Progress
Through People
and Products
Progress
Through People and Products
Just like you, we are investing in CONMED.
We’re investing in our PEOPLE. Leaders. Pioneers.
Go-Getters. People who are results-driven and
customer-focused. People with fresh thinking and
new ideas.
We’re investing in our PRODUCTS. Innovations.
Game-Changers. Ground-Breakers. Products that
change the way physicians treat their patients.
Because progress isn’t doing business as usual.
It’s creating a team of talented people that are
dedicated to solving our customers’ problems
with outside-the-box solutions. That’s how we build.
That’s how we grow.
We are great people making great products.
That is progress. That is CONMED.
2016 Company Snapshot
COMPANY OVERVIEW
GLOBAL PRESENCE
Founded in 1970 in Utica, NY, CONMED is a global medical
technology organization with ~3,300 employees and sales
across six continents
Direct sales to 17 countries and indirect sales to more than
100 countries
KEY BUSINESS CATEGORIES
Revenue by Category
Employees by Region
Total Employees: ~3,300
OUS ~1,250 38%
60
50
40
30
20
10
0
55%
45%
US ~2,050 62%
Revenue by Region
2016 Actual
Europe 19%
Americas Ex-US 11%
Orthopedic Surgery
General Surgery
2016 Actual
All Other 18%
US 52%
Orthopedic Surgery
General Surgery
• Surgical devices including capital, disposables, and
implants used in the repair of soft tissue and joint injuries
• Low Impact™ Laparoscopy, enabled by the AirSeal® System
• GI diagnostic and therapeutic products
• ECG and other patient care devices
CONMED CORPORATION Annual Report 2016 Progress
Through People and Products
Just like you, we are investing in CONMED.
We’re investing in our PEOPLE. Leaders. Pioneers.
Go-Getters. People who are results-driven and
customer-focused. People with fresh thinking and
new ideas.
We’re investing in our PRODUCTS. Innovations.
Game-Changers. Ground-Breakers. Products that
change the way physicians treat their patients.
Because progress isn’t doing business as usual.
It’s creating a team of talented people that are
dedicated to solving our customers’ problems
with outside-the-box solutions. That’s how we build.
That’s how we grow.
We are great people making great products.
That is progress. That is CONMED.
2016 Company Snapshot
COMPANY OVERVIEW
GLOBAL PRESENCE
Founded in 1970 in Utica, NY, CONMED is a global medical
technology organization with ~3,300 employees and sales
across six continents
Direct sales to 17 countries and indirect sales to more than
100 countries
KEY BUSINESS CATEGORIES
Revenue by Category
Employees by Region
Total Employees: ~3,300
OUS ~1,250 38%
60
50
40
30
20
10
0
55%
45%
US ~2,050 62%
Revenue by Region
2016 Actual
Europe 19%
Americas Ex-US 11%
Orthopedic Surgery
General Surgery
2016 Actual
All Other 18%
US 52%
Orthopedic Surgery
General Surgery
• Surgical devices including capital, disposables, and
implants used in the repair of soft tissue and joint injuries
• Low Impact™ Laparoscopy, enabled by the AirSeal® System
• GI diagnostic and therapeutic products
• ECG and other patient care devices
CONMED CORPORATION Annual Report 2016 To Our Shareholders
allocated resources to high-priority projects following an
extensive pipeline rationalization exercise.
While much of our business demonstrated steady
improvement during the year, notably across our International
markets and our U.S. General Surgery business, U.S.
Orthopedics remains challenged. Our leadership team has
already identified the high-priority areas of focus to reverse
recent trends, including reinvigorating the product offering,
improving sales execution, and increasing account access.
Based on the steps taken by our leadership team during the
year, we remain confident that the entirety of our business is
being positioned well for longer-term growth.
As we look to 2017, we remain committed to investing
in both people and products. We will continue to pursue
improved operating performance through both organic and
inorganic growth opportunities, as well as overall profitability
improvement, with the ongoing goal of delivering increased
value to shareholders.
CONMED’s Board of Directors would like to thank our
leadership team for its tremendous effort and passion, as well
as our shareholders for their continued support.
Sincerely,
Mark Tryniski, Chairman of the Board
Fiscal 2016 was a milestone year for CONMED, as we
continued to build on the many exciting initiatives we have
undertaken with respect to people and products to better
position our business for future growth. While acknowledging
that we have more work to do, we are pleased with the
progress that we have made on many fronts.
Our investment in human capital over the past two
years continued to pay dividends, with our new leaders
demonstrating a results-driven culture from the top down
with a focus on accountability. This, paired with our enhanced
sales and marketing effort around the globe, spurred a
renewed commercial focus that drove improved performance
across much of our business in 2016. Furthermore, our
Business Development efforts to drive an acquisition strategy
that complements the positive trends in our underlying
organic business yielded an important strategic addition for
CONMED last year.
During 2016, we successfully completed the integration of
the SurgiQuest acquisition. This transaction exceeded all our
expectations and was truly transformative for our Company.
We were particularly pleased that through solid execution of a
strong integration strategy, we were able to retain the majority
of SurgiQuest’s Marketing, Research & Development, and
Sales teams, such that the integration limited the disruption to
the AirSeal® System’s ongoing commercialization.
With strong leaders in place driving improvements in our
commercial execution, we continued to focus on revitalizing
our product portfolio to improve our competitiveness in the
market. Additionally, we aligned our Manufacturing, Advanced
Engineering, and Regulatory Affairs and Quality Assurance
teams to support our global new product launch agenda. Our
renewed focus on organic innovation is producing results,
as evidenced by the increase in the number of new product
introductions to fifteen in 2016 from five the previous year,
as well as by the growing contribution to revenue from new
products as we exited the year.
CONMED’s 2016 financial results were a testament to the
continued commitment and dedication by our leaders to drive
improving results, as well as to our early successes in our
revamped product development strategic planning process.
Our full year 2016 sales of $763.5 million increased 6.2%
as reported, or 8.6% in constant currency, with AirSeal®
contributing $68.4 million to the top line. Importantly, we
recorded solid gains and improving performance across
78% of our total revenue base, including our international
Curt Hartman
President & CEO
and U.S. General Surgery businesses. More specifically, our
international operations delivered consistent and improving
results throughout the year and exited 2016 at a growth rate
near the top of the markets that we serve.
While pleased with this increased consistency and improved
performance, we continued to face challenges in our U.S.
Orthopedics business. To address this, we have increased
our investment in our new product pipeline and are focused
on the continued development of our capital equipment sales
pipelines. These efforts, coupled with improved execution
should sharpen our focus and enable U.S. Orthopedics to trend
more favorably in the second half of 2017.
Looking forward, we are encouraged by the momentum
and trends across most of our business. To further enhance
our global market presence, we will continue to expand
our portfolio of innovative products, both organically and
through business development opportunities, to fill product
portfolio gaps. We remain confident that continued execution
of our strategic plan will translate into accelerating growth.
Overall, we are gaining traction and continue to drive multiple
initiatives that give us optimism as we look toward 2017.
On behalf of our management team and the Board of Directors,
I thank you for your confidence in CONMED, and I look
forward to updating you on our progress.
Respectfully,
Curt Hartman, President & CEO
Mark Tryniski
Chairman of the Board
2016 was an important year for CONMED Corporation,
highlighted by several significant achievements and important
progress. To build upon our proven track record of industry-
leading products and customer satisfaction, we made
incremental investments across many facets of our business
and completed a key acquisition. Additionally, we enhanced
our Board of Directors, expanded our product portfolio, and
continued to execute on our strategic initiatives.
At the beginning of the year, we welcomed Martha Goldberg
Aronson, an experienced health care executive, to our
Board. Martha brings a proven track record of executive and
operational leadership, and her counsel has already added
value to our team. We have assembled one of the most
seasoned and dynamic Boards in the industry, and, with
Martha’s appointment, eight out of ten Directors are new to
CONMED post-2013.
The transformative acquisition of SurgiQuest, which we
closed in January, significantly bolstered our General Surgery
offering and validated both our investment in Business
Development, as well as our broader acquisition strategy.
In addition, our ongoing efforts to reinvigorate our organic
product pipeline started to bear fruit, as we more effectively
CONMED CORPORATION Annual Report 2016CONMED CORPORATION Annual Report 2016 To Our Shareholders
allocated resources to high-priority projects following an
extensive pipeline rationalization exercise.
While much of our business demonstrated steady
improvement during the year, notably across our International
markets and our U.S. General Surgery business, U.S.
Orthopedics remains challenged. Our leadership team has
already identified the high-priority areas of focus to reverse
recent trends, including reinvigorating the product offering,
improving sales execution, and increasing account access.
Based on the steps taken by our leadership team during the
year, we remain confident that the entirety of our business is
being positioned well for longer-term growth.
As we look to 2017, we remain committed to investing
in both people and products. We will continue to pursue
improved operating performance through both organic and
inorganic growth opportunities, as well as overall profitability
improvement, with the ongoing goal of delivering increased
value to shareholders.
CONMED’s Board of Directors would like to thank our
leadership team for its tremendous effort and passion, as well
as our shareholders for their continued support.
Sincerely,
Mark Tryniski, Chairman of the Board
Fiscal 2016 was a milestone year for CONMED, as we
continued to build on the many exciting initiatives we have
undertaken with respect to people and products to better
position our business for future growth. While acknowledging
that we have more work to do, we are pleased with the
progress that we have made on many fronts.
Our investment in human capital over the past two
years continued to pay dividends, with our new leaders
demonstrating a results-driven culture from the top down
with a focus on accountability. This, paired with our enhanced
sales and marketing effort around the globe, spurred a
renewed commercial focus that drove improved performance
across much of our business in 2016. Furthermore, our
Business Development efforts to drive an acquisition strategy
that complements the positive trends in our underlying
organic business yielded an important strategic addition for
CONMED last year.
During 2016, we successfully completed the integration of
the SurgiQuest acquisition. This transaction exceeded all our
expectations and was truly transformative for our Company.
We were particularly pleased that through solid execution of a
strong integration strategy, we were able to retain the majority
of SurgiQuest’s Marketing, Research & Development, and
Sales teams, such that the integration limited the disruption to
the AirSeal® System’s ongoing commercialization.
With strong leaders in place driving improvements in our
commercial execution, we continued to focus on revitalizing
our product portfolio to improve our competitiveness in the
market. Additionally, we aligned our Manufacturing, Advanced
Engineering, and Regulatory Affairs and Quality Assurance
teams to support our global new product launch agenda. Our
renewed focus on organic innovation is producing results,
as evidenced by the increase in the number of new product
introductions to fifteen in 2016 from five the previous year,
as well as by the growing contribution to revenue from new
products as we exited the year.
CONMED’s 2016 financial results were a testament to the
continued commitment and dedication by our leaders to drive
improving results, as well as to our early successes in our
revamped product development strategic planning process.
Our full year 2016 sales of $763.5 million increased 6.2%
as reported, or 8.6% in constant currency, with AirSeal®
contributing $68.4 million to the top line. Importantly, we
recorded solid gains and improving performance across
78% of our total revenue base, including our international
Curt Hartman
President & CEO
and U.S. General Surgery businesses. More specifically, our
international operations delivered consistent and improving
results throughout the year and exited 2016 at a growth rate
near the top of the markets that we serve.
While pleased with this increased consistency and improved
performance, we continued to face challenges in our U.S.
Orthopedics business. To address this, we have increased
our investment in our new product pipeline and are focused
on the continued development of our capital equipment sales
pipelines. These efforts, coupled with improved execution
should sharpen our focus and enable U.S. Orthopedics to trend
more favorably in the second half of 2017.
Looking forward, we are encouraged by the momentum
and trends across most of our business. To further enhance
our global market presence, we will continue to expand
our portfolio of innovative products, both organically and
through business development opportunities, to fill product
portfolio gaps. We remain confident that continued execution
of our strategic plan will translate into accelerating growth.
Overall, we are gaining traction and continue to drive multiple
initiatives that give us optimism as we look toward 2017.
On behalf of our management team and the Board of Directors,
I thank you for your confidence in CONMED, and I look
forward to updating you on our progress.
Respectfully,
Curt Hartman, President & CEO
Mark Tryniski
Chairman of the Board
2016 was an important year for CONMED Corporation,
highlighted by several significant achievements and important
progress. To build upon our proven track record of industry-
leading products and customer satisfaction, we made
incremental investments across many facets of our business
and completed a key acquisition. Additionally, we enhanced
our Board of Directors, expanded our product portfolio, and
continued to execute on our strategic initiatives.
At the beginning of the year, we welcomed Martha Goldberg
Aronson, an experienced health care executive, to our
Board. Martha brings a proven track record of executive and
operational leadership, and her counsel has already added
value to our team. We have assembled one of the most
seasoned and dynamic Boards in the industry, and, with
Martha’s appointment, eight out of ten Directors are new to
CONMED post-2013.
The transformative acquisition of SurgiQuest, which we
closed in January, significantly bolstered our General Surgery
offering and validated both our investment in Business
Development, as well as our broader acquisition strategy.
In addition, our ongoing efforts to reinvigorate our organic
product pipeline started to bear fruit, as we more effectively
CONMED CORPORATION Annual Report 2016CONMED CORPORATION Annual Report 2016 Progress Through People
DH Koo
Christian Stroupe
DH is a CONMED success story. After 15+ years of success
building and growing CONMED’s orthopedic portfolio in
Asia, his business responsibility increased in 2015 when he
was given the opportunity to lead CONMED’s entire portfolio
across four Asian regions: Korea, Asia Export (consisting of 12
countries), China and India. In 2016, DH continued his sales
growth trajectory with his expanded business responsibility
and evolved his team with new country managers in China
and India.
“DH is an amazing leader. His commitment to
delivering outstanding service and solutions to
both his CONMED team and his customers is
a cornerstone of success. He stepped up and
has done a fantastic job and I’m proud to have
him on my team.”
- PATRICK J. BEYER, President, CONMED International
Christian is the complete package. A CONMED veteran, Christian was
a CONMED sales representative before transitioning to a marketing
role – and it’s that combined experience that makes him so effective
and has greatly contributed to CET’s growth. Christian manages
the GORE® VIABIL® Biliary Endoprosthesis, one of CET’s flagship
products. Through tireless clinical and market support of our sales
team and customers, Christian has enabled continued growth and
market acceptance of the GORE VIABIL stent.
“Christian is an integral part of CET’s success. He
has the knowledge to work with physicians and have
meaningful clinical conversations while always putting
the customer first and foremost. He is always engaged
and looking for new opportunities to drive growth.”
