2 0 0 9 A N N U A L R E P O R T
Contents
Letter to the Shareholders 1
Product Spotlight 4
Market for CONMED’s Common Stock and Related Stockholder Matters 6
Five Year Summary of Selected Financial Data 6
Management’s Discussion and Analysis of Financial Condition and Results of Operations 7
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 Statement 23
Board of Directors 38
Officers 39
Shareholder Information, Subsidiaries 40
J o s e p h J. C o r a s a n t i
President, Chief Executive Officer
March 2010
To My Fellow Shareholders:
At the beginning of the year 2009, CONMED Corporation,
Our financial performance was as follows:
along with businesses in virtually every industry, faced
economic challenges that we have not seen for several
decades. Credit markets seized up, limiting access to capital.
Businesses saw declines in demand, as customers postponed
discretionary purchases and took other steps to conserve cash.
Although the markets for medical devices are typically
insulated from cyclical economic shifts, the swings we
encountered in 2009 were unprecedented. Even we were
• Sales declined 6.4% compared to 2008 revenues.
In constant currency, the decline was a modest 3.7%.
In other words, while some of the decline was due to
reductions in purchases, a significant portion of the
decline was attributable to unfavorable foreign currency
exchange fluctuations. On a more positive note, we do
not believe that the reduced revenue reflected a decline in
market share.
affected, as hospitals delayed or cancelled the purchases of
• Sales outside the United States continued to increase as a
capital items. As capital equipment accounts for 25% of our
percentage of overall sales, growing to 44.7% of sales for
revenues, this had a significant impact on our performance.
the entire year.
This reduced demand was also reflected to some degree in
• GAAP diluted earnings per share for 2009 were $0.42
the demand for disposables, although the impact there was
compared to $1.37 in 2008.
not as severe. While some elective procedures were canceled
or delayed, hospitals and surgeons continued to perform
necessary and sometimes life-saving surgeries. We have not
seen such declines in the demand for our products before,
• Non-GAAP diluted earnings per share for 2009 were $1.00
compared to 2008 non-GAAP EPS of $1.54. As noted
above, a significant portion of this was currency-related.
nor do we think that anyone in the industry anticipated
• Cash from operations continued to be strong. For the year,
these developments.
cash provided by operating activities was $25.0 million,
more than twice the Company’s net income.
In the face of these challenging macro-economic trends, the
reduced demand for capital purchases and the reduced rate
Our Strategy
of procedures, CONMED performed relatively well.
We continued to provide our customers with a reliable supply
of a broad range of products necessary for these life-saving
surgeries. In fact, we did more than this: we worked hard
throughout the year to focus on financial goals, operational
goals, new product development and cost reductions.
The strategy we have followed has served the Company
well, as our sales, net income and shareholder equity
have increased fairly steadily over the years. We made
some adjustments during 2009 as a result of the
economic challenges we faced, but otherwise adhered to
the same principles that brought us to where we are today.
A N N U A L R E P O R T 2 0 0 9
1
C O N M E D C O R P O R A T I O N
1. Grow the Top Line
The final aspect of our growth strategy is acquisitions.
We have been focused on growing the top line for several
years, and our strategy has four components. First,
we continue to provide our customers and our sales
representatives with a steady stream of new and innovative
products. During 2009, we introduced several new
products, including the Shoulder Restoration System
(“SRS”). The SRS includes state-of-the art suture
anchors such as the PopLok™ Knotless Suture Anchor,
the CrossFT™ Fully Threaded Suture Anchor composed
of PEEK-OPTIMA® polymer technology, from Invibio®
Biomaterial Solutions, and the Super Revo®-FT and
ThRevo®-FT Fully Threaded Suture Anchors. The
combination of these implants and instruments offers a
comprehensive, versatile and easy-to-use solution for rotator
cuff repair, providing surgeons the ability to perform both
single-row and double-row fixation procedures.
During 2009, we were unable to locate an acquisition target
on acceptable terms, but we are always looking. And, given
the strength of our balance sheet, we are well positioned to
take advantage of the right opportunities if and when they
present themselves.
2. Increase Profitability By Monitoring and
Reducing Expenses
In addition to our focus on the top line, we also are looking
to increase our profit margins. During 2009, we pursued
margin expansion through increased efficiencies and cost
reductions. We continue to pursue lean manufacturing
techniques to reduce costs and improve our manufacturing
operations. We have also completed the operating
restructuring plan we announced over a year ago, and
shifted several product lines from Central New York
facilities to our low-cost manufacturing facility in Mexico.
Second, we are constantly looking for ways to better leverage
Administratively, we closed an office associated with the
the skills of our sales professionals. We continue to provide
Endoscopic Technologies division and merged those
them with the best training on our products and the clinical
activities with the functions of our corporate headquarters.
challenges our customers face. We add sales representatives
when we can do so responsibly.
We also took the difficult step of freezing our defined benefit
pension plan. This was not an easy decision, as we truly
Third, we continue to drive growth in the demand for our
value our employees, whose service to the Company is
products through surgeon education. Put simply, the more
often measured in decades rather than in years or months.
our customers, or potential customers, know about our
But our employees recognized the need, and accepted the
products and how they address surgical challenges, the more
decision with remarkable understanding. They know that
they like them.
we all work for the shareholders, and we are determined to
increase shareholder value over the long term.
2
C O N M E D C o r p o r a t i o n
Corporate Headquarters: French Road, Utica, NY
H e m o s t a s i s P r o b e s
BiCap® Superconductor™ Probe.
Outlook
The change in the economic climate during the last year
was remarkable, but the demand for our products began
to return to what used to be more normal levels during the
final six months of 2009. We have learned that we cannot
be overly confident about what the markets hold in store for
us, but we are confident that we remain well-positioned for
long-term growth. Our product offering meets the needs of
our hospital customers, and our team of managers and staff
is as strong as it has ever been. We fully expect to leverage
our existing structure, as we work to grow our sales at a rate
that we expect will far outpace the marginal increases in
costs necessary to achieve these goals.
Reconciliation of Reported Net Income to
Non-GAAP Net Income Before Unusual Items
and Amortization of Debt Discount1
(In thousands except per share amounts)
(Unaudited)
Twelve months ended
December 31,
2008
2009
Reported net income
$ 39,989 $ 12,137
_______ _______
Fair value inventory purchase
accounting adjustment included
in cost of sales
New plant/facility consolidation
costs included in cost of sales
Endoscopic Technologies
division consolidation
1,011
—
2,470 11,859
—
845
_______ _______
Total cost of sales, other
3,481 12,704
_______ _______
Facility consolidation costs included
in other expense
1,577 2,726
In conclusion, we are optimistic about CONMED’s long-
Endoscopic Technologies
division consolidation
term future. We remain committed to improving service
Product recall
— 4,080
— 5,992
to our customers, and to increasing profitability for the
Pension gain, net
—
(1,882)
_______ _______
Company. Our strategy has worked well in the past, and it
served us well during the past year. We look forward to the
future with both determination and confidence.
Total other expense
1,577 10,916
_______ _______
Gain on early extinguishment
of debt
(1,947) (1,083)
_______ _______
As always, we thank you for your continued trust and
Amortization of debt discount
4,823 4,111
_______ _______
support.
Sincerely,
Joseph J. Corasanti
President, Chief Executive Officer
Total unusual expense
before income taxes
Provision (benefit) for income
taxes on unusual expense
7,934 26,648
(9,633)
_______ _______
(2,902)
Net income before unusual items $ 45,021 $ 29,152
_______ _______
_______ _______
Per share data:
Reported net income
Basic
Diluted
Net income before unusual items
and amortization of
debt discount
Basic
Diluted
$ 1.39 $
1.37
0.42
0.42
$ 1.56 $
1.54
1.00
1.00
1This table is provided to reconcile certain financial disclosures referenced
in the Letter to Shareholders. Management has provided this reconciliation
of net income before unusual items and amortization of debt discount
as an additional measure that investors can use to compare operating
performance between reporting periods. Management believes this
reconciliation provides a useful presentation of operating performance.
A N N U A L R E P O R T 2 0 0 9
3
C O N M E D C O R P O R A T I O N
“ W i t h S R S , w e h a v e s e t a n e w c o u r s e a n d a r e w e l l p l a c e d f o r f u t u r e s u c c e s s . ”
- Joseph Corasanti, CEO CONMED Corporation
Product Spotlight
CONMED Linvatec enhances its sports medicine
technology, surgeons may find doing the procedure (less
line with the Shoulder Restoration System: a new
invasively) with the SRS system provides an opportunity for a
generation of Sports Medicine products to drive
more speedy patient recovery.
growth and provide surgeons with a choice in
treatment modalities.
In addition, Sports Medicine specialty surgeons across
the country find the SRS line beneficial in treating
The highly anticipated CONMED Linvatec Shoulder
younger patients—often college and professional-level
Restoration System (SRS) was launched in July 2009 at
athletes—who are able to return more quickly to their
the American Orthopedic Society for Sports Medicine
sport or daily lifestyles.
(AOSSM) meeting in Keystone, Colorado. In less than a
year, the SRS has been quickly adopted as the treatment of
choice for surgeons performing Rotator Cuff Surgery. The
Florida-based orthopedic division of CONMED is growing
its business and developing new surgeon relationships as
a result of this innovative technology. The new shoulder
products are positioning CONMED as a leader in the field
of arthroscopic Sports Medicine.
This is an exciting time for CONMED because the SRS
products fill a gap in our portfolio and provide a choice
for surgeons in one of the fastest-growing segments of the
sports medicine market—shoulder arthroscopy. According
to CONMED Linvatec President Joe Darling, “People
want to be more
active later in life
than ever before.
This translates into more people—often the Baby Boomer
generation—undergoing shoulder procedures, which require
newer and better products.” Many repairs are still done
in what is called an “open procedure”…. meaning that
the surgery is done in a more invasive way. With our new
The Shoulder Restoration System is a comprehensive
system for rotator cuff repair. It supports multiple surgical
techniques, allows for secure reconstruction, and positions the
surgeon to achieve successful clinical outcomes. The SRS
products are easy to use and provide an excellent fixation
strength to ensure a good outcome in the surgical procedure.
SRS products feature PEEK* technology
SRS products feature PEEK-OPTIMA® polymer technology,
from Invibio® Biomaterial Solutions. Several of CONMED
SRS products include state-of-the art instrumentation and
suture anchors, many of which are made from PEEK-
OPTIMA, a specialized polyetheretherketone (PEEK)
polymer. PEEK-OPTIMA was chosen as the material for
this new system because of its superior strength, outstanding
biostability, and its exceptional history of use in other
applications such as spinal fusion, trauma, and total joint
replacement. Additionally, the radiographic qualities of
PEEK-OPTIMA are superior to many materials when using
conventional imaging techniques such as X-ray, MRI and
Computer Tomography (CT).
*PEEK-OPTIMA and Invibio are registered trademarks
of Invibio Ltd. All rights are reserved.
4
S R S P r o d u c t s U s e d i n R o t a t o r C u f f S u r g e r y
PopLok™ Knotless Suture Anchor
CrossFT™ Fully Threaded Suture Anchor
Super Revo®-FT and ThRevo®
FT Fully Threaded Suture Anchors
PopLok™ Knotless Suture Anchor
What the Surgeons Say:
PopLok™ is designed for primary and lateral row fixation.
It is a PEEK (Polyetheretherketone) anchor offered in
3.5 and 4.5mm sizes. The PopLok™ is a significant step
“The CONMED Shoulder Restoration System is a simple
and versatile solution to address rotator cuff pathology,”
said Dr. Jeffrey Abrams, a shoulder and sports medicine
specialist with Princeton Orthopaedic Associates, P.A.,
forward in knotless technology because it provides for
in Princeton, New Jersey. “The SRS allows me to intra-
tensioning sutures separately from anchor seating. PopLok™
is cannulated to channel growth factors to the repair site,
capitalizing on the body’s healing powers to restore rotator
cuff integrity.
operatively choose the type of repair most suitable for
the tear pattern and patient demands. All three anchors
in the system, The PopLok™, CrossFT™ and Super
Revo®/ThRevo®-FT, provide exceptional fixation
strength. The Linvatec SRS is a well thought-out system
that is a welcome addition to the CONMED Shoulder
CrossFT™ Fully Threaded Suture Anchor
Arthroscopy offering.”
Also composed of PEEK, the CrossFT™ is offered in 4.5,
In addition to redefining the suture anchor market with the
5.5 and 6.5mm sizes with multiple suture configurations.
Incorporating both a fully-threaded design and a dual-
threaded profile, the CrossFT provides a radiolucent option
products listed above, CONMED has also revolutionized
the instrumentation segment of the market. By focusing
on innovation, a more efficient pilot-hole instrumentation
system has been developed, providing more options
with significant fixation strength and security. As with the
to access and repair shoulder pathology in the rotator
PopLok™, the CrossFT™ is cannulated to channel growth
factors to the repair site.
cuff. The patent pending broaching punch, exclusive to
CONMED, simultaneously enhances fixation and reduces
stress fractures to bone.
Super Revo®-FT and ThRevo®-FT Fully Threaded
Suture Anchors
“We are committed to providing surgeons with
solutions to help them achieve the best results for their
patients,” added Joe Darling. “Our Shoulder Restoration
The Super Revo®-FT and ThRevo®-FT, both 5.0mm
System is an all-encompassing solution for rotator cuff
titanium anchors, are offered with two or three sutures,
respectively. These anchors offer an excellent option for
surgeons who prefer to visualize the anchor after rotator
cuff repair, while capitalizing on the proven Revo® design
for exceptional performance. The self-drilling Revo®
design eliminates a step during the insertion process to save
valuable OR time.
procedures, and adds further depth to the growing number
of products in our Shoulder Arthroscopy portfolio.”
D r . J e f f r e y A b r a m s
Princeton Orthopaedic Associates, P.A.
A N N U A L R E P O R T 2 0 0 9
5
C O N M E D C O R P O R A T I O N
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 1, 2010, there
were 939 registered holders of our common stock and approximately 6,548 accounts held in “street name”.
The following table sets forth quarterly high and low sales prices for the years ended December 31, 2008 and 2009, as reported by the NASDAq
Stock Market.
2008
2009
Period
________________________________________________________________________________________________________
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$ 23.99
16.49
20.58
23.69
$ 11.68
12.31
15.00
18.35
High
$ 28.22
27.22
32.99
31.74
Low
$ 21.59
23.90
25.02
21.13
High
Low
We did not pay cash dividends on our common stock during 2008 or 2009 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 below:
Equity Compensation Plan Information
Plan category
Number of securities
to be issued upon exercise
of outstanding options,
warrants and rights (a)
Weighted-average exercise price
of outstanding options,
warrants and rights
(b)
Number of securities remaining
available for future issuance under
equity compensation plans (excluding
securities reflected in column (a))
(c)
Equity compensation plans
approved by security holders
Equity compensation plans
not approved by security holders
Total
2,875,709
—
_________
2,875,709
_________
_________
$23.70
—
________
$23.70
________
________
1,110,643
—
_________
1,110,643
_________
_________
Five Year Summary Of Selected Financial Data (As Adjusted) (1)
(In thousands, except per share data)
Years Ended December 31,
Statements of Operations Data(2):
Net sales
Income (loss) from operations
Net income (loss)
Earnings (Loss) Per Share:
Basic
Diluted
2005
2006
2007
2008
2009
$ 617,305
63,748
29,423
$ 646,812
(4,603 )
(15,233 )
$ 694,288
80,991
38,544
$ 742,183
75,259
39,989
$ 694,739
28,269
12,137
$
1.00
0.99
$
(.54 )
(.54 )
$
1.36
1.33
$
$
1.39
1.37
0.42
0.42
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 obligations
Total shareholders’ equity
29,300
29,736
27,966
27,966
28,416
28,965
28,796
29,227
29,074
29,142
$ 34,863
16,242
$ 34,175
21,895
$ 36,152
20,910
$ 37,159
35,879
$ 41,283
21,444
$
3,454
903,783
369,725
471,926
$
3,831
861,571
329,818
456,548
$ 11,695
893,951
298,383
518,284
$ 11,811
931,661
316,532
540,215
$ 10,098
958,413
302,791
576,515
(1) In May 2008, the FASB issued guidance which specifies that issuers of convertible debt instruments that permit or require the issuer to pay cash upon conversion should separately
account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.
The Company is required to apply the guidance retrospectively to all past periods presented. We adopted this guidance on January 1, 2009 related to our 2.50% convertible senior
subordinated notes due 2024 (“the Notes”). See additional discussion in Note 16 of the Consolidated Financial Statements.
(2) Results of operations of acquired businesses have been recorded in the financial statements since the date of acquisition.
6
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 report.
economic environment will be sustained or that revenue growth will be
achieved. We will continue to monitor and manage the impact of the
overall economic environment on the Company.
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
2007
38%
21
13
11
9
8
100%
2008
2009
38%
39%
21
21
14
14
11
10
9
9
7
7
______ ______ ______
100%
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 42%, 44% and 45% in
2007, 2008 and 2009, 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
noninvasive) procedures are important trends which are driving the
long-term growth in our industry. We believe that with our broad
product offering of high quality surgical and patient care products,
we can capitalize on this growth for the benefit of the Company and
our shareholders.
In order to further our growth prospects, we have historically used
strategic business acquisitions and exclusive distribution relationships to
continue to diversify our product offerings, increase our market share
and realize economies of scale.
We have a variety of research and development initiatives focused
in each of our principal product lines as continued innovation and
commercialization of new proprietary products and processes are
essential elements of our long-term growth strategy. Our reputation
as an innovator is exemplified by recent new product introductions
such as the CONMED Linvatec Shoulder Restoration System, a
comprehensive system for rotator cuff repair.
Business Challenges
Given significant volatility in the financial markets and foreign
currency exchange rates and depressed economic conditions in both
domestic and international markets, 2009 presented significant business
challenges. Our revenue declined in 2009 as compared to 2008
primarily as a result of the difficult economic environment. While we
are cautiously optimistic that the overall global economic environment
is improving and are therefore forecasting a return to revenue growth
in 2010, there can be no assurance that the improvement in the
During 2009 we successfully completed the first phase of our
operational restructuring plan which we had previously announced
in the second quarter of 2008. During 2010, we will begin the
second phase of our operational restructuring plan which involves
further expanding our lower cost Mexican operations by transferring
additional production lines to our Chihuahua, Mexico facility which
we believe will yield additional cost savings. We expect the second
phase of our restructuring plan to be largely completed by the fourth
quarter of 2010. However, we cannot be certain such activities will be
completed in the estimated time period or that planned cost savings
will be achieved.
