (income). These
expenses consist of severance, acquisition, transition and integration
related charges.
During 2004, we elected to terminate our surgical lights product line.
We instituted a customer replacement program whereby all currently
installed surgical lights were replaced by CONMED. We recorded charges
totaling $5.5 million related to the surgical lights customer replacement
program (including $1.5 million, $1.4 million and $0.1 million in the
years ended December 31, 2005, 2006 and 2007, respectively) in other
expense (income). The surgical lights customer replacement program was
completed during the second quarter of 2007.
During the quarter ended June 30, 2005, we entered into a settlement
of certain environmental claims related to the operations of one of our
subsidiaries during the 1980s, before it was acquired by CONMED, at a
site other than the one it currently occupies. The current owner alleged
that the acquired subsidiary caused environmental contamination of the
property. In order to avoid litigation, we agreed to reimburse the owner
for a certain percentage of past remediation costs, and to participate in the
funding of the remediation activities. The total sum of past costs, including
attorney’s fees, together with an estimate of future costs, amounted to
approximately $0.7 million and was recorded in other expense (income) for
the year ended December 31, 2005. We believe any future costs incurred in
excess of amounts already expensed would be covered by insurance.
During the quarter ended December 31, 2005, we incurred a $0.8 million
loss on the sale of an equity investment. This investment had a carrying
value of $2.0 million and was sold in January 2006 for $1.2 million
resulting in a $0.8 million loss.
During the quarter ended June 30, 2006, we were notified by Dolphin
Medical, Inc. (“Dolphin”), that it would discontinue its Dolphin ONE®
product line as a result of an agreement between Dolphin and Masimo
Corporation in which Masimo agreed to release Dolphin and its affiliates
from certain patent infringement claims. We had sold the Dolphin ONE®
and certain other pulse oximetry products manufactured by Dolphin under
a distribution agreement. As a result of the product line discontinuation, we
recorded a $0.6 million charge to other expense (income) to write-off on-
hand inventory of the discontinued product line.
During 2006, we elected to close our facility in Montreal, Canada which
manufactured products for our CONMED Linvatec line of integrated
operating room systems and equipment. The products which had been
manufactured in the Montreal facility are now purchased from third party
vendors. The closing of this facility was completed in the first quarter
of 2007. We incurred a total of $2.2 million in costs associated with this
closure, of which $1.3 million related to the write-off of inventory and was
included in cost of goods sold during 2006. The remaining $0.9 million
(including $0.3 million in 2007) primarily relates to severance expense
and the disposal of fixed assets and has been recorded in other
expense (income).
During 2007, we elected to close our CONMED Endoscopic Technologies
sales office in France. During 2007, we incurred $1.5 million in costs
associated with this closure primarily related to severance expense. We have
recorded such costs in other expense (income); no further expenses are
expected to be incurred.
In November 2003, we commenced litigation against Johnson & Johnson
and several of its subsidiaries, including Ethicon, Inc. for violations of
federal and state antitrust laws. In the lawsuit we claimed that Johnson
& Johnson engaged in illegal and anticompetitive conduct with respect
32
to sales of product used in endoscopic surgery, resulting in higher
prices to consumers and the exclusion of competition. We sought relief
including an injunction restraining Johnson & Johnson from continuing
its anticompetitive practices as well as receiving the maximum amount
of damages allowed by law. During the litigation, Johnson & Johnson
represented that the marketing practices which gave rise to the litigation
had been altered with respect to CONMED. On March 31, 2007,
CONMED and Johnson & Johnson settled the litigation. Under the terms
of the final settlement agreement, CONMED received a payment of
$11.0 million from Johnson & Johnson in return for which we terminated
the lawsuit. After deducting legal and other related costs, we recorded
a pre-tax gain of $6.1 million related to the settlement which we have
recorded in other expense (income).
Two of the Company’s subsidiaries settled a product liability claim asserted
against it and several of the Company’s subsidiaries in a case captioned
Wehner v. Linvatec Corp., et al. Total settlement and defense related
costs amounted to $1.3 million which we have recorded in other expense
(income) during the quarter ended December 31, 2007.