- JOHN E. “JED” KENNEDY, Vice President & General Manager,
U.S. Endoscopic Technologies
Loredana Moimas
Corporate Director of Quality &
Operations, Strategy & Analytics
Westborough, MA
6 Years with CONMED
DH Koo
General Manager, Asia
Seoul, South Korea
19 Years with CONMED
Matthew Herrington
Matthew has become CONMED’s allograft expert. He brought
a background in biologics to CONMED and has taken it to
the next level with an impressive knowledge of peer-reviewed
studies and biomechanical testing data. That is why it’s no
surprise that Matthew has taken the reins of CONMED’s
sports biologics portfolio and put it on a path for growth. He
engaged with industry experts to rethink our market strategy
and drive change. In 2016 alone, Matt performed regional
trainings throughout the United States to improve sales
force effectiveness, improved sports biologics ordering so
sales representatives can have real time access to available
inventory, and spearheaded a rebranding campaign.
Christian Stroupe
Marketing Manager, CET
Utica, NY
9 Years with CONMED
Loredana Moimas
Sometimes the biggest heroes operate
behind the scenes. Companies with broad
portfolios and long production histories
often have too many SKUs which can
increase costs and complicate supply
chains—and CONMED was no different.
Working with multiple CONMED employees
all over the world, Loredana spearheaded
a daunting SKU rationalization project,
analyzed portfolios, reached consensus on
which products could be rationalized and
completed the project through the final
customer communication.
“Matt is a true biologics expert and has crafted
a strategic plan for the business that’s working.
He jumped into this complex role and managed
it well. His attitude and engagement set the
standard for our entire business.”
- NATHAN FOLKERT, Vice President & General Manager,
U.S. Orthopedics
Matthew Herrington
Product Manager, Sports
Tissue & Biologics
Largo, FL
2 Years with CONMED
“Intelligent, organized and committed, Loredana was the perfect person to take on this
challenging project. Through her efforts, she has helped CONMED operate smarter and
more efficiently.”
- WILFREDO RUIZ-CABAN, Executive Vice President, Quality Assurance, Regulatory Affairs & Operations
CONMED CORPORATION Annual Report 2016CONMED CORPORATION Annual Report 2016 Progress Through People
DH Koo
Christian Stroupe
DH is a CONMED success story. After 15+ years of success
building and growing CONMED’s orthopedic portfolio in
Asia, his business responsibility increased in 2015 when he
was given the opportunity to lead CONMED’s entire portfolio
across four Asian regions: Korea, Asia Export (consisting of 12
countries), China and India. In 2016, DH continued his sales
growth trajectory with his expanded business responsibility
and evolved his team with new country managers in China
and India.
“DH is an amazing leader. His commitment to
delivering outstanding service and solutions to
both his CONMED team and his customers is
a cornerstone of success. He stepped up and
has done a fantastic job and I’m proud to have
him on my team.”
- PATRICK J. BEYER, President, CONMED International
Christian is the complete package. A CONMED veteran, Christian was
a CONMED sales representative before transitioning to a marketing
role – and it’s that combined experience that makes him so effective
and has greatly contributed to CET’s growth. Christian manages
the GORE® VIABIL® Biliary Endoprosthesis, one of CET’s flagship
products. Through tireless clinical and market support of our sales
team and customers, Christian has enabled continued growth and
market acceptance of the GORE VIABIL stent.
“Christian is an integral part of CET’s success. He
has the knowledge to work with physicians and have
meaningful clinical conversations while always putting
the customer first and foremost. He is always engaged
and looking for new opportunities to drive growth.”
- JOHN E. “JED” KENNEDY, Vice President & General Manager,
U.S. Endoscopic Technologies
Loredana Moimas
Corporate Director of Quality &
Operations, Strategy & Analytics
Westborough, MA
6 Years with CONMED
DH Koo
General Manager, Asia
Seoul, South Korea
19 Years with CONMED
Matthew Herrington
Matthew has become CONMED’s allograft expert. He brought
a background in biologics to CONMED and has taken it to
the next level with an impressive knowledge of peer-reviewed
studies and biomechanical testing data. That is why it’s no
surprise that Matthew has taken the reins of CONMED’s
sports biologics portfolio and put it on a path for growth. He
engaged with industry experts to rethink our market strategy
and drive change. In 2016 alone, Matt performed regional
trainings throughout the United States to improve sales
force effectiveness, improved sports biologics ordering so
sales representatives can have real time access to available
inventory, and spearheaded a rebranding campaign.
Christian Stroupe
Marketing Manager, CET
Utica, NY
9 Years with CONMED
Loredana Moimas
Sometimes the biggest heroes operate
behind the scenes. Companies with broad
portfolios and long production histories
often have too many SKUs which can
increase costs and complicate supply
chains—and CONMED was no different.
Working with multiple CONMED employees
all over the world, Loredana spearheaded
a daunting SKU rationalization project,
analyzed portfolios, reached consensus on
which products could be rationalized and
completed the project through the final
customer communication.
“Matt is a true biologics expert and has crafted
a strategic plan for the business that’s working.
He jumped into this complex role and managed
it well. His attitude and engagement set the
standard for our entire business.”
- NATHAN FOLKERT, Vice President & General Manager,
U.S. Orthopedics
Matthew Herrington
Product Manager, Sports
Tissue & Biologics
Largo, FL
2 Years with CONMED
“Intelligent, organized and committed, Loredana was the perfect person to take on this
challenging project. Through her efforts, she has helped CONMED operate smarter and
more efficiently.”
- WILFREDO RUIZ-CABAN, Executive Vice President, Quality Assurance, Regulatory Affairs & Operations
CONMED CORPORATION Annual Report 2016CONMED CORPORATION Annual Report 2016 Progress Through Products
GORE® VIABIL®
Biliary Endoprosthesis
THE PRODUCT:
Designed to help revolutionize the palliation of
symptoms caused by malignant biliary obstruction, the
GORE® VIABIL® Biliary Endoprosthesis is an innovative
biliary stent that combines lower migration rates with
an easy-to-use delivery system to offer real benefits to
physicians and their patients.
THE PROGRESS:
In 2016, sales of this product grew well above the
market. In fact, over the past 10 years, more than
700,000 GORE® ePTFE stent grafts have been
implanted worldwide.
Y-Knot®
All-Suture Platform
THE PRODUCT:
AirSeal® System
THE PRODUCT:
Acquired from SurgiQuest early in 2016, the AirSeal® System is the world’s only
intelligent and integrated access system for laparoscopic and robotic surgery.
A true innovation, it provides stable pneumoperitoneum, constant smoke
evacuation, and valve-free access to the surgical site.
THE PROGRESS:
With a successful integration, sales of the AirSeal® System had a big impact
in 2016. The AirSeal System contributed $68.4 million to CONMED’s top line
revenue in 2016 – well exceeding our original forecasts of $55 to $60 million.
Developed internally, CONMED’s Y-Knot® All-Suture Anchors delivered a series of market firsts: Y-Knot® Flex anchors
for labral repairs were the smallest all-suture anchors available and Y-Knot® RC anchors for rotator cuff were the first
self-punching all-suture anchors. This innovation continued in 2016 with the launch of the Y-Knot® RC with Hi-Fi® Tape -
the first self-punching all-suture anchor with tape – and the Y-Knot® RC with Needles as well.
THE PROGRESS:
Launched in 2012, in just four years the Y-Knot® anchors’ combination of small size, high strength and time-saving
technique have made them CONMED Orthopedics’ best-selling anchor family.
CONMED CORPORATION Annual Report 2016CONMED CORPORATION Annual Report 2016 Progress Through Products
GORE® VIABIL®
Biliary Endoprosthesis
THE PRODUCT:
Designed to help revolutionize the palliation of
symptoms caused by malignant biliary obstruction, the
GORE® VIABIL® Biliary Endoprosthesis is an innovative
biliary stent that combines lower migration rates with
an easy-to-use delivery system to offer real benefits to
physicians and their patients.
THE PROGRESS:
In 2016, sales of this product grew well above the
market. In fact, over the past 10 years, more than
700,000 GORE® ePTFE stent grafts have been
implanted worldwide.
Y-Knot®
All-Suture Platform
THE PRODUCT:
AirSeal® System
THE PRODUCT:
Acquired from SurgiQuest early in 2016, the AirSeal® System is the world’s only
intelligent and integrated access system for laparoscopic and robotic surgery.
A true innovation, it provides stable pneumoperitoneum, constant smoke
evacuation, and valve-free access to the surgical site.
THE PROGRESS:
With a successful integration, sales of the AirSeal® System had a big impact
in 2016. The AirSeal System contributed $68.4 million to CONMED’s top line
revenue in 2016 – well exceeding our original forecasts of $55 to $60 million.
Developed internally, CONMED’s Y-Knot® All-Suture Anchors delivered a series of market firsts: Y-Knot® Flex anchors
for labral repairs were the smallest all-suture anchors available and Y-Knot® RC anchors for rotator cuff were the first
self-punching all-suture anchors. This innovation continued in 2016 with the launch of the Y-Knot® RC with Hi-Fi® Tape -
the first self-punching all-suture anchor with tape – and the Y-Knot® RC with Needles as well.
THE PROGRESS:
Launched in 2012, in just four years the Y-Knot® anchors’ combination of small size, high strength and time-saving
technique have made them CONMED Orthopedics’ best-selling anchor family.
CONMED CORPORATION Annual Report 2016CONMED CORPORATION Annual Report 2016 Corporate Information
EXECUTIVE OFFICERS
BOARD MEMBERS
SHAREHOLDER INFORMATION
Curt R. Hartman
President, Chief Executive Officer
& Director
Terence M. Bergé
Vice President, Corporate Controller
Patrick J. Beyer
President, CONMED International
Heather L. Cohen
Executive Vice President,
Human Resources & Secretary
Nathan Folkert
Vice President & General Manager,
U.S. Orthopedics
Daniel S. Jonas, Esq.
Executive Vice President,
Legal Affairs & General Counsel
John E. (Jed) Kennedy
Vice President & General Manager,
U.S. Endoscopic Technologies
Johonna Pelletier
Treasurer & Vice President, Tax
Stanley W. (Bill) Peters
Vice President & General Manager,
U.S. Advanced Surgical
Luke A. Pomilio
Executive Vice President,
Finance & Chief Financial Officer
Wilfredo Ruiz-Caban
Executive Vice President,
Quality Assurance, Regulatory Affairs
& Operations
Peter K. Shagory
Executive Vice President,
Strategy & Corporate Development
Mark E. Tryniski
Chairman of the Board of Directors
David Bronson
Director
Brian P. Concannon
Director
Charles M. Farkas
Director
Martha Goldberg Aronson
Director
Jo Ann Golden
Director
Curt R. Hartman
President, Chief Executive Officer
& Director
Dirk M. Kuyper
Director
Jerome J. Lande
Director
John L. Workman
Director
CORPORATE OFFICE
CONMED Corporation
525 French Road
Utica, NY 13502
Phone: 1-315-797-8375
Fax: 1-315-797-0321
Customer Service
1-800-448-6506
Email: info@conmed.com
Website: www.conmed.com
Ethics policy available at
www.conmed.com
Interested shareholders may obtain a
copy of the Company’s Annual Report
without charge upon written request to:
Investor Relations Department
CONMED Corporation
Attn: Luke Pomilio
525 French Road
Utica, NY 13502
1-315-624-3202
Transfer Agent/Registrar
Computershare Investor Services
P.O. Box 30170
College Station, TX 77842-3170
1-800-368-5948
www.computershare.com/investor
Independent Registered
Public Accounting Firm
PricewaterhouseCoopers LLP
1200 Bausch & Lomb Place
Rochester, NY 14604
Special Counsel
Sullivan & Cromwell, LLP
125 Broad Street
New York, NY 10004
STOCK
CONMED Corporation’s stock is traded
on the NASDAQ Global Select Stock
Market with the symbol: CNMD
United States
Securities and Exchange Commission
Washington, D.C.
20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016
Commission file number 0-16093
CONMED CORPORATION
(Exact name of registrant as specified in its charter)
New York
(State or other jurisdiction of incorporation or organization)
16-0977505
(I.R.S. Employer Identification No.)
525 French Road, Utica, New York
(Address of principal executive offices)
13502
(Zip Code)
(315) 797-8375
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
As of June 30, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of
the shares of voting common stock held by non-affiliates of the registrant was approximately $1,327,544,000 based upon the closing price of the
Company’s common stock on the NASDAQ Stock Market.
The number of shares of the registrant's $0.01 par value common stock outstanding as of February 21, 2017 was 27,836,532.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Definitive Proxy Statement and any other informational filings for the 2017 Annual Meeting of Shareholders are incorporated
by reference into Part III of this report.
CONMED CORPORATION Annual Report 2016
Corporate Information
EXECUTIVE OFFICERS
BOARD MEMBERS
SHAREHOLDER INFORMATION
Curt R. Hartman
President, Chief Executive Officer
& Director
Terence M. Bergé
Vice President, Corporate Controller
Patrick J. Beyer
President, CONMED International
Heather L. Cohen
Executive Vice President,
Human Resources & Secretary
Nathan Folkert
Vice President & General Manager,
U.S. Orthopedics
Daniel S. Jonas, Esq.
Executive Vice President,
Legal Affairs & General Counsel
John E. (Jed) Kennedy
Vice President & General Manager,
U.S. Endoscopic Technologies
Johonna Pelletier
Treasurer & Vice President, Tax
Stanley W. (Bill) Peters
Vice President & General Manager,
U.S. Advanced Surgical
Luke A. Pomilio
Executive Vice President,
Finance & Chief Financial Officer
Wilfredo Ruiz-Caban
Executive Vice President,
Quality Assurance, Regulatory Affairs
& Operations
Peter K. Shagory
Executive Vice President,
Strategy & Corporate Development
Mark E. Tryniski
Chairman of the Board of Directors
David Bronson
Director
Brian P. Concannon
Director
Charles M. Farkas
Director
Martha Goldberg Aronson
Director
Jo Ann Golden
Director
Curt R. Hartman
President, Chief Executive Officer
& Director
Dirk M. Kuyper
Director
Jerome J. Lande
Director
John L. Workman
Director
CORPORATE OFFICE
CONMED Corporation
525 French Road
Utica, NY 13502
Phone: 1-315-797-8375
Fax: 1-315-797-0321
Customer Service
1-800-448-6506
Email: info@conmed.com
Website: www.conmed.com
Ethics policy available at
www.conmed.com
Interested shareholders may obtain a
copy of the Company’s Annual Report
without charge upon written request to:
Investor Relations Department
CONMED Corporation
Attn: Luke Pomilio
525 French Road
Utica, NY 13502
1-315-624-3202
Transfer Agent/Registrar
Computershare Investor Services
P.O. Box 30170
College Station, TX 77842-3170
1-800-368-5948
www.computershare.com/investor
Independent Registered
Public Accounting Firm
PricewaterhouseCoopers LLP
1200 Bausch & Lomb Place
Rochester, NY 14604
Special Counsel
Sullivan & Cromwell, LLP
125 Broad Street
New York, NY 10004
STOCK
CONMED Corporation’s stock is traded
on the NASDAQ Global Select Stock
Market with the symbol: CNMD
United States
Securities and Exchange Commission
Washington, D.C.