Our CONMED Endoscopic Technologies operating segment has
suffered from sales declines and operating losses since its acquisition
from C.R. Bard in September 2004. We have corrected the
operational issues associated with product shortages that resulted
following the acquisition of the Endoscopic Technologies business
and have consolidated the administrative functions of the Endoscopic
Technologies business from Chelmsford, Massachusetts to our
Corporate Headquarters in Utica, New York. We believe by reducing
costs while continuing to invest in new product development, we can
achieve increased sales and ensure a return to profitability.
Our facilities are subject to periodic inspection by the United States
Food and Drug Administration (“FDA”) and foreign regulatory agencies
for, among other things, conformance to quality System Regulation
and Current Good Manufacturing Practice (“CGMP”) requirements.
Our products are also subject to product recall and we have made
product recalls in the past, including $6.0 million in 2009 related to
certain of our powered instrument handpieces. We are committed to
the principles and strategies of systems-based quality management for
improved CGMP compliance, operational performance and efficiencies
through our Company-wide quality systems initiative. However, there
can be no assurance that our actions will ensure that we will not
receive a warning letter or other regulatory action, which may include
consent decrees or fines, or that we will not make product recalls in
the future.
Critical Accounting Policies
Preparation of our financial statements requires us to make estimates
and assumptions which affect the reported amounts of assets, liabilities,
revenues and expenses. Note 1 to the Consolidated Financial
Statements describes the significant accounting policies used in
preparation of the Consolidated Financial Statements. The most
significant areas involving management judgments and estimates are
described below and are considered by management to be critical
to understanding the financial condition and results of operations
of CONMED Corporation.
Revenue Recognition
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.
A N N U A L R E P O R T 2 0 0 9
7
C O N M E D C O R P O R A T I O N
• 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 $14.1 million, $13.4 million
and $11.3 million for 2007, 2008 and 2009, respectively.
• We sell to a diversified base of customers around the world and,
therefore, believe there is no material concentration of credit risk.
• We assess the risk of loss on accounts receivable and adjust the
allowance for doubtful accounts based on this risk assessment.
Historically, losses on accounts receivable have not been material.
Management believes that the allowance for doubtful accounts
of $1.2 million at December 31, 2009 is adequate to provide for
probable losses resulting from accounts receivable.
Inventory Reserves
We maintain reserves for excess and obsolete inventory resulting from
the inability to sell our products at prices in excess of current carrying
costs. The markets in which we operate are highly competitive, with
new products and surgical procedures introduced on an on-going
basis. Such marketplace changes may result in our products becoming
obsolete. We make estimates regarding the future recoverability of the
costs of our products and record a provision for excess and obsolete
inventories based on historical experience, expiration of sterilization
dates and expected future trends. If actual product life cycles, product
demand or acceptance of new product introductions are less favorable
than projected by management, additional inventory write-downs
may be required. We believe that our current inventory reserves are
adequate.
Goodwill and Intangible Assets
We have a history of growth through acquisitions. Assets and liabilities
of acquired businesses are recorded at their estimated fair values as
of the date of acquisition. Goodwill represents costs in excess of fair
values assigned to the underlying net assets of acquired businesses.
Other intangible assets primarily represent allocations of purchase
price to identifiable intangible assets of acquired businesses. We have
accumulated goodwill of $290.5 million and other intangible assets
of $190.8 million as of December 31, 2009.
In accordance with Financial Accounting Standards Board (“FASB”)
guidance, goodwill and intangible assets deemed to have indefinite
lives are not amortized, but are subject to at least annual impairment
testing. It is our policy to perform our annual impairment testing in
the fourth quarter. The identification and measurement of goodwill
impairment involves the estimation of the fair value of our reporting
units. Estimates of fair value are based on the best information
available as of the date of the assessment, which primarily incorporate
management assumptions about expected future cash flows and
other valuation techniques. Future cash flows may be affected by
changes in industry or market conditions or the rate and extent to
which anticipated synergies or cost savings are realized with newly
acquired entities. We completed our goodwill impairment testing as
of October 1, 2009 and determined that no impairment existed at that
date. For our CONMED Electrosurgery, CONMED Endosurgery and
CONMED Linvatec operating units, our impairment testing utilized
CONMED Corporation’s EBIT multiple adjusted for a market-based
control premium with the resultant fair values exceeding carrying
values by 55% to 140%. Our CONMED Patient Care operating unit
has the least excess of fair value over carrying value of our reporting
units; we therefore utilized both a market-based approach and an
income approach when performing impairment testing with the
resultant fair value exceeding carrying value by 16%. The income
approach contained certain key assumptions including that revenue
would resume historical growth patterns in 2010 while including
certain cost savings associated with the operational restructuring
plan completed during 2009. We continue to monitor events and
circumstances for triggering events which would more likely than not
reduce the fair value of any of our reporting units and require us to
perform impairment testing.
Intangible assets with a finite life are amortized over the estimated
useful life of the asset and are evaluated each reporting period to
determine whether events and circumstances warrant a revision
to the remaining period of amortization. Intangible assets subject
to amortization are reviewed for impairment whenever events or
changes in circumstances indicate that its carrying amount may
not be recoverable. The carrying amount of an intangible asset
subject to amortization is not recoverable if it exceeds the sum of the
undiscounted cash flows expected to result from the use of the asset.
An impairment loss is recognized by reducing the carrying amount
of the intangible asset to its current fair value.
Customer relationship assets arose principally as a result of the 1997
acquisition of Linvatec Corporation. These assets represent the
acquisition date fair value of existing customer relationships based on
the after-tax income expected to be derived during their estimated
remaining useful life. The useful lives of these customer relationships
were not and are not limited by contract or any economic,
regulatory or other known factors. The estimated useful life of the
Linvatec customer relationship assets was determined as of the date
of acquisition as a result of a study of the observed pattern of historical
revenue attrition during the 5 years immediately preceding the
acquisition of Linvatec Corporation. This observed attrition pattern
was then applied to the existing customer relationships to derive the
future expected retirement of the customer relationships. This analysis
indicated an annual attrition rate of 2.6%. Assuming an exponential
attrition pattern, this equated to an average remaining useful life
of approximately 38 years for the Linvatec customer relationship assets.
Customer relationship intangible assets arising as a result of other
business acquisitions are being amortized over a weighted average life
of 17 years. The weighted average life for customer relationship assets
in aggregate is 34 years.
We evaluate the remaining useful life of our customer relationship
intangible assets each reporting period in order to determine whether
events and circumstances warrant a revision to the remaining period
of amortization. In order to further evaluate the remaining useful life
of our customer relationship intangible assets, we perform an annual
analysis and assessment of actual customer attrition and activity.
This assessment includes a comparison of customer activity since the
acquisition date and review of customer attrition rates. In the event
that our analysis of actual customer attrition rates indicates a level
of attrition that is in excess of that which was originally contemplated,
we would change the estimated useful life of the related customer
relationship asset with the remaining carrying amount amortized
prospectively over the revised remaining useful life.
We test our customer relationship assets for recoverability whenever
events or changes in circumstances indicate that the carrying amount
may not be recoverable. Factors specific to our customer relationship
assets which might lead to an impairment charge include a significant
increase in the annual customer attrition rate or otherwise significant
loss of customers, significant decreases in sales or current-period
operating or cash flow losses or a projection or forecast of losses. We
do not believe that there have been events or changes in circumstances
which would indicate the carrying amount of our customer relationship
assets might not be recoverable.
8
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.
On March 26, 2009, the Board of Directors approved a plan to freeze
benefit accruals under our pension plan effective May 14, 2009. As a
result, we recorded a curtailment gain of $4.4 million and a reduction
in accrued pension of $11.4 million which is included in other long
term liabilities. See Note 9 to the Consolidated Financial Statements.
The weighted-average discount rate used to measure pension liabilities
and costs is set by reference to the Citigroup Pension Liability Index.
However, this index gives only an indication of the appropriate
discount rate because the cash flows of the bonds comprising the
index do not match the projected benefit payment stream of the
plan precisely. For this reason, we also consider the individual
characteristics of the plan, such as projected cash flow patterns and
payment durations, when setting the discount rate. This discount rate,
which is used in determining pension expense, was 6.48% in 2008
compared to 5.97% for the first quarter of 2009. The discount rate
used for purposes of remeasuring plan liabilities as of the date the plan
freeze was approved and for purposes of measuring pension expense
for the remainder of 2009 was 7.30%. The rate used in determining
2010 pension expense is 5.86%.
We have used an expected rate of return on pension plan assets
of 8.0% for purposes of determining the net periodic pension benefit
cost. In determining the expected return on pension plan assets,
we consider the relative weighting of plan assets, the historical
performance of total plan assets and individual asset classes and
economic and other indicators of future performance. In addition,
we consult with financial and investment management professionals in
developing appropriate targeted rates of return.
We have estimated our rate of increase in employee compensation
levels at 3.5% consistent with our internal budgeting.
Pension expense in 2010 is expected to be $1.5 million compared to a
net pension gain of $0.8 million (including a $4.4 million curtailment
gain and pension expense of $3.6 million) in 2009. In addition, we will
be required to contribute approximately $3.0 million to the pension
plan for the 2010 plan year.
We have recorded additional expense of approximately $4.0 million in
the year ended December 31, 2009 related to an additional employer
401(k) contribution which is intended to offset some of the impact on
employees of the freeze in pension benefit accruals.
See Note 9 to the Consolidated Financial Statements for further
discussion.
Stock-Based Compensation
All share-base payments to employees, including grants of employee
stock options, restricted stock units, and stock appreciation rights
are recognized in the financial statements based at their fair values.
Compensation expense is recognized using a straight-line method over
the vesting period.
Income Taxes
The recorded future tax benefit arising from net deductible temporary
differences and tax carryforwards is approximately $34.6 million at
December 31, 2009. 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 2007.
Tax years subsequent to 2007 are subject to future examination.
We have established a valuation allowance to reflect the uncertainty
of realizing the benefits of certain net operating loss carryforwards
recognized in connection with an acquisition. Effective January 1,
2009, changes in deferred tax valuation allowances and income tax
uncertainties after the acquisition date, including those associated with
acquisitions that closed prior to this effective date, generally will affect
income tax expense. In assessing the need for a valuation allowance,
we estimate future taxable income, considering the feasibility of ongoing
tax planning strategies and the realizability of tax loss carryforwards.
Valuation allowances related to deferred tax assets may be impacted
by changes to tax laws, changes to statutory tax rates and ongoing and
future taxable income levels.
Consolidated Results of Operations
The following table presents, as a percentage of net sales, certain
categories included in our consolidated statements of income for the
periods indicated:
Years Ended December 31,
Net sales
Cost of sales
Gross margin
Selling and administrative expense
Research and development expense
Other expense (income), net
Income from operations
Gain on early extinguishment
of debt
Amortization of debt discount
Interest expense
Income before income taxes
Provision for income taxes
Net income
2009 Compared to 2008
2007
2009
2008
100.0% 100.0% 100.0%
48.5
49.7
______ _______ ______
51.5
50.3
36.7
34.6
4.5
4.4
0.2
(0.4)
_______ ______ ______
10.1
11.7
51.4
48.6
38.3
4.6
1.6
4.1
______ _______ ______
—
0.7
2.3
8.7
3.1
5.6%
0.1
0.6
1.0
2.6
0.9
______ _______ ______
1.7%
______ _______ ______
______ _______ ______
0.3
0.6
1.4
8.4
3.0
5.4%
Sales for 2009 were $694.7 million, a decrease of $47.5 million
(-6.4%) compared to sales of $742.2 million in 2008 with the decreases
occurring in all product lines except Endosurgery. Foreign currency
exchange rates (when compared to the foreign currency exchange rates
in the same period a year ago) accounted for approximately
$20.4 million of the decrease. In local currency, sales decreased
3.7%. Sales of capital equipment decreased $31.9 million (-16.1%)
from $197.8 million in 2008 to $165.9 million in 2009; sales of
single-use and reposable products decreased $15.6 million (-2.9%) from
$544.4 million in 2008 to $528.8 million in 2009. On a local currency
basis, sales of capital equipment decreased 13.3% while single-use and
reposable products decreased 0.1%. We believe the overall decline in
sales is driven by capital purchasing constraints in hospitals due to the
depressed economic conditions.
Cost of sales decreased to $357.4 million in 2009 as compared to
$359.8 million in 2008 on overall decreases in sales volumes as
described above. Gross profit margins decreased 2.9 percentage points
to 48.6% in 2009 as compared to 51.5% in the same period a year
ago. The decrease in gross profit margins of 2.9 percentage points
is primarily a result of the effects of unfavorable foreign currency
exchange rates on sales (1.5 percentage points) and restructuring
of the Company’s operations as more fully described in Note 17
(1.8 percentage points) offset by improved product mix (0.4 percentage
points).
A N N U A L R E P O R T 2 0 0 9
9
C O N M E D C O R P O R A T I O N
Selling and administrative expense decreased from $272.4 million
in 2008 to $266.3 million in 2009. Foreign currency exchange rates
(when compared to the foreign currency exchange rates in the same
period a year ago) accounted for approximately $6.8 million of the
decrease. Selling and administrative expense as a percentage of net
sales increased to 38.3% in 2009 from 36.7% in 2008. This increase
of 1.6 percentage points is primarily attributable to higher benefit
related costs (0.4 percentage points) and higher sales force and other
administrative expenses (1.2 percentage points) as a percent of sales.
Research and development expense was $31.8 million in 2009
compared to $33.1 million in 2008. As a percentage of net sales,
research and development expense increased to 4.6% in 2009
compared to 4.5% in 2008. The increase in research and development
expense of 0.1 percentage point is due to increased spending on our
CONMED Linvatec orthopedic products (0.5 percentage points)
offset by decreases in other research and development spending
(0.4 percentage points).
As discussed in Note 11 to the Consolidated Financial Statements,
other expense in 2009 consisted of the following: a $2.7 million charge
related to the restructuring of certain of the Company’s operations; a
$4.1 million charge related to the consolidation of the administrative
functions of the CONMED Endoscopic Technologies division; a
$6.0 million charge related to a voluntary recall of certain of our
powered instrument products; and a $1.9 million net pension gain
resulting from the freezing of future benefit accruals effective May
14, 2009. Other expense in 2008 consisted of a $1.6 million charge
related to the restructuring and relocation of certain of the Company’s
facilities.
During the first quarter of 2009, we repurchased and retired
$9.9 million of our 2.50% convertible senior subordinated notes
(the “Notes”) for $7.8 million and recorded a gain on the early
extinguishment of debt of $1.1 million net of the write-offs of
$0.1 million in unamortized deferred financing costs and $1.0 million
in unamortized Notes discount. During the fourth quarter of 2008,
we repurchased and retired $25.0 million of our 2.50% convertible
senior subordinated notes (the “Notes”) for $20.2 million and recorded
a gain on the early extinguishment of debt of $1.9 million net of the
write-off of $0.4 million in unamortized deferred financing costs and
$2.4 million in unamortized Notes discount. 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.
Amortization of debt discount in 2009 was $4.1 million compared
to $4.8 million in 2008. This amortization is associated with the
implementation of FASB guidance as of January 1, 2009 as further
described in Note 16 to the Consolidated Financial Statements.
Interest expense in 2009 was $7.1 million compared to $10.4 million
in 2008. The decrease in interest expense is due to lower weighted
average interest rates combined with lower weighted average
borrowings outstanding in 2009 as compared to 2008. The weighted
average interest rates on our borrowings (inclusive of the finance
charge on our accounts receivable sale facility) decreased to 2.90% in
2009 as compared to 3.78% in 2008.
A provision for income taxes was recorded at an effective rate of
33.1% in 2009 and 35.5% in 2008 as compared to the Federal
statutory rate of 35.0%. The effective tax rate for 2009 is lower
than that recorded in the same period a year ago as a result of the
settlement of our 2007 IRS examination in the first quarter of 2009,
and the resulting adjustment to our reserves and reduction of income
tax expense. 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.
2008 Compared to 2007
Sales for 2008 were $742.2 million, an increase of $47.9 million
(6.9%) compared to sales of $694.3 million in 2007 with the increase
occurring in all product lines except Endoscopic Technologies.
Favorable foreign currency exchange rates in 2008 compared to 2007
accounted for $2.0 million of the increase while the purchase of our
Italian distributor accounted for an increase in sales of approximately
$18.3 million (see Note 15 to the Consolidated Financial Statements).
In local currency, sales increased 6.6%. Sales of capital equipment
increased $8.5 million (4.5%) from $189.3 million in 2007 to
$197.8 million in 2008; sales of single-use and reposable products
increased $39.4 million (7.8%) from $505.0 million in 2007 to
$544.4 million in 2008. On a local currency basis, sales of capital
equipment increased 4.1% while single-use and reposable products
increased 7.6%.
Cost of sales increased to $359.8 million in 2008 compared to
$345.2 million in 2007, primarily as a result of the increased sales
volumes discussed above. Gross profit margins increased
1.2 percentage points from 50.3% in 2007 to 51.5% in 2008. The
increase of 1.2 percentage points is comprised of improved gross
margins from the newly acquired direct sales operation in Italy
(1.2 percentage points) and increases in Patient Care and Linvatec
gross margins (0.3 and 0.7 percentage points, respectively) as a result
of higher selling prices and improved manufacturing efficiencies.
These increases were offset by lower gross margins in our Endoscopic
Technologies business (0.4 percentage points) due to pricing pressures
and lower production volumes, additional costs incurred associated
with our restructuring and relocation of certain of the Company’s
facilities (0.3 percentage points) and product mix (0.3 percentage
points).
Selling and administrative expense increased to $272.4 million in 2008
compared to $240.5 million in 2007. Foreign currency exchange rates
(when compared to the foreign currency exchange rates in the same
period a year ago) accounted for approximately $1.5 million of the
increase. Selling and administrative expense as a percentage of net
sales increased to 36.7% in 2008 from 34.6% in 2007. This increase
of 2.1 percentage points is primarily attributable to higher selling and
administrative expense associated with our newly acquired direct sales
operation in Italy (1.5 percentage points), higher benefit costs (0.3
percentage points), and other selling and administrative costs
(0.3 percentage points).
