2010 annual report
Table of Contents
Financial Highlights ........................................................................................................................................ 2
Letter to the Shareholders .......................................................................................................................... 3
Product Spotlight .................................................................................................................................... 6
Market for CONMED’s Common Stock and Related Stockholder Matters ........................................... 8
Five Year Summary of Selected Financial Data .................................................................................... 8
Management’s Discussion and Analysis of Financial Condition and Results of Operations ................ 9
Management’s Report on Internal Control Over Financial Reporting .............................................. 19
Report of Independent Registered Public Accounting Firm ............................................................... 20
Consolidated Balance Sheets ............................................................................................................... 21
Consolidated Statements of Operations ................................................................................................. 22
Consolidated Statements of Shareholders’ Equity .................................................................................... 23
Consolidated Statements of Cash Flows ........................................................................................................ 24
Notes to Consolidated Financial Statements ...................................................................................................... 25
Board of Directors ...................................................................................................................................................... 39
Corporate Management Team ........................................................................................................................................... 40
Officers ........................................................................................................................................................................................ 42
Shareholder Information, Subsidiaries .................................................................................................................................................... 43
Notes .............................................................................................................................................................................................................. 44
Financial Highlights
NET SALES (IN $ MILLIONS)
SHAREHOLDERS’ EquITY (IN $ MILLIONS)
2
.
2
4
7
7
.
4
9
6
7
.
3
1
7
3
.
4
9
6
8
.
6
4
6
6
.
6
8
5
5
.
6
7
5
2
.
0
4
5
3
.
8
1
5
5
.
6
5
4
06
07
08
09
10
06
07
08
09
10
DEBT PLuS RECEIvABLE FINANCINg (IN $ MILLIONS)
NET INCOME (IN $ MILLIONS)
1
.
6
8
2
8
.
6
4
2
9
.
7
2
2
4
.
3
1
2
6
.
5
9
1
5
.
8
3
0
.
0
4
3
.
0
3
1
.
2
1
06
07
08
09
10
07
08
09
10
NOTE: 2006, 2007, and 2008 debt balances have been adjusted to reflect the
impact of FASB guidance issued in May 2008 related to the accounting for
convertible debt instruments.
)
2
.
5
1
(
06
CONMED Corporation
2
Letter to the Shareholders
Joseph J. Corasanti
President, Chief Executive Officer
April 2011
To My Fellow Shareholders:
During 2010, we saw the beginning of a return to normalcy
in the markets for our products. Revenues increased
modestly compared to sales in the prior year, as we
were able to leverage our structure and to increase our
profitability. In fact, we were very pleased to report that
the increase in our profitability far outpaced the growth in
revenues. Further, we are now beginning to experience the
benefits that flow from the restructuring efforts we made
over the past few years.
As we had done successfully in the past, we continued to
focus on efforts to increase revenues, to improve margins
and to bring new products into our portfolio.
On balance, we performed well during 2010 as the
economy slowly began to improve, or, as we hope, to
recover. On the positive side, patient procedures seemed
to increase; but hospitals were cautious with capital
purchases. And certain overseas markets were affected
by concerns about credit and government spending on
healthcare. In the face of these macro-economic trends,
which we can neither control nor avoid, we were able to
increase sales and profits, and to improve our balance
sheet. While several factors contributed to these results, if
forced to single out one above all others, it was the steady
and unrelenting focus by the senior leadership team. They
worked hard throughout the year, and the results reflect
the sustained effort they made.
The financial performance was as follows:
Our Strategy
• Sales increased 2.7% to $713.7 million, compared to
2009 revenues of $694.7 million. In constant currency,
the increase was a modest 1.4%. On a more positive
note, sales of disposable and reposable products, which
account for roughly 75% of our revenues, experienced
an increase of 3.7% (or 2.3% in constant currency),
which was somewhat offset by the 0.4% decline (1.7%
in constant currency) in capital equipment sales. We
believe that the modest rate of revenue growth is
a reflection of the lingering effects of the economic
challenges many hospitals face, rather than a sign of a
decline in our share in the markets we serve.
• Sales outside the united States continued to increase as
a percentage of overall sales, growing to 48% of sales for
the entire year.
• gross margins increased on an overall basis to 51.2%, a
solid jump up from 48.6% in 2009.
• gAAP diluted earnings per share for 2010 were $1.05
compared to $0.42 in 2009, an increase of 150%.
• Non-gAAP diluted earnings per share for 2010 were
$1.30 compared to 2009 Non-gAAP EPS of $1.00, an
increase of 30%. (See the chart for the reconciliation
between the gAAP and Non-gAAP Net Income figures
on page 5).
• Cash from operations continued to be strong. For
the year, cash provided by operating activities was
$67.2 million, when excluding the effect of a change
in accounting and the termination of the accounts
receivable facility. (See the chart for the reconciliation
between gAAP and Non-gAAP Operating Cash Flows
on page 5).
The strategy we have followed has served the Company
well, as our sales, net income and shareholders’ equity
have increased fairly steadily over the years. We made
some adjustments during 2010 as a result of the economic
challenges we faced, but otherwise adhered to the same
principles that brought us to where we are today. Let me
elaborate.
1. grow the Top Line
We have been focused on growing the top line for several
years, and our strategy has four components.
(a) New Products
We continue to provide our customers and our sales
representatives with a steady stream of new and innovative
products. During 2010 we introduced a number of new
products. Among the more exciting were the following:
The Altrus® Tissue Fusion System was cleared by the FDA
in 2010, with sales commencing in 2011. This thermal
energy-based tissue system, as detailed further in this
Annual Report, is entering a large and growing market.
We believe our technology is superior in how it cuts with
respect to the speed of the cut or seal, the strength of the
seal, and the mechanics of our non-stick surfaces. This is
an important product for our Electrosurgery division, and
we expect that surgeons will be very impressed with its
clinical effects.
The Ergo™ Shaver Handpiece represents the latest
innovation in a long line of arthroscopy power instruments
and offers unique speed, balance and control for surgeons.
The Bullseye® Anatomic Cruciate Reconstruction System
provides surgeons with a unique guide system for ligament
reconstruction in the knee.
Annual Report 2010
3 Letter to the Shareholders cont.
CONMED Corporation
Corporate Headquarters:
French Road, utica, NY
Matryx® Interference Screws We now offer a full range of
sizes of Matryx® interference screws used in the repair of
knee ligaments. With sizes ranging from as small as 5.0 mm
to as large as 11.0 mm, they accommodate the needs of
every patient anatomy as well as physician preferences.
NEW 2.8 and 3.3mm PopLok® Knotless Suture Anchors
Our Knotless PopLok® Suture Anchors are ideal for the
repair of the labrum in the shoulder and hip. With the new
sizes, we now offer the smallest double loaded knotless
suture anchor in the market.
VCare® Dx We introduced a new uterine manipulator
used for diagnostics in the growing women’s health care
market. Adding to our existing line of uterine manipulators,
the vCare® Dx affords excellent control during common
procedures such as laparoscopic myomectomies,
endometriosis and dye perturbation.
The addition of these new implants and instruments
reflects our commitment to providing surgeons with
comprehensive, versatile and easy-to-use solutions in all
of the markets we serve. These range from arthroscopic
repair of soft tissue injuries to general surgery to
gynecology and more. Our goal has always been to provide
surgeons with the ability to perform repairs or procedures
according to whatever their preferred method may be.
(b) Dedicated Service from Our Sales Professionals
We are constantly looking for ways to provide improved
services to our customers. Whether this means training
medical staff, arranging for service and repair, or just
demonstrating the specific features of our products,
we are always seeking to leverage the skills of our sales
professionals. We continue to provide them with the best
training as to our products and the clinical challenges our
customers face. We add sales representatives when we can
do so responsibly.
(c) Surgeon Education
We continue to drive growth in the demand for our
products through surgeon education. Put simply, the more
our customers, or potential customers, know about our
products and how they address surgical challenges, the
more they like them.
(d) Acquisitions
Historically, acquisitions have been one of our strengths,
driving growth for most of the 1990’s through 2004. During
2010, we did acquire one company, whose only asset
was technology that we subsequently developed into The
Sequent™ Meniscal Repair System. This system offers
proprietary suture-locking implant cleats that will provide
a knotless repair and allow the surgeon
to complete an entire meniscal repair
with one device without leaving the joint. This
device also reduces the risk of failures experienced with
currently available devices when entering and leaving the
joint. In addition, the Sequent™ Meniscal Repair System
should enable surgeons to minimize trauma to the tissue
while simplifying the meniscal repair procedure. This
device, which was just released at the February 2011
Annual Meeting of the American Academy of Orthopaedic
Surgeons offers significant cost savings potential through a
reduction in the cost of performing a procedure.
Other than the acquisition of the Sequent technology, 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 2010, we pursued
margin expansion through increased efficiencies and cost
reductions. We continued to pursue lean manufacturing
techniques to reduce costs and to improve quality with our
manufacturing operations. We continued to shift several
product lines to our low-cost manufacturing facility in
Mexico. The costs savings started to flow through to our
bottom line during 2010, as evidenced by the improvement
in our gross margins, which moved from 48.6% in 2009 to
51.2% in 2010.
We were also able to complete a new round of financing
in November 2010. Our timing turned out to be very
fortuitous. The result was a low-rate $250 million credit
line which will provide us with the flexibility for acquisitions
should the need arise, as well as the ability to redeem the
Convertible Notes in the fall of 2011 should we be required
to do so.
Outlook
The economy improved during 2010, although not quite to
the levels seen prior to the recent financial crisis; hospitals
and other customers were cautious in their purchases
during 2010.
We are confident that we remain well-positioned for long-
term growth. Our product offerings meet the needs of
our hospital and surgeon customers. In fact, we have just
released some of the most interesting new products we
have developed in several years. Our team of managers
CONMED Corporation
4
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 outpace the marginal increases
in costs necessary to achieve these goals.
In addition to the financial metrics we watch closely, we
also are careful not to lose sight of our larger purpose. We
provide our customers with a reliable supply of a broad
range of products necessary for life-saving surgeries.
We are optimistic about CONMED’s long-term future. We
remain committed to improving service to our customers
and to increasing profitability for the Company. Our
strategy has worked well in the past, and served us well
during the past year. We look forward to the future with
both determination and confidence.
As always, we thank you for your continued trust and
support.
Sincerely,
Joseph J. Corasanti
President, Chief Executive Officer
Impact to Statement of Cash Flows Related to Accounting
Change Applied Prospectively1
(In thousands)
(unaudited)
Twelve months ended December 31,
2010
Reported cash flows from operations
$ 38,243
________
Sale of accounts receivable to (collections
for) purchaser accounting change and
termination of facility
Adjusted cash flows from operations
29,000
________
$ 67,243
________
________
1 This table is provided to reconcile certain financial disclosures referenced in the
Letter to the Shareholders. Management has provided the above reconciliation of
cash flow from operations before the accounting change as an additional measure
that investors can use to compare operating cash flows between reporting periods.
Management believes this reconciliation provides a useful presentation of cash
flows.
Reconciliation of Reported Net Income to
Non-GAAP Net Income Before Unusual Items
and Amortization of Debt Discount2
(In thousands except per share amounts)
(unaudited)
Twelve months ended
December 31,
Reported net income
2009
2010
$ 12,137 $ 30,346
________
________
New plant/facility consolidation
costs included in cost of sales
11,859
Termination of a product offering
—
2,397
2,489
CONMED Endoscopic Technologies
division consolidation
845
________
—
________
Total cost of sales, other
12,704
________
4,886
________
CONMED Linvatec division
consolidation costs
CONMED Endoscopic Technologies
—
1,497
division consolidation
4,080
679
Facility consolidation costs
included in other expense
2,726
—
—
5,992
(1,882 )
________
—
________
Product recall
Net pension gain
Total other expense
10,916
________
2,176
________
(gain) loss on early
extinguishment of debt
Amortization of debt discount
Total unusual expense
before income taxes
Provision (benefit) for income
taxes on unusual expense
Net income before unusual
items and amortization of
debt discount
Per share data:
Reported net income
Basic
Diluted
Net income before unusual
items and amortization of
debt discount
Basic
Diluted
(1,083 )
________
79
________
________
4,111
4,244
________
26,648
11,385
(9,633 )
________
(4,139 )
________
$ 29,152 $ 37,592
________
________
________
________
$
$
.42 $
.42
1.06
1.05
1.00 $
1.00
1.31
1.30
2 This table is provided to reconcile certain financial disclosures referenced
in the Letter to the 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.