20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016
Commission file number 0-16093
CONMED CORPORATION
(Exact name of registrant as specified in its charter)
New York
(State or other jurisdiction of incorporation or organization)
16-0977505
(I.R.S. Employer Identification No.)
525 French Road, Utica, New York
(Address of principal executive offices)
13502
(Zip Code)
(315) 797-8375
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
As of June 30, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of
the shares of voting common stock held by non-affiliates of the registrant was approximately $1,327,544,000 based upon the closing price of the
Company’s common stock on the NASDAQ Stock Market.
The number of shares of the registrant's $0.01 par value common stock outstanding as of February 21, 2017 was 27,836,532.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Definitive Proxy Statement and any other informational filings for the 2017 Annual Meeting of Shareholders are incorporated
by reference into Part III of this report.
CONMED CORPORATION Annual Report 2016
CONMED CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 2016
TABLE OF CONTENTS
CONMED CORPORATION
Item 1. Business
Forward Looking Statements
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Part I
Part II
Item 5.
Market for Registrant's Common Equity, Related Stockholder
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure
Controls and Procedures
Other Information
Part III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Exhibits, Financial Statement Schedules
Signatures
Item 16.
Form 10-K Summary
Part IV
1
Page
2
7
13
14
14
14
15
17
19
28
29
30
30
30
31
31
31
31
32
33
34
75
This Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2016 (“Form 10-K”) 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 Form 10-K, 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, including those identified under the caption “Item 1A-Risk Factors” and elsewhere in this Form 10-K 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;
the risk of a lack of allograft tissues due to reduced donations of such tissues or due to tissues not meeting the appropriate
high standards for screening and/or processing of such tissues;
compliance with and changes in regulatory requirements; and
various other factors referenced in this Form 10-K.
See “Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Item 1-Business”
and “Item 1A-Risk Factors” for a further discussion of these factors. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. We do not undertake any obligation to publicly release any
revisions to these forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect the
occurrence of unanticipated events.
General
CONMED Corporation was incorporated under the laws of the State of New York in 1970. CONMED is a medical
technology company that provides surgical devices and equipment for minimally invasive procedures. The Company’s products
are used by surgeons and physicians in a variety of specialties including orthopedics, general surgery, gynecology, neurosurgery
and gastroenterology. Headquartered in Utica, New York, the Company’s 3,300 employees distribute its products worldwide from
several manufacturing locations.
We have historically used strategic business acquisitions, internal product development activities and exclusive
distribution relationships to diversify our product offerings, increase our market share in certain product lines, realize economies
of scale and take advantage of growth opportunities in the healthcare field.
2
CONMED CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 2016
TABLE OF CONTENTS
CONMED CORPORATION
Item 1. Business
Forward Looking Statements
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Part I
Part II
Item 5.
Market for Registrant's Common Equity, Related Stockholder
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure
Controls and Procedures
Other Information
Part III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Exhibits, Financial Statement Schedules
Signatures
Item 16.
Form 10-K Summary
Part IV
1
Page
2
7
13
14
14
14
15
17
19
28
29
30
30
30
31
31
31
31
32
33
34
75
This Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2016 (“Form 10-K”) 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 Form 10-K, 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, including those identified under the caption “Item 1A-Risk Factors” and elsewhere in this Form 10-K 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;
the risk of a lack of allograft tissues due to reduced donations of such tissues or due to tissues not meeting the appropriate
high standards for screening and/or processing of such tissues;
compliance with and changes in regulatory requirements; and
various other factors referenced in this Form 10-K.
See “Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Item 1-Business”
and “Item 1A-Risk Factors” for a further discussion of these factors. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. We do not undertake any obligation to publicly release any
revisions to these forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect the
occurrence of unanticipated events.
General
CONMED Corporation was incorporated under the laws of the State of New York in 1970. CONMED is a medical
technology company that provides surgical devices and equipment for minimally invasive procedures. The Company’s products
are used by surgeons and physicians in a variety of specialties including orthopedics, general surgery, gynecology, neurosurgery
and gastroenterology. Headquartered in Utica, New York, the Company’s 3,300 employees distribute its products worldwide from
several manufacturing locations.
We have historically used strategic business acquisitions, internal product development activities and exclusive
distribution relationships to diversify our product offerings, increase our market share in certain product lines, realize economies
of scale and take advantage of growth opportunities in the healthcare field.
2
We are committed to offering products with the highest standards of quality, technological excellence and customer
service. Substantially all of our facilities have attained certification under the ISO international quality standards and other domestic
and international quality accreditations.
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports are accessible free of charge through the Investor Relations section of our website (http://www.conmed.com) as soon as
practicable after such materials have been electronically filed with, or furnished to, the United States Securities and Exchange
Commission (the "SEC"). Our SEC filings are also available for reading and copying at the SEC’s Public Reference Room at 100
F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling
the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (http:/www.sec.gov) containing reports, proxy and
information statements and other information regarding issuers that file electronically with the SEC.
Orthopedic surgery
General surgery
Surgical visualization
Consolidated net sales
Net sales (in thousands)
Year Ended December 31,
2015
2014
2016
48%
45
7
100%
54%
38
8
100%
54%
38
8
100%
$
763,520
$
719,168
$
740,055
The increase in the percentage of net sales to General Surgery in 2016 is driven by the acquisition of SurgiQuest, Inc.
on January 4, 2016 as further described in Note 2 to the consolidated financial statements.
Business Strategy
Orthopedic Surgery
Our principal objectives are to improve the quality of surgical outcomes and patient care through the development of
innovative medical devices, the refinement of existing products and the development of new technologies which reduce risk,
trauma, cost and procedure time. We believe that by meeting these objectives we will enhance our ability to anticipate and adapt
to customer needs and market opportunities and provide shareholders with superior investment returns. We intend to achieve
future growth in revenues and earnings through the following initiatives:
•
Introduction of New Products and Product Enhancements. We continually pursue organic growth through the
development of new products and enhancements to existing products. We seek to develop new technologies which
improve the durability, performance and usability of existing products. In addition to our internal research and
development efforts, we receive new ideas for products and technologies, particularly in procedure-specific areas, from
surgeons, inventors and other healthcare professionals.
• Pursue Strategic Acquisitions. We pursue strategic acquisitions, distribution and similar arrangements in existing and
new growth markets
increased operating efficiencies, geographic diversification and market
penetration. Targeted companies have historically included those with proven technologies and established brand names
which provide potential sales, marketing and manufacturing synergies. This includes the January 4, 2016 acquisition of
SurgiQuest, Inc. ("SurgiQuest") as further described in Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 2 to the consolidated financial statements.
to achieve
• Realize Manufacturing and Operating Efficiencies. We continually review our production systems for opportunities
to reduce operating costs, consolidate product lines or identical process flows, reduce inventory requirements and optimize
existing processes. Our vertically integrated manufacturing facilities allow for further opportunities to reduce overhead
and increase operating efficiencies and capacity utilization.
• Geographic Diversification. We believe that significant growth opportunities exist for our surgical products outside
the United States. Principal international markets for our products include Europe, Latin America, Canada and Asia/
Pacific Rim. Critical elements of our future sales growth in these markets include leveraging our existing relationships
with international surgeons, hospitals, third-party payers and foreign distributors (including sub-distributors and sales
agents), maintaining an appropriate presence in emerging market countries and continually evaluating our routes-to-
market.
• Active Participation in the Medical Community. We believe that excellent working relationships with physicians and
others in the medical industry enable us to gain an understanding of new therapeutic and diagnostic alternatives, trends
and emerging opportunities. Active participation allows us to quickly respond to the changing needs of physicians and
patients. In addition, we are an active sponsor of medical education both in the United States and internationally, offering
training on new and innovative surgical techniques as well as other medical education materials for use with our products.
Products
The following table sets forth the percentage of net sales for each of our product lines during each of the three years
ended December 31:
Our orthopedic surgery product offering includes sports medicine, powered surgical instruments, and sports biologics
and tissue. These products are marketed under a number of brands, including Hall®, CONMED Linvatec®, Concept® and Shutt®.
We offer a comprehensive range of devices and products to repair injuries which have occurred in the articulating joint
areas of the body. Many of these injuries are the result of sports related events or similar traumas. Our sports medicine products
include powered resection instruments, arthroscopes, reconstructive systems, tissue repair sets, metal and bioabsorbable implants
as well as related disposable products and fluid management systems. It is our standard practice to place some of these products,
such as shaver consoles and pumps, with certain customers at no charge in exchange for commitments to purchase disposable
products over certain time periods. This capital equipment is loaned and subject to return if certain minimum single-use purchases
are not met. Single-use products include products such as shaver blades, burs and pump tubing. In sports medicine, we compete
with Smith & Nephew, plc; Arthrex, Inc.; Stryker Corporation; Johnson & Johnson: DePuy Mitek, Inc. and Zimmer Biomet, Inc.
Our powered instruments offering is sold principally under the Hall® Surgical brand name, for use in large and small
bone orthopedic, arthroscopic, oral/maxillofacial, podiatric, plastic, ENT, neurological, spinal and cardiothoracic surgeries. Our
newest product is the Hall 50™ Powered Instrument System, specifically designed to meet the requirements of most orthopedic
applications. The modularity and versatility of the Hall 50™ Powered Instrument System allows a facility to purchase a single
power system to perform total joint arthroplasty, trauma, arthroscopy and some small bone procedures. In powered instruments,
our competition includes Stryker Corporation; Medtronic plc, (Midas Rex and Xomed divisions); Johnson & Johnson: DePuy
Synthes, Inc.; MicroAire Surgical Instruments, LLC and Zimmer Holdings, Inc.
As more fully described in Note 5 to the consolidated financial statements, on January 3, 2012, the Company entered
into the Sports Medicine Joint Development and Distribution Agreement (the "JDDA") with Musculoskeletal Transplant
Foundation (“MTF”) to obtain MTF's worldwide promotion rights with respect to allograft tissues within the field of sports
medicine and related products. Under the terms of this agreement, we are now the exclusive worldwide promoter of these allograft
tissues, which includes the reconstruction and/or replacement of tendon, ligament, cartilage or menisci, along with the correction
of deformities within the extremities.
General Surgery
Our general surgery product line offers a large range of products in the areas of advanced surgical, endoscopic technologies,
and critical care.
Our advanced surgical product offering includes an extensive line of electrosurgical generators, handpieces, smoke
management systems and accessories. Our endomechanical instrumentation products offer a full line of instruments including
trocars, suction irrigation devices, graspers, scissors and dissectors used in minimally invasive surgery. We offer a unique and
premium uterine manipulator called VCARE® for use in increasing the efficiency of laparoscopic hysterectomies and other
gynecologic laparoscopic procedures. Our competition includes Medtronic plc (formerly Covidien); Johnson & Johnson: Ethicon
Endo-Surgery, Inc.; ERBE Elektromedizin GmbH; Megadyne and Applied Medical Resources Corporation.
On January 4, 2016, we acquired SurgiQuest for $265 million in cash (on a cash-free, debt-free basis). SurgiQuest
developed, manufactured and marketed the AirSeal® System, the first integrated access management technology for use in
laparoscopic and robotic procedures. This proprietary and differentiated access system is complementary to our general surgery
offering.
3
4
We are committed to offering products with the highest standards of quality, technological excellence and customer
service. Substantially all of our facilities have attained certification under the ISO international quality standards and other domestic
and international quality accreditations.
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports are accessible free of charge through the Investor Relations section of our website (http://www.conmed.com) as soon as
practicable after such materials have been electronically filed with, or furnished to, the United States Securities and Exchange
Commission (the "SEC"). Our SEC filings are also available for reading and copying at the SEC’s Public Reference Room at 100
F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling
the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (http:/www.sec.gov) containing reports, proxy and
information statements and other information regarding issuers that file electronically with the SEC.
Orthopedic surgery
General surgery
Surgical visualization
Consolidated net sales
Net sales (in thousands)
Year Ended December 31,
2015
2014
2016
48%
45
7
100%
54%
38
8
100%
54%
38
8
100%
$
763,520
$
719,168
$
740,055
The increase in the percentage of net sales to General Surgery in 2016 is driven by the acquisition of SurgiQuest, Inc.
on January 4, 2016 as further described in Note 2 to the consolidated financial statements.
Business Strategy
Orthopedic Surgery
Our principal objectives are to improve the quality of surgical outcomes and patient care through the development of
innovative medical devices, the refinement of existing products and the development of new technologies which reduce risk,
trauma, cost and procedure time. We believe that by meeting these objectives we will enhance our ability to anticipate and adapt
to customer needs and market opportunities and provide shareholders with superior investment returns. We intend to achieve
future growth in revenues and earnings through the following initiatives:
•
Introduction of New Products and Product Enhancements. We continually pursue organic growth through the
development of new products and enhancements to existing products. We seek to develop new technologies which
improve the durability, performance and usability of existing products. In addition to our internal research and
development efforts, we receive new ideas for products and technologies, particularly in procedure-specific areas, from
surgeons, inventors and other healthcare professionals.
• Pursue Strategic Acquisitions. We pursue strategic acquisitions, distribution and similar arrangements in existing and
new growth markets
increased operating efficiencies, geographic diversification and market
penetration. Targeted companies have historically included those with proven technologies and established brand names
which provide potential sales, marketing and manufacturing synergies. This includes the January 4, 2016 acquisition of
SurgiQuest, Inc. ("SurgiQuest") as further described in Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 2 to the consolidated financial statements.
to achieve
• Realize Manufacturing and Operating Efficiencies. We continually review our production systems for opportunities
to reduce operating costs, consolidate product lines or identical process flows, reduce inventory requirements and optimize
existing processes. Our vertically integrated manufacturing facilities allow for further opportunities to reduce overhead
and increase operating efficiencies and capacity utilization.
• Geographic Diversification. We believe that significant growth opportunities exist for our surgical products outside
the United States. Principal international markets for our products include Europe, Latin America, Canada and Asia/
Pacific Rim. Critical elements of our future sales growth in these markets include leveraging our existing relationships
with international surgeons, hospitals, third-party payers and foreign distributors (including sub-distributors and sales
agents), maintaining an appropriate presence in emerging market countries and continually evaluating our routes-to-
market.