Research and development expense was $33.1 million in 2008
compared to $30.4 million in 2007. As a percentage of net sales,
research and development expense remained flat at 4.5% in 2008 from
4.4% in 2007.
As discussed in Note 11 to the Consolidated Financial Statements,
other expense in 2008 consisted of a $1.6 million charge related to
the restructuring and relocation of certain of the Company’s facilities.
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 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.
During the fourth quarter of 2008, we repurchased and retired
$25.0 million of our 2.50% convertible senior subordinated notes
(the “Notes”) for $20.2 million and recorded a gain on the early
extinguishment of debt of $1.9 million net of the write-off of
$0.4 million in unamortized deferred financing costs and $2.4 million
in unamortized Notes discount. 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.
Amortization of debt discount in 2008 was $4.8 million compared
to $4.6 million in 2007. This amortization is associated with the
implementation of FASB guidance as of January 1, 2009 as further
described in Note 16 to the Consolidated Financial Statements.
Interest expense in 2008 was $10.4 million compared to
$16.2 million in 2007. The decrease in interest expense is due to lower
10
weighted average interest rates combined with lower weighted average
borrowings outstanding in 2008 as compared to 2007. The weighted
average interest rates on our borrowings (inclusive of the finance
charge on our accounts receivable sale facility) decreased to 3.78% in
2008 as compared to 5.51% in 2007.
A provision for income taxes was recorded at an effective rate of 35.5%
in 2008 and 35.9% in 2007 as compared to the Federal statutory
rate of 35.0%. The effective tax rate was lower in 2008 than in 2007
largely as a result of decreased apportionment factors to state taxing
jurisdictions and a decreased level of stock-based compensation that is
not expected to create a future tax deduction. 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, 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 2007, 2008 and 2009:
CONMED Endosurgery, CONMED Electrosurgery and
CONMED Linvatec
Net sales
Income from operations
Operating margin
2009
2008
2007
_____________________________
$ 564,834 $ 612,521 $ 574,820
62,715
10.9%
98,101
16.0%
87,569
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 decreased $22.1 million (-7.6%) in 2009 to
$269.8 million from $291.9 million in 2008. Unfavorable foreign
currency exchange rates (when compared to the foreign currency
exchange rates in the same period a year ago) accounted for
approximately $9.2 million of the decrease. Sales of capital
equipment decreased $19.6 million (-21.1%) from $92.9 million in
2008 to $73.3 million in 2009; sales of single-use products decreased
$2.5 million (-1.3%) from $199.0 million in 2008 to $196.5 million
in 2009. On a local currency basis, sales of capital equipment
decreased 18.6% while single-use products increased 2.2%. We
believe the overall decline in sales is driven by capital purchasing
constraints in hospitals due to the depressed economic conditions.
Arthroscopy sales increased $27.3 million (10.3%) in 2008 to
$291.9 million from $264.6 million in 2007. These increases are
principally a result of increased sales of our procedure specific,
resection and video imaging products for arthroscopy and general
surgery. Favorable foreign currency exchange rates (when compared
to the foreign currency exchange rates in the same period a year ago)
accounted for approximately $1.4 million of the increase.
Sales of capital equipment increased $4.8 million (5.4%) from
$88.1 million in 2007 to $92.9 million in 2008; sales of single-use
products increased $22.5 million (12.7%) from $176.5 million in
2007 to $199.0 million in 2008. On a local currency basis, sales
of capital equipment increased 5.1% while single-use products
increased 12.1%.
a year ago) accounted for approximately $6.1 million of the decrease.
Sales of capital equipment decreased $8.7 million (-11.4%) from
$76.4 million in 2008 to $67.7 million in 2009; sales of single-use
products decreased $3.0 million (-3.8%) in 2009 to $76.3 million
compared to $79.3 million in 2008. On a local currency basis,
sales of capital equipment decreased 8.1% while single-use products
increased 0.8%. We believe the overall decline in sales is driven
by capital purchasing constraints in hospitals due to the depressed
economic conditions. Powered surgical instrument sales increased
$6.4 million (4.3%) in 2008 to $155.7 million from $149.3 million
in 2007 on increased sales of large bone handpieces and large bone,
small bone and specialty burs and blades. Favorable foreign
currency exchange rates (when compared to the same period a
year ago) accounted for approximately $1.0 million of the increase.
Sales of capital equipment increased $0.8 million (1.1%) from
$75.6 million in 2007 to $76.4 million in the 2008; sales of single-use
products increased $5.6 million (7.6%) from $73.7 million in 2007
to $79.3 million in 2008. On a local currency basis, sales of capital
equipment increased 0.4% while single-use products increased 6.9%.
• Electrosurgery sales decreased $5.5 million (-5.5%) in 2009 to
$95.0 million from $100.5 million in 2008. Unfavorable foreign
currency exchange rates (when compared to the foreign currency
exchange rates in the same period a year ago) accounted for
approximately $1.5 million of the decrease. Sales of capital
equipment decreased $3.6 million (-12.6%) from $28.5 million in
2008 to $24.9 million in 2009; sales of single-use products decreased
$1.9 million (-2.6%) from $72.0 million 2008 to $70.1 million
in 2009. On a local currency basis, sales of capital equipment
decreased 10.2% while single-use products decreased 1.5%.
We believe the overall decline in sales is driven by capital purchasing
constraints in hospitals due to the depressed economic conditions.
Electrosurgery sales increased $8.4 million (9.1%) in 2008 to
$100.5 million from $92.1 million in 2007 on increased sales of our
System 5000™ electrosurgical generators, ABC® handpieces, pencils
and electrodes. Foreign currency exchange rates (when compared to
the foreign currency exchange rates in the same period a year ago)
did not have a significant impact on sales. Sales of capital
equipment increased $2.9 million (11.3%) to $28.5 million in 2008
from $25.6 million in 2007; sales of single-use products increased
$5.5 million (8.3%) to $72.0 million 2008 from $66.5 million in
2007. On a local currency basis, sales of capital equipment increased
11.3% while single-use products increased 8.1%.
• Endosurgery sales increased $1.6 million (2.5%) in 2009 to
$66.0 million from $64.4 million in 2008. Unfavorable foreign
currency exchange rates (when compared to the foreign currency
exchange rates in the same period a year ago) decreased sales
approximately $1.6 million. On local currency basis, sales increased
5.0%. Endosurgery sales increased $5.5 million (9.3%) in 2008
to $64.4 million from $58.9 million in 2007. Unfavorable foreign
currency exchange rates (when compared to the foreign currency
exchange rates in the same period a year ago) decreased sales
approximately $0.2 million. On local currency basis, sales increased
9.7%. The overall increase in sales is mainly driven by our VCARE
product which we believe is an innovative product for laparoscopic
hysterectomies.
• Operating margins as a percentage of net sales decreased
5.1 percentage points to 10.9% in 2009 compared to 16.0% in 2008.
The decrease in operating margins is due to lower gross margins
(1.7 percentage points) due to unfavorable foreign currency exchange
rates, higher research and development spending (0.6 percentage
points) due to increased emphasis on our CONMED Linvatec
orthopedic products, and costs associated with the voluntary recall
of certain powered instrument products (1.0 percentage points);
see Note 11 to the Consolidated Financial Statements for further
discussion. In addition, sales force and other relatively fixed
administrative expenses increased 1.8 points as a percentage of lower
overall sales.
• Powered surgical instrument sales decreased $11.7 million (-7.5%) in
2009 to $144.0 million from $155.7 million in 2008. Unfavorable
foreign currency exchange rates (when compared to the same period
• Operating margins as a percentage of net sales increased
0.5 percentage points to 16.0% in 2008 compared to 15.5% in
2007. The increase in operating margins are due to higher gross
A N N U A L R E P O R T 2 0 0 9
11
C O N M E D C O R P O R A T I O N
margins (2.0 percentage points) in 2008 compared to 2007 as result
of the newly acquired direct operations in Italy and improved
manufacturing efficiencies and other decreases in selling and
administrative expense (0.2 percentage points) offset by higher selling
and administrative expenses associated with the newly acquired
direct sales operation in Italy (1.7 percentage points).
CONMED Patient Care
Net sales
Income (loss) from operations
Operating margin
2009
2008
2007
____________________________
$ 76,711 $ 78,384 $ 70,978
(1,263)
(1.8%)
2.6%
2,003
2,259
2.9%
Product offerings include a line of vital signs and cardiac monitoring
products including pulse oximetry equipment & sensors, ECG
electrodes and cables, cardiac defibrillation & pacing pads and blood
pressure cuffs. We also offer a complete line of reusable surgical
patient positioners and suction instruments & tubing for use in the
operating room, as well as a line of IV products.
• Patient Care sales decreased $7.4 million (-9.4%) in 2009 to
$71.0 million compared to $78.4 million in 2008 principally due
to decreased sales of suction instruments and ECG electrodes to
distributors. Unfavorable foreign currency exchange rates (when
compared to the foreign currency exchange rates in the same period
a year ago) accounted for approximately $0.5 million of the decrease.
On a local currency basis, sales decreased 8.8%. We believe the
decrease in sales is due to a general slowdown in hospital spending
as a result of the weak economic environment. Patient Care sales
increased $1.7 million (2.2%) in 2008 to $78.4 million compared to
$76.7 million in 2007 on increased sales of defibrillator pads and
ECG electrodes. Foreign currency exchange rates (when compared
to the foreign currency exchange rates in the same period a year ago)
did not have a significant impact on sales.
• Operating margins as a percentage of net sales decreased
4.7% percentage points to -1.8% in 2009 compared to 2.9% in
2008. The decreases in operating margins are primarily due to
decreases in gross margins of 1.7 percentage points on lower sales
volumes in 2009 compared to 2008. Higher selling and relatively
fixed administrative costs (4.3 percentage points) accounted for
the remaining increase and were offset by decreased research and
development spending (1.3 percentage points) on our Endotracheal
Cardiac Output Monitor (“ECOM”) project.
• Operating margins as a percentage of net sales increased
0.3% percentage points to 2.9% in 2008 compared to 2.6% in 2007.
The increases in operating margins are primarily due to increases in
gross margins of 3.1 percentage points in 2008 compared to 2007
as a result of higher selling prices and lower production variances
offset by increased research and development costs (2.1 percentage
points) associated with our Endotracheal Cardiac Output Monitor
(“ECOM”) project and higher selling and administrative costs
(0.7 percentage points).
CONMED Endoscopic Technologies
Net sales
Income (loss) from operations
Operating margin
2009
2008
2007
____________________________
$ 48,941
$ 52,743 $ 51,278
(7,904)
(7,411)
(16.2%)
(14.5%)
(6,250)
(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 $2.4 million (-4.7%)
in 2009 to $48.9 million from $51.3 million in 2008 principally
due to decreased sales of disposable biopsy forceps. Unfavorable
foreign currency exchange rates (when compared to the foreign
currency exchange rates in the same period a year ago) accounted
for approximately $1.4 million of the decrease. On a local currency
basis, sales decreased 1.9%. We believe the decrease in sales is
due to a general slowdown in hospital spending as a result of the
12
weak economic environment. Endoscopic Technologies net sales
declined $1.4 million (-2.7%) in 2008 to $51.3 million from $52.7
million in 2007, principally due to decreased sales of forceps and
pulmonary products as a result of production and operational issues
which resulted in product shortages and backorders during the first
half of 2008. Unfavorable foreign currency exchange rates (when
compared to the foreign currency exchange rates in the same period
a year ago) decreased sales approximately $0.2 million. On a local
currency basis, sales decreased 2.3%
• Operating margins as a percentage of net sales decreased
1.7 percentage points to (-16.2%) in 2009 from (-14.5%) in 2008.
The decrease in operating margins of 1.7 percentage points in
2009 is primarily due to charges associated with the consolidation
of divisional administrative offices from Chelmsford, Massachusetts
to our Corporate Headquarters in Utica, New York (8.3 percentage
points); see Note 11 to the Consolidated Financial Statements.
This increase in cost was partially offset by higher gross margins
(2.3 percentage points), lower research and development spending
of (2.5 percentage points) and overall lower spending in selling and
administrative expenses (1.8 percentage points) as a result of our
continued efforts to improve the profitability of the business.
• Operating margins as a percentage of net sales decreased 2.7
percentage points to (-14.5%) in 2008 from (-11.8%) in 2007.
The decrease in operating margins of 2.7 percentage points in 2008
is primarily due to decreases in gross margins of 5.4 percentage points
as a result of increased production costs and pricing pressures as well
as higher selling and administrative expenses as a percentage of sales
(0.9 percentage points) offset by decreased research and development
spending as a percentage of sales (0.7 percentage points) and the
charge in 2007 associated with the closure of a sales office in France
(2.9 percentage points).
Liquidity and Capital Resources
Our liquidity needs arise primarily from capital investments,
working capital requirements and payments on indebtedness under
our senior credit agreement. We have historically met these liquidity
requirements with funds generated from operations, including sales
of accounts receivable and borrowings under our revolving credit
facility. In addition, we use term borrowings, including borrowings
under our senior credit agreement and borrowings under separate
loan facilities, in the case of real property purchases, to finance our
acquisitions. We also have the ability to raise funds through the sale
of stock or we may issue debt through a private placement or public
offering. 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 $246.5 million at December 31,
2009. Net cash provided by operating activities was $65.9 million in
2007, $61.1 million in 2008 and $25.0 million in 2009, generated on
net income of $38.5 million in 2007, $40.0 million in 2008 and
$12.1 million in 2009. The decline in operating cash flows for 2009 is
due in part to a $27.9 million decline in net income compared to 2008.
In addition, during 2009 we reduced sales of accounts receivable
under our accounts receivable sales agreement by $13.0 million, thus
reducing operating cash flows by $13.0 million, or $10.0 million more
than in the previous year.
Investing Cash Flows
Capital expenditures were $20.9 million, $35.9 million and
$21.4 million in 2007, 2008 and 2009, respectively. Capital
expenditures are expected to approximate $22.0 million in 2010.
The decrease in capital expenditures in 2009 compared to 2008
is due to the completion during the second quarter of 2009 of the
implementation of an enterprise business software application as
well as certain other infrastructure improvements related to our
restructuring efforts as more fully described in Note 17 and in
“Restructuring” below.
During 2008, we purchased our Italian distributor (the “Italy
acquisition”) for $21.8 million. See Note 15 to the Consolidated
Financial Statements for further discussion of the Italy acquisition.
The purchase of a business and a purchase price adjustment resulted in
payments totaling $5.9 million in 2007.
Financing Cash Flows
Net cash used in financing activities during 2009 consisted of the
following: $1.2 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),
$6.0 million in borrowings on our revolver under our senior credit
agreement, $1.4 million in repayments of term borrowings under our
senior credit agreement, $1.4 million in repayments on our mortgage
notes, a $1.2 million net change in cash overdrafts, and a $7.8 million
repurchase of our 2.50% convertible senior subordinated notes. See
Note 5 to the Consolidated Financial Statements for further discussion
of the repurchase of the Notes.
Our $235.0 million senior credit agreement (the “senior credit
agreement”) consists of a $100.0 million revolving credit facility and
a $135.0 million term loan. There were $10.0 million in borrowings
outstanding on the revolving credit facility as of December 31, 2009.
Our available borrowings on the revolving credit facility at December
31, 2009 were $81.6 million with approximately $8.4 million of the
facility set aside for outstanding letters of credit. There were
$56.3 million in borrowings outstanding on the term loan at
December 31, 2009.
Borrowings outstanding on the revolving credit facility are due and
payable on April 12, 2011. The scheduled principal payments on
the term loan portion of the senior credit agreement are $1.4 million
annually through December 2011, increasing to $53.6 million in 2012
with the remaining balance outstanding due and payable on April 12,
2013. We may also be required, under certain circumstances, to make
additional principal payments based on excess cash flow as defined in
the senior credit agreement. Interest rates on the term loan portion
of the senior credit agreement are at LIBOR plus 1.50% (1.75% at
December 31, 2009) or an alternative base rate; interest rates on the
revolving credit facility portion of the senior credit agreement are at
LIBOR plus 1.50% or an alternative base rate (3.625% at December
31, 2009). For those borrowings where the Company elects to use the
alternative base rate, the base rate will be the greater of the Prime Rate
or the Federal Funds Rate in effect on such date plus 0.50%, plus a
margin of 0.50% for term loan borrowings or 0.25% for borrowings
under the revolving credit facility.
The senior credit agreement is collateralized by substantially all of our
personal property and assets, except for our accounts receivable and
related rights which are pledged in connection with our accounts
receivable sales agreement. The senior credit agreement contains
covenants and restrictions which, among other things, require the
maintenance of certain financial ratios, and restrict dividend payments
and the incurrence of certain indebtedness and other activities,
including acquisitions and dispositions. We were in full compliance
with these covenants and restrictions as of December 31, 2009. We
are also required, under certain circumstances, to make mandatory
prepayments from net cash proceeds from any issuance of equity and
asset sales.
We have a mortgage note outstanding in connection with the property
and facilities utilized by our CONMED Linvatec subsidiary bearing
interest at 8.25% per annum with semiannual payments of principal
and interest through June 2019. The principal balance outstanding
on the mortgage note aggregated $11.3 million at December 31,
2009. The mortgage note is collateralized by the CONMED Linvatec
property and facilities.
We have outstanding $115.1 million in 2.50% convertible senior
subordinated notes due 2024 (“the Notes”). During the year ended
December 31, 2008, we repurchased and retired $25.0 million
of the Notes for $20.2 million and recorded a gain on the early
extinguishment of debt of $1.9 million net of the write-off of
$0.4 million in unamortized deferred financing costs and $2.4 million
in unamortized debt discount. During the year ended December
31, 2009, we repurchased and retired $9.9 million of the Notes for
$7.8 million and recorded a gain on the early extinguishment of debt
of $1.1 million net of the write-offs of $0.1 million in unamortized
deferred financing costs and $1.0 million in unamortized debt
discount. The Notes represent subordinated unsecured obligations and
are convertible under certain circumstances, as defined in the bond
indenture, into a combination of cash and CONMED common stock.