Annual Report 2010
5
Product Spotlight
Altrus® Thermal Tissue Fusion System
Ergo™ Shaver Handpiece
The Ergo™ Shaver power arthroscopy handpiece is
the most recent innovation in our successful power
arthroscopy line, more than 20 years in the making.
As the name implies, the handle is ergonomically
engineered, a crucial benefit for experienced
arthroscopic surgeons. This design provides optimal
balance and control to reduce the hand fatigue
encountered in many arthroscopic procedures. A
combination of speed, power and human-factored
engineering means shorter procedure times, leading
to potential savings and increased case load for
hospitals. With the addition of the Ergo™ Shaver, our
extensive line of arthroscopic burs and blades is the
perfect system for soft tissue and bone resection.
Our new Altrus® System combines the features that
surgeons and clinicians want most in current vessel
sealing technologies. This thermal-energy-based
system allows jaw temperature control, faster and
more reliable seals, bladeless cut cycles and minimal
thermal spread.
This next-generation energy-based vessel sealing
technology provides a temperature-controlled energy
source, and fast cycle times to minimize lateral tissue
damage and reduce surgeon hand fatigue. It also
offers better anatomical access and functionality
with a Maryland-style jaw; a unique parallel closure
mechanism for consistent pressure across the jaw
surface; manual and automatic modes for surgeon
flexibility; and clean, bladeless cutting without dulling
or jamming. Its ergonomic design also minimizes
surgeon hand fatigue, and its multi-functionality
reduces the need for multiple instruments and
instrument exchanges. The jaws of the handpiece
stay clean, reducing the need to remove and clean
during surgery, and its thermal technology works in
fluid environments.
CONMED Corporation
6 Bullseye® Anatomic Cruciate
Reconstruction System
The Bullseye® is a unique guide system for knee
ligament reconstruction. It allows surgeons to
perform these complex procedures with precision,
and with consistent and reproducible results.
The Bullseye® enables safe and accurate placement of
grafts for optimal healing in “anatomic repairs,” those
that mimic the undamaged torn knee ligaments. It
visually depicts the placement and size of the tunnel
to be created and filled with the new ligament.
The guides also help ensure that the ligament
will be correctly positioned without damaging or
interfering with nearby structures such as knee
cartilage. For these surgeries, arthroscopic surgeons
want reproducibility, and assurance that the graft
is correctly positioned in the joint. The Bullseye®
System ably delivers both.
Matryx® Interference Screws
The proprietary chemical makeup of our Matryx®
screws allows them to be absorbed by the body
over time and, in the process, helps foster new bone
formation around a repaired ligament. An expanded
range of smaller sizes is possible using our new
microTCP, a remarkable biocomposite material with
unmatched strength and absorption characteristics.
They now provide surgeons with interference screw
options as small as 5mm in diameter.
These are the smallest biocomposite interference
screws currently on the market for primary knee
ligament reconstruction. The complete Matryx®
product line now contains a full range of diameters,
from 5.0mm through 11.0mm.
Annual Report 2010
7 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 January 31, 2011, there
were 864 registered holders of our common stock and approximately 6,157 accounts held in “street name”.
The following table sets forth quarterly high and low sales prices for the years ended December 31, 2009 and 2010, as reported by the
NASDAq Stock Market.
2009
2010
Period
_________________________________________________________________________________________________________
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Low
$ 11.68
12.31
15.00
18.35
High
$ 25.23
25.08
22.41
26.64
$ 23.99
16.49
20.58
23.69
$ 21.51
18.63
16.84
21.51
High
Low
We did not pay cash dividends on our common stock during 2009 or 2010 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
Equity compensation plans
approved by security holders
Equity compensation plans
not approved by security holders
Total
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)
2,870,723
$
23.98
—
_________
2,870,723
_________
_________
—
_________
$
23.98
_________
_________
970,156
_________
—
970,156
_________
_________
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
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
2006
2007
2008
2009
2010
$ 646,812
(4,603 )
(15,233 )
$ 694,288
80,991
38,544
$ 742,183
75,259
39,989
$ 694,739 $ 713,723
57,093
30,346
28,269
12,137
$
$
(.54 )
(.54 )
1.36
1.33
$
1.39
1.37
$
0.42 $
0.42
1.06
1.05
27,966
27,966
28,416
28,965
28,796
29,227
29,074
29,142
28,715
28,911
$ 34,175
21,895
$ 36,152
20,910
$ 37,159
35,879
$ 41,283 $ 41,807
14,732
21,444
$
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 $ 12,417
985,773
958,413
219,344
302,791
586,563
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 15 of the Consolidated Financial Statements.
(2) Results of operations of acquired businesses have been recorded in the financial statements since the date of acquisition.
CONMED Corporation
8
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.
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
2008
38 %
21
14
11
9
7
2009
39 %
21
14
10
9
7
100 % 100 %
2010
40 %
20
14
10
9
7
_____ _____ _____
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 44%, 45% and 48% in
2008, 2009 and 2010, 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 2.8 and 3.3mm PopLock® Knotless Suture Anchors, for
repair of unstable shoulders and for use in the emerging Endoscopic
hip market; the Concept® Suture Passer, for use in rotator cuff
repair; the Sequent™ Meniscal Repair System, which offers suture-
locking implant cleats that will provide a knotless repair and
allow the surgeon to complete an entire mensical repair with one
device without leaving the joint; CrossFT BC™ biocomposite suture
anchor for rotator cuff repair; PRO6140 & PRO6240 pin drivers, to
allow the use of one device during procedures such as total joint
arthroplasty, trauma, sports medicine surgeries as well as small
bone orthopedics; and the Altrus® Thermal Tissue Fusion System,
which utilizes thermal energy to seal, cut, grasp, and dissect vessels
up to 7mm in size utilizing a closed feedback loop between the
energy source and the single-use handpiece to precisely control the
desired effect on tissue.
Business Challenges
given significant volatility in the financial markets and foreign
currency exchange rates and depressed economic conditions in both
domestic and international markets, 2009 presented significant
business challenges. While we are cautiously optimistic that the
overall global economic environment is improving and have seen a
return to revenue growth in 2010, there can be no assurance that
the improvement in the economic environment will be sustained.
We will continue to monitor and manage the impact of the overall
economic environment on the Company.
During 2009 and 2010, we successfully completed our operational
restructuring plans whereby we consolidated manufacturing
and distribution centers as well as restructured certain of our
administrative functions. We will continue to restructure both
operations and administrative functions as necessary throughout
the organization. However, we cannot be certain such activities will
be completed in the estimated time period or that planned cost
savings will be achieved.
Our facilities are subject to periodic inspection by the united States
Food and Drug Administration (“FDA”) and foreign regulatory
agencies or notified bodies for, among other things, conformance
to quality System Regulation and Current good Manufacturing
Practice (“CgMP”) requirements and foreign or international
standards. 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, that
we will not make product recalls in the future or that we will not
experience temporary or extended periods during which we may
not be able to sell products in foreign countries.
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:
Annual Report 2010
9
• 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
$13.4 million, $11.3 million and $7.9 million for 2008, 2009
and 2010, 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 $1.1 million at December 31, 2010 is adequate to provide for
probable losses resulting from accounts receivable.
Inventory Reserves
We maintain reserves for excess and obsolete inventory resulting
from the inability to sell our products at prices in excess of current
carrying costs. The markets in which we operate are highly
competitive, with new products and surgical procedures introduced
on an on-going basis. Such marketplace changes may result in
our products becoming obsolete. We make estimates regarding
the future recoverability of the costs of our products and record a
provision for excess and obsolete inventories based on historical
experience, expiration of sterilization dates and expected future
trends. If actual product life cycles, product demand or acceptance
of new product introductions are less favorable than projected by
management, additional inventory write-downs may be required.
We believe that our current inventory reserves are adequate.
Goodwill and Intangible Assets
We have a history of growth through acquisitions. Assets and
liabilities of acquired businesses are recorded at their estimated
fair values as of the date of acquisition. goodwill represents costs
in excess of fair values assigned to the underlying net assets of
acquired businesses. Other intangible assets primarily represent
allocations of purchase price to identifiable intangible assets of
acquired businesses. We have accumulated goodwill of
$295.1 million and other intangible assets of $190.1 million as of
December 31, 2010.
CONMED Corporation
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, 2010
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 76% to 121%. 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 15%. The income
approach contained certain key assumptions including that revenue
would resume historical growth patterns in 2011 while including
certain cost savings associated with the operational restructuring
plan completed during 2010. 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.
10 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 analysis and assessment of actual customer attrition
and activity as events and circumstances warrant. 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.
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 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 rates used in
determining 2010 and 2011 pension expense are 5.86% and 5.41%,
respectively.
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.
Pension expense in 2011 is expected to be $1.9 million compared
to expense of $0.9 million in 2010. In addition, we will be required
to contribute approximately $2.1 million to the pension plan for the
2011 plan year.
See Note 9 to the Consolidated Financial Statements for further
discussion.
Stock-Based Compensation
All share-based payments to employees, including grants of
employee stock options, restricted stock units, performance share
units and stock appreciation rights are recognized in the financial
statements based at their fair values. Compensation expense is
generally recognized using a straight-line method over the vesting
period. Compensation expense for performance share units is
recognized using the graded vesting method.
Income Taxes
The recorded future tax benefit arising from deductible temporary
differences and tax carryforwards is approximately $38.3 million at
December 31, 2010. Management believes that earnings during the
periods when the temporary differences become deductible will be
sufficient to realize the related future income tax benefits.
We operate in multiple taxing jurisdictions, both within and outside
the united States. We face audits from these various tax authorities
regarding the amount of taxes due. Such audits can involve complex
issues and may require an extended period of time to resolve. The
Internal Revenue Service (“IRS”) has completed examinations of our
united States federal income tax returns through 2009. Tax years
subsequent to 2009 are subject to future examination.
Consolidated Results of Operations
The following table presents, as a percentage of net sales, certain
categories included in our consolidated statements of operations 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 from operations
gain (loss) on early extinguishment
of debt
Amortization of debt discount
Interest expense
Income before income taxes
Provision for income taxes
Net income
2010 Compared to 2009
2008
2010
2009
100.0 % 100.0 % 100.0 %
48.5 51.4 48.8
______ ______ ______
51.5 48.6 51.2
36.7 38.3 38.7
4.2
0.3
8.0
______ ______ ______
4.5
0.2
10.1
4.6
1.6
4.1
______ ______ ______
0.3
0.6
1.4
8.4
3.0
5.4 %
(0.0 )
0.6
1.0
6.4
2.1
______ ______ ______
4.3 %
______ ______ ______
______ ______ ______
0.1
0.6
1.0
2.6
0.9
1.7 %
Sales for 2010 were $713.7 million, an increase of $19.0 million
(2.7%) compared to sales of $694.7 million in 2009 with the
increases occurring in Arthroscopy, Electrosurgery and Endosurgery.
Foreign currency exchange rates (when compared to the foreign
Annual Report 2010
11
currency exchange rates in the same period a year ago) accounted
for approximately $9.6 million of the increase. In local currency,
sales increased 1.4%. Sales of capital equipment decreased
$0.7 million (-0.4%) from $165.9 million in 2009 to $165.2 million
in 2010; sales of single-use and reposable products increased
$19.7 million (3.7%) from $528.8 million in 2009 to $548.5 million
in 2010. On a local currency basis, sales of capital equipment
decreased 1.7% while single-use and reposable products
increased 2.3%.
Cost of sales decreased to $348.3 million in 2010 as compared
to $357.4 million in 2009. gross profit margins increased 2.6
percentage points to 51.2% in 2010 as compared to 48.6% in the
same period a year ago. The increase in gross profit margins of 2.6
percentage points is primarily a result of the effects of favorable
foreign currency exchange rates on sales (0.7 percentage points)
and net cost savings as a result of our restructuring efforts (1.9
percentage points) as more fully described in Note 16 to the
Consolidated Financial Statements.