• Active Participation in the Medical Community. We believe that excellent working relationships with physicians and
others in the medical industry enable us to gain an understanding of new therapeutic and diagnostic alternatives, trends
and emerging opportunities. Active participation allows us to quickly respond to the changing needs of physicians and
patients. In addition, we are an active sponsor of medical education both in the United States and internationally, offering
training on new and innovative surgical techniques as well as other medical education materials for use with our products.
Products
The following table sets forth the percentage of net sales for each of our product lines during each of the three years
ended December 31:
Our orthopedic surgery product offering includes sports medicine, powered surgical instruments, and sports biologics
and tissue. These products are marketed under a number of brands, including Hall®, CONMED Linvatec®, Concept® and Shutt®.
We offer a comprehensive range of devices and products to repair injuries which have occurred in the articulating joint
areas of the body. Many of these injuries are the result of sports related events or similar traumas. Our sports medicine products
include powered resection instruments, arthroscopes, reconstructive systems, tissue repair sets, metal and bioabsorbable implants
as well as related disposable products and fluid management systems. It is our standard practice to place some of these products,
such as shaver consoles and pumps, with certain customers at no charge in exchange for commitments to purchase disposable
products over certain time periods. This capital equipment is loaned and subject to return if certain minimum single-use purchases
are not met. Single-use products include products such as shaver blades, burs and pump tubing. In sports medicine, we compete
with Smith & Nephew, plc; Arthrex, Inc.; Stryker Corporation; Johnson & Johnson: DePuy Mitek, Inc. and Zimmer Biomet, Inc.
Our powered instruments offering is sold principally under the Hall® Surgical brand name, for use in large and small
bone orthopedic, arthroscopic, oral/maxillofacial, podiatric, plastic, ENT, neurological, spinal and cardiothoracic surgeries. Our
newest product is the Hall 50™ Powered Instrument System, specifically designed to meet the requirements of most orthopedic
applications. The modularity and versatility of the Hall 50™ Powered Instrument System allows a facility to purchase a single
power system to perform total joint arthroplasty, trauma, arthroscopy and some small bone procedures. In powered instruments,
our competition includes Stryker Corporation; Medtronic plc, (Midas Rex and Xomed divisions); Johnson & Johnson: DePuy
Synthes, Inc.; MicroAire Surgical Instruments, LLC and Zimmer Holdings, Inc.
As more fully described in Note 5 to the consolidated financial statements, on January 3, 2012, the Company entered
into the Sports Medicine Joint Development and Distribution Agreement (the "JDDA") with Musculoskeletal Transplant
Foundation (“MTF”) to obtain MTF's worldwide promotion rights with respect to allograft tissues within the field of sports
medicine and related products. Under the terms of this agreement, we are now the exclusive worldwide promoter of these allograft
tissues, which includes the reconstruction and/or replacement of tendon, ligament, cartilage or menisci, along with the correction
of deformities within the extremities.
General Surgery
Our general surgery product line offers a large range of products in the areas of advanced surgical, endoscopic technologies,
and critical care.
Our advanced surgical product offering includes an extensive line of electrosurgical generators, handpieces, smoke
management systems and accessories. Our endomechanical instrumentation products offer a full line of instruments including
trocars, suction irrigation devices, graspers, scissors and dissectors used in minimally invasive surgery. We offer a unique and
premium uterine manipulator called VCARE® for use in increasing the efficiency of laparoscopic hysterectomies and other
gynecologic laparoscopic procedures. Our competition includes Medtronic plc (formerly Covidien); Johnson & Johnson: Ethicon
Endo-Surgery, Inc.; ERBE Elektromedizin GmbH; Megadyne and Applied Medical Resources Corporation.
On January 4, 2016, we acquired SurgiQuest for $265 million in cash (on a cash-free, debt-free basis). SurgiQuest
developed, manufactured and marketed the AirSeal® System, the first integrated access management technology for use in
laparoscopic and robotic procedures. This proprietary and differentiated access system is complementary to our general surgery
offering.
3
4
Our endoscopic technologies offering includes a comprehensive line of minimally invasive diagnostic and therapeutic
products used in conjunction with procedures which require flexible endoscopy. This offering includes mucosal management
devices, forceps, scope management accessories, bronchoscopy devices, dilatation, stricture management devices, hemostasis,
biliary devices and polypectomy. Our competition includes Boston Scientific Corporation - Endoscopy; Cook Medical, Inc.; Merit
Medical Endotek; Olympus, Inc.; STERIS Corporation - U.S. Endoscopy and Cantel Medical- Medivators, Inc.
Our critical care offering includes a line of vital signs, cardiac monitoring and patient care products including ECG
electrodes & accessories and cardiac defibrillation & pacing pads. We also offer a complete line of suction instruments and tubing
that are used throughout all areas of the hospital as well as in Ambulatory Surgery Centers and the emergency medical market.
Finally, we offer a physician's office electrosurgical product mainly used by dermatologists. This offering's main competition
includes Medtronic plc (formerly Covidien) and 3M Company.
Surgical Visualization
Our surgical visualization product line offers imaging systems for use in minimally invasive orthopedic and general
surgery procedures including 2DHD and 3DHD vision technologies. Competition includes Smith & Nephew, plc; Arthrex, Inc.;
Stryker Corporation; Olympus, Inc.; Richard Wolf and Karl Storz GmbH.
International
Expanding our international presence is an important component of our long-term growth plan. Our products are sold
in over 100 foreign countries. International sales efforts are coordinated through local country dealers (including sub-distributors
or sales agents) or through direct in-country sales. We distribute our products through sales subsidiaries and branches with offices
located in Australia, Austria, Belgium, Canada, China, Denmark, Finland, France, Germany, Italy, Korea, the Netherlands, Poland,
Spain, Sweden and the United Kingdom. In these countries, our sales are denominated in the local currency and amounted to
approximately 30% of our total net sales in 2016. In the remaining countries where our products are sold through independent
distributors, sales are denominated in United States dollars.
Competition
We compete in orthopedic, surgical visualization and general surgery medical device markets across the world. Our
competitors range from large manufacturers with multiple business units to smaller manufacturers with limited product offerings.
We believe we have appropriate product offerings and adequate market share to compete effectively in these markets. The global
markets are constantly changing due to technological advances. We seek to closely align our research and development with our
key business objectives, namely developing and improving products and processes, applying innovative technology to the
manufacture of products for new global markets and reducing the cost of producing core products.
The breadth of our product lines in our key product areas enables us to meet a wide range of customer requirements and
preferences. This has enhanced our ability to market our products to surgeons, hospitals, surgery centers, group purchasing
organizations ("GPOs"), integrated delivery networks ("IDNs") and other customers, particularly as institutions seek to reduce
costs and minimize the number of suppliers.
Marketing
A significant portion of our products are distributed domestically directly to more than 6,000 hospitals, surgery centers
and other healthcare institutions as well as through medical specialty distributors. We are not dependent on any single customer
and no single customer accounted for more than 10% of our net sales in 2016, 2015 and 2014.
A significant portion of our U.S. sales are to customers affiliated with GPOs, IDNs and other large national or regional
accounts, as well as to the Veterans Administration and other hospitals operated by the Federal government. For hospital inventory
management purposes, some of our customers prefer to purchase our products through independent third-party medical product
distributors.
Our employee sales representatives are specially trained in our various product offerings. Each employee sales
representative is assigned a defined geographic area and compensated on a commission basis or through a combination of salary
and commission. The sales force is supervised and supported by either area directors or district managers. In certain geographies,
sales agent groups are used in the United States to sell our orthopedic products. These sales agent groups are paid a commission
for sales made to customers while home office sales and marketing management provide the overall direction for marketing and
positioning of our products. Our sales professionals provide surgeons and medical personnel with information relating to the
technical features and benefits of our products.
Our health systems organization is responsible for interacting with large regional and national accounts (e.g. GPOs, IDNs,
etc.). We have contracts with many such organizations and believe that the loss of any individual group purchasing contract will
not materially impact our business. In addition, all of our sales professionals are required to work closely with distributors where
applicable and maintain close relationships with end-users.
We sell to a diversified base of customers around the world and, therefore, believe there is no material concentration of
credit risk.
Manufacturing
Raw material costs constitute a substantial portion of our cost of production. Substantially all of our raw materials and
select components used in the manufacturing process are procured from external suppliers. We work closely with multiple suppliers
to ensure continuity of supply while maintaining high quality and reliability. As a consequence of supply chain best practices,
new product development and acquisitions, we often form strategic partnerships with key suppliers. As a consequence of these
supplier partnerships, components and raw materials may be sole sourced. Due to the strength of these suppliers and the variety
of products we provide, we do not believe the risk of supplier interruption poses an overall material adverse effect on our financial
and operational performance. We schedule production and maintain adequate levels of safety stock based on a number of factors,
including experience, knowledge of customer ordering patterns, demand, manufacturing lead times and optimal quantities required
to maintain the highest possible service levels. Customer orders are generally processed for immediate shipment and backlog of
firm orders is therefore not considered material to an understanding of our business.
Research and Development
New and improved products play a critical role in our continued sales growth. Internal research and development efforts
focus on the development of new products and product technological and design improvements aimed at complementing and
expanding existing product lines. We continually seek to leverage new technologies which improve the durability, performance
and usability of existing products. In addition, we maintain close working relationships with surgeons, inventors and operating
room personnel who often make new product and technology disclosures, principally in procedure-specific areas. In certain cases,
we seek to obtain rights to these ideas through negotiated agreements. Such agreements typically compensate the originator
through payments based upon a percentage of licensed product net sales. Annual royalty expense approximated $2.3 million, $2.3
million and $2.6 million in 2016, 2015 and 2014, respectively.
Amounts expended for Company research and development were approximately $32.3 million, $27.4 million and $27.8
million during 2016, 2015 and 2014, respectively. In 2016, the Company increased its efforts on new product development and
innovation.
Intellectual Property
Patents and other proprietary rights, in general, are important to our business. We have rights to intellectual property,
including United States patents and foreign equivalent patents which cover a wide range of our products. We own a majority of
these patents and have exclusive and non-exclusive licensing rights to the remainder. In addition, certain of these patents have
currently been licensed to third parties on a non-exclusive basis. We believe that the development of new products and technological
and design improvements to existing products will continue to be of primary importance in maintaining our competitive position.
Government Regulation and Quality Systems
The development, manufacture, sale and distribution of our products are subject to regulation by numerous agencies and
legislative bodies, including the U.S. Food and Drug Administration ("FDA") and comparable foreign counterparts. In the United
States, these regulations were enacted under the Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetic
Act and its subsequent amendments, and the regulations issued or proposed thereunder.
The FDA’s Quality System Regulations set forth requirements for our product design and manufacturing processes,
require the maintenance of certain records, provide for on-site inspection of our facilities and continuing review by the FDA. Many
of our products are also subject to industry-defined standards. Authorization to commercially market our products in the U.S. is
granted by the FDA under a procedure referred to as a 510(k) pre-market notification. This process requires us to notify the FDA
5
6
Our endoscopic technologies offering includes a comprehensive line of minimally invasive diagnostic and therapeutic
products used in conjunction with procedures which require flexible endoscopy. This offering includes mucosal management
devices, forceps, scope management accessories, bronchoscopy devices, dilatation, stricture management devices, hemostasis,
biliary devices and polypectomy. Our competition includes Boston Scientific Corporation - Endoscopy; Cook Medical, Inc.; Merit
Medical Endotek; Olympus, Inc.; STERIS Corporation - U.S. Endoscopy and Cantel Medical- Medivators, Inc.
Our critical care offering includes a line of vital signs, cardiac monitoring and patient care products including ECG
electrodes & accessories and cardiac defibrillation & pacing pads. We also offer a complete line of suction instruments and tubing
that are used throughout all areas of the hospital as well as in Ambulatory Surgery Centers and the emergency medical market.
Finally, we offer a physician's office electrosurgical product mainly used by dermatologists. This offering's main competition
includes Medtronic plc (formerly Covidien) and 3M Company.
Surgical Visualization
Our surgical visualization product line offers imaging systems for use in minimally invasive orthopedic and general
surgery procedures including 2DHD and 3DHD vision technologies. Competition includes Smith & Nephew, plc; Arthrex, Inc.;
Stryker Corporation; Olympus, Inc.; Richard Wolf and Karl Storz GmbH.
International
Expanding our international presence is an important component of our long-term growth plan. Our products are sold
in over 100 foreign countries. International sales efforts are coordinated through local country dealers (including sub-distributors
or sales agents) or through direct in-country sales. We distribute our products through sales subsidiaries and branches with offices
located in Australia, Austria, Belgium, Canada, China, Denmark, Finland, France, Germany, Italy, Korea, the Netherlands, Poland,
Spain, Sweden and the United Kingdom. In these countries, our sales are denominated in the local currency and amounted to
approximately 30% of our total net sales in 2016. In the remaining countries where our products are sold through independent
distributors, sales are denominated in United States dollars.
Competition
We compete in orthopedic, surgical visualization and general surgery medical device markets across the world. Our
competitors range from large manufacturers with multiple business units to smaller manufacturers with limited product offerings.
We believe we have appropriate product offerings and adequate market share to compete effectively in these markets. The global
markets are constantly changing due to technological advances. We seek to closely align our research and development with our
key business objectives, namely developing and improving products and processes, applying innovative technology to the
manufacture of products for new global markets and reducing the cost of producing core products.
The breadth of our product lines in our key product areas enables us to meet a wide range of customer requirements and
preferences. This has enhanced our ability to market our products to surgeons, hospitals, surgery centers, group purchasing
organizations ("GPOs"), integrated delivery networks ("IDNs") and other customers, particularly as institutions seek to reduce
costs and minimize the number of suppliers.
Marketing
A significant portion of our products are distributed domestically directly to more than 6,000 hospitals, surgery centers
and other healthcare institutions as well as through medical specialty distributors. We are not dependent on any single customer
and no single customer accounted for more than 10% of our net sales in 2016, 2015 and 2014.
A significant portion of our U.S. sales are to customers affiliated with GPOs, IDNs and other large national or regional
accounts, as well as to the Veterans Administration and other hospitals operated by the Federal government. For hospital inventory
management purposes, some of our customers prefer to purchase our products through independent third-party medical product
distributors.
Our employee sales representatives are specially trained in our various product offerings. Each employee sales
representative is assigned a defined geographic area and compensated on a commission basis or through a combination of salary
and commission. The sales force is supervised and supported by either area directors or district managers. In certain geographies,
sales agent groups are used in the United States to sell our orthopedic products. These sales agent groups are paid a commission
for sales made to customers while home office sales and marketing management provide the overall direction for marketing and
positioning of our products. Our sales professionals provide surgeons and medical personnel with information relating to the
technical features and benefits of our products.