Upon conversion, the holder of each Note will receive the conversion
value of the Note payable in cash up to the principal amount of the
Note and CONMED common stock for the Note’s conversion value in
excess of such principal amount. Amounts in excess of the principal
amount are at an initial conversion rate, subject to adjustment,
of 26.1849 shares per $1,000 principal amount of the Note (which
represents an initial conversion price of $38.19 per share). As of
December 31, 2009, there was no value assigned to the conversion
feature because the Company’s share price was below the conversion
price. The Notes mature on November 15, 2024 and are not
redeemable by us prior to November 15, 2011. Holders of the Notes
have the right to put to us some or all of the Notes for repurchase on
November 15, 2011, 2014 and 2019 and, provided the terms of the
indenture are satisfied, we will be required to repurchase those Notes.
The Notes contain two embedded derivatives. The embedded
derivatives are recorded at fair value in other long-term liabilities
and changes in their value are recorded through the consolidated
statements of operations. The embedded derivatives have a nominal
value, and it is our belief that any change in their fair value would
not have a material adverse effect on our business, financial condition,
results of operations, or cash flows.
Our Board of Directors has authorized a share repurchase program
under which we may repurchase up to $100.0 million of our common
stock, although no more than $50.0 million may be purchased in any
calendar year. We did not repurchase any shares during 2009. 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 $40.0 million
undivided percentage ownership interest in such receivables (the
“asset interest”) to a bank (the “purchaser”). The purchaser’s share
of collections on accounts receivable are calculated as defined in
the accounts receivable sales agreement, as amended. Effectively,
collections on the pool of receivables flow first to the purchaser and
then to CRC, but to the extent that the purchaser’s share of collections
may be less than the amount of the purchaser’s asset interest, there is
no recourse to CONMED or CRC for such shortfall. For receivables
which have been sold, CONMED Corporation and its subsidiaries
retain collection and administrative responsibilities as agent for
the purchaser. As of December 31, 2008 and 2009, the undivided
A N N U A L R E P O R T 2 0 0 9
13
with the second phase of our restructuring plan which we expect
to yield annual cost savings of approximately $1.5 million beginning
in 2011.
In conjunction with our restructuring plan, we considered FASB
guidance which requires that long-lived assets be tested for recoverability
whenever events or changes in circumstances indicate that their carrying
amount may not be recoverable. As a result of our restructuring, two
manufacturing facilities located in the Utica, New York area were
closed prior to the end of their previously estimated useful lives. We
determined one facility did not have any value and therefore recorded
a $0.5 million charge for the remaining net book value of the facility in
the fourth quarter of 2009. We plan to sell or lease the second facility
and have tested it for impairment under the guidance for long-lived
assets to be held and used. We performed our impairment testing
on the second facility by comparing future cash flows expected to be
generated by this facility (undiscounted and without interest charges)
against the carrying amount ($2.1 million as of December 31, 2009).
Since future cash flows expected to be generated by the second facility
exceed its carrying amount, we do not believe any impairment exists at
this time. However, we cannot be certain an impairment charge will
not be required in the future.
As of December 31, 2009, we have incurred $18.6 million (including
$4.1 million and $14.5 million, in the years ended December 31, 2008
and 2009, respectively) in costs associated with our restructuring.
Approximately $14.3 million (including $2.5 million and $11.8 million
in the years ended December 31, 2008 and 2009, respectively) of the
total $18.6 million in restructuring costs have been charged to cost
of goods sold. The $14.3 million charged to cost of goods sold includes
$6.1 million in under utilization of production facilities (including
$1.2 million and $4.9 million, in the years ended December 31, 2008
and 2009, respectively), $2.4 million in accelerated depreciation
(including $0.3 million and $2.1 million, in the years ended
December 31, 2008 and 2009, respectively), $2.1 million in severance
related charges (including $0.1 million and $2.0 million, in the years
ended December 31, 2008 and 2009, respectively), and $3.7 million
in other charges (including $0.9 million and $2.8 million, in the years
ended December 31, 2008 and 2009, respectively).
The remaining $4.3 million (including $1.6 million and $2.7 million,
in the years ended December 31, 2008 and 2009, respectively) in
restructuring costs have been recorded in other expense and primarily
include severance, lease and other charges related to the consolidation
of our distribution centers.
As the second phase of our restructuring plan progresses, we will incur
additional charges, including employee termination and other exit costs.
Based on the criteria contained within FASB guidance, no accrual for
such costs has been made at this time.
We estimate the total costs of the second phase of our restructuring
plan will approximate $2.5 million during 2010, including $1.3 million
related to employee termination costs and $1.2 million in other
restructuring related activities. We expect these restructuring costs will
be charged to cost of goods sold. The second phase of the restructuring
plan impacts Corporate manufacturing facilities which support multiple
reporting segments. As a result, costs associated with the second phase
of our restructuring plan will be reflected in the Corporate line within
our business segment reporting.
C O N M E D C O R P O R A T I O N
percentage ownership interest in receivables sold by CRC to the
purchaser aggregated $42.0 million and $29.0 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 $2.9 million,
$1.7 million and $0.5 million, in 2007, 2008 and 2009, 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 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 October 30, 2009 whereby the purchase
commitment was decreased from $50.0 million to $40.0 million and
extended through October 29, 2010 under otherwise substantially the
same terms and conditions.
In June 2009, the FASB issued guidance which requires additional
disclosures about the transfer and derecognition of financial assets,
eliminates the concept of qualifying special-purpose entities, creates
more stringent conditions for reporting a transfer of a portion of a
financial asset as a sale, clarifies other sale-accounting criteria, and
changes the initial measurement of a transferor’s interest in transferred
financial assets. This guidance is effective for fiscal years beginning
after November 15, 2009. As a result of this new guidance, our
accounts receivable sales agreement, will no longer be permitted to be
accounted for as a sale and reduction in accounts receivable beginning
in 2010. As a result, accounts receivable sold under the agreement
will be recorded as additional borrowings rather than as a reduction in
accounts receivable.
Restructuring
During 2009, we completed the first phase of our operational
restructuring plan which we had previously announced in the second
quarter of 2008. The restructuring included the closure of two
manufacturing facilities located in the Utica, New York area totaling
approximately 200,000 square feet with manufacturing transferred
into either our Corporate headquarters location in Utica, New York or
into a newly constructed leased manufacturing facility in Chihuahua,
Mexico. In addition, manufacturing previously done by a contract
manufacturing facility in Juarez, Mexico was transferred in-house to
the Chihuahua facility. Finally, certain domestic distribution activities
were centralized in a new leased consolidated distribution center in
Atlanta, Georgia. We believe our restructuring will reduce our cost
base by consolidating our Utica, New York operations into a single
facility and expanding our lower cost Mexican operations, as well
as improve service to our customers by shipping orders from more
centralized distribution centers. The closure of the two manufacturing
facilities, consolidation of distribution activities and the first phase
of transitioning manufacturing operations was substantially complete
as of December 31, 2009. We expect the completion of the first phase
of our operational restructuring plan to yield annual cost savings
of approximately $3.0 - $5.0 million beginning in 2010.
During 2010, we plan to enter into the second phase of our
restructuring plan which contemplates transferring additional
production lines from Utica, New York to our manufacturing facility in
Chihuahua, Mexico. We expect to incur $2.5 million in costs associated
14
Contractual Obligations
and transacted in United States dollars.
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, 2009.
Payments Due by Period
Less than
1-3
3-5 More than
Long-term debt
Purchase
obligations
Operating lease
obligations
Total contractual
obligations
Total
1 Year Years Years 5 Years
$ 192,692 $ 2,174 $ 66,800 $ 2,190 $ 121,528
51,702 51,173
529
—
—
37,538 6,456 10,516 8,030 12,536
_______ _______ _______ _______ _______
$ 281,932 $ 59,803 $ 77,845 $ 10,220 $ 134,064
_______ _______ _______ _______ _______
_______ _______ _______ _______ _______
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 2010, which
are expected to be approximately $3.0 million. (See Note 9 to the
Consolidated Financial Statements). The above table also does not
include unrecognized tax benefits of approximately $1.0 million, the
timing and certainty of recognition for which is not known. (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
Because a significant portion of our operations consist of sales activities
in foreign jurisdictions, 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. During
2009, changes in foreign currency exchange rates decreased sales
by approximately $20.4 million and income before income taxes by
approximately $13.6 million.
We manage our foreign currency transaction risks through the
use of forward contracts to hedge forecasted cash flows associated
with foreign currency transaction exposures. We account for these
forward contracts as cash flow hedges. To the extent these forward
contracts meet hedge accounting criteria, changes in their fair value
are not included in current earnings but are included in accumulated
other comprehensive income (loss). These changes in fair value
will be reclassified into earnings as a component of sales when the
forecasted transaction occurs. The notional contract amounts for
forward contracts outstanding at December 31, 2009 which have been
accounted for as cash flow hedges totaled $80.2 million. Net realized
losses recognized for forward contracts accounted for as cash flow
hedges approximated $0.4 million for the year ended December 31,
2009. Net unrealized gains on forward contracts outstanding which
have been accounted for as cash flow hedges and which have been
included in accumulated other comprehensive income (loss) totaled
$0.1 million at December 31, 2009. These unrealized gains will be
recognized in income in 2010.
We also enter into forward contracts to exchange foreign currencies
for United States dollars in order to hedge our currency transaction
exposures on intercompany receivables denominated in foreign
currencies. These forward contracts settle each month at month-end,
at which time we enter into new forward contracts. We have not
designated these forward contracts as hedges and have not applied
hedge accounting to them. The notional contract amounts for
forward contracts outstanding at December 31, 2009 which have not
been designated as hedges totaled $28.6 million. Net realized losses
recognized in connection with those forward contracts not accounted
for as hedges approximated $3.9 million for the year ended
December 31, 2009, offsetting gains on our intercompany receivables
of $4.6 million for the year ended December 31, 2009. These gains
and losses have been recorded in selling and administrative expense in
the Consolidated Statements of Operations.
We record these forward foreign exchange contracts at fair value;
the fair value for forward foreign exchange contracts outstanding
at December 31, 2009 was $0.1 million and is included in Prepaid
Expenses and Other Current Assets in the Consolidated Balance
Sheets.
See Note 14 to the Consolidated Financial Statements for a discussion
of new accounting pronouncements.
Refer to Note 13 in the Consolidated Financial Statements for
further discussion.
quantitative and qualitative Disclosures About Market Risk
Interest Rate Risk
Market risk is the potential loss arising from adverse changes in market
rates and prices such as commodity prices, foreign currency exchange
rates and interest rates. In the normal course of business, we are
exposed to various market risks, including changes in foreign currency
exchange rates and interest rates. We manage our exposure to these
and other market risks through regular operating and financing
activities and as necessary through the use of derivative financial
instruments.
Foreign Currency Risk
Approximately 45% of our total 2009 consolidated net sales were
to customers outside the United States. We have sales subsidiaries
in a significant number of countries in Europe as well as Australia,
Canada and Korea. In those countries in which we have a direct
presence, our sales are denominated in the local currency amounting to
approximately 30% of our total net sales in 2009. The remaining 15%
of sales to customers outside the United States was on an export basis
At December 31, 2009, we had approximately $66.3 million
of variable rate long-term debt outstanding under our senior credit
agreement and an additional $29.0 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, 2009. Assuming
no repayments other than our 2009 scheduled term loan payments, if
market interest rates for similar borrowings and accounts receivable
sales averaged 1.0% more in 2010 than they did in 2009, interest
expense would increase, and income before income taxes would
decrease by $0.9 million. Comparatively, if market interest rates for
similar borrowings average 1.0% less in 2010 than they did in 2009,
our interest expense would decrease, and income before income taxes
would increase by $1.1 million.
A N N U A L R E P O R T 2 0 0 9
15
C O N M E D C O R P O R A T I O N
Business Forward-Looking Statements
This Annual Report for the Fiscal Year Ended December 31, 2009
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;
• changes in foreign exchange and interest rates;
• cyclical customer purchasing patterns due to budgetary and other
constraints;
• changes in customer preferences;
• competition;
• changes in technology;
• the introduction and acceptance of new products;
• the ability to evaluate, finance and integrate acquired businesses,
products and companies;
• changes in business strategy;
• the availability and cost of materials;
• the possibility that United States or foreign regulatory and/or
administrative agencies may initiate enforcement actions against us
or our distributors;
• future levels of indebtedness and capital spending;
• quality of our management and business abilities and the judgment
of our personnel;
• the availability, terms and deployment of capital;
• the risk of litigation, especially patent litigation as well as the cost
associated with patent and other litigation; and
• changes in regulatory requirements.
16
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, 2009. 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, 2009. The effectiveness of the Company’s internal control over financial reporting as
of December 31, 2009 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
A N N U A L R E P O R T 2 0 0 9
17
C O N M E D C O R P O R A T I O N
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, 2009 and
December 31, 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009
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, 2009, 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 16 to the consolidated financial statements, the Company changed the manner in which it accounts for convertible debt
instruments effective January 1, 2009.
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
Albany, New York
February 25, 2010
18
Consolidated Balance Sheets
December 31, 2008 and 2009
(In thousands except share and per share amounts)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful
accounts of $1,370 in 2008 and $1,175 in 2009
Inventories
Deferred income taxes
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Deferred income taxes
Goodwill
Other intangible assets, net
Other assets
Total assets
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt
Accounts payable
Accrued compensation and benefits
Income taxes payable
Other current liabilities
Total current liabilities
Long-term debt
Deferred income taxes
Other long-term liabilities
Total liabilities
Commitments and contingencies
Shareholders’ equity:
Preferred stock, par value $.01 per share; authorized
500,000 shares, none issued or outstanding
Common stock, par value $.01 per share; 100,000,000 authorized;
31,299,203 issued in 2008 and 2009, respectively
Paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Less: Treasury stock, at cost; 2,274,822 and 2,149,832 shares in
2008 and 2009, respectively
Total shareholders’ equity
Total liabilities and shareholders’ equity
See notes to consolidated financial statements.
As Adjusted
(Note 16)
2008
2009
$ 11,811
$ 10,098
96,515
159,976
13,514
11,218
________
293,034
________
143,737
1,228
290,245
195,939
7,478
________
$ 931,661
________
________
$
3,185
35,887
20,129
1,279
14,434
________
74,914
________
182,739
88,468
45,325
________
391,446
________
126,162
164,275
14,782
10,293
_________
325,610
_________
143,502
1,953
290,505
190,849
5,994
_________
$ 958,413
_________
_________
$
2,174
26,210
25,955
677
24,091
_________
79,107
_________
182,195
97,916
22,680
_________
381,898
_________
—
—
313
313,830
314,373
(31,032)
(57,269)
________
540,215
________
$ 931,661
________
________
313
317,366
325,370
(12,405)
(54,129)
________
576,515
_________
$ 958,413
_________
_________
A N N U A L R E P O R T 2 0 0 9
19
C O N M E D C O R P O R A T I O N
Consolidated Statements of Operations
Years Ended December 31, 2007, 2008 and 2009
(In thousands except per share amounts)
Net sales
Cost of sales
Gross profit
Selling and administrative expense
Research and development expense
Other expense (income)
Income from operations
Gain on early extinguishment of debt
Amortization of debt discount
Interest expense
Income before income taxes
Provision for income taxes
Net income
Earnings per share
Basic
Diluted
As Adjusted
(Note 16)
2007
$ 694,288
345,163
_________
349,125
_________
240,541
30,400
(2,807 )
_________
268,134
_________
80,991
—
4,618
16,234
_________
60,139
21,595
_________
$ 38,544
_________
_________
2008
$ 742,183
359,802
_________
382,381
_________
272,437
33,108
1,577
_________
307,122
_________
75,259
1,947
4,823
10,372
_________
62,011
22,022
_________
$ 39,989
_________
_________
2009
$ 694,739
357,407
_________
337,332
_________
266,310
31,837
10,916
_________
309,063
_________
28,269
1,083
4,111
7,086
_________
18,155
6,018
_________
$ 12,137
_________
_________
$
1.36
1.33
$
1.39
1.37
$
0.42
0.42
See notes to consolidated financial statements.
20
Consolidated Statements of Shareholders’ Equity
Years Ended December 31, 2007, 2008 and 2009
(In thousands) As Adjusted (Note 16)
Common Stock
__________________
Amount
Shares
Accumulated
Other
Paid-in Retained Comprehensive Treasury Shareholders’
Capital
Earnings Income (Loss)
Stock
Equity
Balance at December 31, 2006
Adjustment for adoption
31,304
_______ _______
_______ _______
$ 313 $ 284,858 $ 247,425 $
(83,630 ) $ 440,354
________ ________ ________ _________ _________
________ ________ ________ _________ _________
(8,612) $
of FASB guidance related to convertible debt
—
_______ _______
—
21,808
16,194
________ ________ ________ _________ _________
(5,614) — —
Adjusted balance at December 31, 2006
Common stock issued under employee plans
Tax benefit arising from common stock issued
under employee plans
Stock-based compensation
Comprehensive income (loss):
Foreign currency translation adjustments
Pension liability (net of income tax
expense of $1,654)
Net income
Total comprehensive income
Balance at December 31, 2007
Common stock issued under employee plans
Tax benefit arising from common stock issued
under employee plans
Stock-based compensation
Retirement of 2.50% convertible notes
Comprehensive income (loss):
Foreign currency translation adjustments
Pension liability (net of income tax
benefit of $10,566)
Net income
Total comprehensive income
Balance at December 31, 2008
Common stock issued under employee plans
Tax benefit arising from common stock issued
under employee plans
Retirement of 2.50% convertible notes
Stock-based compensation
Comprehensive income:
Foreign currency translation adjustments
Pension liability (net of income tax
expense of $6,629)
Cash flow hedging gain (net of income tax
expense of $45)
Net income (loss)
Total comprehensive income
Balance at December 31, 2009
See notes to consolidated financial statements.