Selling and administrative expense increased to $276.5 million from
$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 $2.8 million of
the increase. Selling and administrative expense as a percentage
of net sales increased to 38.7% in 2010 from 38.3% in 2009. This
increase of 0.4 percentage points is primarily attributable to higher
compensation and benefit costs during the period.
Research and development expense was $29.7 million in 2010
compared to $31.8 million in 2009. As a percentage of net sales,
research and development expense decreased to 4.2% in 2010
compared to 4.6% in 2009. The decrease of 0.4 percentage points is
mainly driven by decreased spending on our CONMED Patient Care
products (0.2 percentage points), CONMED Linvatec products (0.1
percentage points) and other products (0.1 percentage points).
As discussed in Note 11 to the Consolidated Financial Statements,
other expense in 2010 consisted of the following: a $1.5 million
charge related to the consolidation of administrative functions in
our CONMED Linvatec division and a $0.7 million charge related to
a lease impairment on our Chelmsford, Massachusetts facility.
Other expense in 2009 consisted of 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.
During the second quarter of 2010, we repurchased and retired
$3.0 million of our 2.50% convertible senior subordinated notes
(the “Notes”) for $2.9 million and recorded a loss on the early
extinguishment of debt of $0.1 million. 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 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 2010 was $4.2 million compared
to $4.1 million in 2009. This amortization is associated with the
CONMED Corporation
implementation of FASB guidance as of January 1, 2009 as further
described in Note 15 to the Consolidated Financial Statements.
Interest expense was $7.1 million in both 2009 and 2010. Interest
expense remained the same on lower weighted average borrowings
due to higher weighted average interest rates on the borrowings.
The weighted average interest rates on our borrowings (inclusive of
the finance charge on our accounts receivable sale facility) increased
to 3.18% in 2010 as compared to 2.90% in 2009.
A provision for income taxes was recorded at an effective rate
of 33.5% in 2010 and 33.1% in 2009 as compared to the Federal
statutory rate of 35.0%. The effective tax rate for 2010 is higher
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.
2009 Compared to 2008
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 16 (1.8 percentage points) offset by improved product mix (0.4
percentage points).
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).
12 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 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 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 15 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.
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 2008, 2009 and 2010:
CONMED Endosurgery, CONMED Electrosurgery and
CONMED Linvatec
2008
2009
2010
Net sales
Income from operations
Operating margin
$ 612,521 $ 574,820 $ 596,923
98,101 62,715 77,271
12.9%
16.0%
10.9%
Product offerings include a complete line of endo-mechanical
instrumentation for minimally invasive laparoscopic procedures,
electrosurgical generators and related surgical instruments,
arthroscopic instrumentation for use in orthopedic surgery and
small bone, large bone and specialty powered surgical instruments.
• Arthroscopy sales increased $18.6 million (6.9%) in 2010 to
$288.4 million from $269.8 million in 2009. Favorable foreign
currency exchange rates (when compared to the foreign currency
exchange rates in the same period a year ago) accounted for
approximately $4.6 million of the increase. Sales of capital
equipment increased $1.9 million (2.6%) to $75.2 million in
2010 from $73.3 million in 2009; sales of single-use products
increased $16.7 million (8.5%) to $213.2 million in 2010 from
$196.5 million in 2009. On a local currency basis, sales of capital
equipment increased 1.4% while single-use products increased
6.6%. We believe the overall increase in sales is driven by our
new shoulder restoration system and increases in our resection
and video imaging products for arthroscopy and general surgery.
Arthroscopy sales decreased $22.1 million (-7.6%) in 2009 to
$269.8 million from $291.9 million in 2008 as we believe hospitals
experienced capital purchasing restraints due to depressed
economic conditions. 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%) to $73.3 million in 2009 from
$92.9 million in 2008; sales of single-use products decreased
$2.5 million (-1.3%) to $196.5 million in 2009 from $199.0 million
in 2008. On a local currency basis, sales of capital equipment
decreased 18.6% while single-use products increased 2.2%.
• Powered surgical instrument sales decreased $1.7 million (-1.2%)
in 2010 to $142.3 million from $144.0 million in 2009 mainly due
to decreases in sales of our small bone handpieces. Favorable
foreign currency exchange rates (when compared to the same
period a year ago) increased sales approximately $2.8 million.
Sales of capital equipment decreased $3.3 million (-4.9%) to
$64.4 million in 2010 from $67.7 million in 2009; sales of single-
use products increased $1.6 million (2.1%) in 2010 to $77.9
million compared to $76.3 million in 2009. On a local currency
basis, sales of capital equipment decreased 6.4% while single-use
products decreased 0.3%. Powered surgical instrument sales
decreased $11.7 million (-7.5%) in 2009 to $144.0 million from
$155.7 million in 2008 as we believe hospitals experienced capital
purchasing restraints due to depressed economic conditions.
unfavorable foreign currency exchange rates (when compared to
the same period a year ago) accounted for approximately
$6.1 million of the decrease. Sales of capital equipment
decreased $8.7 million (-11.4%) to $67.7 million in 2009 from
$76.4 million in 2008; sales of single-use products decreased
$3.0 million (-3.8%) in 2009 to $76.3 million from $79.3 million
in 2008. On a local currency basis, sales of capital equipment
decreased 8.1% while single-use products increased 0.8%.
• Electrosurgery sales increased $2.2 million (2.3%) in 2010 to
$97.2 million from $95.0 million in 2009 mainly due to higher
pencil sales. Favorable foreign currency exchange rates (when
compared to the foreign currency exchange rates in the same
period a year ago) accounted for approximately $0.9 million of the
Annual Report 2010
13
increase. Sales of capital equipment increased $0.7 million (2.8%)
to $25.6 million in 2010 from $24.9 million in 2009; sales of single-
use products increased $1.5 million (2.1%) to $71.6 million in
2010 from $70.1 million in 2009. On a local currency basis, sales
of capital equipment increased 1.6% while single-use products
increased 1.3%. Electrosurgery sales decreased $5.5 million
(-5.5%) in 2009 to $95.0 million from $100.5 million in 2008 as we
believe hospitals experienced capital purchasing restraints due
to depressed economic conditions. 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%) to $24.9 million in 2009 from
$28.5 million in 2008; sales of single-use products decreased
$1.9 million (-2.6%) to $70.1 million in 2009 from $72.0 million
in 2008. On a local currency basis, sales of capital equipment
decreased 10.2% while single-use products decreased 1.5%.
• Endosurgery sales increased $3.0 million (4.5%) in 2010 to
$69.0 million from $66.0 million in 2009 mainly due to increased
sales of our suction irrigation and vCARE products. Favorable
foreign currency exchange rates (when compared to the foreign
currency exchange rates in the same period a year ago) increased
sales approximately $0.4 million. On local currency basis, sales
increased 3.9%. 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%.
• Operating margins as a percentage of net sales increased 2.0
percentage points to 12.9% in 2010 compared to 10.9% in 2009.
The increase in operating margins is primarily due to higher
gross margins (0.7 percentage points) mainly driven by favorable
foreign currency exchange rates, net of costs associated with
the termination of a product offering in our CONMED Linvatec
division (0.4 percentage points) as more fully described in Note
16 to our Consolidated Financial Statements, lower research and
development spending (0.2 percentage points) and the prior year
including costs associated with the voluntary recall of certain
powered instrument products (0.9 percentage points).
• 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.
CONMED Patient Care
Net sales
Income (loss) from operations
Operating margin
2009
2008
2010
$ 78,384 $ 70,978 $ 68,283
(38 )
(0.1% )
(1,263 )
(1.8% )
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
CONMED Corporation
patient positioners and suction instruments & tubing for use in the
operating room, as well as a line of Iv products.
• Patient Care sales decreased $2.7 million (-3.8%) in 2010 to
$68.3 million compared to $71.0 million in 2009 principally due
to decreased sales of ECg electrodes and Iv devices. Favorable
foreign currency exchange rates (when compared to the foreign
currency exchange rates in the same period a year ago) increased
sales approximately $0.3 million. On a local currency basis,
sales decreased 4.2%. 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%.
• Operating margins as a percentage of net sales increased 1.7%
percentage points to -0.1% in 2010 compared to -1.8% in 2009.
The increase in operating margins is primarily driven by increases
in gross margins (0.8 percentage points) mainly due to cost
improvements resulting from our operational restructuring and
lower research and development spending (1.0 percentage
points).
• 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.
CONMED Endoscopic Technologies
Net sales
Income (loss) from operations
Operating margin
2009
2008
2010
$ 51,278 $ 48,941 $ 48,517
(1,315 )
(2.7% )
(7,411 )
(14.5% )
(7,904 )
(16.2% )
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 $0.4 million (-0.8%)
in 2010 to $48.5 million from $48.9 million in 2009 principally
due to lower stricture management and forcep sales. Favorable
foreign currency exchange rates (when compared to the foreign
currency exchange rates in the same period a year ago) increased
sales approximately $0.6 million. On a local currency basis, sales
decreased 2.0%. 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%.
• Operating margins as a percentage of net sales increased 13.5
percentage points to (-2.7%) in 2010 from (-16.2%) in 2009. The
increase in operating margins of 13.5 percentage points in 2010
is primarily due to the prior year including costs associated with
the consolidation of the administrative offices (8.3 percentage
points), higher gross margins (1.3 percentage points) and overall
lower administrative expenses (5.3 percentage points) as a result
14
of the consolidation of the CONMED Endoscopic Technologies
division into the Corporate facility offset by a lease impairment
charge in 2010 related to the Chelmsford, Massachusetts facility
(1.4 percentage points); see Note 11 to the Consolidated Financial
Statements.
• 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.
Liquidity and Capital Resources
Our liquidity needs arise primarily from capital investments,
working capital requirements and payments on indebtedness under
the senior credit agreement. During 2011, additional liquidity
needs may arise if the Notes are put to us as further described
below. We have historically met these liquidity requirements with
funds generated from operations, including borrowings under
our revolving credit facility. In addition, we use term borrowings,
including borrowings under our senior credit agreement and
borrowings under separate loan facilities, in the case of real
property purchases, to finance our acquisitions. We also have the
ability to raise funds through the sale of stock or we may issue debt
through a private placement or public offering.
Operating Cash Flows
Our net working capital position was $170.3 million at December 31,
2010. Net cash provided by operating activities was $61.1 million
in 2008, $25.0 million in 2009, and $38.2 million in 2010 generated
on net income of $40.0 million in 2008, $12.1 million in 2009 and
$30.3 million in 2010. The increase in cash provided by operating
activities in 2010 is mainly driven by the increase in net income of
$18.2 million.
Effective January 1, 2010, a new accounting pronouncement
requires accounts receivable sold under our accounts receivable
sale agreement be recorded as additional borrowings rather than
as a reduction in accounts receivable. This change in accounting
has been reflected on a prospective basis. Accordingly, cash
collections on behalf of the purchaser of the $29.0 million undivided
percentage ownership interest in accounts receivable sold prior to
January 1, 2010 have been presented as a reduction in cash from
operations. We terminated the accounts receivable sales agreement
effective November 4, 2010 and repaid the outstanding balance of
$24.0 million. See Note 14 to the Consolidated Financial Statements
for further discussion of the change in accounting for the accounts
receivable sales agreement.
Investing Cash Flows
Capital expenditures were $35.9 million, $21.4 million and
$14.7 million in 2008, 2009, and 2010, respectively. Capital
expenditures are expected to approximate $20.0 million in 2011.
The decrease in capital expenditures in 2010 compared to 2009 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 16 to the
Consolidated Financial Statements and in “Restructuring” below.
During 2010, we acquired a business with a cash purchase price of
$5.0 million (see Note 4 to the Consolidated Financial Statements
for further discussion). During 2008, we purchased our Italian
distributor (the “Italy acquisition”) for $21.8 million.
Financing Cash Flows
Net cash used in financing activities during 2010 consisted of the
following: $2.5 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), $12.0 million in borrowings on our revolver under our
senior credit agreement, $23.0 million in repurchases of treasury
stock, $1.4 million in repayments of term borrowings under
our senior credit agreement, $0.8 million in repayments on our
mortgage notes, a $2.9 million repurchase of our 2.50% convertible
senior subordinated notes and $2.5 million in payments related
to the issuance of debt. See Note 5 to the Consolidated Financial
Statements for further discussion of the repurchase of the Notes.