Our health systems organization is responsible for interacting with large regional and national accounts (e.g. GPOs, IDNs,
etc.). We have contracts with many such organizations and believe that the loss of any individual group purchasing contract will
not materially impact our business. In addition, all of our sales professionals are required to work closely with distributors where
applicable and maintain close relationships with end-users.
We sell to a diversified base of customers around the world and, therefore, believe there is no material concentration of
credit risk.
Manufacturing
Raw material costs constitute a substantial portion of our cost of production. Substantially all of our raw materials and
select components used in the manufacturing process are procured from external suppliers. We work closely with multiple suppliers
to ensure continuity of supply while maintaining high quality and reliability. As a consequence of supply chain best practices,
new product development and acquisitions, we often form strategic partnerships with key suppliers. As a consequence of these
supplier partnerships, components and raw materials may be sole sourced. Due to the strength of these suppliers and the variety
of products we provide, we do not believe the risk of supplier interruption poses an overall material adverse effect on our financial
and operational performance. We schedule production and maintain adequate levels of safety stock based on a number of factors,
including experience, knowledge of customer ordering patterns, demand, manufacturing lead times and optimal quantities required
to maintain the highest possible service levels. Customer orders are generally processed for immediate shipment and backlog of
firm orders is therefore not considered material to an understanding of our business.
Research and Development
New and improved products play a critical role in our continued sales growth. Internal research and development efforts
focus on the development of new products and product technological and design improvements aimed at complementing and
expanding existing product lines. We continually seek to leverage new technologies which improve the durability, performance
and usability of existing products. In addition, we maintain close working relationships with surgeons, inventors and operating
room personnel who often make new product and technology disclosures, principally in procedure-specific areas. In certain cases,
we seek to obtain rights to these ideas through negotiated agreements. Such agreements typically compensate the originator
through payments based upon a percentage of licensed product net sales. Annual royalty expense approximated $2.3 million, $2.3
million and $2.6 million in 2016, 2015 and 2014, respectively.
Amounts expended for Company research and development were approximately $32.3 million, $27.4 million and $27.8
million during 2016, 2015 and 2014, respectively. In 2016, the Company increased its efforts on new product development and
innovation.
Intellectual Property
Patents and other proprietary rights, in general, are important to our business. We have rights to intellectual property,
including United States patents and foreign equivalent patents which cover a wide range of our products. We own a majority of
these patents and have exclusive and non-exclusive licensing rights to the remainder. In addition, certain of these patents have
currently been licensed to third parties on a non-exclusive basis. We believe that the development of new products and technological
and design improvements to existing products will continue to be of primary importance in maintaining our competitive position.
Government Regulation and Quality Systems
The development, manufacture, sale and distribution of our products are subject to regulation by numerous agencies and
legislative bodies, including the U.S. Food and Drug Administration ("FDA") and comparable foreign counterparts. In the United
States, these regulations were enacted under the Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetic
Act and its subsequent amendments, and the regulations issued or proposed thereunder.
The FDA’s Quality System Regulations set forth requirements for our product design and manufacturing processes,
require the maintenance of certain records, provide for on-site inspection of our facilities and continuing review by the FDA. Many
of our products are also subject to industry-defined standards. Authorization to commercially market our products in the U.S. is
granted by the FDA under a procedure referred to as a 510(k) pre-market notification. This process requires us to notify the FDA
5
6
of the new product and obtain FDA clearance before marketing the device. We believe that our products and processes presently
meet applicable standards in all material respects.
Medical device regulations continue to evolve world-wide. Products marketed in the European Union and other countries
require preparation of technical files and design dossiers which demonstrate compliance with applicable international regulations.
As government regulations continue to change, there is a risk that the distribution of some of our products may be interrupted or
discontinued if they do not meet the country specific requirements.
We market our products in numerous foreign countries and therefore are subject to regulations affecting, among other
things, product standards, sterilization, packaging requirements, labeling requirements, import laws and onsite inspection by
independent bodies with the authority to issue or not issue certifications we may require to be able to sell products in certain
countries. Many of the regulations applicable to our devices and products in these countries are similar to those of the FDA. The
member countries of the European Union have adopted the European Medical Device Directives, which create a single set of
medical device regulations for all member countries. These regulations require companies that wish to manufacture and distribute
medical devices in the European Union to maintain quality system certifications through European Union recognized Notified
Bodies. These Notified Bodies authorize the use of the CE Mark allowing free movement of our products throughout the member
countries. Requirements pertaining to our products vary widely from country to country, ranging from simple product registrations
to detailed submissions such as those required by the FDA. We believe that our products and quality procedures currently meet
applicable standards for the countries in which they are marketed.
As noted above, 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. Refer to Note 11 to
the consolidated financial statements for further discussion.
Employees
As of December 31, 2016, we had approximately 3,300 full-time employees, including approximately 2,200 in operations,
160 in research and development and the remaining in sales, marketing and related administrative support. We believe that we
have good relations with our employees and have never experienced a strike or similar work stoppage. None of our domestic
employees are represented by a labor union.
Item 1A. Risk Factors
An investment in our securities, including our common stock, involves a high degree of risk. Investors should carefully
consider the specific factors set forth below as well as the other information included or incorporated by reference in this Form
10-K. See “Forward Looking Statements”.
Our financial performance is dependent on conditions in the healthcare industry and the broader economy.
The results of our business are directly tied to the economic conditions in the healthcare industry and the broader economy as a
whole. We will continue to monitor and manage the impact of the overall economic environment on the Company, including
proposals for broad reform of the existing United States corporate tax system, including provisions impacting companies that
import goods from Mexico or export goods from the United States. These proposals are currently under evaluation by various
legislative and administrative bodies. We cannot predict the overall impact that such proposals may have on our business model,
financial condition or results of operations.
In addition, approximately 21% of our revenues are derived from the sale of capital products. The sales of such products are
negatively impacted if hospitals and other healthcare providers are unable to secure the financing necessary to purchase these
products or otherwise defer purchases.
Our significant international operations subject us to foreign currency fluctuations and other risks associated with operating
in countries outside the Untied States.
A significant portion of our revenues are derived from international sales. Approximately 48% of our total 2016 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, China and Korea. In those countries in which we have a direct presence, our sales are denominated in
the local currency and those sales denominated in local currency amounted to approximately 30% of our total net sales in 2016. The
remaining 18% of sales to customers outside the United States was on an export basis and transacted in United States dollars.
7
Because a significant portion of our operations consist of sales activities in jurisdictions outside the United States, 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. While we have implemented a hedging strategy involving foreign currency forward contracts
for 2016, our revenues and earnings are only partially protected from foreign currency translation if the United States dollar
strengthens as compared with currencies such as the Euro. Further, as of the date of this Form 10-K, we have not entered into any
foreign currency forward contracts beyond 2018. Our international presence exposes us to certain other inherent risks, including:
•
•
•
•
•
•
•
imposition of limitations on conversions of foreign currencies into dollars or remittance of dividends and other payments
by international subsidiaries;
imposition or increase of withholding and other taxes on remittances and other payments by international subsidiaries;
trade barriers;
political risks, including political instability;
reliance on third parties to distribute our products;
hyperinflation in certain countries outside the United States; and
imposition or increase of investment and other restrictions by foreign governments.
We cannot assure you that such risks will not have a material adverse effect on our business and results of operations.
Our financial performance is subject to the risks inherent in our acquisition strategy, including the effects of increased borrowing
and integration of newly acquired businesses or product lines.
A key element of our business strategy has been to expand through acquisitions and we may seek to pursue additional acquisitions
in the future. Our success is dependent in part upon our ability to integrate acquired companies or product lines into our existing
operations. We may not have sufficient management and other resources to accomplish the integration of our past and future
acquisitions and implementing our acquisition strategy may strain our relationship with customers, suppliers, distributors, personnel
or others. There can be no assurance that we will be able to identify and make acquisitions on acceptable terms or that we will
be able to obtain financing for such acquisitions on acceptable terms. In addition, while we are generally entitled to customary
indemnification from sellers of businesses for any difficulties that may have arisen prior to our acquisition of each business,
acquisitions may involve exposure to unknown liabilities and the amount and time for claiming under these indemnification
provisions is often limited. As a result, our financial performance is now, and will continue to be, subject to various risks associated
with the acquisition of businesses, including the financial effects associated with any increased borrowing required to fund such
acquisitions or with the integration of such businesses. We incurred substantial additional debt in connection with the SurgiQuest
acquisition, and we cannot ensure that we will be able to successfully advance SurgiQuest’s product lines or that risks related to
the SurgiQuest acquisition will not negatively impact our financial performance.
Our financial performance may be adversely impacted by healthcare reform legislation.
Provisions of healthcare legislation, including provisions of the Patient Protection and Affordable Care Act ("ACA"), could
meaningfully change the way health care is developed and delivered and may adversely affect our business and results of operations.
For example, the ACA includes provisions aimed at improving quality and decreasing costs of Medicare, governing comparative
effectiveness research, and implementing an independent payment advisory board and pilot programs to evaluate alternative
payment methodologies. That legislation also included a 2.3% excise tax imposed upon sales within the U.S. of certain medical
device products, which has been delayed until 2018. We also face uncertainties that might result in the modification or repeal of
any provisions of the ACA, including as a result of current and future executive orders and legislative actions. The uncertainty
associated with modifications or a repeal could generally cause healthcare markets to be unstable and we could be subject to some
interruptions, the magnitude of which are impossible to determine, as healthcare providers, both facilities and medical professionals,
who have benefited from the ACA determine the paths forward.
As a manufacturer of medical devices that interacts with physicians and health care providers domestically and internationally,
we face risks under domestic and foreign regulations, including the Foreign Corrupt Practices Act.
Manufacturers of medical devices have been the subject of various investigations or enforcement actions relating to interactions
with health care providers domestically or internationally. The interactions with domestic health care providers are subject to
regulations, known as the Anti-Kickback Statute, the Stark Act and the False Claims Act, that generally govern incentives for
health care providers, or methods of reimbursement funded in whole or in part by the government. Similarly, the Foreign Corrupt
Practices Act (“FCPA”) prohibits certain conduct by manufacturers, generally described as bribery, with respect to interactions,
either directly through foreign subsidiaries or indirectly through distributors, with health care providers who may be considered
government officials because they are affiliated with public hospitals. The FCPA also imposes obligations on manufacturers listed
8
of the new product and obtain FDA clearance before marketing the device. We believe that our products and processes presently
meet applicable standards in all material respects.
Medical device regulations continue to evolve world-wide. Products marketed in the European Union and other countries
require preparation of technical files and design dossiers which demonstrate compliance with applicable international regulations.
As government regulations continue to change, there is a risk that the distribution of some of our products may be interrupted or
discontinued if they do not meet the country specific requirements.
We market our products in numerous foreign countries and therefore are subject to regulations affecting, among other
things, product standards, sterilization, packaging requirements, labeling requirements, import laws and onsite inspection by
independent bodies with the authority to issue or not issue certifications we may require to be able to sell products in certain
countries. Many of the regulations applicable to our devices and products in these countries are similar to those of the FDA. The
member countries of the European Union have adopted the European Medical Device Directives, which create a single set of
medical device regulations for all member countries. These regulations require companies that wish to manufacture and distribute
medical devices in the European Union to maintain quality system certifications through European Union recognized Notified
Bodies. These Notified Bodies authorize the use of the CE Mark allowing free movement of our products throughout the member
countries. Requirements pertaining to our products vary widely from country to country, ranging from simple product registrations
to detailed submissions such as those required by the FDA. We believe that our products and quality procedures currently meet
applicable standards for the countries in which they are marketed.
As noted above, 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. Refer to Note 11 to
the consolidated financial statements for further discussion.
Employees
As of December 31, 2016, we had approximately 3,300 full-time employees, including approximately 2,200 in operations,
160 in research and development and the remaining in sales, marketing and related administrative support. We believe that we
have good relations with our employees and have never experienced a strike or similar work stoppage. None of our domestic
employees are represented by a labor union.
Item 1A. Risk Factors
An investment in our securities, including our common stock, involves a high degree of risk. Investors should carefully
consider the specific factors set forth below as well as the other information included or incorporated by reference in this Form
10-K. See “Forward Looking Statements”.
Our financial performance is dependent on conditions in the healthcare industry and the broader economy.
The results of our business are directly tied to the economic conditions in the healthcare industry and the broader economy as a
whole. We will continue to monitor and manage the impact of the overall economic environment on the Company, including
proposals for broad reform of the existing United States corporate tax system, including provisions impacting companies that
import goods from Mexico or export goods from the United States. These proposals are currently under evaluation by various
legislative and administrative bodies. We cannot predict the overall impact that such proposals may have on our business model,
financial condition or results of operations.
In addition, approximately 21% of our revenues are derived from the sale of capital products. The sales of such products are
negatively impacted if hospitals and other healthcare providers are unable to secure the financing necessary to purchase these
products or otherwise defer purchases.
Our significant international operations subject us to foreign currency fluctuations and other risks associated with operating
in countries outside the Untied States.
A significant portion of our revenues are derived from international sales. Approximately 48% of our total 2016 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, China and Korea. In those countries in which we have a direct presence, our sales are denominated in
the local currency and those sales denominated in local currency amounted to approximately 30% of our total net sales in 2016. The
remaining 18% of sales to customers outside the United States was on an export basis and transacted in United States dollars.
7
Because a significant portion of our operations consist of sales activities in jurisdictions outside the United States, 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. While we have implemented a hedging strategy involving foreign currency forward contracts
for 2016, our revenues and earnings are only partially protected from foreign currency translation if the United States dollar
strengthens as compared with currencies such as the Euro. Further, as of the date of this Form 10-K, we have not entered into any
foreign currency forward contracts beyond 2018. Our international presence exposes us to certain other inherent risks, including:
•
•
•
•
•
•
•
imposition of limitations on conversions of foreign currencies into dollars or remittance of dividends and other payments
by international subsidiaries;
imposition or increase of withholding and other taxes on remittances and other payments by international subsidiaries;
trade barriers;
political risks, including political instability;
reliance on third parties to distribute our products;
hyperinflation in certain countries outside the United States; and
imposition or increase of investment and other restrictions by foreign governments.
We cannot assure you that such risks will not have a material adverse effect on our business and results of operations.
Our financial performance is subject to the risks inherent in our acquisition strategy, including the effects of increased borrowing
and integration of newly acquired businesses or product lines.