31,304
_______ _______
_______ _______
313 $ 306,666 $ 241,811 $
(83,630 ) $ 456,548
________ ________ ________ _________ _________
________ ________ ________ _________ _________
(8,612) $
$
(5 )
(662)
(4,031)
16,048
11,355
(41)
3,771
(41)
3,771
5,284
2,823
38,544
_______ _______
46,651
________ ________ ________ _________ _________
31,299
_______ _______
_______ _______
$ 313 $ 309,734 $ 276,324 $
(67,582 ) $ 518,284
________ ________ ________ _________ _________
________ ________ ________ _________ _________
(505) $
(1,483)
(1,940)
10,313
6,890
1,630
4,178
(229)
1,630
4,178
(229)
(12,498)
(18,029)
39,989
_______ _______
9,462
________ ________ ________ _________ _________
31,299
_______ _______
_______ _______
$ 313 $ 313,830 $ 314,373 $ (31,032) $
(57,269 ) $ 540,215
________ ________ ________ _________ _________
________ ________ ________ _________ _________
(1,245)
(1,140)
3,140
755
561
(88)
4,308
561
(88)
4,308
7,241
11,310
76
_______ _______
30,764
________ ________ ________ _________ _________
12,137
31,299
_______ _______
_______ _______
$ 313 $ 317,366 $ 325,370 $ (12,405) $
(54,129) $ 576,515
________ ________ ________ _________ _________
________ ________ ________ _________ _________
A N N U A L R E P O R T 2 0 0 9
21
C O N M E D C O R P O R A T I O N
Consolidated Statements of Cash Flows
Years Ended December 31, 2007, 2008 and 2009
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation
Amortization of debt discount
Amortization, all other
Stock-based compensation
Deferred income taxes
Sale of accounts receivable to (collections on behalf of) purchaser
Income tax benefit of stock option exercises
Excess tax benefit from stock option exercises
Gain on extinguishment of debt
Increase (decrease) in cash flows from changes in assets and liabilities,
net of effects from acquisitions:
Accounts receivable
Inventories
Accounts payable
Income taxes
Accrued compensation and benefits
Other assets
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Payments related to business acquisitions, net of cash acquired
Purchases of property, plant and equipment
Net cash used in investing activities
Cash flows from financing activities:
Net proceeds from common stock issued under employee plans
Excess tax benefit from stock options exercises
Payments on senior credit agreement
Proceeds of senior credit agreement
Payments on mortgage notes
Payments on senior subordinated notes
Net change in cash overdrafts
Net cash 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
22
As Adjusted
(Note 16)
2007
2008
2009
$ 38,544
_________
$ 39,989
_________
$ 12,137
_________
13,101
4,618
18,433
3,771
15,008
1,000
—
—
—
14,641
4,823
17,695
4,178
16,304
(3,000)
1,630
(1,738)
(1,947)
(6,301)
(22,621)
(2,414)
3,118
2,012
(83)
(2,292)
_________
27,350
_________
65,894
_________
(3,735)
(8,110)
(7,043)
2,627
(238)
(4,469)
(10,458)
_________
21,160
_________
61,149
_________
(5,933)
(20,910)
_________
(26,843)
_________
(22,023)
(35,879)
_________
(57,902)
_________
11,355
—
(44,000)
—
(990)
—
(1,770)
_________
(35,405)
_________
_________
4,218
7,864
3,831
_________
$ 11,695
_________
_________
7,347
1,738
(1,350)
4,000
(1,109)
(20,248)
4,270
_________
(5,352)
_________
2,221
_________
116
11,695
_________
$ 11,811
_________
_________
18,651
4,111
18,521
4,308
4,241
(13,000)
561
(886)
(1,083)
(12,879)
(9,454)
(7,400)
(2,287)
5,630
(197)
4,054
_________
12,891
_________
25,028
_________
(330)
(21,444)
_________
(21,774)
_________
1,198
886
(1,350)
6,000
(1,425)
(7,808)
(1,188)
_________
(3,687)
_________
(1,280)
_________
(1,713)
11,811
_________
$ 10,098
_________
_________
$ 14,386
4,172
$ 9,381
7,397
$ 6,303
3,650
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
Note 1 — Operations and Significant Accounting Policies
Organization and operations
CONMED Corporation (“CONMED”, the “Company”, “we” or “us”)
is a medical technology company 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 $40.0 million
undivided percentage ownership interest in such receivables (the
“asset interest”) to a bank (the “purchaser”). The purchaser’s share
of collections on accounts receivable are calculated as defined in
the accounts receivable sales agreement, as amended. Effectively,
collections on the pool of receivables flow first to the purchaser and
then to CRC, but to the extent that the purchaser’s share of collections
may be less than the amount of the purchaser’s asset interest, there is
no recourse to CONMED or CRC for such shortfall. For receivables
which have been sold, CONMED Corporation and its subsidiaries
retain collection and administrative responsibilities as agent for
the purchaser. As of December 31, 2008 and 2009, the undivided
percentage ownership interest in receivables sold by CRC to the
purchaser aggregated $42.0 million and $29.0 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 $2.9 million,
$1.7 million and $0.5 million, in 2007, 2008 and 2009, 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 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 October 30, 2009 whereby the purchase
commitment was decreased from $50.0 million to $40.0 million and
extended through October 29, 2010 under otherwise substantially the
same terms and conditions.
In June 2009, the Financial Accounting Standards Board (“FASB”)
issued guidance which requires additional disclosures about the
transfer and derecognition of financial assets, eliminates the concept
of qualifying special-purpose entities, creates more stringent
conditions for reporting a transfer of a portion of a financial asset as
a sale, clarifies other sale-accounting criteria, and changes the initial
measurement of a transferor’s interest in transferred financial assets.
This guidance is effective for fiscal years beginning after November
15, 2009. As a result of this new guidance, our accounts receivable
sales agreement will no longer be permitted to be accounted for as
a sale and reduction in accounts receivable beginning in 2010. As a
result, accounts receivable sold under the agreement will be recorded
as additional borrowings rather than as a reduction in accounts
receivable.
Inventories
Inventories are valued at the lower of cost or market. Cost is
determined on the FIFO (first-in, first-out) method of accounting.
Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated using
the straight-line method over the following estimated useful lives:
Building and improvements 40 years
Leasehold improvements
Machinery and equipment
Shorter of life of asset or life of lease
2 to 15 years
Goodwill and other intangible assets
We have a history of growth through acquisitions. Assets and liabilities
of acquired businesses are recorded at their estimated fair values as
of the date of acquisition. Goodwill represents costs in excess of fair
values assigned to the underlying net assets of acquired businesses.
Other intangible assets primarily represent allocations of purchase
price to identifiable intangible assets of acquired businesses. We have
accumulated goodwill of $290.5 million and other intangible assets
of $190.8 million as of December 31, 2009.
In accordance with FASB guidance, goodwill and intangible assets
deemed to have indefinite lives are not amortized, but are subject to at
least annual impairment testing. It is our policy to perform our annual
impairment testing in the fourth quarter. The identification and
measurement of goodwill impairment involves the estimation of the
fair value of our reporting units. Estimates of fair value are based on
the best information available as of the date of the assessment, which
primarily incorporate management assumptions about expected future
cash flows and other valuation techniques. Future cash flows may
be affected by changes in industry or market conditions or the rate
and extent to which anticipated synergies or cost savings are realized
A N N U A L R E P O R T 2 0 0 9
23
C O N M E D C O R P O R A T I O N
with newly acquired entities. We completed our goodwill impairment
testing as of October 1, 2009 and determined that no impairment
existed at that date. For our CONMED Electrosurgery,
CONMED Endosurgery and CONMED Linvatec operating units,
our impairment testing utilized CONMED Corporation’s EBIT
multiple adjusted for a market-based control premium with the
resultant fair values exceeding carrying values by 55% to 140%. Our
CONMED Patient Care operating unit has the least excess of fair
value over carrying value of our reporting units; we therefore utilized
both a market-based approach and an income approach when
performing impairment testing with the resultant fair value exceeding
carrying value by 16%. The income approach contained certain key
assumptions including that revenue would resume historical growth
patterns in 2010 while including certain cost savings associated with the
operational restructuring plan completed during 2009. We continue
to monitor events and circumstances for triggering events which would
more likely than not reduce the fair value of any of our reporting units
and require us to perform impairment testing.
Intangible assets with a finite life are amortized over the estimated
useful life of the asset and are evaluated each reporting period to
determine whether events and circumstances warrant a revision
to the remaining period of amortization. Intangible assets subject
to amortization are reviewed for impairment whenever events or
changes in circumstances indicate that its carrying amount may
not be recoverable. The carrying amount of an intangible asset
subject to amortization is not recoverable if it exceeds the sum of the
undiscounted cash flows expected to result from the use of the asset.
An impairment loss is recognized by reducing the carrying amount
of the intangible asset to its current fair value.
Customer relationship assets arose principally as a result of the 1997
acquisition of Linvatec Corporation. These assets represent the
acquisition date fair value of existing customer relationships based on
the after-tax income expected to be derived during their estimated
remaining useful life. The useful lives of these customer relationships
were not and are not limited by contract or any economic,
regulatory or other known factors. The estimated useful life of the
Linvatec customer relationship assets was determined as of the date
of acquisition as a result of a study of the observed pattern of historical
revenue attrition during the 5 years immediately preceding the
acquisition of Linvatec Corporation. This observed attrition pattern
was then applied to the existing customer relationships to derive the
future expected retirement of the customer relationships. This analysis
indicated an annual attrition rate of 2.6%. Assuming an exponential
attrition pattern, this equated to an average remaining useful life
of approximately 38 years for the Linvatec customer relationship assets.
Customer relationship intangible assets arising as a result of other
business acquisitions are being amortized over a weighted average life
of 17 years. The weighted average life for customer relationship assets
in aggregate is 34 years.
We evaluate the remaining useful life of our customer relationship
intangible assets each reporting period in order to determine whether
events and circumstances warrant a revision to the remaining period
of amortization. In order to further evaluate the remaining useful life
of our customer relationship intangible assets, we perform an annual
analysis and assessment of actual customer attrition and activity.
This assessment includes a comparison of customer activity since the
acquisition date and review of customer attrition rates. In the event
that our analysis of actual customer attrition rates indicates a level
of attrition that is in excess of that which was originally contemplated,
we would change the estimated useful life of the related customer
relationship asset with the remaining carrying amount amortized
prospectively over the revised remaining useful life.
We test our customer relationship assets for recoverability whenever
events or changes in circumstances indicate that the carrying amount
may not be recoverable. Factors specific to our customer relationship
assets which might lead to an impairment charge include a significant
increase in the annual customer attrition rate or otherwise significant
loss of customers, significant decreases in sales or current-period
operating or cash flow losses or a projection or forecast of losses. We
do not believe that there have been events or changes in circumstances
which would indicate the carrying amount of our customer relationship
assets might not be recoverable.
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 $97.2 million and $108.3 million at December 31, 2008
and 2009, respectively, based on their quoted market price.
Translation of foreign currency financial statements
Assets and liabilities of foreign subsidiaries have been translated into
United States dollars at the applicable rates of exchange in effect at
the end of the period reported. Revenues and expenses have been
translated at the applicable weighted average rates of exchange in effect
during the period reported. Translation adjustments are reflected in
accumulated other comprehensive income (loss). Transaction gains and
losses are included in net income.
Foreign Exchange and Hedging Activity
We manage our foreign currency transaction risks through the use
of forward contracts to hedge forecasted cash flows associated with
foreign currency transaction exposures. We account for these forward
contracts as cash flow hedges. To the extent these forward contracts
meet hedge accounting criteria, changes in their fair value are not
included in current earnings but are included in accumulated other
comprehensive income (loss). These changes in fair value will be
reclassified into earnings as a component of sales when the forecasted
transaction occurs.
We also enter into forward contracts to exchange foreign currencies
for United States dollars in order to hedge our currency transaction
exposures on intercompany receivables denominated in foreign
currencies. These forward contracts settle each month at month-end,
at which time we enter into new forward contracts. We have not
designated these forward contracts as hedges and have not applied
hedge accounting to them. We record these forward contracts at
fair value with resulting gains and losses included in selling and
administrative expense in the Consolidated Statements of Income.
Income taxes
Deferred income 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 income tax
provision generally represents the net change in the assets and liabilities
for deferred income taxes. A valuation allowance is established when it
is necessary to reduce deferred income tax assets to amounts for which
realization is likely.
Deferred income 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 income 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 for accounting for
24
uncertainty in income taxes. Such guidance 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.
• 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 $14.1 million, $13.4 million
and $11.3 million for 2007, 2008 and 2009, respectively.
• We sell to a diversified base of customers around the world and,
therefore, believe there is no material concentration of credit risk.
• We assess the risk of loss on accounts receivable and adjust the
allowance for doubtful accounts based on this risk assessment.
Historically, losses on accounts receivable have not been material.
Management believes that the allowance for doubtful accounts of
$1.2 million at December 31, 2009 is adequate to provide for
probable losses resulting from accounts receivable.
Earnings per share
Basic earnings per share (“basic EPS”) is computed by dividing net
income by the weighted average number of shares outstanding for
the reporting period. Diluted earnings per share (“diluted EPS”)
gives effect during the reporting period to all dilutive potential shares
outstanding resulting from employee share-based awards. The
following table sets forth the calculation of basic and diluted earnings
per share at December 31, 2007, 2008 and 2009, respectively:
2008
2007
2009
$ 38,544 $ 39,989 $ 12,137
________
________
________
________
________
________
Net income
Basic-weighted average
shares outstanding
Effect of dilutive potential securities
28,416
549
________
28,796
________
431
29,074
68
________
Diluted-weighted average
shares outstanding
Basic EPS
Diluted EPS
28,965
________
________
$
________
________
$
________
________
29,227
________
________
________
________
________
________
29,142
________
________
0.42
________
________
0.42
________
________
1.36 $
1.39 $
1.33 $
1.37 $
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 0.9 and 2.2 million at December 31, 2008 and 2009,
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, 2009, 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, 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.
Stock-based compensation
We adopted FASB guidance related to stock-based compensation
effective January 1, 2006. Such guidance 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,
no compensation expense was recognized for stock options under the
provisions of previous guidance since all options granted had an exercise
price equal to the market value of the underlying stock on the grant
date.
We adopted the new guidance using the modified prospective transition
method. Under this method, the provisions 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 to calculate the
tax effects of stock-based compensation for those employee awards that
were outstanding upon adoption. 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. 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:
Cash Flow
Hedging
Gain
Cumulative
Accumulated
Other
Pension Translation Comprehensive
Liability Adjustments
Income (loss)
—
Balance,
December 31, 2008 $ —
Pension liability,
net of income tax
Cash flow hedging
gain, net of
income tax
Foreign currency
translation
adjustments
Balance,
December 31, 2009 $
76
—
________
76
________
________
$
(27,592) $
(3,440) $
(31,032)
11,310
—
11,310
—
—
76
—
_________
7,241
_________
7,241
_________
$ (16,282) $ 3,801
_________
_________
_________
_________
$ (12,405)
_________
_________
A N N U A L R E P O R T 2 0 0 9
25
C O N M E D C O R P O R A T I O N
Note 2 — Inventories
Other intangible assets consist of the following:
Inventories consist of the following at December 31,:
Raw materials
Work in process
Finished goods
2008
2009
$ 55,022 $ 48,959
17,203
98,113
________ ________
$ 159,976 $ 164,275
________ ________
________ ________
22,177
82,777
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
$
2008
2009
4,273 $ 4,486
93,855
91,047
117,339 148,641
8,902
________ ________
242,621 255,884
(98,884 ) (112,382)
________ ________
$ 143,737 $ 143,502
________ ________
________ ________
29,962
Included in machinery and equipment in 2009 is approximately
$22.1 million of capitalized software costs related to the implementation
of an enterprise business software application in 2009.
We lease various manufacturing facilities, office facilities and equipment
under operating leases. Rental expense on these operating leases
was approximately $3,724, $3,443 and $5,988 for the years ended
December 31, 2007, 2008 and 2009, respectively. The aggregate future
minimum lease commitments for operating leases at December 31,
2009 are as follows:
2010
2011
2012
2013
2014
$ 6,456
5,479
5,037
4,398
3,632
Thereafter
12,536
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,
Adjustments to goodwill resulting from
business acquisitions finalized
Foreign currency translation
Balance as of December 31,
2008
2009
$ 289,508 $ 290,245
300
632
105
(40)
________ ________
$ 290,245 $ 290,505
________ ________
________ ________
_________________________________________
Dec. 31, 2008
Dec. 31, 2009
Gross
Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
$ 127,594 $
40,714
(32,187)
$ 127,594
$ (36,490)
(28,526)
41,809
(30,408)
Amortized
intangible assets:
Customer
relationships
Patents and other
intangible assets
Unamortized
intangible assets:
Trademarks and
tradenames
88,344
—
________ _________
$ 256,652 $
(60,713)
________ _________
________ _________
—
88,344
________ ________
$ 257,747
$ (66,898)
________ ________
________ ________
Other intangible assets primarily represent allocations of purchase price
to identifiable intangible assets of acquired businesses. The weighted
average amortization period for intangible assets which are amortized is
25 years. Customer relationships are being amortized over a weighted
average life of 34 years. Patents and other intangible assets are being
amortized over a weighted average life of 15 years.
Customer relationship assets were recognized principally as a result
of the 1997 acquisition of Linvatec Corporation. These assets represent
the acquisition date fair value of existing customer relationships based
on the after-tax income expected to be derived during their estimated
remaining useful life. The useful lives of these customer relationships
were not and are not limited by contract or any economic, regulatory or
other known factors. The estimated useful life of the Linvatec customer
relationship assets was determined as of the date of acquisition as a
result of a study of the observed pattern of historical revenue attrition
during the 5 years immediately preceding the acquisition of Linvatec
Corporation. This observed attrition pattern was then applied to the
existing customer relationships to derive the future expected retirement
of the customer relationships. This analysis indicated an annual
attrition rate of 2.6%. Assuming an exponential attrition pattern, this
equated to an average remaining useful life of approximately 38 years
for the Linvatec customer relationship assets. Customer relationship
intangible assets arising as a result of other business acquisitions are
being amortized over a weighted average life of 17 years. The weighted
average life for customer relationship assets in aggregate is 34 years.
Trademarks and tradenames were recognized principally in connection
with the 1997 acquisition of Linvatec Corporation. 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, our trademarks and tradenames intangible
assets are not amortized.
Total accumulated impairment losses (associated with our CONMED
Endoscopic Technologies operating unit) aggregated $46,689 at
December 31, 2008 and 2009.