On November 30, 2010, we entered into the First Amendment to
our Amended and Restated Credit Agreement (the “senior credit
agreement”) providing for an expanded $250.0 million revolving
credit facility expiring on November 30, 2015. The senior credit
agreement continues to include a $135.0 million term loan of which
$54.9 million was outstanding as of December 31, 2010. There
were $22.0 million in borrowings outstanding on the revolving
credit facility as of December 31, 2010. Our available borrowings
on the revolving credit facility at December 31, 2010 were
$218.5 million with approximately $9.5 million of the facility set
aside for outstanding letters of credit.
Borrowings outstanding on the revolving credit facility are due
and payable on November 30, 2015. 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% (1.77% at December 31,
2010) or an alternative base rate; interest rates on the revolving
credit facility portion of the senior credit agreement are at LIBOR
plus 1.75% (2.02% at December 31, 2010) or an alternative base
rate. For those borrowings where the Company elects to use the
alternative base rate, the base rate will be the greater of the Prime
Rate or the Federal Funds Rate in effect on such date plus 0.50%,
plus a margin of 0.50% for term loan borrowings or 0.25% for
borrowings under the revolving credit facility.
The senior credit agreement is collateralized by substantially all
of our personal property and assets. 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, 2010. We are also required, under certain
circumstances, to make mandatory prepayments from net cash
proceeds from any issuance of equity and asset sales.
Annual Report 2010
15 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 $10.5 million at
December 31, 2010. The mortgage note is collateralized by the
CONMED Linvatec property and facilities.
We have outstanding $112.1 million in 2.50% convertible senior
subordinated notes due 2024 (“the Notes”). During 2010, we
repurchased and retired $3.0 million of the Notes for $2.9 million
and recorded a loss on the early extinguishment of debt of
$0.1 million. During 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 Notes 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, 2010,
there was no value assigned to the conversion feature because the
Company’s share price was below the conversion price. The Notes
mature on November 15, 2024 and are not redeemable by us prior
to November 15, 2011. Holders of the Notes have the right to put
to us some or all of the Notes for repurchase on November 15,
2011, 2014 and 2019 and, provided the terms of the indenture are
satisfied, we will be required to repurchase the Notes. If the Notes
are put to us on November 15, 2011, we expect to utilize our
$250.0 million revolving credit facility for payment of the Notes.
The Notes contain two embedded derivatives. The embedded
derivatives are recorded at fair value in other long-term liabilities
and changes in their value are recorded through the consolidated
statements of operations. The embedded derivatives have a
nominal value, and it is our belief that any change in their fair value
would not have a material adverse effect on our business, financial
condition, results of operations, or cash flows.
We had an accounts receivable sales agreement through November
4, 2010 at which time we repaid in full the $24.0 million outstanding
and terminated the agreement. under this agreement, we
and certain of our subsidiaries sold on an ongoing basis certain
accounts receivable to CONMED Receivables Corporation (“CRC”),
a wholly-owned, bankruptcy-remote, special-purpose subsidiary
of CONMED Corporation. CRC in turn sold 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 were
calculated as defined in the accounts receivable sales agreement,
as amended. Effectively, collections on the pool of receivables
flowed first to the purchaser and then to CRC, but to the extent
that the purchaser’s share of collections were less than the
amount of the purchaser’s asset interest, there was no recourse
to CONMED or CRC for such shortfall. For receivables which had
been sold, CONMED Corporation and its subsidiaries retained
collection and administrative responsibilities as agent for the
purchaser. As of December 31, 2009, the undivided percentage
ownership interest in receivables sold by CRC to the purchaser
CONMED Corporation
aggregated $29.0 million which was accounted for as a sale and
reflected in the balance sheet as a reduction in accounts receivable.
Effective January 1, 2010, new accounting guidance requires such
receivables sales to be accounted for as additional borrowings and
recorded in the current portion of long term debt rather than as
previously treated as a sale and reflected in the balance sheet as a
reduction in accounts receivable. This guidance is required to be
applied on a prospective basis, therefore the December 31, 2009
balance sheet reflects accounts receivable sold under the accounts
receivable sales agreement as a reduction in accounts receivable,
not as additional borrowings - see Note 14 for further discussion.
Expenses associated with the sale of accounts receivable, including
the purchaser’s financing costs to purchase the accounts receivable,
were $1.7 million, $0.5 million and $0.3 million, in 2008, 2009, and
2010, respectively, and are included in interest expense.
Our Board of Directors has authorized a share repurchase program
under which we may repurchase up to $100.0 million of our
common stock, although no more than $50.0 million in any calendar
year. We repurchased $23.0 million under the share repurchase
program during 2010. The remaining availability under the Board
of Directors’ authorization for stock repurchases is $23.8 million.
We have financed the repurchases and may finance additional
repurchases through operating cash flow and from available
borrowings under our revolving credit facility.
Management believes that cash flow from operations, including
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.”
Restructuring
During 2010, we continued our operational restructuring plan which
includes the transfer of additional production lines from utica,
New York to our manufacturing facility in Chihuahua, Mexico. We
incurred $2.4 million in costs associated with the restructuring
during 2010. These costs were charged to cost of goods sold and
include severance and other charges associated with the transfer of
production to Mexico.
As part of our ongoing restructuring, in 2010 the Company decided
to exit certain product offerings within our integrated operating
room systems product line. These product offerings include the
service arms and service managers. We incurred $2.5 million in
costs associated with this termination which were charged to cost of
goods sold.
During 2010, we incurred $1.5 million in restructuring costs
associated with the consolidation of administrative functions in
our CONMED Linvatec division. These costs were charged to other
expense.
We will continue to restructure both operations and administrative
functions as necessary throughout the organization. As the
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 restructuring costs will
approximate $2.0 million to $3.0 million in 2011 and will be charged
to cost of goods sold and other expense.
Refer to Note 16 to the Consolidated Financial Statements for
further discussions regarding restructuring.
16 Contractual Obligations
The following table summarizes our contractual obligations for the
next five years and thereafter (amounts in thousands). Purchase
obligations represent purchase orders for goods and services placed
in the ordinary course of business. There were no capital lease
obligations as of December 31, 2010.
Payments Due by Period
Less than
1 Year
1-3
5 Years
Years
$ 199,518 $ 114,337 $ 55,606 $ 24,374 $ 5,201
3-5 More than
Years
Total
48,627 48,264
363
—
—
30,752
9,376
_______ _______ _______ _______ _______
5,905
9,704
5,767
$ 278,897 $ 168,506 $ 65,673 $ 30,141 $ 14,577
_______ _______ _______ _______ _______
_______ _______ _______ _______ _______
Long-term debt
Purchase
obligations
Operating lease
obligations
Total contractual
obligations
In addition to the above contractual obligations, we are required to
make periodic interest payments on our long-term debt obligations;
(see additional discussion under “quantitative and qualitative
Disclosures About Market Risk—Interest Rate Risk” and Note 5 to
the Consolidated Financial Statements). The above table does not
include required contributions to our pension plan in 2011, which
are expected to be approximately $2.1 million. (See Note 9 to the
Consolidated Financial Statements). The above table also does not
include unrecognized tax benefits of approximately $1.3 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”),
performance share units (“PSus”) 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 and PSus are valued at the market value of the
underlying stock on the date of grant. Stock options, SARs, RSus
and PSus 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
See Note 14 to the Consolidated Financial Statements for a
discussion of new accounting pronouncements.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from adverse changes in
market rates and prices such as commodity prices, foreign currency
exchange rates and interest rates. In the normal course of business,
we are exposed to various market risks, including changes in
foreign currency exchange rates and interest rates. We manage
our exposure to these and other market risks through regular
operating and financing activities and as necessary through the use
of derivative financial instruments.
Foreign Currency Risk
Approximately 48% of our total 2010 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 32% of our total net sales in 2010. The
remaining 16% of sales to customers outside the united States was
on an export basis and transacted in united States dollars.
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 2010, changes in foreign currency
exchange rates increased sales by approximately $9.6 million and
income before income taxes by approximately $6.8 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 Loss. These changes in fair
value will be recognized into earnings as a component of sales when
the forecasted transaction occurs. The notional contract amounts
for forward contracts outstanding at December 31, 2010 which have
been accounted for as cash flow hedges totaled $51.4 million. Net
realized gains (losses) recognized for forward contracts accounted
for as cash flow hedges approximated -$0.4 million and $2.0 million
for the years ended December 31, 2009 and 2010, respectively. Net
unrealized losses on forward contracts outstanding which have been
accounted for as cash flow hedges and which have been included in
other comprehensive income totaled $1.2 million at December 31,
2010. It is expected these unrealized losses will be recognized in the
consolidated statement of operations in 2011.
We also enter into forward contracts to exchange foreign currencies
for united States dollars in order to hedge our currency transaction
exposures on intercompany receivables denominated in foreign
currencies. These forward contracts settle each month at month-
end, at which time we enter into new forward contracts. We have
not designated these forward contracts as hedges and have not
applied hedge accounting to them. The notional contract amounts
for forward contracts outstanding at December 31, 2010 which
have not been designated as hedges totaled $30.1 million. Net
realized gains (losses) recognized in connection with those forward
contracts not accounted for as hedges approximated -$3.9 million
and $0.3 million for the years ended December 31, 2009 and
2010, respectively, offsetting gains (losses) on our intercompany
receivables of $4.6 million and -$0.7 million for the years ended
December 31, 2009 and 2010, respectively. 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, 2010 was $2.0 million and is included in Other
Current Liabilities in the Consolidated Balance Sheets.
Refer to Note 13 in the Consolidated Financial Statements for
further discussion.
Interest Rate Risk
At December 31, 2010, we had approximately $76.9 million of
variable rate long-term debt outstanding under our senior credit
agreement. Assuming no repayments other than our 2010
scheduled term loan payments, if market interest rates for similar
borrowings averaged 1.0% more in 2011 than they did in 2010,
interest expense would increase, and income before income taxes
Annual Report 2010
17
would decrease by $0.8 million. Comparatively, if market interest
rates for similar borrowings average 1.0% less in 2011 than they did
in 2010, our interest expense would decrease, and income before
income taxes would increase by $0.8 million.
Business Forward-Looking Statements
This Annual Report for the Fiscal Year Ended December 31, 2010
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.
CONMED Corporation
18 Management’s Report on Internal Control Over Financial Reporting
The management of CONMED Corporation is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles. Our
internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary
to permit preparation of financial statements in accordance with accounting principles generally accepted in the united States of America,
and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company;
and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Management assessed the effectiveness of CONMED’s internal control over financial reporting as of
December 31, 2010. 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, 2010. The effectiveness of the Company’s internal
control over financial reporting as of December 31, 2010 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
Annual Report 2010
19
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, 2010 and December 31, 2009, and the results of their operations and their cash flows for each of the three years in the
period ended December 31, 2010 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, 2010, 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 1 to the consolidated financial statements, the Company changed the manner in which it accounts for the undivided
percentage ownership interest in receivables sold effective January 1, 2010.
As discussed in Note 15 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 28, 2011
CONMED Corporation
20 Consolidated Balance Sheets
December 31, 2009 and 2010
(In thousands except share and per share amounts)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful
accounts of $1,175 in 2009 and $1,066 in 2010
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 2009 and 2010, respectively
Paid-in capital
Retained earnings
Accumulated other comprehensive loss
Less: Treasury stock, at cost; 2,149,832 and 3,077,377 shares in
2009 and 2010, respectively
Total shareholders’ equity
Total liabilities and shareholders’ equity
See notes to consolidated financial statements.
2009
2010
$ 10,098
$ 12,417
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
________
145,350
172,796
8,476
11,153
________
350,192
________
140,895
2,009
295,068
190,091
7,518
________
$ 985,773
________
________
$ 110,433
21,692
28,411
973
18,357
________
179,866
________
85,182
106,046
28,116
________
399,210
________
—
—
313
317,366
325,370
(12,405 )
(54,129 )
________
576,515
________
$ 958,413
________
________
313
319,406
354,020
(15,861 )
(71,315 )
________
586,563
________
$ 985,773
________
________
Annual Report 2010
21
Consolidated Statements of Operations
Years Ended December 31, 2008, 2009 and 2010
(In thousands except per share amounts)
Net sales
Cost of sales
gross profit
Selling and administrative expense
Research and development expense
Other expense
Income from operations
gain (loss) 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
See notes to consolidated financial statements.