A key element of our business strategy has been to expand through acquisitions and we may seek to pursue additional acquisitions
in the future. Our success is dependent in part upon our ability to integrate acquired companies or product lines into our existing
operations. We may not have sufficient management and other resources to accomplish the integration of our past and future
acquisitions and implementing our acquisition strategy may strain our relationship with customers, suppliers, distributors, personnel
or others. There can be no assurance that we will be able to identify and make acquisitions on acceptable terms or that we will
be able to obtain financing for such acquisitions on acceptable terms. In addition, while we are generally entitled to customary
indemnification from sellers of businesses for any difficulties that may have arisen prior to our acquisition of each business,
acquisitions may involve exposure to unknown liabilities and the amount and time for claiming under these indemnification
provisions is often limited. As a result, our financial performance is now, and will continue to be, subject to various risks associated
with the acquisition of businesses, including the financial effects associated with any increased borrowing required to fund such
acquisitions or with the integration of such businesses. We incurred substantial additional debt in connection with the SurgiQuest
acquisition, and we cannot ensure that we will be able to successfully advance SurgiQuest’s product lines or that risks related to
the SurgiQuest acquisition will not negatively impact our financial performance.
Our financial performance may be adversely impacted by healthcare reform legislation.
Provisions of healthcare legislation, including provisions of the Patient Protection and Affordable Care Act ("ACA"), could
meaningfully change the way health care is developed and delivered and may adversely affect our business and results of operations.
For example, the ACA includes provisions aimed at improving quality and decreasing costs of Medicare, governing comparative
effectiveness research, and implementing an independent payment advisory board and pilot programs to evaluate alternative
payment methodologies. That legislation also included a 2.3% excise tax imposed upon sales within the U.S. of certain medical
device products, which has been delayed until 2018. We also face uncertainties that might result in the modification or repeal of
any provisions of the ACA, including as a result of current and future executive orders and legislative actions. The uncertainty
associated with modifications or a repeal could generally cause healthcare markets to be unstable and we could be subject to some
interruptions, the magnitude of which are impossible to determine, as healthcare providers, both facilities and medical professionals,
who have benefited from the ACA determine the paths forward.
As a manufacturer of medical devices that interacts with physicians and health care providers domestically and internationally,
we face risks under domestic and foreign regulations, including the Foreign Corrupt Practices Act.
Manufacturers of medical devices have been the subject of various investigations or enforcement actions relating to interactions
with health care providers domestically or internationally. The interactions with domestic health care providers are subject to
regulations, known as the Anti-Kickback Statute, the Stark Act and the False Claims Act, that generally govern incentives for
health care providers, or methods of reimbursement funded in whole or in part by the government. Similarly, the Foreign Corrupt
Practices Act (“FCPA”) prohibits certain conduct by manufacturers, generally described as bribery, with respect to interactions,
either directly through foreign subsidiaries or indirectly through distributors, with health care providers who may be considered
government officials because they are affiliated with public hospitals. The FCPA also imposes obligations on manufacturers listed
8
on U.S. stock exchanges to maintain accurate books and records, and maintain internal accounting controls sufficient to provide
assurance that transactions are accurately recorded, lawful and in accordance with management’s authorization. The FCPA can
pose unique challenges for manufacturers who operate in foreign cultures where conduct prohibited by the FCPA may not be
viewed as illegal in local jurisdictions, and because, in some cases, a United States manufacturer may face risks under the FCPA
based on the conduct of third parties over whom the manufacturer may not have complete control.
In this regard, from time to time, the Company may receive an information request or subpoena from a government agency, such
as the Securities and Exchange Commission, Department of Justice, Equal Employment Opportunity Commission, the
Occupational Safety and Health Administration, the Department of Labor, the Treasury Department or other federal and state
agencies or foreign governments or government agencies. Alternatively, employees or private parties may provide us with reports
of alleged misconduct. These information requests or subpoenas may or may not be routine inquiries, or may begin as informal
or routine inquiries and over time develop into investigations or enforcement actions of various types under the FCPA or otherwise.
Similarly, the employee and third party reports may prompt us to conduct internal investigations into the alleged misconduct. No
inquiry that the Company currently faces or has faced to date, and no report of misconduct that the Company has received to date,
has had a material adverse effect on our financial condition, results of operations or cash flows. There can be no assurance, however,
that any pending inquiries will become investigations or enforcement actions, or the costs associated with responding to such
inquiries, investigations, enforcement actions or investigations relating to reports of misconduct will not have a material adverse
effect on our financial condition, results of operations or cash flows.
Failure to comply with regulatory requirements may result in recalls, fines or materially adverse implications.
Substantially all of our products are classified as class II medical devices subject to regulation by numerous agencies and legislative
bodies, including the FDA and comparable international counterparts. As a manufacturer of medical devices, our manufacturing
processes and facilities are subject to on-site inspection and continuing review by the FDA for compliance with the Quality System
Regulations. We may have future inspections at our sites and there can be no assurance that the costs of responding to such
inspections will not be material. Refer to Note 11 to the consolidated financial statements for further discussion.
Manufacturing and sales of our products outside the United States are also subject to international regulatory requirements which
vary from country to country. Moreover, we are generally required to obtain regulatory clearance or approval prior to marketing
a new product. The time required to obtain approvals from foreign countries may be longer or shorter than that required for FDA
clearance, and requirements for such approvals may differ from FDA requirements. Failure to comply with applicable domestic
and/or foreign regulatory requirements may result in:
•
•
•
•
•
•
•
•
fines or other enforcement actions;
recall or seizure of products;
total or partial suspension of production;
loss of certification;
withdrawal of existing product approvals or clearances;
refusal to approve or clear new applications or notices;
increased quality control costs; or
criminal prosecution.
Failure to comply with Quality System Regulations and applicable international regulations could result in a material adverse
effect on our business, financial condition or results of operations.
If we are not able to manufacture products in compliance with regulatory standards, we may decide to cease manufacturing of
those products and may be subject to product recall.
In addition to the Quality System Regulations, many of our products are also subject to industry-defined standards. We may not
be able to comply with these regulations and standards due to deficiencies in component parts or our manufacturing processes. If
we are not able to comply with the Quality System Regulations or industry-defined standards, we may not be able to fill customer
orders and we may decide to cease production of non-compliant products. Failure to produce products could affect our profit
margins and could lead to loss of customers.
Our products are subject to product recall and we have conducted product recalls in the past. Although no recall has had a material
adverse effect on our business or financial condition, we cannot assure you that regulatory issues will not have a material adverse
effect on our business, financial condition or results of operations in the future or that product recalls will not harm our reputation
and our customer relationships.
The highly competitive market for our products may create adverse pricing pressures.
The market for our products is highly competitive and our customers have numerous alternatives of supply. Many of our competitors
offer a range of products in areas other than those in which we compete, which may make such competitors more attractive to
surgeons, hospitals, group purchasing organizations and others. In addition, many of our competitors are large, technically
competent firms with substantial assets. Competitive pricing pressures or the introduction of new products by our competitors
could have an adverse effect on our revenues. See “Products” in Item 1 - Business for a further discussion of these competitive
forces.
Factors which may influence our customers’ choice of competitor products include:
•
•
•
•
•
•
changes in surgeon preferences;
increases or decreases in healthcare spending related to medical devices;
our inability to supply products to them as a result of product recall, market withdrawal or back-order;
the introduction by competitors of new products or new features to existing products;
the introduction by competitors of alternative surgical technology; and
advances in surgical procedures, discoveries or developments in the healthcare industry.
We use a variety of raw materials in our businesses, and significant shortages or price increases could increase our
operating costs and adversely impact the competitive positions of our products.
Our reliance on certain suppliers and commodity markets to secure raw materials used in our products exposes us to volatility in
the prices and availability of raw materials. In some instances, we participate in commodity markets that may be subject to
allocations by suppliers. A disruption in deliveries from our suppliers, price increases or decreased availability of raw materials
or commodities could have an adverse effect on our ability to meet our commitments to customers or increase our operating costs.
We believe that our supply management practices are based on an appropriate balancing of the foreseeable risks and the costs of
alternative practices. Nonetheless, price increases or the unavailability of some raw materials may have an adverse effect on our
results of operations or financial condition.
Cost reduction efforts in the healthcare industry could put pressures on our prices and margins.
In recent years, the healthcare industry has undergone significant change driven by various efforts to reduce costs. Such efforts
include national healthcare reform, trends towards managed care, cuts in Medicare, consolidation of healthcare distribution
companies and collective purchasing arrangements by GPOs and IDNs. Demand and prices for our products may be adversely
affected by such trends.
We may not be able to keep pace with technological change or to successfully develop new products with wide market acceptance,
which could cause us to lose business to competitors.
The market for our products is characterized by rapidly changing technology. Our future financial performance will depend in
part on our ability to develop and manufacture new products on a cost-effective basis, to introduce them to the market on a timely
basis and to have them accepted by surgeons.
We may not be able to keep pace with technology or to develop viable new products. In addition, many of our competitors are
substantially larger with greater financial resources which may allow them to more rapidly develop new products. Factors which
may result in delays of new product introductions or cancellation of our plans to manufacture and market new products include:
•
•
•
•
capital constraints;
research and development delays;
delays in securing regulatory approvals; and
changes in the competitive landscape, including the emergence of alternative products or solutions which reduce or
eliminate the markets for pending products.
Our new products may fail to achieve expected levels of market acceptance.
New product introductions may fail to achieve market acceptance. The degree of market acceptance for any of our products will
depend upon a number of factors, including:
•
our ability to develop and introduce new products and product enhancements in the time frames we currently estimate;
9
10
on U.S. stock exchanges to maintain accurate books and records, and maintain internal accounting controls sufficient to provide
assurance that transactions are accurately recorded, lawful and in accordance with management’s authorization. The FCPA can
pose unique challenges for manufacturers who operate in foreign cultures where conduct prohibited by the FCPA may not be
viewed as illegal in local jurisdictions, and because, in some cases, a United States manufacturer may face risks under the FCPA
based on the conduct of third parties over whom the manufacturer may not have complete control.
In this regard, from time to time, the Company may receive an information request or subpoena from a government agency, such
as the Securities and Exchange Commission, Department of Justice, Equal Employment Opportunity Commission, the
Occupational Safety and Health Administration, the Department of Labor, the Treasury Department or other federal and state
agencies or foreign governments or government agencies. Alternatively, employees or private parties may provide us with reports
of alleged misconduct. These information requests or subpoenas may or may not be routine inquiries, or may begin as informal
or routine inquiries and over time develop into investigations or enforcement actions of various types under the FCPA or otherwise.
Similarly, the employee and third party reports may prompt us to conduct internal investigations into the alleged misconduct. No
inquiry that the Company currently faces or has faced to date, and no report of misconduct that the Company has received to date,
has had a material adverse effect on our financial condition, results of operations or cash flows. There can be no assurance, however,
that any pending inquiries will become investigations or enforcement actions, or the costs associated with responding to such
inquiries, investigations, enforcement actions or investigations relating to reports of misconduct will not have a material adverse
effect on our financial condition, results of operations or cash flows.
Failure to comply with regulatory requirements may result in recalls, fines or materially adverse implications.
Substantially all of our products are classified as class II medical devices subject to regulation by numerous agencies and legislative
bodies, including the FDA and comparable international counterparts. As a manufacturer of medical devices, our manufacturing
processes and facilities are subject to on-site inspection and continuing review by the FDA for compliance with the Quality System
Regulations. We may have future inspections at our sites and there can be no assurance that the costs of responding to such
inspections will not be material. Refer to Note 11 to the consolidated financial statements for further discussion.
Manufacturing and sales of our products outside the United States are also subject to international regulatory requirements which
vary from country to country. Moreover, we are generally required to obtain regulatory clearance or approval prior to marketing
a new product. The time required to obtain approvals from foreign countries may be longer or shorter than that required for FDA
clearance, and requirements for such approvals may differ from FDA requirements. Failure to comply with applicable domestic
and/or foreign regulatory requirements may result in:
•
•
•
•
•
•
•
•
fines or other enforcement actions;
recall or seizure of products;
total or partial suspension of production;
loss of certification;
withdrawal of existing product approvals or clearances;
refusal to approve or clear new applications or notices;
increased quality control costs; or
criminal prosecution.
Failure to comply with Quality System Regulations and applicable international regulations could result in a material adverse
effect on our business, financial condition or results of operations.
If we are not able to manufacture products in compliance with regulatory standards, we may decide to cease manufacturing of
those products and may be subject to product recall.
In addition to the Quality System Regulations, many of our products are also subject to industry-defined standards. We may not
be able to comply with these regulations and standards due to deficiencies in component parts or our manufacturing processes. If
we are not able to comply with the Quality System Regulations or industry-defined standards, we may not be able to fill customer
orders and we may decide to cease production of non-compliant products. Failure to produce products could affect our profit
margins and could lead to loss of customers.
Our products are subject to product recall and we have conducted product recalls in the past. Although no recall has had a material
adverse effect on our business or financial condition, we cannot assure you that regulatory issues will not have a material adverse
effect on our business, financial condition or results of operations in the future or that product recalls will not harm our reputation
and our customer relationships.
The highly competitive market for our products may create adverse pricing pressures.
The market for our products is highly competitive and our customers have numerous alternatives of supply. Many of our competitors
offer a range of products in areas other than those in which we compete, which may make such competitors more attractive to
surgeons, hospitals, group purchasing organizations and others. In addition, many of our competitors are large, technically
competent firms with substantial assets. Competitive pricing pressures or the introduction of new products by our competitors
could have an adverse effect on our revenues. See “Products” in Item 1 - Business for a further discussion of these competitive
forces.
Factors which may influence our customers’ choice of competitor products include:
•
•
•
•
•
•
changes in surgeon preferences;
increases or decreases in healthcare spending related to medical devices;
our inability to supply products to them as a result of product recall, market withdrawal or back-order;
the introduction by competitors of new products or new features to existing products;
the introduction by competitors of alternative surgical technology; and
advances in surgical procedures, discoveries or developments in the healthcare industry.
We use a variety of raw materials in our businesses, and significant shortages or price increases could increase our
operating costs and adversely impact the competitive positions of our products.
Our reliance on certain suppliers and commodity markets to secure raw materials used in our products exposes us to volatility in
the prices and availability of raw materials. In some instances, we participate in commodity markets that may be subject to
allocations by suppliers. A disruption in deliveries from our suppliers, price increases or decreased availability of raw materials
or commodities could have an adverse effect on our ability to meet our commitments to customers or increase our operating costs.
We believe that our supply management practices are based on an appropriate balancing of the foreseeable risks and the costs of
alternative practices. Nonetheless, price increases or the unavailability of some raw materials may have an adverse effect on our
results of operations or financial condition.
Cost reduction efforts in the healthcare industry could put pressures on our prices and margins.