Note 12 — 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:
2005
2006
2007
Balance as of January 1,
Provision for warranties
Claims made
$ 3,524 $ 3,416 $
3,617
________ ________ ________
3,078
5,774
4,035
(3,389 )
________ ________ ________
(5,573 )
(4,143 )
Balance as of December 31,
$ 3,416 $ 3,617 $
3,306
________ ________ ________
________ ________ ________
Note 13 — New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”)
issued Statement of Financial Accounting Standard No. 157, “Fair Value
Measurements” (“SFAS 157”), which is effective for fiscal years beginning
after November 15, 2007 and for interim periods within those years. This
statement defines fair value, establishes a framework for measuring fair
value and expands the related disclosure requirements. The Company
is currently assessing the impact of SFAS 157 on its consolidated
financial statements.
In February 2007, the FASB issued Statement of Financial Accounting
Standard No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities-Including an amendment of FASB Statement
No. 115” (“SFAS 159”). SFAS 159 expands the use of fair value accounting
but does not affect existing standards which require assets and liabilities
to be carried at fair value. Under SFAS 159, a company may elect to use
fair value to measure accounts and loans receivable, available-for- sale and
held-to-maturity securities, equity method investments, accounts payable,
guarantees, issued debt and other eligible financial instruments. SFAS
159 is effective for fiscal years beginning after November 15, 2007. The
Company is currently assessing the impact of SFAS 159 on its consolidated
financial statements.
In December 2007, the FASB issued Statement of Financial Accounting
Standard No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”).
SFAS 141R requires the use of “full fair value” to record all the identifiable
assets, liabilities, noncontrolling interests and goodwill acquired in a
business combination. SFAS 141R is effective for fiscal years beginning
on or after December 15, 2008. The Company is currently assessing the
impact of SFAS 141R on its consolidated financial statements.
CONMED Corporation
In December 2007, the FASB issued Statement of Financial Accounting
Standard No. 160, “Noncontrolling Interests in Consolidated Financial
Statements” (“SFAS 160”). SFAS 160 requires the noncontrolling
interests (minority interests) to be recorded at fair value and reported as a
component of equity. SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008. The Company is currently assessing the impact
of SFAS 160 on its consolidated financial statements.
Note 14 — Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data for 2006 and 2007 are as follows:
Three Months Ended
2006
Net sales
Gross profit
Net income (loss)
EPS: Basic
Diluted
2007
Net sales
Gross profit
Net income (loss)
EPS: Basic
Diluted
$
$
$
$
March
158,466
77,900
4,340
.15
.15
March
171,014
85,225
11,922
.43
.42
$
$
$
$
June
163,473
77,774
3,414
.12
.12
June
169,258
85,860
9,345
.33
.32
September
154,981
$
74,731
3,332
.12
.12
$
September
164,448
$
82,358
8,355
.29
.29
$
December
$ 169,892
82,441
(23,593 )
(.84 )
(.84 )
$
December
$ 189,568
95,682
11,834
.41
.41
$
Unusual Items Included In Selected Quarterly Financial Data:
2006
First quarter
During the first quarter of 2006, we recorded a charge of $0.1 million
related to our termination of our surgical lights product line and $0.5 million
of acquisition and transition-integration related costs associated with the
Endoscopic Technologies acquisition to other expense – see Note 11.
Second quarter
During the second quarter of 2006, we recorded a charge of $0.6 million
related to the write-off of inventory in settlement of a patent dispute
and $1.0 million of acquisition and transition-integration related costs
associated with the Endoscopic Technologies acquisition to other expense
– see Note 11.
During the second quarter of 2006, we recorded a loss on the early
extinguishment of debt of $0.7 million – see Note 5.
Third quarter
During the third quarter of 2006, we recorded a charge of $0.4 million related
to severance payments due to the closing of a manufacturing plant, $1.0
million in charges related to the termination of our surgical lights product
line, and $0.6 million of acquisition and transition-integration related costs
associated with the Endoscopic Technologies acquisition to other expense
– see Note 11.