As Adjusted
(Note 15)
2008
2009
2010
$ 742,183
$ 694,739
$ 713,723
359,802
________
357,407
________
382,381
________
337,332
________
272,437
33,108
266,310
31,837
1,577
________
10,916
________
307,122
________
309,063
________
348,339
________
365,384
________
276,463
29,652
2,176
________
308,291
________
75,259
28,269
57,093
1,947
4,823
1,083
4,111
(79)
4,244
10,372
________
7,086
________
7,113
________
62,011
18,155
45,657
22,022
________
6,018
________
15,311
________
$ 39,989
________
________
$ 12,137
________
________
$ 30,346
________
________
$
1.39
1.37
$
0.42
0.42
$
1.06
1.05
CONMED Corporation
22
Consolidated Statements of Shareholders’ Equity
Years Ended December 31, 2008, 2009 and 2010
(In thousands) As Adjusted (Note 15)
Common Stock
Shares
Amount
Paid-in
Capital
Accumulated
Other
Retained Comprehensive Treasury Shareholders’
Earnings
Stock
Equity
Loss
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
Total comprehensive income
Balance at December 31, 2009
31,299 $
(505 ) $ (67,582 ) $ 518,284
________ ________ ________ ________ ________ ________ ________
________ ________ ________ ________ ________ ________ ________
313 $ 309,734 $ 276,324 $
(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
12,137
30,764
________ ________ ________ ________ ________ ________ ________
31,299 $
313 $ 317,366 $ 325,370 $ (12,405 ) $ (54,129 ) $ 576,515
________ ________ ________ ________ ________ ________ ________
________ ________ ________ ________ ________ ________ ________
Common stock issued under employee plans
(2,376 )
(1,696 )
Repurchase of treasury stock
Tax benefit arising from common stock issued
under employee plans
Retirement of 2.50% convertible notes
Stock-based compensation
Comprehensive income (loss):
Foreign currency translation adjustments
Pension liability (net of income tax
benefit of $1,289)
Cash flow hedging loss (net of income tax
benefit of $775)
Net income
Total comprehensive income
Balance at December 31, 2010
See notes to consolidated financial statements.
227
(34 )
4,223
5,791
1,719
(22,977 )
(22,977 )
227
(34 )
4,223
65
(2,200 )
(1,321 )
30,346
26,890
________ ________ ________ ________ ________ ________ ________
31,299 $
313 $ 319,406 $ 354,020 $ (15,861 ) $ (71,315 ) $ 586,563
________ ________ ________ ________ ________ ________ ________
________ ________ ________ ________ ________ ________ ________
Annual Report 2010
23
Consolidated Statements of Cash Flows
Years Ended December 31, 2008, 2009 and 2010
(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) loss 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
Repurchase of treasury stock
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
Payments related to issuance of debt
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
See notes to consolidated financial statements.
CONMED Corporation
As Adjusted
(Note 15)
2008
2009
2010
$ 39,989
________
$ 12,137
________
$ 30,346
________
14,641
4,823
17,695
4,178
16,304
(3,000 )
1,630
(1,738 )
(1,947 )
18,651
4,111
18,521
4,308
4,241
(13,000 )
561
(886 )
(1,083 )
17,392
4,244
20,171
4,223
13,158
(29,000 )
227
(485 )
79
(3,735 )
(8,110 )
(7,043 )
2,627
(238 )
(4,469 )
(10,458 )
________
21,160
________
61,149
________
(12,879 )
(9,454 )
(7,400 )
(2,287 )
5,630
(197 )
4,054
________
12,891
________
25,028
________
9,342
(20,317 )
(4,645 )
(692 )
2,516
332
(8,648 )
________
7,897
________
38,243
________
(22,023 )
(35,879 )
________
(57,902 )
________
(330 )
(21,444 )
________
(21,774 )
________
(5,289 )
(14,732 )
________
(20,021 )
________
7,347
—
1,738
(1,350 )
4,000
(1,109 )
(20,248 )
—
4,270
________
(5,352 )
________
2,221
________
116
11,695
________
$ 11,811
________
________
1,198
—
886
(1,350 )
6,000
(1,425 )
(7,808 )
—
(1,188 )
________
(3,687 )
________
(1,280 )
________
(1,713 )
11,811
________
$ 10,098
________
________
2,452
(22,977 )
485
(1,350 )
12,000
(824 )
(2,933 )
(2,525)
66
________
(15,606 )
________
(297 )
________
2,319
10,098
________
$ 12,417
________
________
$
9,381
7,397
$ 6,303
3,650
$ 6,025
3,257
24
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.
December 31, 2009, the undivided percentage ownership interest in
receivables sold by CRC to the purchaser aggregated $29.0 million
which was accounted for as a sale and reflected in the balance
sheet as a reduction in accounts receivable. Effective January 1,
2010, new accounting guidance requires such receivables sales
to be accounted for as additional borrowings and recorded in
the current portion of long term debt rather than as previously
treated as a sale and reflected in the balance sheet as a reduction
in accounts receivable. This guidance is required to be applied
on a prospective basis, therefore the December 31, 2009 balance
sheet reflects accounts receivable sold under the accounts
receivable sales agreement as a reduction in accounts receivable,
not as additional borrowings - see Note 14 for further discussion.
Expenses associated with the sale of accounts receivable, including
the purchaser’s financing costs to purchase the accounts receivable,
were $1.7 million, $0.5 million and $0.3 million, in 2008, 2009, and
2010, respectively, and are included in interest expense.
Use of estimates
Inventories
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 had an accounts receivable sales agreement through November
4, 2010 at which time we repaid in full the $24.0 million outstanding
and terminated the agreement. under this agreement, we
and certain of our subsidiaries sold on an ongoing basis certain
accounts receivable to CONMED Receivables Corporation (“CRC”),
a wholly-owned, bankruptcy-remote, special-purpose subsidiary
of CONMED Corporation. CRC in turn sold 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 were
calculated as defined in the accounts receivable sales agreement,
as amended. Effectively, collections on the pool of receivables
flowed first to the purchaser and then to CRC, but to the extent that
the purchaser’s share of collections was less than the amount of
the purchaser’s asset interest, there was no recourse to CONMED
or CRC for such shortfall. For receivables which had been sold,
CONMED Corporation and its subsidiaries retained collection and
administrative responsibilities as agent for the purchaser. As of
Inventories are valued at the lower of cost or market. Cost is
determined on the FIFO (first-in, first-out) method of accounting.
Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated
using the straight-line method over the following estimated useful
lives:
Building and improvements 40 years
Leasehold improvements
Machinery and equipment 2 to 15 years
Shorter of life of asset or life of lease
Goodwill and other intangible assets
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
$295.1 million and other intangible assets of $190.1 million as of
December 31, 2010.
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 with newly acquired entities. We
completed our goodwill impairment testing as of October 1, 2010
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 76% to 121%. 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
Annual Report 2010
25 income approach when performing impairment testing with the
resultant fair value exceeding carrying value by 15%. The income
approach contained certain key assumptions including that revenue
would resume historical growth patterns in 2011 while including
certain cost savings associated with the operational restructuring
plan completed during 2010. 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 analysis and assessment of actual customer attrition
and activity as events and circumstances warrant. 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
CONMED Corporation
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 $108.3 million and $111.7 million at
December 31, 2009 and 2010, 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 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 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 Operations.
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.
26 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.
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, 2008, 2009 and 2010,
respectively:
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 a repatriation of assets from
a subsidiary or the sale or liquidation of a subsidiary. 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.
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
$13.4 million, $11.3 million and $7.9 million for 2008, 2009
and 2010, 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 $1.1 million at December 31, 2010 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
Net income
Basic-weighted average
shares outstanding
Effect of dilutive potential
securities
Diluted-weighted average
shares outstanding
Basic EPS
Diluted EPS
2008
$ 39,989
_______
_______
2010
2009
$ 12,137 $ 30,346
_______
_______
_______
_______
28,796
29,074
28,715
431
_______
29,227
_______
_______
$ 1.39
_______
_______
$ 1.37
_______
_______
_______
68
196
_______
29,142
_______
_______
$
_______
_______
$
_______
_______
0.42 $
0.42 $
28,911
_______
_______
1.06
_______
_______
1.05
_______
_______
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 2.2 and 1.5 million at
December 31, 2009 and 2010, respectively. upon conversion of
the Notes, the holder of each Note will receive the conversion
value of the Note payable in cash up to the principal amount of the
Note and CONMED common stock for the Note’s conversion value
in excess of such principal amount. As of December 31, 2010, our
share price has not exceeded the conversion price of the Notes,
therefore the conversion value was less than the principal amount
of the Notes. 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
All share-based payments to employees, including grants of
employee stock options, restricted stock units, performance share
units and stock appreciation rights are recognized in the financial
statements based at their fair values. Compensation expense is
generally recognized using a straight-line method over the vesting
period. Compensation expense for performance share units is
recognized using the graded vesting method.
We issue 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.
Annual Report 2010
27
Accumulated other comprehensive loss
Note 4 — goodwill and Other Intangible Assets
Accumulated other comprehensive loss consists of the following:
The changes in the net carrying amount of goodwill for the years
ended December 31, are as follows:
Cash Flow
Hedging
Gain (Loss)
Accumulated
Other
Cumulative
Translation Comprehensive
Pension
Liability Adjustments
Loss
Balance,
December 31, 2009 $
________
76 $ (16,282 ) $ 3,801 $ (12,405 )
________ ________ ________
Pension liability,
net of income tax
—
(2,200 )
—
(2,200 )
Cash flow hedging
loss, net of
income tax
Foreign currency
translation
adjustments
(1,321 )
—
—
(1,321 )
________
—
65
________ ________ ________
—
65
Balance,
December 31, 2010 $
________
________
(1,245 ) $ (18,482 ) $ 3,866 $
(15,861 )
________ ________ ________
________ ________ ________
Note 2 — Inventories
Inventories consist of the following at December 31,:
Raw materials
Work in process
Finished goods
2009
2010
$ 48,959 $ 49,038
15,460
17,203
98,113 108,298
________ ________
$ 164,275 $ 172,796
________ ________
________ ________
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
2009
2010
8,902
$ 4,486 $ 4,486
95,923
93,855
148,641
161,635
5,198
________ ________
255,884
267,242
(112,382 ) (126,347 )
________ ________
$ 143,502 $ 140,895
________ ________
________ ________
We lease various manufacturing facilities, office facilities and
equipment under operating leases. Rental expense on these
operating leases was approximately $3,443, $5,988 and $5,830 for
the years ended December 31, 2008, 2009 and 2010, respectively.
The aggregate future minimum lease commitments for operating
leases at December 31, 2010 are as follows:
2011
2012
2013
2014
2015
Thereafter
$ 5,905
5,163
4,541
3,636
2,131
9,376
CONMED Corporation
Balance as of January 1,
Adjustments to goodwill resulting from
business acquisitions finalized
Foreign currency translation
Balance as of December 31,
2009
2010
$ 290,245 $ 290,505
300 4,378
185
(40 )
________ ________
$ 290,505 $ 295,068
________ ________
________ ________
Total accumulated impairment losses (associated with our CONMED
Endoscopic Technologies operating unit) aggregated $46,689 at
December 31, 2009 and 2010.
During 2010, the Company acquired the stock of a business for a
cash purchase price of $5.0 million. The fair value of this acquisition
included assets of $5.0 million related to in-process research
and development and $4.1 million in goodwill, and liabilities of
$2.4 million related to contingent consideration and $1.7 million
in deferred income tax liabilities. The in-process research and
development and goodwill associated with the acquisition are not
deductible for income tax purposes.
goodwill associated with each of our principal operating units at
December 31, is as follows:
CONMED Electrosurgery
CONMED Endosurgery
CONMED Linvatec
CONMED Patient Care
Balance as of December 31,
2009
2010
$ 16,645 $ 16,645
42,439
42,439
171,397
175,682
60,024 60,302
________ ________
$ 290,505 $ 295,068
________ ________
________ ________
Other intangible assets consist of the following:
Dec. 31, 2009
Dec. 31, 2010
Gross
Carrying
Amount Amortization Amount Amortization
Gross
Accumulated Carrying Accumulated
$ 127,594 $ (36,490 ) $ 127,594 $ (40,801 )
41,809
(30,408 )
47,178 (32,224 )
Amortized
intangible assets:
Customer
relationships
Patents and other
intangible assets
Unamortized
intangible assets:
Trademarks and
tradenames
88,344
88,344
—
________ ________
________
$ 257,747 $ (66,898 ) $ 263,116 $ (73,025 )
________ ________
________
________ ________
________
—
________
________
________
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.