Amortization expense related to intangible assets for the year ending
December 31, 2009 and estimated amortization expense for each of the
five succeeding years is as follows:
Goodwill associated with each of our principal operating units at
December 31, is as follows:
2008
2009
$ 16,645 $ 16,645
42,439 42,439
171,437 171,397
60,024
________ ________
$ 290,245 $ 290,505
________ ________
________ ________
59,724
CONMED Electrosurgery
CONMED Endosurgery
CONMED Linvatec
CONMED Patient Care
Balance as of December 31,
26
2009
2010
2011
2012
2013
2014
$ 6,185
6,110
6,110
5,904
5,854
5,624
Note 5 — Long-Term Debt
Long-term debt consists of the following at December 31,:
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
2009
2008
4,000 $ 10,000
56,287
57,638
111,549 106,770
11,312
________ ________
185,924 184,369
2,174
________ ________
$ 182,739 $ 182,195
________ ________
________ ________
12,737
3,185
Our $235.0 million senior credit agreement (the “senior credit
agreement”) consists of a $100.0 million revolving credit facility and
a $135.0 million term loan. There were $10.0 million in borrowings
outstanding on the revolving credit facility as of December 31,
2009. Our available borrowings on the revolving credit facility at
December 31, 2009 were $81.6 million with approximately $8.4 million
of the facility set aside for outstanding letters of credit. There were
$56.3 million in borrowings outstanding on the term loan at
December 31, 2009.
Borrowings outstanding on the revolving credit facility are due and
payable on April 12, 2011. The scheduled principal payments on
the term loan portion of the senior credit agreement are $1.4 million
annually through December 2011, increasing to $53.6 million in 2012
with the remaining balance outstanding due and payable on April 12,
2013. We may also be required, under certain circumstances, to make
additional principal payments based on excess cash flow as defined in
the senior credit agreement. Interest rates on the term loan portion
of the senior credit agreement are at LIBOR plus 1.50% (1.75% at
December 31, 2009) or an alternative base rate; interest rates on the
revolving credit facility portion of the senior credit agreement are at
LIBOR plus 1.50% or an alternative base rate (3.625% at
December 31, 2009). For those borrowings where the Company
elects to use the alternative base rate, the base rate will be the greater
of the Prime Rate or the Federal Funds Rate in effect on such date
plus 0.50%, plus a margin of 0.50% for term loan borrowings or
0.25% for borrowings under the revolving credit facility.
The senior credit agreement is collateralized by substantially all of our
personal property and assets, except for our accounts receivable and
related rights which are pledged in connection with our accounts
receivable sales agreement. The senior credit agreement contains
covenants and restrictions which, among other things, require the
maintenance of certain financial ratios, and restrict dividend payments
and the incurrence of certain indebtedness and other activities,
including acquisitions and dispositions. We are also required, under
certain circumstances, to make mandatory prepayments from net cash
proceeds from any issuance of equity and asset sales.
We have a mortgage note outstanding in connection with the property
and facilities utilized by our CONMED Linvatec subsidiary bearing
interest at 8.25% per annum with semiannual payments of principal
and interest through June 2019. The principal balance outstanding
on the mortgage note aggregated $11.3 million at December 31,
2009. The mortgage note is collateralized by the CONMED Linvatec
property and facilities.
We have outstanding $115.1 million in 2.50% convertible senior
subordinated notes due 2024. During the year ended December 31,
2008, we repurchased and retired $25.0 million of the Notes for
$20.2 million and recorded a gain on the early extinguishment of debt
of $1.9 million net of the write-off of $0.4 million in unamortized
deferred financing costs and $2.4 million in unamortized debt discount.
During the year ended December 31, 2009, we repurchased and
retired $9.9 million of the Notes for $7.8 million and recorded a gain
on the early extinguishment of debt of $1.1 million net of the write-offs
of $0.1 million in unamortized deferred financing costs and $1.0 million
in unamortized debt discount. The Notes represent subordinated
unsecured obligations and are convertible under certain circumstances,
as defined in the bond indenture, into a combination of cash and
CONMED common stock. Upon conversion, the holder of each Note
will receive the conversion value of the Note payable in cash up to the
principal amount of the Note and CONMED common stock for the
Note’s conversion value in excess of such principal amount. Amounts
in excess of the principal amount are at an initial conversion rate,
subject to adjustment, of 26.1849 shares per $1,000 principal amount
of the Note (which represents an initial conversion price of $38.19 per
share). As of December 31, 2009, there was no value assigned to the
conversion feature because the Company’s share price was below the
conversion price. The Notes mature on November 15, 2024 and are
not redeemable by us prior to November 15, 2011. Holders of the
Notes have the right to put to us some or all of the Notes for repurchase
on November 15, 2011, 2014 and 2019 and, provided the terms of the
indenture are satisfied, we will be required to repurchase those Notes.
The Notes contain two embedded derivatives. The embedded
derivatives are recorded at fair value in other long-term liabilities and
changes in their value are recorded through the consolidated statements
of income. The embedded derivatives have a nominal value, and it is
our belief that any change in their fair value would not have a material
adverse effect on our business, financial condition, results of operations,
or cash flows.
In May 2008, the FASB issued guidance which specifies that issuers
of convertible debt instruments that permit or require the issuer to
pay cash upon conversion should separately account for the liability
and equity components in a manner that will reflect the entity’s
nonconvertible debt borrowing rate when interest cost is recognized
in subsequent periods. The Company was required to apply the
guidance retrospectively to all past periods presented. We adopted this
guidance on January 1, 2009 related to our 2.50% convertible senior
subordinated notes due 2024.
Our effective borrowing rate for nonconvertible debt at the time
of issuance of the Notes was estimated to be 6.67%, which resulted in
$34.6 million of the $150.0 million aggregate principal amount of Notes
issued, or $21.8 million after taxes, being attributable to equity. For
the year ended December 31, 2007, 2008 and 2009, we have recorded
interest expense related to the amortization of debt discount on the
Notes of $4.6 million, $4.8 million and $4.1 million, respectively, at
the effective interest rate of 6.67%. The debt discount on the Notes
is being amortized through November 2011. For the years ended
December 31, 2007, 2008 and 2009, we have recorded interest expense
on the Notes of $3.8 million, $3.7 million and $2.9 million, respectively,
at the contractual coupon rate of 2.50%.
Amounts recognized in the consolidated balance sheets related to the
Notes consist of the following at December 31,:
Principal value of the Notes
Unamortized discount
Carrying value of the Notes
Equity component
2008
(13,451)
2009
$ 125,000 $ 115,093
(8,323)
________ ________
$ 111,549 $ 106,770
________ ________
________ ________
$ 21,579 $ 21,491
________ ________
________ ________
The scheduled maturities of long-term debt outstanding at December
31, 2009 are as follows:
2010
2011
2012
2013
2014
$
2,174
12,244
54,556
1,050
1,140
Thereafter
121,528
A N N U A L R E P O R T 2 0 0 9
27
C O N M E D C O R P O R A T I O N
Note 6 — Income Taxes
The provision for income taxes for the years ended December 31, 2007,
2008 and 2009 consists of the following:
2007
2008
2009
Current tax expense:
Federal
State
Foreign
Deferred income tax expense
Provision for income taxes
498
3,126
$ 2,634 $ 2,094 $ (1,281)
1,102
791
2,267
2,851
_______ _______ ________
1,777
5,718
15,008 16,304
4,241
_______ _______ ________
$ 21,595 $ 22,022 $ 6,018
_______ _______ ________
_______ _______ ________
6,587
A reconciliation between income taxes computed at the statutory
federal rate and the provision for income taxes for the years ended
December 31, 2007, 2008 and 2009 follows:
2007
2008
2009
Tax provision at statutory rate based
on income before income taxes
State income taxes
Stock-based compensation
Foreign income taxes
Research and development credit
Settlement of taxing authority
examinations
Other nondeductible permanent
differences
Other, net
35.00%
1.77
0.60
0.20
(1.29)
35.00% 35.00%
1.47
0.43
(0.58)
(1.45)
5.59
1.59
(2.90)
(4.46)
(1.05)
—
(5.60)
0.91
(0.27)
_______ _______ ________
2.86
1.07
.68
—
35.91%
35.51% 33.15%
_______ _______ ________
_______ _______ ________
The tax effects of the significant temporary differences which comprise
the deferred income tax assets and liabilities at December 31, 2008 and
2009 are as follows:
Assets:
Inventory
Net operating losses
Capitalized research and development
Deferred compensation
Accounts receivable
Employee benefits
Accrued pension
Research and development credit
Foreign tax credit
Other
Valuation allowance
Liabilities:
Goodwill and intangible assets
Depreciation
State taxes
Contingent interest
Net liability
2008
2009
$
4,376 $ 3,912
780
2,493
4,757
—
2,331
2,302
2,524
2,534
2,157
1,582
3,436
11,783
3,004
3,814
1,513
1,140
4,250 10,390
(1,058)
(2,069)
________ ________
34,556
31,395
________ ________
83,524 95,049
4,548
6,054
2,090
1,250
14,293 14,050
________ ________
105,121 115,737
________ ________
$ (73,726) $ (81,181)
________ ________
________ ________
Income before income taxes consists of the following U.S. and foreign
income:
2008
2007
2009
$ 53,046 $ 51,616 $ 10,108
8,047
________ ________ ________
$ 60,139 $ 62,011 $ 18,155
________ ________ ________
________ ________ ________
7,093 10,395
U.S. income
Foreign income
Total income
28
The net operating loss carryforward of an acquired subsidiary begins
to expire in 2023. The net operating loss carryforward is subject to a
pre-existing ownership change limitation under IRC section 382 as a
result of the purchase of stock of the acquired subsidiary. The annual
existing ownership change limitation on the acquired net operating
loss is $2.1 million. We have established a valuation allowance to
reflect the uncertainty of realizing the benefit of the net operating loss
carryforward recognized in connection with an acquisition. Changes in
deferred tax valuation allowances and income tax uncertainties after the
acquisition date, including those associated with acquisitions generally
will affect income tax expense.
The gross amount of Federal net operating loss carryforwards available
is $3.8 million. This includes $2.1 million of net operating loss
carryforward from an acquired subsidiary as discussed above. The
remaining $1.7 million begins to expire in 2026. Approximately
$1.7 million of the gross Federal net operating loss is attributable to
stock-based compensation windfall tax deductions. In accordance with
FASB guidance, the $0.6 million windfall tax benefit on the $1.7 million
net operating loss carryforward has not been recorded as a deferred
tax asset. The $0.6 million tax benefit will be recorded in additional
paid-in capital when realized.
The amount of Federal Research and Development credit carryforward
available is $3.8 million. These credits begin to expire in 2024. The
total amount of Federal Foreign Tax Credit carryforward available is
$1.5 million. These credits begin to expire in 2017.
Deferred tax amounts include approximately $3.5 million of future
tax benefits associated with state tax credits which have an indefinite
carryforward period.
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 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 $41.0 million at
December 31, 2009.) 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 accounting for
uncertainty in income taxes that prescribe 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 for the years ending December 31,:
Balance as of January 1,
Increases (decreases) 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
Decreases in unrecorded tax positions
related to lapse of statute of
limitations
Balance as of December 31,
2007
$ 1,359 $
2008
2009
1,866 $ 2,869
(164)
212
1,410
1,117
139
183
(739)
(154)
(1,322)
—
—
(172 )
________ ________ ________
$ 1,866 $
2,869 $ 1,869
________ ________ ________
________ ________ ________
If the total unrecognized tax benefits of $1.9 million at December 31,
2009 were recognized, it would reduce our annual effective tax rate.
The amount of interest accrued in 2009 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 taxing
authority examinations for the tax years 2006 through 2008. The range
of change in unrecognized tax benefits is estimated between
$0.8 million and $1.5 million.
volatility of the Company’s stock over a period equal to the expected life
of each option and SAR grant. The expected life 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, 2009.:
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, 2008 and 2009, 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 aggregating $53.2 million under this authorization. No stock
repurchases were made in 2007, 2008 or 2009.
We have reserved 5.8 million shares of common stock for issuance to
employees and directors under three shareholder-approved share-based
compensation plans (the “Plans”) of which approximately 1.1 million
shares remain available for grant at December 31, 2009. The exercise
price on all outstanding options and stock appreciation rights (“SARs”)
is equal to the quoted fair market value of the stock at the date of grant.
Restricted stock units (“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 $3.8 million,
$4.2 million and $4.3 million for the year ended December 31, 2007,
2008 and 2009, respectively. This amount is included in selling and
administrative expenses on the Consolidated Statements of Operations.
Tax related benefits of $0.8 million, $1.1 million and $1.3 million were
also recognized for the years ended December 31, 2007, 2008 and
2009. Cash received from the exercise of stock options was
$11.3 million, $6.9 million and $0.7 million for the years ended
December 31, 2007, 2008 and 2009, 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, 2007, 2008 and 2009 was $11.88,
$9.35 and $7.03, 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, 2007, 2008 and
2009, respectively: risk-free interest rate of 4.56%, 3.25% and 2.48%;
volatility factor of the expected market price of the Company’s common
stock of 32.61%, 30.36% and 37.17%; a weighted-average expected life
of the option and SAR of 5.7 years for 2007 and 2008 and 6.2 years
for 2009; 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 closest
to the expected life. Expected volatilities are based upon historical
Number
of Shares Weighted-Average
(in 000’s) Exercise Price
Outstanding at December 31, 2008
Granted
Forfeited
Exercised
Outstanding at December 31, 2009
Exercisable at December 31, 2009
2,423
233
(159 )
(46 )
_______
2,451
_______
_______
1,839
_______
_______
$ 24.10
$ 17.30
$ 22.38
$ 16.92
________
$ 23.70
________
________
$ 23.94
________
________
The weighted average remaining contractual term for stock options
and SARs outstanding and exercisable at December 31, 2009 was 5.0
years and 4.0 years, respectively. The aggregate intrinsic value of stock
options and SARs outstanding and exercisable at December 31, 2009
was $4.8 million and $3.3 million, respectively. The aggregate intrinsic
value of stock options and SARs exercised during the year ended
December 31, 2007, 2008 and 2009 was $6.7 million, $4.0 million and
$0.2 million, respectively.
The following table illustrates the RSU activity for the year ended
December 31, 2009. There were no RSU’s granted prior to 2006.
Outstanding at December 31, 2008
Granted
Vested
Forfeited
Outstanding at December 31, 2009
Number Weighted-Average
of Shares
(in 000’s)
336
197
(77 )
(31 )
_______
425
_______
_______
Grant-Date
Fair Value
$ 26.01
$ 17.02
$ 25.48
$ 24.67
________
$ 22.03
________
________
The weighted average fair value of awards of RSUs granted in the years
ended December 31, 2007, 2008 and 2009 was $29.13, $26.94 and
$17.02, respectively.
The total fair value of shares vested was $0.6 million, $1.3 million and
$1.8 million for the years ended December 31, 2007, 2008 and 2009,
respectively.
As of December 31, 2009, there was $12.1 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 a
weighted average period of 3.5 years.
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 2009, we issued
approximately 28,900 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
A N N U A L R E P O R T 2 0 0 9
29
C O N M E D C O R P O R A T I O N
similar in the nature of products, production processes, customer base,
distribution methods and regulatory environment. Our CONMED
Endosurgery, CONMED Electrosurgery and CONMED Linvatec
operating segments also have similar economic characteristics and
therefore qualify for aggregation. Our CONMED Patient Care and
CONMED Endoscopic Technologies operating units do not qualify for
aggregation since their economic characteristics do not meet the criteria
for aggregation as a result of the lower overall operating income (loss) in
these segments.
CONMED Endosurgery, CONMED Electrosurgery and CONMED
Linvatec consist of a single aggregated segment comprising a complete
line of endo-mechanical instrumentation for minimally invasive
laparoscopic procedures, electrosurgical generators and related surgical
instruments, arthroscopic instrumentation for use in orthopedic surgery
and small bone, large bone and specialty powered surgical instruments.
CONMED Patient Care product offerings include a line of vital signs
and cardiac monitoring products as well as suction instruments & tubing
for use in the operating room. CONMED Endoscopic Technologies
product offerings include a comprehensive line of minimally invasive
endoscopic diagnostic and therapeutic instruments used in procedures
which require examination of the digestive tract.
The following is net sales information by product line and reportable
segment:
Arthroscopy
Powered Surgical Instruments
CONMED Linvatec
CONMED Electrosurgery
CONMED Endosurgery
CONMED Linvatec,
Electrosurgery, and Endosurgery
CONMED Patient Care
CONMED Endoscopic
Technologies
Total
2008
2007
2009
$ 264,637 $ 291,910 $ 269,820
155,659 144,014
149,261
_________ _________ _________
447,569 413,834
413,898
94,959
100,493
92,107
66,027
64,459
58,829
_________ _________ _________
564,834
76,711
612,521 574,820
78,384 70,978
52,743
51,278 48,941
_________ _________ _________
$ 694,288 $ 742,183 $ 694,739
_________ _________ _________
_________ _________ _________
Total assets, capital expenditures, depreciation and amortization
information are impracticable to present by reportable segment because
the necessary information is not available.
The following is a reconciliation between segment operating income
(loss) and income before income taxes. The Corporate line includes
corporate related items not allocated to operating units:
2007
2008
2009
CONMED Linvatec,
Electrosurgery, and Endosurgery
CONMED Patient Care
CONMED Endoscopic Technologies
Corporate
Income from operations
Gain on early extinguishment
of debt
Amortization of bond discount
Interest expense
Income before income taxes
$ 87,569 $ 98,101 $ 62,715
(1,263)
2,259
(7,904)
(7,411 )
(17,690 )
(25,279)
_________ _________ _________
75,259 28,269
2,003
(6,250 )
(2,331 )
80,991
—
4,618
16,234
1,083
4,111
7,086
_________ _________ _________
$ 60,139 $ 62,011 $ 18,155
_________ _________ _________
_________ _________ _________
1,947
4,823
10,372
Net sales information for geographic areas consists of the following:
2007
2008
2009
$ 404,434 $ 411,773 $ 385,770
55,313
52,792 48,713
45,335
44,123 35,155
26,274
28,026 29,244
30,270 30,159
30,199
132,733
175,199 165,698
_________ _________ _________
$ 694,288 $ 742,183 $ 694,739
_________ _________ _________
_________ _________ _________
United States
Canada
United Kingdom
Japan
Australia
All other countries
Total
30
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, 2008 and 2009. No single
customer represented over 10% of our consolidated net sales for the
years ended December 31, 2007, 2008 and 2009.
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.