Fourth quarter
During the fourth quarter of 2006, we recorded a charge of $1.3 million to
cost of sales to write-off inventory related to the closing of a manufacturing
plant. In addition, we recorded $0.1 million in severance costs due to
the closing of a manufacturing plant, $0.4 million in charges related to
the termination of our surgical lights product line, and $0.5 million of
acquisition and transition-integration related costs associated with the
Endoscopic Technologies acquisition to other expense – see Note 11.
During the fourth quarter of 2006, after completing our annual goodwill
impairment testing, we determined that the goodwill of our Endoscopic
Technologies operating unit was impaired and consequently we recorded a
goodwill impairment charge of $46.7 million – see Note 4.
2007
First quarter
During the first quarter of 2007, we recorded a charge of $0.1 million
related to our termination of our surgical lights product line, $0.3 million
related to the closure of a manufacturing plant, and $0.3 million related to
the closure of a sales office – see Note 11.
During the first quarter of 2007, we recorded a pre-tax gain of $6.1 million
related to the settlement of a legal dispute between CONMED and
Johnson & Johnson. – see Note 11.
Second quarter
During the second quarter of 2007, we recorded a charge of $1.3 million
related to severance payments due to the closing of a sales office – see Note
11.
Third quarter
There were no unusual items in the third quarter of 2007.
Fourth quarter
During the fourth quarter of 2007, we recorded a charge of $1.3 million
related to the settlement of a product liability case. Such charges included
the settlement and defense related costs – see Note 11.
Note 15 — Subsequent Event
On January 9, 2008, CONMED Corporation entered into an agreement
to purchase a distributor’s business for approximately $14.4 million. This
purchase consists mainly of customer lists.
33
2007 Annual Report
B O A R d O F d I R E C T O R S
1 EUGENE R. CORASANTI is Vice Chairman of the Company and Chairman of the Board of Directors. Mr. Corasanti also served as the Company’s
Chief Executive Officer from its founding until 2006, as well as President and Chief Operating Officer from its founding until August 1999. Prior to the founding
of the Company, Mr. Corasanti was an independent public accountant. Mr. Corasanti holds a B.B.A. degree in Accounting from Niagara University. Eugene R.
Corasanti’s son, Joseph J. Corasanti, is President and Chief Executive Officer and a Director of the Company.
2 JOSEPH J. CORASANTI has served as President and Chief Executive Officer since January 1, 2007, having served as President and Chief Operating
Officer from August 1999 through December 2006. Mr. Corasanti has been a Director of the Company since May 1994. Mr. Corasanti is also on the Board
of Directors of II-VI, Inc. He previously served as General Counsel and Vice President-Legal Affairs, and Executive Vice-President/General Manager of the
Company. Prior to that time he was an Associate Attorney with the law firm of Morgan, Wenzel & McNicholas. Mr. Corasanti holds a B.A. degree in Political
Science from Hobart College and a J.D. degree from Whittier College School of Law. Joseph J. Corasanti is the son of Eugene R. Corasanti, Vice Chairman and
Chairman of the Board of Directors.
3 BRUCE F. dANIELS has served as a Director of the Company since August 1992. Mr. Daniels is a retired executive. From August 1974 to June 1997,
Mr. Daniels held various executive positions, including a position as Controller with Chicago Pneumatic Tool Company. Mr. Daniels holds a B.S. degree in
Business from Utica College of Syracuse University.
4 JO ANN GOLdEN joined the Board of Directors in May 2003. Ms. Golden is a certified public accountant and managing partner of the New Hartford,
NY office of Dermody Burke and Brown, CPAs, LLC. Ms. Golden is past President of the New York State Society of CPAs and the New York State Society’s
Foundation for Accounting Education. She also served as Secretary and Vice President of the State Society and was a member of the governing Council of the
American Institute of Certified Public Accountants, where she served on the Global Credential Survey Task Force in 2001. Ms. Golden holds a B.A. degree from
the State University College at New Paltz, and a B.S. degree in Accounting from Utica College of Syracuse University.
5 STEPHEN m. mANdIA has served as a Director of the Company since July 2002. Mr. Mandia has been Chief Executive Officer of East Coast Olive Oil
Corp. since 1991. Mr. Mandia also possesses financial ownership and sits on the Board of ECOO Realty Corp. and Northside Gourmet Corp. Mr. Mandia holds a
B.S. degree from Bentley College, having also undertaken undergraduate studies at Richmond College in London.