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
28
flow for an indefinite period of time. Therefore, our trademarks and
tradenames intangible assets are not amortized.
Amortization expense related to intangible assets for the year
ending December 31, 2010 and estimated amortization expense for
each of the five succeeding years is as follows:
2010
2011
2012
2013
2014
2015
$ 6,127
5,963
5,910
5,682
5,210
4,602
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
2010
$ 10,000 $ 22,000
56,287
54,938
106,770 108,189
11,312 10,488
________ ________
195,615
184,369
2,174 110,433
________ ________
$ 182,195 $ 85,182
________ ________
________ ________
On November 30, 2010, we entered into the First Amendment to
our Amended and Restated Credit Agreement (the “senior credit
agreement”) providing for an expanded revolving credit facility of
$250.0 million expiring on November 30, 2015. The senior credit
agreement continues to include a $135.0 million term loan. There
were $22.0 million in borrowings outstanding on the revolving
credit facility as of December 31, 2010. Our available borrowings
on the revolving credit facility at December 31, 2010 were
$218.5 million with approximately $9.5 million of the facility set
aside for outstanding letters of credit. There were $54.9 million in
borrowings outstanding on the term loan at December 31, 2010.
Borrowings outstanding on the revolving credit facility are due
and payable on November 30, 2015. 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% (1.77% at December 31,
2010) or an alternative base rate; interest rates on the revolving
credit facility portion of the senior credit agreement are at LIBOR
plus 1.75% (2.02% at December 31, 2010) or an alternative base
rate. For those borrowings where the Company elects to use the
alternative base rate, the base rate will be the greater of the Prime
Rate or the Federal Funds Rate in effect on such date plus 0.50%,
plus a margin of 0.50% for term loan borrowings or 0.25% for
borrowings under the revolving credit facility.
The senior credit agreement is collateralized by substantially all
of our personal property and assets. 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 $10.5 million at
December 31, 2010. The mortgage note is collateralized by the
CONMED Linvatec property and facilities.
We have outstanding $112.1 million in 2.50% convertible senior
subordinated notes due 2024 (“the Notes”). During 2010, we
repurchased and retired $3.0 million of the Notes for $2.9 million
and recorded a loss on the early extinguishment of debt of
$0.1 million. During 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 Notes 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, 2010,
there was no value assigned to the conversion feature because the
Company’s share price was below the conversion price. The Notes
mature on November 15, 2024 and are not redeemable by us prior
to November 15, 2011. Holders of the Notes have the right to put
to us some or all of the Notes for repurchase on November 15,
2011, 2014 and 2019 and, provided the terms of the indenture are
satisfied, we will be required to repurchase the Notes, and therefore
we have classified the Notes as a current liability.
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.
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 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, 2008, 2009 and 2010, we
have recorded interest expense related to the amortization of debt
discount on the Notes of $4.8 million, $4.1 million and
Annual Report 2010
29
$4.2 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, 2008, 2009
and 2010, we have recorded interest expense on the Notes of
$3.7 million, $2.9 million and $2.8 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
2009
2010
$ 115,093 $ 112,093
(3,904 )
(8,323 )
________ ________
$ 108,189
$ 106,770
________ ________
________ ________
$ 21,491
$ 21,438
________ ________
________ ________
The scheduled maturities of long-term debt outstanding at
December 31, 2010 are as follows:
The tax effects of the significant temporary differences which
comprise the deferred income tax assets and liabilities at
December 31, 2009 and 2010 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
2009
2010
780
$ 3,912 $ 4,509
3,091
3,213
4,757
2,381
2,331
2,903
2,524
2,877
2,157
4,309
3,436
4,581
3,814
2,079
1,513
10,390
8,558
(226)
(1,058)
________ ________
34,556 38,275
________ ________
2011
2012
2013
2014
2015
$ 114,337
54,556
1,050
1,140
23,234
Thereafter
5,201
Note 6 — Income Taxes
The provision for income taxes for the years ended December 31,
2008, 2009 and 2010 consists of the following:
2008
2009
2010
Current tax expense:
Federal
State
Foreign
Deferred income tax expense
Provision for income taxes
________ ________
(1,281 ) $
791
2,267
$ 2,094 $
498
3,126
(717 )
232
2,638
________
2,153
5,718
13,158
16,304
________ ________
________
$ 22,022 $ 6,018 $ 15,311
________
________ ________
________
________ ________
1,777
4,241
A reconciliation between income taxes computed at the statutory
federal rate and the provision for income taxes for the years ended
December 31, 2008, 2009 and 2010 follows:
2008
2009
2010
Tax provision at statutory rate
based on income before
income taxes
State income taxes
Stock-based compensation
Foreign income taxes
Research & development credit
Settlement of taxing authority
examinations
Other nondeductible permanent
differences
Other, net
35.00%
1.47
0.43
(0.58 )
(1.45 )
35.00% 35.00%
5.59
1.59
(2.90 )
(4.46 )
2.55
0.01
0.07
(1.83 )
—
(5.60 )
(3.27 )
0.91
(0.27 )
________ ________
35.51%
________ ________
________ ________
2.86
1.07
1.22
(0.22 )
________
33.15% 33.53%
________
________
CONMED Corporation
Liabilities:
goodwill and intangible assets
Depreciation
State taxes
Contingent interest
Net liability
95,049
4,548
2,090
108,230
7,446
3,443
14,050 14,717
________ ________
115,737 133,836
________ ________
$ (81,181) $ (95,561)
________ ________
________ ________
Income before income taxes consists of the following u.S. and
foreign income:
u.S. income
Foreign income
Total income
2010
2008
2009
$ 51,616 $ 10,108 $ 37,953
7,704
________
________ ________
$ 62,011 $ 18,155 $ 45,657
________ ________
________
________
________ ________
10,395
8,047
The gross amount of Federal net operating loss carryforwards
available is $10.1 million. This carryforward 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 $4.6 million. These credits begin to
expire in 2024. The total amount of Federal Foreign Tax Credit
carryforward available is $2.1 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 2009.
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 $47.0 million at
December 31, 2010.) It is not practicable given the complexities of
the foreign tax credit calculation to estimate the tax due upon any
possible repatriation.
30
We recognize tax liabilities in accordance with the provisions
for accounting for 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 following table summarizes the activity related to our
unrecognized tax benefits for the years ending December 31,:
Balance as of January 1,
Increases 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,
2008
2009
$ 1,866 $ 2,869 $ 1,869
2010
212
139
52
1,117
183
166
(154 )
(1,322 )
(757 )
(172 )
—
________ ________ ________
$ 2,869 $ 1,869 $ 1,330
________ ________ ________
________ ________ ________
—
If the total unrecognized tax benefits of $1.3 million at
December 31, 2010 were recognized, it would reduce our annual
effective tax rate. The amount of interest accrued in 2010 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
$0.0 million and $0.9 million.
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, 2009 and 2010, 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. During 2010, we repurchased 1.2 million
shares for an aggregate cost of $23.0 million. No stock repurchases
were made in 2008 or 2009. Through December 31, 2010, we
have repurchased a total of 3.3 million shares of common stock
aggregating $76.2 million under this authorization.
We have reserved 6.0 million shares of common stock for
issuance to employees and directors under three shareholder-
approved share-based compensation plans (the “Plans”) of which
approximately 1.0 million shares remain available for grant at
December 31, 2010. 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”) and performance stock units (“PSus”) are valued at the
market value of the underlying stock on the date of grant. Stock
options, SARs, RSus and PSus 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 and PSus are from the Company’s treasury
stock.
Total pre-tax stock-based compensation expense recognized in
the Consolidated Statements of Operations was $4.2 million,
$4.3 million and $4.2 million for the years ended December 31,
2008, 2009 and 2010, respectively. This amount is included in
selling and administrative expenses on the Consolidated Statements
of Operations. Tax related benefits of $1.1 million, $1.3 million and
$1.6 million were also recognized for the years ended December
31, 2008, 2009 and 2010. Cash received from the exercise of stock
options was $6.9 million, $0.7 million and $2.0 million for the years
ended December 31, 2008, 2009 and 2010, 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, 2008, 2009 and 2010
was $9.35, $7.03 and $7.72, 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, 2008, 2009 and 2010, respectively: risk-free interest
rate of 3.25%, 2.48% and 2.07%; volatility factor of the expected
market price of the Company’s common stock of 30.36%, 37.17%
and 36.72%; a weighted-average expected life of the option and SAR
of 5.7 years for 2008, 6.2 years for 2009, and 6.4 years for 2010; 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
u.S. Treasury bond with a maturity date closest to the expected
life. Expected volatilities are based upon historical volatility of the
Company’s stock over a period equal to the expected life of each
option and SAR grant. The expected life 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, 2010.:
Number
of Shares Weighted-Average
(in 000’s)
Outstanding at December 31, 2009
granted
Forfeited
Exercised
Outstanding at December 31, 2010
Exercisable at December 31, 2010
2,451
149
(100 )
(163 )
_________
2,337
_________
_________
_________
_________
1,816 $
Exercise Price
23.70
$
19.26
$
25.30
$
14.68
$
_________
$
23.98
_________
_________
24.75
_________
_________
The weighted average remaining contractual term for stock options
and SARs outstanding and exercisable at December 31, 2010 was
4.5 years and 3.5 years, respectively. The aggregate intrinsic value
of stock options and SARs outstanding and exercisable at December
31, 2010 was $8.1 million and $5.2 million, respectively. The
aggregate intrinsic value of stock options and SARs exercised during
the years ended December 31, 2008, 2009 and 2010 was
$4.0 million, $0.2 million and $1.2 million, respectively.
Annual Report 2010
31
The following table illustrates the RSu and PSu activity for the year
ended December 31, 2010. There were no RSu’s granted prior to
2006 and no PSu’s granted prior to 2010.
Outstanding at December 31, 2009
granted
vested
Forfeited
Outstanding at December 31, 2010
425
270
(105 )
(56 )
_________
534
_________
_________
Number Weighted-Average
of Shares
(in 000’s)
Grant-Date
Fair Value
22.03
$
19.26
$
22.69
$
21.84
$
_________
$
20.54
_________
_________
The weighted average fair value of awards of RSus and PSus granted
in the years ended December 31, 2008, 2009 and 2010 was $26.94,
$17.02 and $19.26, respectively.
The total fair value of shares vested was $1.3 million, $1.8 million
and $2.8 million for the years ended December 31, 2008, 2009 and
2010, respectively.
As of December 31, 2010, there was $11.0 million of total
unrecognized compensation cost related to nonvested stock options,
SARs, RSus and PSus granted under the Plan which is expected to
be recognized over a weighted average period of 3.3 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
2010, we issued approximately 24,300 shares of common stock
under the Employee Plan. No stock-based compensation expense
has been recognized in the accompanying consolidated financial
statements as a result of common stock issuances under the
Employee Plan.
Note 8 — Business Segments and geographic Areas
CONMED conducts its business through five principal operating
segments, CONMED Endoscopic Technologies, CONMED
Endosurgery, CONMED Electrosurgery, CONMED Linvatec and
CONMED Patient Care. We believe each of our segments are similar
in the nature of products, production processes, customer base,
distribution methods and regulatory environment. 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.