Total employer contributions to the 401(k) plan were $2.5 million,
$2.7 million and $6.8 million during the years ended December 31,
2007, 2008 and 2009, respectively. Included in the 2009 total is a
discretionary one-time $4.0 million employer 401(k) contribution.
During the first quarter of 2009, the Company announced the freezing
of benefit accruals under the defined benefit pension plan for United
States employees (“the Plan”) effective May 14, 2009. As a result, the
Company recorded a curtailment gain of $4.4 million and a reduction
in accrued pension of $11.4 million which is included in other long
term liabilities.
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 loss (gain)
Curtailment gain
Benefits paid
Projected benefit obligation at end of year
2008
2009
$ 61,514 $ 61,222
________ ________
________ ________
$ 56,592
5,835
3,977
14,837
—
76,610
187
3,920
(4,802)
(11,358)
(3,335)
________ ________
$ 76,610 $ 61,222
________ ________
(4,631 )
Change in plan assets
Fair value of plan assets at beginning of year $ 48,532 $ 45,381
6,723
Actual gain (loss) on plan assets
4,073
Employer contribution
(3,335)
Benefits paid
________ ________
$ 45,381 $ 52,842
________ ________
$ (31,229 ) $
(8,380)
________ ________
________ ________
Fair value of plan assets at end of year
(10,520 )
12,000
(4,631 )
Funded status
Amounts recognized in the consolidated balance sheets consist of the
following at December 31,:
Accrued long-term pension liability
Accumulated other comprehensive
income (loss)
2008
$ 31,229 $
2009
8,380
(43,762)
(25,823)
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
2008
5.97%
8.00%
3.50%
2009
5.86%
8.00%
3.50%
Accumulated other comprehensive income (loss) for the years ended
December 31, 2008 and 2009 consists of the following items not yet
recognized in net periodic pension cost (before income taxes):
The allocation of pension plan assets by category is as follows at
December 31,:
Net actuarial loss
Transition liability
Prior service cost
Accumulated other
comprehensive income (loss)
2008
2009
$ (48,216) $ (25,823)
—
—
________ ________
(28)
4,482
$ (43,762 ) $ (25,823 )
________ ________
________ ________
Other changes in plan assets and benefit obligations recognized in other
comprehensive income in 2009 are as follows:
Current year actuarial gain
Curtailment gain
Amortization of actuarial loss
Amortization of prior service costs (credits)
Amortization of transition liability
Total recognized in other comprehensive
income
$
9,409
6,990
1,627
(88)
1
________
$ 17,939
________
________
The estimated portion of net actuarial loss in accumulated other
comprehensive income (loss) that is expected to be recognized as a
component of net periodic pension cost in 2010 is $1,313.
Net periodic pension cost for the years ended December 31, consists
of the following:
Service cost—benefits earned
during the period
Interest cost on projected
benefit obligation
Return on plan assets
Curtailment gain
Transition amount
Prior service cost
Amortization of loss
Net periodic pension cost
2007
2008
2009
$ 5,863 $ 5,835 $
1,887
3,216
(3,226 )
—
4
3,977
(4,210 )
—
4
(351 )
1,320
3,920
(3,817)
(4,368)
1
(88)
1,627
________ ________ ________
$ 6,888 $ 6,575 $
(838)
________ ________ ________
________ ________ ________
(351 )
1,382
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
2007
5.90%
8.00%
3.00%
2008
6.48%
8.00%
3.50%
2009
5.97%*
8.00%
3.50%
*For the year ending December 31, 2009, the discount rate used in
determining pension expense was 5.97% in the first quarter of 2009;
the discount rate used for purposes of remeasuring plan liabilities as
of the date the plan freeze was approved and for purposes of measuring
pension expense for the remainder of 2009 was 7.30%.
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.
Equity securities
Debt securities
Total
Percentage of Pension Target
Plan Assets
2008
47%
53
_____
100%
_____
_____
2009
64%
36
_____
100%
_____
_____
Allocation
2010
75%
25
_____
100%
_____
_____
As of December 31, 2009, 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.
The following table sets forth the fair value of Plan assets as
of December 31,:
Common Stock
Money Market Fund
Equity Funds
Fixed Income Securities
Accrued Interest and Dividend
Total Assets at Fair Value
2008
21,554
6,162
2009
$ 15,250 $ 20,795
16,090
13,247
2,328 2,638
87
72
________ ________
$ 45,381 $ 52,842
________ ________
________ ________
FASB guidance, defines fair value, establishes a framework for
measuring fair value and related disclosure requirements. A valuation
hierarchy was established for disclosure of the inputs to the valuations
used to measure fair value. This hierarchy prioritizes the inputs
into three broad levels as follows. Level 1 inputs are quoted prices
(unadjusted) in active markets for identical assets or liabilities. Level
2 inputs are quoted prices for similar assets and liabilities in active
markets, quoted prices for identical or similar assets in markets that are
not active, inputs other than quoted prices that are observable for the
asset or liability, including interest rates, yield curves and credit risks, or
inputs that are derived principally from or corroborated by observable
market data through correlation. Level 3 inputs are unobservable
inputs based on our own assumptions used to measure assets and
liabilities at fair value. A financial asset or liability’s classification within
the hierarchy is determined based on the lowest level input that is
significant to the fair value measurement.
Following is a description of the valuation methodologies used for
assets measured at fair value. There have been no changes in the
methodologies used at December 31, 2008 and 2009:
Common Stock:
Common stock is valued at the closing price
reported on the common stock’s respective stock
exchange and is classified within level 1 of the
valuation hierarchy.
Money Market Fund: These investments are public investment
Equity Funds:
Fixed Income
Securities:
vehicles valued using $1 for the Net Asset Value
(NAV). The money market fund is classified
within level 2 of the valuation hierarchy.
These investments are public investment
vehicles valued using the NAV provided by the
administrator of the fund. The NAV is based on
the value of the underlying assets owned by the
fund, minus its liabilities, and then divided by the
number of shares outstanding. The NAV is a
quoted price in an active market and is classified
within level 1 of the valuation hierarchy.
Valued at the closing price reported on the
active market on which the individual securities
are traded and are classified within level 1 of the
valuation hierarchy.
A N N U A L R E P O R T 2 0 0 9
31
C O N M E D C O R P O R A T I O N
The methods described above may produce a fair value calculation
that may not be indicative of net realizable value or reflective of future
fair values. Furthermore, while the Plan believes its valuation methods
are appropriate and consistent with other market participants, the use
of different methodologies or assumptions to determine the fair value
of certain financial instruments could result in a different fair value
measurement at the reporting date.
The following table sets forth by level, within the fair value hierarchy,
the Plan’s assets at fair value as of December 31, 2009:
Common Stock
Money Market Fund
Equity Funds
Fixed Income Securities
Total Assets at Fair Value
Total
Level 1
Level 2
$ 20,795 $ — $ 20,795
16,090 16,090
— 13,247
2,638
—
_________ _________ _________
$ 36,680 $ 16,090 $ 52,770
_________ _________ _________
_________ _________ _________
—
13,247
2,638
We are required to contribute approximately $3.0 million to our
pension plan for the 2010 Plan year.
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, 2009 and reflect the
impact of expected future employee service.
2010
2012
2012
2013
2014
2015-2019
$ 2,751
2,815
2,982
3,167
3,311
19,216
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 subpoena may or may
not be routine inquiries, or may begin as routine inquiries and over
time develop into enforcement actions of various types. The product
liability claims are generally covered by various insurance policies,
subject to certain deductible amounts, maximum policy limits and
certain exclusions in the respective policies or required as a matter
of law. In some cases we may be entitled to indemnification by third
parties. When there is no insurance coverage, as would typically be the
case primarily in lawsuits alleging patent infringement or in connection
with certain government investigations, or indemnification obligation
of a third party we establish reserves sufficient to cover probable losses
associated with such claims. We do not expect that the resolution of any
pending claims or investigations will have a material adverse effect
on our financial condition, results of operations or cash flows. There
can be no assurance, however, that future claims or investigations, or
the costs associated with responding to such claims or investigations,
especially claims and investigations not covered by insurance, will not
have a material adverse effect on our results of operations.
Manufacturers of medical products may face exposure to significant
product liability claims. To date, we have not experienced any product
liability claims that are material to our financial statements or condition,
but any such claims arising in the future could have a material adverse
effect on our business or results of operations. We currently maintain
commercial product liability insurance of $25 million per incident and
$25 million in the aggregate annually, which we believe is adequate.
This coverage is on a claims-made basis. There can be no assurance
32
that claims will not exceed insurance coverage, that the carriers will be
solvent or that such insurance will be available to us in the future at a
reasonable cost.
Our operations are subject, and in the past have been subject, to a
number of environmental laws and regulations governing, among
other things, air emissions, wastewater discharges, the use, handling
and disposal of hazardous substances and wastes, soil and groundwater
remediation and employee health and safety. In some jurisdictions
environmental requirements may be expected to become more
stringent in the future. In the United States certain environmental
laws can impose liability for the entire cost of site restoration upon
each of the parties that may have contributed to conditions at the site
regardless of fault or the lawfulness of the party’s activities. While
we do not believe that the present costs of environmental compliance
and remediation are material, there can be no assurance that future
compliance or remedial obligations would not have a material adverse
effect on our financial condition, results of operations or cash flows.
On April 7, 2006, CONMED received a copy of a complaint filed
in the United States District for the Northern District of New York
on behalf of a purported class of former CONMED Linvatec
sales representatives. The complaint alleges that the former sales
representatives were entitled to, but did not receive, severance in 2003
when CONMED Linvatec restructured its distribution channels.
The range of loss associated with this complaint ranges from $0 to
$3.0 million, not including any interest, fees or costs that might be
awarded if the five named plaintiffs were to prevail on their own
behalf as well as on behalf of the approximately 70 (or 90 as alleged
by the plaintiffs) other members of the purported class. CONMED
Linvatec did not generally pay severance during the 2003 restructuring
because the former sales representatives were offered sales positions
with CONMED Linvatec’s new manufacturer’s representatives. Other
than three of the five named plaintiffs in the class action, nearly all
of CONMED Linvatec’s former sales representatives accepted
such positions.
The Company’s motions to dismiss and for summary judgment, which
were heard at a hearing held on January 5, 2007, were denied by a
Memorandum Decision and Order dated May 22, 2007. The District
Court also granted the plaintiffs’ motion to certify a class of former
CONMED Linvatec sales representatives whose employment with
CONMED Linvatec was involuntarily terminated in 2003 and who did
not receive severance benefits. With discovery essentially completed, on
July 21, 2008, the Company filed motions seeking summary judgment
and to decertify the class. In addition, on July 21, 2008, Plaintiffs filed a
motion seeking summary judgment. These motions were submitted for
decision on August 26, 2008. There is no fixed time frame within which
the Court is required to rule on the motions. The Company believes
there is no merit to the claims asserted in the Complaint, and plans to
vigorously defend the case. There can be no assurance, however, that
the Company will prevail in the litigation.
Note 11 — Other Expense (income)
Other expense (income) for the year ended December 31, consists of the
following:
$
Termination of product offering
Facility closure costs
Gain on litigation settlement
Product liability settlement
New plant/facility consolidation costs
Net pension gain
Product recall
CONMED Endoscopic Technologies
division consolidation costs
2007
2008
148 $
1,822
(6,072 )
1,295
—
—
—
— $
—
—
—
1,577
—
—
2009
—
—
—
—
2,726
(1,882 )
5,992
Other expense (income)
$
(2,807 ) $ 1,577 $ 10,916
________ ________ ________
________ ________ ________
4,080
________ ________ ________
—
—
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 $0.1 million in the year ended
December 31, 2007) in other expense (income). The surgical lights
customer replacement program was completed during the second
quarter of 2007.
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 and incurred $1.5 million in costs
associated with this closure primarily related to severance expense. We
have recorded such costs in other expense (income).
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 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 were recorded in other
expense (income) during 2007.
During 2008, we announced a plan to restructure certain of our
operations. We incurred $18.6 million in restructuring costs of which
$4.3 million (including $1.6 million and $2.7 million in the years ending
December 31, 2008 and 2009, respectively) have been recorded in
other expense (income) and include charges related to the consolidation
of our distribution centers. The remaining $14.3 million (including
$2.5 million and $11.8 million in the years ending December 31, 2008
and 2009, respectively) in restructuring costs have been charged to cost
of goods sold and represent startup activities associated with a new
manufacturing facility in Chihuahua, Mexico and the closure of two
Utica, New York area manufacturing facilities (See Note 17).
During 2009, we elected to freeze benefit accruals under the defined
benefit pension plan for United States employees, effective May 14,
2009. As a result, we recorded a net pension gain of $1.9 million in the
first quarter of 2009 associated with the elimination of future benefit
accruals under the pension plan (see Note 9).
During 2009, we announced a voluntary recall of certain model
numbers of the PRO5 & PRO6 series battery handpieces and certain
lots of the MC5057 Universal Cable used with certain of CONMED
Linvatec’s powered handpieces. Current models of products are not
affected. The cost of this recall is expected to be approximately
$6.0 million and we have recorded this cost in 2009. We have
performed repairs on $0.9 million of the total $6.0 million of expected
costs in 2009.
During 2009, we elected to consolidate the administrative offices and
operations of the CONMED Endoscopic Technologies division from
its offices in Chelmsford, Massachusetts to our Corporate headquarters
in Utica, New York. The sales force and product portfolio remain
unchanged and CONMED Endoscopic Technologies continues to
operate as a separate division of the Company. We incurred a total
of $4.9 million in charges of which $4.1 million have been recorded
in other expense (income) and include charges relating to severance,
lease termination costs, write down of fixed assets and other transition
costs. The remaining $0.8 million in costs relate to the write-down
of inventory and is included in cost of goods sold. We believe the
divisional consolidation is now complete and do not expect any
further costs.
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:
2007
2008
2009
Balance as of January 1,
Provision for warranties
Claims made
Balance as of December 31,
Note 13 — Fair Value Measurement
$ 3,617 $ 3,306 $ 3,341
________ ________ ________
3,638
(3,596)
________ ________ ________
$ 3,306 $ 3,341 $ 3,383
________ ________ ________
________ ________ ________
3,078
(3,389 )
3,581
(3,546 )
In March 2008, the FASB issued guidance which requires entities
to provide enhanced disclosure about how and why the entity uses
derivative instruments, how the instruments and related hedged items
are accounted and how the instruments and related hedged items affect
the financial position, results of operations, and cash flows of the entity.
We adopted such guidance during the quarter ended March 31, 2009.
We enter into derivative instruments for risk management purposes
only. We operate internationally and, in the normal course of business,
are exposed to fluctuations in interest rates, foreign exchange rates
and commodity prices. These fluctuations can increase the costs
of financing, investing and operating the business. We use forward
contracts, a type of derivative instrument, to manage our foreign
currency exposures.
By nature, all financial instruments involve market and credit risks. We
enter into forward contracts with a major investment grade financial
institution and have policies to monitor credit risk. While there can be
no assurance, we do not anticipate any material non-performance by
our counterparty.
Foreign Currency Forward Contracts. We manage our foreign
currency transaction risks through the use of forward contracts to
hedge forecasted cash flows associated with foreign currency transaction
exposures. We account for these forward contracts as cash flow hedges.
To the extent these forward contracts meet hedge accounting criteria,
changes in their fair value are not included in current earnings but are
included in Accumulated Other Comprehensive Loss. These changes
in fair value will be into earnings as a component of sales when the
forecasted transaction occurs. The notional contract amounts for
forward contracts outstanding at December 31, 2009 which have been
accounted for as cash flow hedges totaled $80.2 million. Net realized
losses recognized for forward contracts accounted for as cash flow
hedges approximated $0.4 million for the year ended December 31,
A N N U A L R E P O R T 2 0 0 9
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C O N M E D C O R P O R A T I O N
2009. Net unrealized gains on forward contracts outstanding which
have been accounted for as cash flow hedges and which have been
included in accumulated other comprehensive income (loss) totaled
$0.1 million at December 31, 2009. It is expected these unrealized
gains will be recognized in income in 2010.
We also enter into forward contracts to exchange foreign currencies
for United States dollars in order to hedge our currency transaction
exposures on intercompany receivables denominated in foreign
currencies. These forward contracts settle each month at month-end,
at which time we enter into new forward contracts. We have not
designated these forward contracts as hedges and have not applied
hedge accounting to them. The notional contract amounts for
forward contracts outstanding at December 31, 2009 which have not
been designated as hedges totaled $28.6 million. Net realized losses
recognized in connection with those forward contracts not accounted
for as hedges approximated $3.9 million for the year ended
December 31, 2009, offsetting gains on our intercompany receivables
of $4.6 million for the year ended December 31, 2009. These gains
and losses have been recorded in selling and administrative expense in
the consolidated statements of income.
We record these forward foreign exchange contracts at fair value; the
following table summarizes the fair value for forward foreign exchange
contracts outstanding at December 31, 2009:
Asset
Liabilities
Balance Sheet Fair Balance Sheet Fair
Net
Fair
Value Value
Location
Value
Location
Derivatives
designated
as hedged
instruments:
Prepaid Expenses
Foreign
Exchange and other
Contracts current assets
Prepaid Expenses
and other
$ 739 current assets
_____
$ (618)
$ 121
______ ______
Derivatives
not designated
as hedging
instruments:
Prepaid Expenses
Foreign
Exchange and other
Contracts current assets
Prepaid Expenses
and other
25 current assets
_____
(26)
______ ______
(51)
This hierarchy prioritizes the inputs into three broad levels as follows.
Level 1 inputs are quoted prices (unadjusted) in active markets for
identical assets or liabilities. Level 2 inputs are quoted prices for similar
assets and liabilities in active markets, quoted prices for identical or
similar assets in markets that are not active, inputs other than quoted
prices that are observable for the asset or liability, including interest
rates, yield curves and credit risks, or inputs that are derived principally
from or corroborated by observable market data through correlation.
Level 3 inputs are unobservable inputs based on our own assumptions
used to measure assets and liabilities at fair value. A financial asset or
liability’s classification within the hierarchy is determined based on the
lowest level input that is significant to the fair value measurement.
Valuation Techniques. Liabilities carried at fair value and measured
on a recurring basis as of December 31, 2009 consist of forward foreign
exchange contracts and two embedded derivatives associated with
our 2.50% convertible senior subordinated notes. The value of these
liabilities was determined within Level 2 of the valuation hierarchy and
was not material either individually or in the aggregate to our financial
position, results of operations or cash flows.