6 WILLIAm d. mATTHEWS has served as a Director of the Company since August 1997. From 1986 until retiring from the positions in 1999,
Mr. Matthews was the Chairman of the Board and the Chief Executive Officer of Oneida Ltd. Mr. Matthews is the Chairman of the Board of Directors and a
member of the audit committee of Oneida Financial Corporation, and a former director of Coyne Textile Services. Mr. Matthews holds a B.A. degree from Union
College and an L.L.B. degree from Cornell University School of Law.
7 STUART J. SCHWARTZ has served as a Director of the Company since May 1998. Dr. Schwartz is a retired physician. From 1969 to December 1997
he was engaged in private practice as a urologist. Dr. Schwartz holds a B.A. degree from Cornell University and an M.D. degree from SUNY Upstate Medical
College, Syracuse.
8 mARk E. TRYNISkI has served as a Director of the Company since May 2007. He is the President and Chief Executive Officer of Community Bank
System, Inc. (NYSE:CBU), where he served as Executive Vice President and Chief Operating Officer from February 2004 through August 2006. From June
2003 through February 2004, Mr. Tryniski was the Chief Financial Officer. Prior to joining Community Bank in June 2003, Mr. Tryniski was a partner with
PricewaterhouseCoopers LLP in Syracuse, New York. Mr. Tryniski holds a B.S. degree from the State University of New York at Oswego.
1
2
3
4
5
6
7
8
34
CONMED Corporation O F F I C E R S
Executive Officers
Joseph J. Corasanti, Esq.
President and CEO
William W. Abraham
Senior Vice President
David A. Johnson
Vice President – Global Operations and
Supply Chain
Daniel S. Jonas, Esq.
General Counsel and Vice President –
Legal Affairs
Jane E. Metcalf
Vice President – Corporate Regulatory Affairs
Luke A. Pomilio
Vice President – Corporate Controller
Robert D. Shallish, Jr.
Vice President – Finance and
Chief Financial Officer
Senior Officers
Terence M. Berge´
Treasurer and Assistant Corporate Controller
Heather L. Cohen, Esq.
Secretary and Deputy General Counsel
Alexander R. Jones
Vice President - Corporate Sales
David R. Murray
President – CONMED Electrosurgery
John J. Stotts
Vice President – CONMED Patient Care
Dennis M. Werger
Vice President, General Manager –
CONMED Endoscopic Technologies
Frank R. Williams
Vice President – CONMED EndoSurgery
35
2007 Annual Report S H A R E H O L d E R I N F O R m A T I O N n S U B S I d I A R I E S
Shareholder Information
Interested shareholders may obtain a copy of the
Company’s Form 10-K without charge upon written
request to:
Investor Relations Department
CONMED Corporation
525 French Road
Utica, NY 13502
Transfer Agent/Registrar
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Stock
The NASDAQ Stock Market® Stock Symbol: CNMD
Independent Registered Public
Accounting Firm
PricewaterhouseCoopers LLP
3600 HSBC Center
Buffalo, NY 14203
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
Phone (315) 797-8375
Fax (315) 797-0321
Customer Service
1-800-448-6506
email: info@conmed.com
website: www.conmed.com
Ethics Policy
Available at www.conmed.com
Operating Subsidiaries
CONMED Electrosurgery
CONMED Endoscopic Technologies
CONMED Integrated Systems Canada
CONMED Italia Srl.
CONMED Linvatec
CONMED Linvatec Australia
CONMED Linvatec Austria
CONMED Linvatec Belgium
CONMED Linvatec Biomaterials
CONMED Linvatec Canada
CONMED Linvatec Deutschland
CONMED Linvatec Europe
CONMED Linvatec France
CONMED Linvatec Korea
CONMED Linvatec Nederland
CONMED Linvatec Poland
CONMED Linvatec Spain
CONMED Linvatec U.K.
CONMED Receivables Corporation
36
CONMED Corporation Designed by Romanelli Communications
2007 Annual Report 525 French Road | Utica, NY 13502 | USA
©CONMED CORPORATION 4/08, 9M, Printed in the U.S.A.