CONMED Corporation
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 612,521
CONMED Patient Care
78,384
CONMED Endoscopic
Technologies
Total
2010
2008
2009
$ 291,910 $ 269,820 $ 288,421
142,288
144,014
155,659
________ ________ ________
430,709
413,834
447,569
100,493
97,210
94,959
69,004
66,027
64,459
________ ________ ________
574,820
70,978
596,923
68,283
48,517
48,941
51,278
________ ________ ________
$ 742,183 $ 694,739 $ 713,723
________ ________ ________
________ ________ ________
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:
CONMED Linvatec, Electrosurgery,
2008
2009
2010
and Endosurgery
CONMED Patient Care
CONMED Endoscopic Technologies
Corporate
Income from operations
gain (loss) on early
extinguishment of debt
Amortization of bond discount
Interest expense
Income before income taxes
$ 98,101 $ 62,715 $ 77,271
2,259
(38 )
(1,263 )
(7,411 )
(1,315 )
(7,904 )
(18,825 )
(25,279 )
(17,690 )
________ ________ ________
57,093
28,269
75,259
1,947
4,823
10,372
(79 )
4,244
7,113
________ ________ ________
$ 62,011 $ 18,155 $ 45,657
________ ________ ________
________ ________ ________
1,083
4,111
7,086
Net sales information for geographic areas consists of the following:
united States
Canada
united Kingdom
Japan
Australia
All other countries
Total
2010
2008
2009
$ 411,773 $ 385,770 $ 371,914
61,593
48,713
52,792
31,576
35,155
44,123
32,226
29,244
28,026
30,270
34,564
30,159
175,199
181,850
165,698
________ ________ ________
$ 742,183 $ 694,739 $ 713,723
________ ________ ________
________ ________ ________
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, 2009 and 2010.
No single customer represented over 10% of our consolidated net
sales for the years ended December 31, 2008, 2009 and 2010.
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 $2.7 million,
$6.8 million and $6.5 million during the years ended December 31,
2008, 2009 and 2010, respectively.
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
32
$4.4 million and a reduction in accrued pension of $11.4 million
which is included in other long term liabilities. During 2009, the
Company recorded a one-time discretionary $4.0 million employer
401(k) contribution and in 2010 permanently increased the 401(k)
employer contribution to offset the negative impact of the Plan
freeze.
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
Change in plan assets
Fair value of plan assets at
beginning of year
Actual gain on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at end of year
Funded status
2009
2010
$ 61,222 $ 66,136
________ ________
________ ________
61,222
$ 76,610
219
187
3,585
3,920
5,538
(4,802 )
(11,358 )
—
(4,428 )
(3,335 )
________ ________
$ 61,222 $ 66,136
________ ________
6,723
4,073
(3,335 )
$ 45,381 $ 52,842
4,962
1,933
(4,428 )
________ ________
$ 52,842 $ 55,309
________ ________
$ (8,380 ) $ (10,827 )
________ ________
________ ________
Amounts recognized in the consolidated balance sheets consist of
the following at December 31,:
2009
2010
Accrued long-term pension liability
Accumulated other comprehensive loss
$ 8,380 $ 10,827
(29,313 )
(25,823 )
The following actuarial assumptions were used to determine our
accumulated and projected benefit obligations as of December 31,:
Net periodic pension cost for the years ended December 31,
consists of the following:
2008
2009
2010
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
$ 5,835 $ 1,887 $
219
3,977
(4,210 )
—
4
(351 )
1,320
3,920
(3,817 )
(4,368 )
1
(88 )
1,627
3,585
(4,227 )
—
—
—
1,313
________
890
________
________
________ ________
$ 6,575 $
________ ________
________ ________
(838 ) $
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
2008
6.48%
8.00%
3.50%
2009
5.97%*
8.00%
3.50%
2010
5.86%
8.00%
N/A
*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.
The allocation of pension plan assets by category is as follows at
December 31,:
Percentage of Pension
Plan Assets
2009
2010
64%
36
_______
100%
_______
_______
70%
30
_______
100%
_______
_______
Target
Allocation
2011
75%
25
_______
100%
_______
_______
Discount rate
Expected return on plan assets
2009
5.86%
8.00%
2010
5.41%
8.00%
Equity securities
Debt securities
Total
Accumulated other comprehensive loss for the years ended
December 31, 2009 and 2010 consists of net actuarial losses
of $25,823 and $29,313, respectively, not yet recognized in net
periodic pension cost (before income taxes).
Other changes in plan assets and benefit obligations recognized in
other comprehensive income in 2010 are as follows:
Current year actuarial loss
Amortization of actuarial loss
Total recognized in other
comprehensive loss
$ (4,803 )
1,313
________
$ (3,490 )
________
________
The estimated portion of net actuarial loss in accumulated
other comprehensive loss that is expected to be recognized as a
component of net periodic pension cost in 2011 is $1,464.
As of December 31, 2010, the Plan held 27,562 shares of our
common stock, which had a fair value of $0.7 million. We believe
that our long-term asset allocation on average will approximate the
targeted allocation. We regularly review our actual asset allocation
and periodically rebalance the pension plan’s investments to our
targeted allocation when deemed appropriate.
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
Total Assets at Fair value
2009
2010
$ 20,809 $ 24,035
14,818
16,093
13,268
14,456
2,672 2,000
________ ________
$ 52,842 $ 55,309
________ ________
________ ________
Annual Report 2010
33
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, 2009 and 2010:
Common Stock:
Money Market
Fund:
Equity Funds:
Fixed Income
Securities:
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.
These investments are public investment
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.
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, 2010:
Common Stock
Money Market Fund
Equity Funds
Fixed Income Securities
Total Assets at Fair value
Total
Level 1
Level 2
$ 24,035 $ — $ 24,035
14,818
14,818
—
14,456
14,456
—
2,000
—
2,000
________ ________ ________
$ 40,491 $ 14,818 $ 55,309
________ ________ ________
________ ________ ________
We are required and expect to contribute approximately
$2.1 million to our pension plan for the 2011 Plan year.
CONMED Corporation
The following table summarizes the benefits expected to be paid
by our pension plan in each of the next five years and in aggregate
for the following five years. The expected benefit payments are
estimated based on the same assumptions used to measure the
Company’s projected benefit obligation at December 31, 2010 and
reflect the impact of expected future employee service.
2011
2012
2013
2014
2015
2016-2020
$ 3,475
2,331
2,851
2,966
3,352
19,471
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
financial condition, results of operations or cash flows.
Manufacturers of medical products may face exposure to significant
product liability claims. To date, we have not experienced any
product liability claims that are material to our financial statements
or condition, but any such claims arising in the future could have a
material adverse effect on our business or results of operations.
We currently maintain commercial product liability insurance of
$25 million per incident and $25 million in the aggregate annually,
which we believe is adequate. This coverage is on a claims-made
basis. There can be no assurance that claims will not exceed
insurance coverage, that the carriers will be solvent or that such
insurance will be available to us in the future at a reasonable cost.
Our operations are subject, and in the past have been subject,
to a number of environmental laws and regulations governing,
among other things, air emissions, wastewater discharges, the use,
handling and disposal of hazardous substances and wastes, soil
and groundwater remediation and employee health and safety. In
some jurisdictions environmental requirements may be expected to
become more stringent in the future. In the united States certain
environmental laws can impose liability for the entire cost of site
restoration upon each of the parties that may have contributed to
conditions at the site regardless of fault or the lawfulness of the
party’s activities. While we do not believe that the present costs
34
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.
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:
Note 11 — Other Expense
Other expense for the year ended December 31, consists of the
following:
2008
2009
2010
New plant/facility
consolidation costs
Net pension gain
Product recall
CONMED Endoscopic Technologies
division consolidation costs
CONMED Linvatec division
consolidation costs
$ 1,577 $ 2,726 $
(1,882 )
5,992
—
—
—
4,080
679
—
—
—
________ ________
—
1,497
________
—
Other expense
$ 1,577 $ 10,916 $
________ ________
________ ________
2,176
________
________
During 2008, we announced a plan to restructure certain of our
operations. We incurred $1.6 million and $2.7 million in the years
ending December 31, 2008 and 2009, respectively, related to the
consolidation of certain domestic distribution activities in a new
leased consolidated distribution center in Atlanta, georgia (see
Note 16).
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 $5.1 million of the total $6.0 million of
expected costs.
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 and include charges relating to
severance, lease impairment 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.
During 2010, we recorded a lease impairment charge of $0.7 million
related to our Chelmsford, Massachusetts facility.
During 2010, we consolidated certain administrative functions in our
CONMED Linvatec division and incurred $1.5 million in severance
related restructuring 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
Balance as of January 1,
Provision for warranties
Claims made
Balance as of December 31,
2008
2009
2010
$ 3,306 $ 3,341 $
________ ________
3,581
(3,546 )
3,638
(3,596 )
________ ________
$ 3,341 $ 3,383 $
________ ________
________ ________
3,383
________
3,510
(3,530 )
________
3,363
________
________
Note 13 — Fair value Measurement
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 certain foreign currency exposures.
By nature, all financial instruments involve market and credit risks.
We enter into forward contracts with major investment grade
financial institutions and have policies to monitor the credit risk
of those counterparties. While there can be no assurance, we
do not anticipate any material non-performance by any of these
counterparties.
Foreign Currency Forward Contracts. We hedge forecasted
intercompany sales denominated in foreign currencies through the
use of forward contracts. We account for these forward contracts
as cash flow hedges. To the extent these forward contracts meet
hedge accounting criteria, changes in their fair value are not
included in current earnings but are included in Accumulated
Other Comprehensive Loss. These changes in fair value will
be recognized into earnings as a component of sales when the
forecasted transaction occurs. The notional contract amounts for
forward contracts outstanding at December 31, 2010 which have
been accounted for as cash flow hedges totaled $51.4 million. Net
realized gains (losses) recognized for forward contracts accounted
for as cash flow hedges approximated -$0.4 million and $2.0 million
for the years ended December 31, 2009 and 2010, respectively. Net
unrealized losses on forward contracts outstanding which have been
accounted for as cash flow hedges and which have been included in
other comprehensive income totaled $1.2 million at December 31,
2010. It is expected these unrealized losses will be recognized in the
consolidated statement of operations in 2011.
We also enter into forward contracts to exchange foreign currencies
for united States dollars in order to hedge our currency transaction
exposures on intercompany receivables denominated in foreign
currencies. These forward contracts settle each month at month-
end, at which time we enter into new forward contracts. We have
not designated these forward contracts as hedges and have not
applied hedge accounting to them. The notional contract amounts
for forward contracts outstanding at December 31, 2010 which
have not been designated as hedges totaled $30.1 million. Net
realized gains (losses) recognized in connection with those forward
contracts not accounted for as hedges approximated -$3.9 million
and $0.3 million for the years ended December 31, 2009 and
2010, respectively, offsetting gains (losses) on our intercompany
receivables of $4.6 million and -$0.7 million for the years ended
December 31, 2009 and 2010, respectively. These gains and losses
have been recorded in selling and administrative expense in the
consolidated statements of operations.
Annual Report 2010
35
The carrying amounts reported in our balance sheets for cash and
cash equivalents, accounts receivable, accounts payable and long-
term debt excluding the 2.50% convertible senior subordinated notes
approximate fair value. The fair value of the Notes approximated
$108.3 million and $111.7 million at December 31, 2009 and
December 31, 2010, 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. Our accounts receivable sales
agreement under which a wholly-owned, bankruptcy-remote, special
purpose subsidiary of CONMED Corporation sells an undivided
percentage ownership interest in receivables to a bank is no longer
permitted to be accounted for as a sale and reduction in accounts
receivable. We adopted this guidance effective January 1, 2010
and as a result, accounts receivable sold under the agreement were
recorded as additional borrowings rather than as a reduction in
accounts receivable prior to our payment in full of the outstanding
balance and termination of the agreement on November 4, 2011.
Note 15 — 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, 2008, 2009 and 2010,
we have recorded interest expense related to the amortization of
debt discount on the Notes of $4.8 million, $4.1 million and
$4.2 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, 2008, 2009
and 2010, we have recorded interest expense on the Notes of
$3.7 million, $2.9 million and $2.8 million, respectively, at the
contractual coupon rate of 2.50%.
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, 2010:
Asset
Balance Sheet
Location
Derivatives
designated
as hedged
instruments:
Foreign
Exchange Other current
Contracts
liabilities
Derivatives
not designated
as hedging
instruments:
Foreign
Exchange Other current
Contracts
liabilities
Total
derivatives
Liabilities
Fair Balance Sheet
Value
Location
Net
Fair
Fair
Value Value
Other current
$
(8)
______
liabilities
$ 1,983 $ 1,975
______ ______
Other current
(12)
______
liabilities
46
______ ______
58
$
(20)
______
______
$ 2,041 $ 2,021
______ ______
______ ______
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
$2.0 million in other current liabilities.