The carrying amounts reported in our balance sheets for cash and
cash equivalents, accounts receivable, accounts payable and long-
term debt excluding the 2.50% convertible senior subordinated notes
approximate fair value. The fair value of the Notes approximated $97.2
million and $108.3 million at December 31, 2008 and December 31,
2009, respectively, based on their quoted market price. See Note 5 for
additional discussion of the Notes.
Note 14 — New Accounting Pronouncements
In June 2009, the FASB issued guidance which requires additional
disclosures about the transfer and derecognition of financial assets,
eliminates the concept of qualifying special-purpose entities, creates
more stringent conditions for reporting a transfer of a portion of a
financial asset as a sale, clarifies other sale-accounting criteria, and
changes the initial measurement of a transferor’s interest in transferred
financial assets. This guidance is effective for fiscal years beginning after
November 15, 2009. Our current off balance sheet arrangement in
which a wholly-owned, bankruptcy-remote, special purpose subsidiary
of CONMED Corporation sells an undivided percentage ownership
interest in receivables to a bank under an accounts receivable sales
agreement, will no longer be permitted to be accounted for as a sale
and reduction in accounts receivable beginning in 2010. As a result,
accounts receivable sold under the agreement (which aggregated
$29.0 million at December 31, 2009) would be recorded as additional
borrowings rather than as a reduction in accounts receivable. There
will be no impact to the results of operations.
Total
derivatives
$ 764
_____
_____
$ (669) $ 95
______ ______
______ ______
Note 15 — Business Acquisition
Our forward foreign exchange contracts are subject to a master netting
agreement and qualify for netting in the consolidated balance sheets.
Accordingly, we have recorded the net fair value of $0.1 million in
prepaid expenses and other current assets.
Fair Value Disclosure. FASB guidance, defines fair value,
establishes a framework for measuring fair value and related disclosure
requirements. This guidance applies when fair value measurements are
required or permitted. The guidance indicates, among other things,
that a fair value measurement assumes that the transaction to sell an
asset or transfer a liability occurs in the principal market for the asset or
liability or, in the absence of a principal market, the most advantageous
market for the asset or liability. Fair value is defined based upon an exit
price model.
We adopted this guidance as of January 1, 2008, with the exception
of its application to non-recurring nonfinancial assets and nonfinancial
liabilities, which was delayed to fiscal years beginning after November
15, 2008, which we therefore adopted as of January 1, 2009. As
of December 31, 2009, we do not have any significant non-recurring
measurements of nonfinancial assets and nonfinancial liabilities.
Valuation Hierarchy. A valuation hierarchy was established for
disclosure of the inputs to the valuations used to measure fair value.
34
On January 9, 2008, we purchased our Italian distributor’s business for
approximately $21.8 million in cash (the “Italy acquisition”). Under
the terms of the acquisition agreement, we agreed to pay additional
consideration in 2009 based upon the 2008 results of the acquired
business.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed as a result of the Italy acquisition.
Cash
Inventory
Accounts receivable
Other assets
Customer relationships
Total assets acquired
Income taxes payable
Other current liabilities
Total liabilities assumed
Net assets acquired
$
953
3,444
19,701
846
9,479
________
34,423
________
(2,443 )
(9,658 )
________
(12,101 )
________
$ 22,322
________
________
The unaudited pro forma statement of operations for the year ended
December 31, 2007, assuming the Italy acquisition occurred as of
January 1, 2007 is presented below. This pro forma statement
of operations has been prepared for comparative purposes only and does
not purport to be indicative of the results of operations which actually
would have resulted had the Italy acquisition occurred on the dates
indicated, or which may result in the future.
Net sales
Net income
Net income per share:
Basic
Diluted
2007
710,685
41,069
1.45
1.42
$
$
$
$
Note 16 — Convertible senior subordinated notes
In May 2008, the FASB issued guidance which specifies that issuers
of convertible debt instruments that permit or require the issuer to
pay cash upon conversion should separately account for the liability
and equity components in a manner that will reflect the entity’s
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. The Company was required to apply the guidance
retrospectively to all past periods presented. We adopted this guidance
on January 1, 2009 related to our 2.50% convertible senior subordinated
notes due 2024 (“the Notes”).
Our effective borrowing rate for nonconvertible debt at the time
of issuance of the Notes was estimated to be 6.67%, which resulted in
$34.6 million of the $150.0 million aggregate principal amount of Notes
issued, or $21.8 million after taxes, being attributable to equity. For the
years ended December 31, 2007, 2008 and 2009, we have recorded
interest expense related to the amortization of debt discount on the
Notes of $4.6 million, $4.8 million and $4.1 million, respectively, at the
effective interest rate of 6.67%. The debt discount on the Notes is
being amortized through November 2011. For the years ended
December 31, 2007, 2008 and 2009, we have recorded interest expense
on the Notes of $3.8 million, $3.7 million and $2.9 million, respectively,
at the contractual coupon rate of 2.50%.
The following table illustrates the effects of adopting the new guidance
on each Consolidated Balance Sheet line item as of December 31, 2008:
Long-term debt
Deferred income taxes
Total liabilities
Paid-in capital
Retained earnings
Total shareholders’ equity
As Originally
Effect
As
Reported Adjusted of Change
$ 182,739
$ 196,190
88,468
83,498
391,446
399,927
313,830
292,251
314,373
327,471
540,215
531,734
$ (13,451)
4,970
(8,481)
21,579
(13,098)
8,481
The following tables illustrate the effects of adopting the new guidance
on each Consolidated Statement of Operations and Consolidated
Statement of Cash Flows for the years ended December 31, 2007 and
2008:
As Originally
As
Reported Adjusted of Change
Effect
—
64,757
23,301
41,456
1.46
1.43
$ 4,376
—
69,263
24,702
44,561
$
Consolidated statement of
operations for the year
ended December 31, 2007:
Amortization of debt discount $
Income before income taxes
Provision for income taxes
Net income
EPS:
Basic
Diluted
Consolidated statement of
operations for the year
ended December 31, 2008:
Gain on early extinguishment
of debt
Amortization of debt discount
Income before income taxes
Provision for income taxes
Net income
EPS:
Basic
Diluted
Consolidated statement of
cash flow for the year
ended December 31, 2007:
Net income
Amortization of debt discount
Deferred income taxes
Consolidated statement of
cash flow for the year
ended December 31, 2008:
Net income
Amortization of debt discount
Deferred income taxes
$
$ 4,618
60,139
21,595
38,544
$
4,618
(4,618)
(1,706)
(2,912)
$
$
1.36
1.33
(.10)
(.10)
$ 1,947
4,823
62,011
22,022
39,989
$
(2,429)
4,823
(7,252)
(2,680)
(4,572)
1.55
1.52
$
$
1.39
1.37
(.16)
(.15)
$ 41,456
—
16,714
$ 44,561
—
18,984
$ 38,544
4,618
15,008
$
(2,912)
4,618
(1,706)
$ 39,989
4,823
16,304
$
(4,572)
4,823
(2,680)
Note 17 — Restructuring
During 2009, we completed the first phase of our operational
restructuring plan which we had previously announced in the
second quarter of 2008. The restructuring included the closure of
two manufacturing facilities located in the Utica, New York area
totaling approximately 200,000 square feet with manufacturing
transferred into either our Corporate headquarters location in Utica,
New York or into a newly constructed leased manufacturing facility
in Chihuahua, Mexico. In addition, manufacturing previously done
by a contract manufacturing facility in Juarez, Mexico was transferred
in-house to the Chihuahua facility. Finally, certain domestic distribution
activities were centralized in a new leased consolidated distribution
center in Atlanta, Georgia. We believe our restructuring will reduce
our cost base by consolidating our Utica, New York operations into
a single facility and expanding our lower cost Mexican operations, as
well as improve service to our customers by shipping orders from more
centralized distribution centers. The closure of the two manufacturing
facilities, consolidation of distribution activities and the first phase
of transitioning manufacturing operations was substantially complete
as of December 31, 2009.
A N N U A L R E P O R T 2 0 0 9
35
C O N M E D C O R P O R A T I O N
During 2010, we plan to enter into the second phase of our restructuring
plan which contemplates transferring additional production lines from
Utica, New York to our manufacturing facility in Chihuahua, Mexico.
We expect to incur $2.5 million in costs associated with the second phase
of our restructuring plan.
In conjunction with our restructuring plan, we considered FASB
guidance which requires that long-lived assets be tested for recoverability
whenever events or changes in circumstances indicate that their carrying
amount may not be recoverable. As a result of our restructuring, two
manufacturing facilities located in the Utica, New York area were
closed prior to the end of their previously estimated useful lives. We
determined one facility did not have any value and therefore recorded a
$0.5 million charge for the remaining net book value of the facility in the
fourth quarter of 2009. We plan to sell or lease the second facility and
have tested it for impairment under the guidance for long-lived assets to
be held and used. We performed our impairment testing on the second
facility by comparing future cash flows expected to be generated by this
facility (undiscounted and without interest charges) against the carrying
amount ($2.1 million as of December 31, 2009). Since future cash
flows expected to be generated by the second facility exceed its carrying
amount, we do not believe any impairment exists at this time. However,
we cannot be certain an impairment charge will not be required in the
future.
As of December 31, 2009, we have incurred $18.6 million (including
$4.1 million and $14.5 million, in the years ended December 31, 2008
and 2009, respectively) in costs associated with our restructuring.
Approximately $14.3 million (including $2.5 million and $11.8 million in
the years ended December 31, 2008 and 2009, respectively) of the total
$18.6 million in restructuring costs have been charged to cost of goods
sold. The $14.3 million charged to cost of goods sold includes
$6.1 million in under utilization of production facilities (including
$1.2 million and $4.9 million, in the years ended December 31, 2008
and 2009, respectively), $2.4 million in accelerated depreciation
(including $0.3 million and $2.1 million, in the years ended
December 31, 2008 and 2009, respectively), $2.1 million in severance
related charges (including $0.1 million and $2.0 million, in the years
ended December 31, 2008 and 2009, respectively), and $3.7 million
in other charges (including $0.9 million and $2.8 million, in the years
ended December 31, 2008 and 2009, respectively).
The remaining $4.3 million (including $1.6 million and $2.7 million,
in the years ended December 31, 2008 and 2009, respectively) in
restructuring costs have been recorded in other expense and primarily
include severance, lease and other charges related to the consolidation
of our distribution centers.
As the second phase of our restructuring plan progresses, we will incur
additional charges, including employee termination and other exit costs.
Based on the criteria contained within FASB guidance, no accrual for
such costs has been made at this time.
We estimate the total costs of the second phase of our restructuring plan
will approximate $2.5 million during 2010, including $1.3 million related
to employee termination costs and $1.2 million in other restructuring
related activities. We expect these restructuring costs will be charged to
cost of goods sold. The second phase of the restructuring plan impacts
Corporate manufacturing facilities which support multiple reporting
segments. As a result, costs associated with the second phase of our
restructuring plan will be reflected in the Corporate line within our
business segment reporting.
Note 18 — Subsequent Events
We evaluated subsequent events through February 25, 2010, the date the
financial statements have been issued.
36
Note 19 — Selected quarterly Financial Data (Unaudited)
Selected quarterly financial data for 2008 and 2009 are as follows:
2008
Net sales
Gross profit
Net income
EPS: Basic
Diluted
2009
Net sales
Gross profit
Net income
EPS: Basic
Diluted
March
$ 190,773
97,764
10,252
.36
.35
$
March
$ 164,062
76,352
4,485
.15
.15
$
Three Months Ended
June
$ 192,755
100,890
11,685
.41
.40
September
$ 179,409
94,688
9,735
.34
.33
$
$
June
$ 164,569
77,312
1,409
.05
.05
$
September
$ 175,475
87,636
1,288
.04
.04
$
December
$ 179,246
89,039
8,317
.28
.28
$
December
$ 190,633
96,032
4,955
.17
.17
$
Unusual Items Included In Selected quarterly Financial Data:
2008
First quarter
During the first quarter of 2008, we recorded a charge of
$1.0 million to cost of goods sold related to the purchase accounting
fair value adjustment for inventory acquired in connection with the
purchase of our Italian distributor.
2009
First quarter
During the first quarter of 2009, we recorded a charge of $3.4 million
related to the restructuring of certain of our operations; $2.9 million
of the charge is recorded in cost of goods sold and $0.5 million is
recorded in other expense (income)– see Note 11 and Note 17.
Second quarter
There were no unusual items in the second quarter of 2008.
Third quarter
During the third quarter of 2008, we recorded a charge of
$0.7 million in other expense (income) related to the restructuring
of certain of our operations – see Note 11 and Note 17.
Fourth quarter
During the fourth quarter of 2008, we recorded a gain of $1.9 million
on the early extinguishment of debt – see Note 5.
During the fourth quarter of 2008, we recorded a charge of
$3.4 million related to the restructuring of certain of our operations;
$2.5 million of the charge is recorded in cost of goods sold and
$0.9 million is recorded in other expense (income) – see Note 11
and Note 17.
During the first quarter of 2009, we elected to freeze benefit accruals
under the defined benefit pension plan for United States employees,
effective May 14, 2009. As a result, we recorded a net pension gain in
other expense (income) of $1.9 million associated with the elimination
of future benefit accruals under the pension plan – see Note 9 and
Note 11.
During the first quarter of 2009, we repurchased and retired
$9.9 million of the Notes for $7.8 million and recorded a gain on the
early extinguishment of debt of $1.1 million net of the write-offs of
$0.1 million in unamortized deferred financing costs and $1.0 million in
unamortized debt discount – See Note 5.
Second quarter
During the second quarter of 2009, we recorded a charge of
$4.4 million related to the restructuring of certain of our operations;
$3.7 million of the charge is recorded in cost of goods sold and
$0.7 million is recorded in other expense (income) – see Note 11 and
Note 17.
Third quarter
During the third quarter of 2009, we recorded a charge of $3.3 million
related to the restructuring of certain of our operations; $2.2 million
of the charge is recorded in cost of goods sold and $1.1 million is
recorded in other expense (income) – see Note 11 and Note 17.
During the third quarter of 2009, we recorded a charge of $6.0 million
in other expense (income) related to the voluntary recall of certain model
numbers of the PRO5 & PRO6 series battery handpieces and certain
lots of the MC5057 Universal Cable used with certain of CONMED
Linvatec’s powered handpieces – see Note 11.
During the third quarter of 2009, we recorded a charge of
$0.3 million in other expense (income) related to the consolidation of
the administrative offices of CONMED Endoscopic Technologies – see
Note 11.
Fourth quarter
During the fourth quarter of 2009, we recorded a charge of
$3.4 million related to the restructuring of certain of our operations;
$3.0 million of the charge is recorded in cost of goods sold and $0.4
million is recorded in other expense (income) – see Note 11 and Note 17.
During the fourth quarter of 2009, we recorded a charge of $4.6 million
related to the consolidation of the administrative offices and operations
of CONMED Endoscopic Technologies; $0.8 million of the charge
is recorded in cost of goods sold and $3.8 million is recorded in other
expense (income) – see Note 11.
A N N U A L R E P O R T 2 0 0 9
37
C O N M E D C O R P O R A T I O N
Stephen M. Mandia has served as a Director
of the Company since July 2002. Mr. Mandia
has served as Chairman of the Board of
Directors of Sovena USA, formerly East Coast
Olive Oil Corp., and now a subsidiary of
Sovena Group since January 1, 2010. He previously served
as Chief Executive Officer of Sovena USA from 1991 to
December 31, 2009. Mr. Mandia holds a B.S. degree from
Bentley College, having also undertaken undergraduate
studies at Richmond College in London. Mr. Mandia is the
Chairman of the Corporate Governance and Nominating
Committee, and also serves on the Compensation Committee.
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. Dr. Schwartz is the
Chairman of the Compensation Committee, and also serves
on the Corporate Governance and Nominating Committee.
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 also serves on the Board of Directors of
the Independent Bankers Association of New York State. Mr.
Tryniski holds a B.S. degree from the State University of New
York at Oswego. Mr. Tryniski serves on the Audit Committee
as well as the Corporate Governance and Nominating
Committee.
Board of Directors
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.
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.
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. Mr. Daniels is the Chairman of the
Audit Committee, and also serves on the Compensation
Committee.
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 on the
Board of Directors of the Bank of Utica. 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. Ms. Golden serves on
the Audit Committee.
38
Senior Officers
Terence M. Bergé
Treasurer and Assistant Corporate Controller
Alexander R. Jones
Vice President – Corporate Sales
David R. Murray
President – CONMED Electrosurgery
John J. Stotts
Vice President – CONMED Patient Care
Mark R. Donovan
Vice President, CONMED Endoscopic Technologies
and Global Corporate Marketing
Frank R. Williams
Vice President – CONMED EndoSurgery
Executive Officers
Joseph J. Corasanti, Esq.
President and CEO
William W. Abraham
Vice President – Business Development
Heather L. Cohen, Esq.
Vice President – Corporate Human Resources
Joseph G. Darling
President – CONMED Linvatec
Daniel S. Jonas, Esq.
General Counsel and Vice President – Legal Affairs
Gregory R. Jones
Vice President – Corporate Regulatory Affairs
Luke A. Pomilio
Vice President – Corporate Controller
and Corporate General Manager
Robert D. Shallish, Jr.
Vice President – Finance and Chief Financial Officer
(As of April 2010)
A N N U A L R E P O R T 2 0 0 9
39
C O N M E D C O R P O R A T I O N
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
CONMED Corporation’s stock is traded on the NASDAq
Global Select Stock Market with the symbol: CNMD
Independent Registered Public
Accounting Firm
PricewaterhouseCoopers LLP
677 Broadway
Albany, NY 12207
General Counsel
Daniel S. Jonas, Esq.
525 French Road
Utica, NY 13502
Special Counsel
Sullivan & Cromwell, LLP
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 Oy
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
Consolidated Medical Equipment Company
S.de r.L. de C.V. (Mexico)
40
D E S I G N E D B Y R O M A N E L L I C O M M U N I C A T I O N S
A N N U A L R E P O R T 2 0 0 9
525 French Road | Utica, NY 13502 | USA
©CONMED CORPORATION 4/10, 9M, Printed in the U.S.A.