In recent years, the healthcare industry has undergone significant change driven by various efforts to reduce costs. Such efforts
include national healthcare reform, trends towards managed care, cuts in Medicare, consolidation of healthcare distribution
companies and collective purchasing arrangements by GPOs and IDNs. Demand and prices for our products may be adversely
affected by such trends.
We may not be able to keep pace with technological change or to successfully develop new products with wide market acceptance,
which could cause us to lose business to competitors.
The market for our products is characterized by rapidly changing technology. Our future financial performance will depend in
part on our ability to develop and manufacture new products on a cost-effective basis, to introduce them to the market on a timely
basis and to have them accepted by surgeons.
We may not be able to keep pace with technology or to develop viable new products. In addition, many of our competitors are
substantially larger with greater financial resources which may allow them to more rapidly develop new products. Factors which
may result in delays of new product introductions or cancellation of our plans to manufacture and market new products include:
•
•
•
•
capital constraints;
research and development delays;
delays in securing regulatory approvals; and
changes in the competitive landscape, including the emergence of alternative products or solutions which reduce or
eliminate the markets for pending products.
Our new products may fail to achieve expected levels of market acceptance.
New product introductions may fail to achieve market acceptance. The degree of market acceptance for any of our products will
depend upon a number of factors, including:
•
our ability to develop and introduce new products and product enhancements in the time frames we currently estimate;
9
10
•
•
•
•
•
our ability to successfully implement new technologies;
the market’s readiness to accept new products;
having adequate financial and technological resources for future product development and promotion;
the efficacy of our products; and
the prices of our products compared to the prices of our competitors’ products.
If our new products do not achieve market acceptance, we may be unable to recover our investments and may lose business to
competitors.
In addition, some of the companies with which we now compete, or may compete in the future, have or may have more extensive
research, marketing and manufacturing capabilities and significantly greater technical and personnel resources than we do, and
may be better positioned to continue to improve their technology in order to compete in an evolving industry. See “Products” in
Item 1 - Business for a further discussion of these competitive forces.
Our senior credit agreement contains covenants which may limit our flexibility or prevent us from taking actions.
Our senior credit agreement contains, and future credit facilities are expected to contain, certain restrictive covenants which will
affect, and in many respects significantly limit or prohibit, among other things, our ability to:
•
•
•
•
•
•
incur indebtedness;
make investments;
engage in transactions with affiliates;
pay dividends or make other distributions on, or redeem or repurchase, capital stock;
sell assets; and
pursue acquisitions.
These covenants, unless waived, may prevent us from pursuing acquisitions, significantly limit our operating and financial
flexibility and limit our ability to respond to changes in our business or competitive activities. Our ability to comply with such
provisions may be affected by events beyond our control. In the event of any default under our credit agreement, the credit
agreement lenders may elect to declare all amounts borrowed under our credit agreement, together with accrued interest, to be
due and payable. If we were unable to repay such borrowings, the credit agreement lenders could proceed against collateral
securing the credit agreement which consists of substantially all of our property and assets. Our credit agreement also contains a
material adverse effect clause which may limit our ability to access additional funding under our credit agreement should a material
adverse change in our business occur.
Our leverage and debt service requirements may require us to adopt alternative business strategies.
As of December 31, 2016, we had $499.1 million of debt outstanding, representing 45% of total capitalization. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and Note 6 to our
consolidated financial statements.
The degree to which we are leveraged could have important consequences to investors, including but not limited to the following:
•
•
•
•
•
•
a portion of our cash flow from operations must be dedicated to debt service and will not be available for operations,
capital expenditures, acquisitions, dividends and other purposes;
our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general
corporate purposes may be limited or impaired or may be at higher interest rates;
we may be at a competitive disadvantage when compared to competitors that are less leveraged;
we may be hindered in our ability to adjust rapidly to market conditions;
our degree of leverage could make us more vulnerable in the event of a downturn in general economic conditions or other
adverse circumstances applicable to us; and
our interest expense could increase if interest rates in general increase because a portion of our borrowings, including
our borrowings under our credit agreement, are and will continue to be at variable rates of interest.
We may not be able to generate sufficient cash to service our indebtedness, which could require us to reduce our expenditures,
sell assets, restructure our indebtedness or seek additional equity capital.
Our ability to satisfy our obligations will depend upon our future operating performance, which will be affected by prevailing
economic conditions and financial, business and other factors, many of which are beyond our control. We may not have sufficient
11
cash flow available to enable us to meet our obligations. If we are unable to service our indebtedness, we will be forced to adopt
an alternative strategy that may include actions such as foregoing acquisitions, reducing or delaying capital expenditures, selling
assets, restructuring or refinancing our indebtedness or seeking additional equity capital. We cannot assure you that any of these
strategies could be implemented on terms acceptable to us, if at all. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Liquidity and Capital Resources” for a discussion of our indebtedness and its implications.
We rely on a third party to obtain, process and distribute sports medicine allograft tissue. If such tissue cannot be obtained,
is not accepted by the market or is not accepted under numerous government regulations, our results of operations could be
negatively impacted.
A portion of our orthopedic revenues relate to our share of the service fees from the MTF allograft tissues for which we have
exclusive promotion rights, as further described in our revenue recognition policy in Note 1 to the consolidated financial statements.
Our primary costs related to these revenues come from our commission expense and certain marketing costs. Our ability to increase
the service fees may be constrained by certain factors which are outside of our control, such as the limited supply of donors and
donated tissue that meets the quality standards of MTF. Similarly, under the terms of the Joint Development and Distribution
Agreement (“JDDA”), MTF remains responsible for tissue procurement and processing, shipment of tissues and invoicing of
service fees to customers. To the extent MTF’s performance does not meet customer expectations or otherwise fails, CONMED
may be unable to increase the allograft service fees or to find a suitable replacement for MTF on terms that are acceptable.
The FDA and several states have statutory authority to regulate allograft processing and allograft-based materials. The FDA could
identify deficiencies in future inspections of MTF or MTF's suppliers or promulgate future regulatory rulings that could disrupt
our business, reducing profitability.
If the Company or our business partners are unable to adequately protect our information assets from cyber-based attacks or
other security incidents, our operations could be disrupted.
We are increasingly dependent on information technology, including the internet, for the storage, processing, and transmission of
our electronic, business-related, information assets. We leverage our internal information technology infrastructures, and those
of our business partners, to enable, sustain, and support our global business interests. In the event that the Company or our business
partners are unable to prevent, detect, and remediate cyber-based attacks or other security incidents in a timely manner, our
operations could be disrupted or we may incur financial or reputational losses arising from the theft, alteration, misuse, unauthorized
disclosure, or destruction of our information assets.
If we infringe third parties’ patents, or if we lose our patents or they are held to be invalid, we could become subject to liability
and our competitive position could be harmed.
Much of the technology used in the markets in which we compete is covered by patents. We have numerous U.S. patents and
corresponding international patents on products expiring at various dates from 2017 through 2038 and have additional patent
applications pending. See Item 1 Business “Research and Development” and “Intellectual Property” for a further description of
our patents. The loss of our patents could reduce the value of the related products and any related competitive
advantage. Competitors may also be able to design around our patents and to compete effectively with our products. In addition,
the cost of enforcing our patents against third parties and defending our products against patent infringement actions by others
could be substantial. We cannot assure you that:
•
•
•
•
pending patent applications will result in issued patents;
patents issued to or licensed by us will not be challenged by competitors;
our patents will be found to be valid or sufficiently broad to protect our technology or provide us with a competitive
advantage; or
we will be successful in defending against pending or future patent infringement claims asserted against our products.
Ordering patterns of our customers may change resulting in reductions in sales.
Our hospital and surgery center customers purchase our products in quantities sufficient to meet their anticipated demand. Likewise,
our healthcare distributor customers purchase our products for ultimate resale to healthcare providers in quantities sufficient to
meet the anticipated requirements of the distributors’ customers. Should inventories of our products owned by our hospital, surgery
center and distributor customers grow to levels higher than their requirements, our customers may reduce the ordering of products
from us. This could result in reduced sales during a financial accounting period.
12
•
•
•
•
•
our ability to successfully implement new technologies;
the market’s readiness to accept new products;
having adequate financial and technological resources for future product development and promotion;
the efficacy of our products; and
the prices of our products compared to the prices of our competitors’ products.
If our new products do not achieve market acceptance, we may be unable to recover our investments and may lose business to
competitors.
In addition, some of the companies with which we now compete, or may compete in the future, have or may have more extensive
research, marketing and manufacturing capabilities and significantly greater technical and personnel resources than we do, and
may be better positioned to continue to improve their technology in order to compete in an evolving industry. See “Products” in
Item 1 - Business for a further discussion of these competitive forces.
Our senior credit agreement contains covenants which may limit our flexibility or prevent us from taking actions.
Our senior credit agreement contains, and future credit facilities are expected to contain, certain restrictive covenants which will
affect, and in many respects significantly limit or prohibit, among other things, our ability to:
•
•
•
•
•
•
incur indebtedness;
make investments;
engage in transactions with affiliates;
pay dividends or make other distributions on, or redeem or repurchase, capital stock;
sell assets; and
pursue acquisitions.
These covenants, unless waived, may prevent us from pursuing acquisitions, significantly limit our operating and financial
flexibility and limit our ability to respond to changes in our business or competitive activities. Our ability to comply with such
provisions may be affected by events beyond our control. In the event of any default under our credit agreement, the credit
agreement lenders may elect to declare all amounts borrowed under our credit agreement, together with accrued interest, to be
due and payable. If we were unable to repay such borrowings, the credit agreement lenders could proceed against collateral
securing the credit agreement which consists of substantially all of our property and assets. Our credit agreement also contains a
material adverse effect clause which may limit our ability to access additional funding under our credit agreement should a material
adverse change in our business occur.
Our leverage and debt service requirements may require us to adopt alternative business strategies.
As of December 31, 2016, we had $499.1 million of debt outstanding, representing 45% of total capitalization. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and Note 6 to our
consolidated financial statements.
The degree to which we are leveraged could have important consequences to investors, including but not limited to the following:
•
•
•
•
•
•
a portion of our cash flow from operations must be dedicated to debt service and will not be available for operations,
capital expenditures, acquisitions, dividends and other purposes;
our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general
corporate purposes may be limited or impaired or may be at higher interest rates;
we may be at a competitive disadvantage when compared to competitors that are less leveraged;
we may be hindered in our ability to adjust rapidly to market conditions;
our degree of leverage could make us more vulnerable in the event of a downturn in general economic conditions or other
adverse circumstances applicable to us; and
our interest expense could increase if interest rates in general increase because a portion of our borrowings, including
our borrowings under our credit agreement, are and will continue to be at variable rates of interest.
We may not be able to generate sufficient cash to service our indebtedness, which could require us to reduce our expenditures,
sell assets, restructure our indebtedness or seek additional equity capital.
Our ability to satisfy our obligations will depend upon our future operating performance, which will be affected by prevailing
economic conditions and financial, business and other factors, many of which are beyond our control. We may not have sufficient
11
cash flow available to enable us to meet our obligations. If we are unable to service our indebtedness, we will be forced to adopt
an alternative strategy that may include actions such as foregoing acquisitions, reducing or delaying capital expenditures, selling
assets, restructuring or refinancing our indebtedness or seeking additional equity capital. We cannot assure you that any of these
strategies could be implemented on terms acceptable to us, if at all. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Liquidity and Capital Resources” for a discussion of our indebtedness and its implications.
We rely on a third party to obtain, process and distribute sports medicine allograft tissue. If such tissue cannot be obtained,
is not accepted by the market or is not accepted under numerous government regulations, our results of operations could be
negatively impacted.
A portion of our orthopedic revenues relate to our share of the service fees from the MTF allograft tissues for which we have
exclusive promotion rights, as further described in our revenue recognition policy in Note 1 to the consolidated financial statements.
Our primary costs related to these revenues come from our commission expense and certain marketing costs. Our ability to increase
the service fees may be constrained by certain factors which are outside of our control, such as the limited supply of donors and
donated tissue that meets the quality standards of MTF. Similarly, under the terms of the Joint Development and Distribution
Agreement (“JDDA”), MTF remains responsible for tissue procurement and processing, shipment of tissues and invoicing of
service fees to customers. To the extent MTF’s performance does not meet customer expectations or otherwise fails, CONMED
may be unable to increase the allograft service fees or to find a suitable replacement for MTF on terms that are acceptable.
The FDA and several states have statutory authority to regulate allograft processing and allograft-based materials. The FDA could
identify deficiencies in future inspections of MTF or MTF's suppliers or promulgate future regulatory rulings that could disrupt
our business, reducing profitability.
If the Company or our business partners are unable to adequately protect our information assets from cyber-based attacks or
other security incidents, our operations could be disrupted.
We are increasingly dependent on information technology, including the internet, for the storage, processing, and transmission of
our electronic, business-related, information assets. We leverage our internal information technology infrastructures, and those
of our business partners, to enable, sustain, and support our global business interests. In the event that the Company or our business
partners are unable to prevent, detect, and remediate cyber-based attacks or other security incidents in a timely manner, our
operations could be disrupted or we may incur financial or reputational losses arising from the theft, alteration, misuse, unauthorized
disclosure, or destruction of our information assets.
If we infringe third parties’ patents, or if we lose our patents or they are held to be invalid, we could become subject to liability
and our competitive position could be harmed.
Much of the technology used in the markets in which we compete is covered by patents. We have numerous U.S. patents and
corresponding international patents on products expiring at various dates from 2017 through 2038 and have additional patent
applications pending. See Item 1 Business “Research and Development” and “Intellectual Property” for a further description of
our patents. The loss of our patents could reduce the value of the related products and any related competitive
advantage. Competitors may also be able to design around our patents and to compete effectively with our products. In addition,
the cost of enforcing our patents against third parties and defending our products against patent infringement actions by others
could be substantial. We cannot assure you that:
•
•
•
•
pending patent applications will result in issued patents;
patents issued to or licensed by us will not be challenged by competitors;
our patents will be found to be valid or sufficiently broad to protect our technology or provide us with a competitive
advantage; or
we will be successful in defending against pending or future patent infringement claims asserted against our products.
Ordering patterns of our customers may change resulting in reductions in sales.
Our hospital and surgery center customers purchase our products in quantities sufficient to meet their anticipated demand. Likewise,
our healthcare distributor customers purchase our products for ultimate resale to healthcare providers in quantities sufficient to
meet the anticipated requirements of the distributors’ customers. Should inventories of our products owned by our hospital, surgery
center and distributor customers grow to levels higher than their requirements, our customers may reduce the ordering of products
from us. This could result in reduced sales during a financial accounting period.