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.
Valuation Hierarchy. A valuation hierarchy was established for
disclosure of the inputs to the valuations used to measure fair value.
This hierarchy prioritizes the inputs into three broad levels as follows.
Level 1 inputs are quoted prices (unadjusted) in active markets for
identical assets or liabilities. Level 2 inputs are quoted prices for
similar assets and liabilities in active markets, quoted prices for
identical or similar assets in markets that are not active, inputs other
than quoted prices that are observable for the asset or liability,
including interest rates, yield curves and credit risks, or inputs that
are derived principally from or corroborated by observable market
data through correlation. Level 3 inputs are unobservable inputs
based on our own assumptions used to measure assets and liabilities
at fair value. A financial asset or liability’s classification within the
hierarchy is determined based on the lowest level input that is
significant to the fair value measurement.
Valuation Techniques. Liabilities carried at fair value and measured
on a recurring basis as of December 31, 2010 consist of forward
foreign exchange contracts and two embedded derivatives associated
with our 2.50% convertible senior subordinated notes (the “Notes”).
The value of the forward foreign exchange contract liabilities was
determined within Level 2 of the valuation hierarchy and is listed
in the table above. The value of the two embedded derivatives
associated with the Notes was determined within Level 2 of the
valuation hierarchy and was not material either individually or in
the aggregate to our financial position, results of operations or cash
flows.
CONMED Corporation
36
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 year ended
December 31, 2008:
As Originally
Reported
As
Effect
Adjusted of Change
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, 2008:
Net income
Amortization of debt discount
Deferred income taxes
Note 16 — Restructuring
—
69,263
24,702
44,561
$ 4,376 $ 1,947
4,823
62,011
22,022
39,989
1.39
1.37
1.55 $
1.52
$
$ 44,561 $ 39,989
4,823
16,304
—
18,984
$
$
$
(2,429 )
4,823
(7,252 )
(2,680 )
(4,572 )
(.16 )
(.15 )
(4,572 )
4,823
(2,680 )
During 2008, 2009, and 2010 we incurred the following restructuring
costs:
New plant/facility
consolidation costs
$ 2,470 $ 11,859 $ 2,397
2008
2009
2010
CONMED Endoscopic Technologies
division consolidation
Termination of a product offering
Restructuring costs included
—
—
845
—
—
2,489
________ ________ ________
in cost of sales
New plant/facility
$ 2,470 $ 12,704 $ 4,886
________ ________ ________
consolidation costs
$ 1,577 $ 2,726 $
—
CONMED Endoscopic Technologies
division consolidation
CONMED Linvatec division
consolidation costs
—
4,080
679
________ ________ ________
1,497
—
—
During 2008, we announced a plan to restructure certain of our
operations. For the years ending December 31, 2008, 2009 and
2010, we charged $2.5 million, $11.9 million, and $2.4 million,
respectively, in restructuring related expense to cost of goods
sold. In 2008 and 2009, these charges represent startup activities
associated with a new manufacturing facility in Chihuahua, Mexico
and the closure of two utica, New York area manufacturing facilities.
These costs include under-utilization of production facilities,
accelerated depreciation, severance and other charges. During 2010,
we continued our operational restructuring plan which includes
the transfer of additional production lines from utica, New York
to Chihuahua, Mexico. These costs include severance and other
charges associated with the transfer of production lines. For the
years ended December 31, 2008 and 2009 we charged $1.6 million
and $2.7 million, respectively, in restructuring related expense
to other expense. These charges relate to the consolidation of
certain domestic distribution activities in a new leased consolidated
distribution center in Atlanta, georgia.
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. During 2009, we
incurred a total of $4.9 million in charges of which $4.1 million have
been recorded in other expense and include charges relating to
severance, lease impairment, 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. During
2010, we recorded a further lease impairment charge of $0.7 million
related to our Chelmsford facility.
As part of our ongoing restructuring, the Company discontinued
certain product offerings within our CONMED Linvatec portfolio.
These product offerings include the service arms and service
managers associated with our integrated operating room systems
and equipment line. We incurred $2.5 million in costs associated
with this termination of a product offering which were charged to
cost of goods sold.
During 2010, we incurred $1.5 million in severance costs associated
with the consolidation of administrative functions in our CONMED
Linvatec division. These costs were charged to other expense.
Restructuring costs included in
other expense
$ 1,577 $ 6,806 $ 2,176
________ ________ ________
Note 17 — Selected quarterly Financial Data (unaudited)
Selected quarterly financial data for 2009 and 2010 are as follows:
Three Months Ended
2009
Net sales
gross profit
Net income
EPS: Basic
Diluted
2010
Net sales
gross profit
Net income
EPS: Basic
Diluted
March
$ 164,062
76,352
4,485
$
.15
.15
March
$ 176,365
91,795
7,319
$
.25
.25
June
$ 164,569
77,312
1,409
$
.05
.05
June
$ 181,086
93,683
7,306
$
.25
.25
September
$ 175,475
87,636
1,288
$
.04
.04
September
$ 172,195
88,983
8,758
$
.31
.31
December
$ 190,633
96,032
4,955
$
.17
.17
December
$ 184,077
90,923
6,963
.25
.24
$
Annual Report 2010
37
unusual Items Included In Selected quarterly Financial Data:
2009
2010
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– see Note 11 and Note 16.
First Quarter
During the first quarter of 2010, we incurred $0.6 million in costs
associated with the moving of additional product lines to our
manufacturing facility in Chihuahua, Mexico. These costs were
charged to cost of goods sold – see Note 16.
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 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 – see Note 11 and Note 16.
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 – see Note 11 and Note 16.
During the third quarter of 2009, we recorded a charge of
$6.0 million in other expense 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 related to the consolidation of the
administrative offices of CONMED Endoscopic Technologies – see
Note 11 and Note 16.
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 – see Note 11 and Note 16.
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– see Note 11 and Note 16.
Second Quarter
During the second quarter of 2010, we incurred $1.0 million in
costs associated with the moving of additional product lines to our
manufacturing facility in Chihuahua, Mexico. These costs were
charged to cost of goods sold – see Note 16.
During the second quarter of 2010, we recorded a charge of
$1.0 million in other expense related to the consolidation of
administrative functions in our CONMED Linvatec division – see Note
11 and Note 16.
During the second quarter of 2010, we repurchased and retired
$3.0 million of our 2.50% convertible senior subordinated notes
(the “Notes”) for $2.9 million and recorded a loss on the early
extinguishment of debt of $0.1 million - see Note 5.
Third Quarter
During the third quarter of 2010, we incurred $0.3 million in costs
associated with the moving of additional product lines to our
manufacturing facility in Chihuahua, Mexico. These costs were
charged to cost of goods sold – see Note 16.
During the third quarter of 2010, we recorded a charge of
$0.3 million in other expense related to the consolidation of
administrative functions in our CONMED Linvatec division – see Note
11 and Note 16.
Fourth Quarter
During the fourth quarter of 2010, we incurred $0.6 million in
costs associated with the moving of additional product lines to our
manufacturing facility in Chihuahua, Mexico. These costs were
charged to cost of goods sold – see Note 16.
During the fourth quarter of 2010, we incurred $2.5 million in costs
associated with the termination of a product offering in our CONMED
Linvatec division. These costs were charged to cost of goods sold –
see Note 16.
During the fourth quarter of 2010, we recorded a charge of
$0.2 million in other expense related to the consolidation of
administrative functions in our CONMED Linvatec division – see Note
11 and Note 16.
During the fourth quarter of 2010, we recorded a charge of
$0.7 million in other expense related to a lease impairment in our
CONMED Endoscopic Technologies division – see Note 11 and
Note 16.
CONMED Corporation
38 Board of Directors
1
2
3
4
5
6
7
1. Eugene R. Corasanti is vice Chairman of the Company and Chairman of the Board of Directors. Mr. E. 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. E. Corasanti was an independent public accountant. Mr. E. Corasanti
holds a B.B.A. degree in Accounting from Niagara university. Eugene R. Corasanti’s son, Joseph J. Corasanti, is President and Chief
Executive Officer and a Director of the Company.
2. Joseph J. Corasanti has served as President and Chief Executive Officer since January 1, 2007, having served as President and Chief
Operating Officer from August 1999 through December 2006. Mr. J. Corasanti has been a Director of the Company since May 1994.
Mr. J. Corasanti is also on the Board of Directors of II-vI, Inc. (NASDAq: IIvI) and is a member of the audit committee. 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, Los Angeles, California. Mr. J. Corasanti is
admitted to the State Bar of New York and California. Mr. J. Corasanti holds a B.A. degree in Political Science from Hobart College and
a J.D. degree from Whittier College School of Law. Joseph J. Corasanti is the son of Eugene R. Corasanti, vice Chairman and Chairman
of the Board of Directors.
3. Bruce F. Daniels has served as a Director of the Company since August 1992. Mr. Daniels is a retired executive. From August 1974
to June 1997, Mr. Daniels held various executive positions, including a position as Controller with Chicago Pneumatic Tool Company.
Mr. Daniels holds a B.S. degree in Business from utica College of Syracuse university. Mr. Daniels is the Chairman of the Audit
Committee, and also serves on the Compensation Committee.
4. Jo Ann golden joined the Board of Directors in May 2003. Ms. golden is a certified public accountant and managing partner of the
New Hartford, NY office of Dermody Burke and Brown, CPAs, LLC. Ms. golden is also 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.
5. 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., now a subsidiary of Sovena group since January 1, 2010 and currently
serves as the Chairman of the Board of Eva gourmet. 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.
6. 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.
7. Mark E. Tryniski has served as a Director of the Company since May 2007 and the Lead Independent Director since May 2009. 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. 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.
Annual Report 2010
39 Corporate Management Team
1
2
4
3
William W. Abraham 7
vice President – Business Development
Joseph J. Corasanti, Esq. 4
President and CEO
Heather L. Cohen, Esq. 1
vice President – Corporate Human Resources,
Deputy general Counsel and Secretary
Daniel S. Jonas, Esq. 2
general Counsel and vice President – Legal Affairs
CONMED Corporation
40 5
6
7
8
Gregory R. Jones 6
vice President – Corporate quality Assurance
and Regulatory Affairs
Luke A. Pomilio 5
vice President – Controller
and Corporate general Manager
Robert D. Shallish, Jr. 3
vice President – Finance and Chief Financial Officer
Mark D. Snyder 8
vice President – Worldwide Operations
and Supply Chain
Annual Report 2010
41 Corporate Officers
Senior Officers
Joseph J. Corasanti, Esq.
President and CEO
William W. Abraham
vice President – Business Development
Heather L. Cohen, Esq.
vice President – Corporate Human Resources,
Deputy general Counsel and Secretary
Joseph G. Darling
President – CONMED Linvatec
David R. Murray
President – CONMED Electrosurgery
Mark R. Donovan
vice President – CONMED Endoscopic Technologies
and global Corporate Marketing
Daniel S. Jonas, Esq.
general Counsel and vice President – Legal Affairs
Alexander R. Jones
vice President – Corporate Sales
Gregory R. Jones
vice President – Corporate quality Assurance
and Regulatory Affairs
Luke A. Pomilio
vice President – Controller
and Corporate general Manager
Robert D. Shallish, Jr.
vice President – Finance and Chief Financial Officer
Mark D. Snyder
vice President – Worldwide Operations
and Supply Chain
John J. Stotts
vice President – CONMED Patient Care
Frank R. Williams
vice President – CONMED EndoSurgery
Terence M. Bergé
Treasurer and Assistant Corporate Controller
CONMED Corporation
42 Shareholder Information
Corporate Offices
Interested shareholders may obtain a copy of the Company’s
Annual Report 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
800-368-5948
www.rtco.com
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
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 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.
Consolidated Medical Equipment Company
S.de r.L. de C.v. (Mexico)
Annual Report 2010
43
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CONMED Corporation
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525 French Road | utica, NY 13502 | uSA
©CONMED CORPORATION 4/11, 7.2M, Printed in the u.S.A.