12
We can be sued for producing defective products and our insurance coverage may be insufficient to cover the nature and
amount of any product liability claims.
The nature of our products as medical devices and today’s litigious environment should be regarded as potential risks which could
significantly and adversely affect our financial condition and results of operations. The insurance we maintain to protect against
claims associated with the use of our products has deductibles and may not adequately cover the amount or nature of any claim
asserted against us. We are also exposed to the risk that our insurers may become insolvent or that premiums may increase
substantially. See “Item 3 - Legal Proceedings” for a further discussion of the risk of product liability actions and our insurance
coverage.
Damage to our physical properties as a result of windstorm, earthquake, fire or other natural or man-made disaster may cause
a financial loss and a loss of customers.
Although we maintain insurance coverage for physical damage to our property and the resultant losses that could occur during a
business interruption, we are required to pay deductibles and our insurance coverage is limited to certain caps. For example, our
deductible for windstorm damage to our Florida property amounts to 2% of any loss.
Further, while insurance reimburses us for our lost gross earnings during a business interruption, if we are unable to supply our
customers with our products for an extended period of time, there can be no assurance that we will regain the customers’ business
once the product supply is returned to normal.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Facilities
The following table sets forth certain information with respect to our principal operating facilities. We believe that our
facilities are generally well maintained, are suitable to support our business and adequate for present and anticipated needs.
Location
Square Feet
Own or Lease
Lease Expiration
Utica, NY
Largo, FL
Chihuahua, Mexico
Lithia Springs, GA
Brussels, Belgium
Milford, CT
Mississauga, Canada
Westborough, MA
Frenchs Forest, Australia
Seoul, Korea
Anaheim, CA
Frankfurt, Germany
Milan, Italy
Barcelona, Spain
Swindon, Wiltshire, UK
Greenwood Village, CO
Askim, Sweden
Lyon, France
Beijing, China
Copenhagen, Denmark
New York, NY
Beijing, China
Warsaw, Poland
Espoo, Finland
Shanghai, China
Innsbruck, Austria
500,000
278,000
207,720
188,400
45,531
40,542
22,378
19,515
16,912
15,585
14,037
13,606
13,024
12,820
8,562
8,541
8,353
7,438
6,799
5,899
3,473
3,456
3,222
3,078
2,269
1,820
Own
Own
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
—
—
September 2019
December 2019
June 2024
November 2020
December 2018
June 2020
July 2020
January 2020
August 2018
March 2023
March 2023
December 2023
December 2020
January 2020
May 2019
December 2026
June 2017
October 2018
September 2022
September 2019
February 2018
Open Ended
February 2018
June 2020
Our principal manufacturing facilities are located in Utica, NY, Largo, FL, Anaheim, CA and Chihuahua, Mexico. Lithia
Springs, GA and Brussels, Belgium are our principal distribution centers. The remaining facilities are sales and administrative
offices with certain offices also including smaller distribution centers.
Item 3. Legal Proceedings
We are involved in various proceedings, legal actions and claims arising in the normal course of business, including
proceedings related to product, labor and intellectual property and other matters that are more fully described in Note 11 to the
consolidated financial statements. We are not a party to any pending legal proceedings other than ordinary routine litigation
incidental to our business.
Item 4. Mine Safety Disclosures
Not applicable.
13
14
We can be sued for producing defective products and our insurance coverage may be insufficient to cover the nature and
amount of any product liability claims.
The nature of our products as medical devices and today’s litigious environment should be regarded as potential risks which could
significantly and adversely affect our financial condition and results of operations. The insurance we maintain to protect against
claims associated with the use of our products has deductibles and may not adequately cover the amount or nature of any claim
asserted against us. We are also exposed to the risk that our insurers may become insolvent or that premiums may increase
substantially. See “Item 3 - Legal Proceedings” for a further discussion of the risk of product liability actions and our insurance
coverage.
Damage to our physical properties as a result of windstorm, earthquake, fire or other natural or man-made disaster may cause
a financial loss and a loss of customers.
Although we maintain insurance coverage for physical damage to our property and the resultant losses that could occur during a
business interruption, we are required to pay deductibles and our insurance coverage is limited to certain caps. For example, our
deductible for windstorm damage to our Florida property amounts to 2% of any loss.
Further, while insurance reimburses us for our lost gross earnings during a business interruption, if we are unable to supply our
customers with our products for an extended period of time, there can be no assurance that we will regain the customers’ business
once the product supply is returned to normal.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Facilities
The following table sets forth certain information with respect to our principal operating facilities. We believe that our
facilities are generally well maintained, are suitable to support our business and adequate for present and anticipated needs.
Location
Square Feet
Own or Lease
Lease Expiration
Utica, NY
Largo, FL
Chihuahua, Mexico
Lithia Springs, GA
Brussels, Belgium
Milford, CT
Mississauga, Canada
Westborough, MA
Frenchs Forest, Australia
Seoul, Korea
Anaheim, CA
Frankfurt, Germany
Milan, Italy
Barcelona, Spain
Swindon, Wiltshire, UK
Greenwood Village, CO
Askim, Sweden
Lyon, France
Beijing, China
Copenhagen, Denmark
New York, NY
Beijing, China
Warsaw, Poland
Espoo, Finland
Shanghai, China
Innsbruck, Austria
500,000
278,000
207,720
188,400
45,531
40,542
22,378
19,515
16,912
15,585
14,037
13,606
13,024
12,820
8,562
8,541
8,353
7,438
6,799
5,899
3,473
3,456
3,222
3,078
2,269
1,820
Own
Own
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
—
—
September 2019
December 2019
June 2024
November 2020
December 2018
June 2020
July 2020
January 2020
August 2018
March 2023
March 2023
December 2023
December 2020
January 2020
May 2019
December 2026
June 2017
October 2018
September 2022
September 2019
February 2018
Open Ended
February 2018
June 2020
Our principal manufacturing facilities are located in Utica, NY, Largo, FL, Anaheim, CA and Chihuahua, Mexico. Lithia
Springs, GA and Brussels, Belgium are our principal distribution centers. The remaining facilities are sales and administrative
offices with certain offices also including smaller distribution centers.
Item 3. Legal Proceedings
We are involved in various proceedings, legal actions and claims arising in the normal course of business, including
proceedings related to product, labor and intellectual property and other matters that are more fully described in Note 11 to the
consolidated financial statements. We are not a party to any pending legal proceedings other than ordinary routine litigation
incidental to our business.
Item 4. Mine Safety Disclosures
Not applicable.
13
14
PART II
Performance Graph
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our common stock, par value $.01 per share, is traded on the NASDAQ Stock Market under the symbol “CNMD”. At
January 31, 2017, there were 597 registered holders of our common stock and approximately 5,353 accounts held in “street name”.
The following table sets forth quarterly high and low closing sales prices for the years ended December 31, 2016 and
2015, as reported by the NASDAQ Stock Market.
The performance graph below compares the yearly percentage change in the Company’s Common Stock with the
cumulative total return of the NASDAQ Composite Index and the cumulative total return of the Standard & Poor’s Health Care
Equipment Index. In each case, the cumulative total return assumes reinvestment of dividends into the same class of equity securities
at the frequency with which dividends are paid on such securities during the applicable fiscal year.
Period
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Period
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
2016
High
Low
$
42.61
47.73
50.00
46.45
36.16
38.97
38.48
37.75
2015
High
Low
$
51.88
59.11
60.19
49.99
44.90
48.29
47.09
38.34
Our Board of Directors has authorized a share repurchase program; see Note 8 to the consolidated financial statements.
On February 29, 2012, the Board of Directors adopted a cash dividend policy and declared an initial quarterly dividend
of $0.15 per share. On October 28, 2013, the Board of Directors increased the quarterly dividend to $0.20 per share. The fourth
quarter dividend for 2016 was paid on January 5, 2017 to shareholders of record as of December 15, 2016. The total dividend
payable at December 31, 2016 was $5.6 million and is included in other current liabilities in the consolidated balance sheet. 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.
Refer to Item 12 for information relating to compensation plans under which equity securities of CONMED Corporation
are authorized for issuance.
15
16
PART II
Performance Graph
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our common stock, par value $.01 per share, is traded on the NASDAQ Stock Market under the symbol “CNMD”. At
January 31, 2017, there were 597 registered holders of our common stock and approximately 5,353 accounts held in “street name”.
The following table sets forth quarterly high and low closing sales prices for the years ended December 31, 2016 and
2015, as reported by the NASDAQ Stock Market.
The performance graph below compares the yearly percentage change in the Company’s Common Stock with the
cumulative total return of the NASDAQ Composite Index and the cumulative total return of the Standard & Poor’s Health Care
Equipment Index. In each case, the cumulative total return assumes reinvestment of dividends into the same class of equity securities
at the frequency with which dividends are paid on such securities during the applicable fiscal year.
Period
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Period
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
2016
High
Low
$
42.61
47.73
50.00
46.45
36.16
38.97
38.48
37.75
2015
High
Low
$
51.88
59.11
60.19
49.99
44.90
48.29
47.09
38.34
Our Board of Directors has authorized a share repurchase program; see Note 8 to the consolidated financial statements.
On February 29, 2012, the Board of Directors adopted a cash dividend policy and declared an initial quarterly dividend
of $0.15 per share. On October 28, 2013, the Board of Directors increased the quarterly dividend to $0.20 per share. The fourth
quarter dividend for 2016 was paid on January 5, 2017 to shareholders of record as of December 15, 2016. The total dividend
payable at December 31, 2016 was $5.6 million and is included in other current liabilities in the consolidated balance sheet. 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.
Refer to Item 12 for information relating to compensation plans under which equity securities of CONMED Corporation
are authorized for issuance.
15
16
incurred charges of $4.5 million and $2.1 million, respectively, related to the termination of a product offering. See
additional discussion in Note 12 to the consolidated financial statements.
(3)
Acquisition, restructuring and other expense included in selling and administrative costs are the following:
Restructuring costs
Business and asset acquisition costs
Gain on sale of facility
Management restructuring costs
Shareholder activism costs
Patent dispute and other matters
Pension settlement expense
2016
2015
2014
2013
2012
$
6,873
20,599
(1,890)
—
—
—
—
$
$
13,655
2,543
—
—
—
—
—
3,354
722
—
12,546
3,966
3,374
—
$
$
8,750
—
6,497
1,898
—
—
—
3,206
1,443
—
—
—
1,555
—
Acquisition, restructuring and other expense included in
selling and administrative expense
$
25,582
$
16,198
$
23,962
$
13,399
$
9,950
See additional discussion in Notes 2 and 12 to the consolidated financial statements.
(4)
(5)
During 2016, we incurred a $2.7 million charge related to commitment fees paid to certain of our lenders, which provided
a financing commitment for the SurgiQuest acquisition and recorded a loss on the early extinguishment of debt of $0.3
million in conjunction with the fifth amended and restated senior credit agreement as further described in Note 6 to the
consolidated financial statements. In 2013, we recorded a $0.3 million charge related to a loss on the early extinguishment
of debt.
In November 2015, the FASB issued ASU No. 2015-17 "Income Taxes (ASC 740): Balance Sheet Classification of
Deferred Taxes". This ASU requires all deferred income tax assets and liabilities be presented as non-current in classified
balance sheets. We adopted this guidance as of January 1, 2016 and applied retrospectively.
Item 6. Selected Financial Data
The following table sets forth selected historical financial data for the years ended December 31, 2016, 2015, 2014, 2013
and 2012. The financial data set forth below should be read in conjunction with the information under “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” included in Item 7 of this Form 10-K and the Consolidated Financial
Statements of the Company and the notes thereto.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
2016
Years Ended December 31,
2014
(In thousands, except per share data)
2013
2015
2012
Statements of Operations Data (1):
Net sales
Cost of sales (2)
Gross profit
Selling and administrative expense (3)
Research and development expense
Income from operations
Other expense (4)
Interest expense
Income before income taxes
Provision for income taxes
Net income
Per Share Data:
Basic earnings per share
Diluted earnings per share
Dividends per share of common stock
Weighted Average Number of Common Shares In
Calculating:
Basic earnings per share
Diluted earnings per share
Other Financial Data:
Depreciation and amortization
Capital expenditures
Balance Sheet Data (at period end):
Cash and cash equivalents
Total assets(5)
Long-term obligations(5)
Total shareholders’ equity
$ 763,520
355,190
408,330
338,400
32,254
37,676
2,942
15,359
19,375
4,711
14,664
$
$ 719,168
337,466
381,702
303,091
27,436
51,175
—
6,031
45,144
14,646
30,498
$
$ 740,055
335,998
404,057
323,492
27,779
52,786
—
6,111
46,675
14,483
32,192
$
$ 762,704
350,287
412,417
330,078
25,831
56,508
263
5,613
50,632
14,693
35,939
$
$ 767,140
361,297
405,843
312,419
28,214
65,210
—
5,730
59,480
18,999
40,481
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
0.53
0.52
0.80
27,804
27,964
55,309
14,753
27,428
1,328,983
634,455
580,576
1.10
1.09
0.80
27,653
27,858
43,879
15,009
72,504
1,101,700
396,909
585,073
1.17
1.16
0.80
27,401
27,769
45,734
15,411
66,332
1,086,703
389,449
581,298
$
$
$
$
$
$
$
$
$
$
1.30
1.28
0.65
27,722
28,114
47,867
18,445
54,443
1,079,881
362,336
606,319
1.43
1.41
0.60
28,301
28,653
46,616
21,532
23,720
1,068,620
336,408
606,998
(1)
(2)
Results of operations of acquired businesses have been recorded in the financial statements since the date of
acquisition. Refer to Note 2 to the consolidated financial statements.
In 2016, 2015, 2014, 2013 and 2012, we incurred charges related to the restructuring of certain of our manufacturing
operations of $3.1 million, $8.0 million, $5.6 million, $6.5 million and $7.1 million, respectively; in 2016 and 2013 we
17
18
incurred charges of $4.5 million and $2.1 million, respectively, related to the termination of a product offering. See
additional discussion in Note 12 to the consolidated financial statements.
(3)
Acquisition, restructuring and other expense included in selling and administrative costs are the following:
Restructuring costs
Business and asset acquisition costs
Gain on sale of facility
Management restructuring costs
Shareholder activism costs
Patent dispute and other matters
Pension settlement expense
2016
2015
2014
2013
2012
$
6,873
20,599
(1,890)
—
—
—
—
$
$
13,655
2,543
—
—
—
—
—
3,354
722
—
12,546
3,966
3,374
—
$
$
8,750
—
6,497
1,898
—
—
—
3,206
1,443
—
—
—
1,555
—
Acquisition, restructuring and other expense included in
selling and administrative expense
$
25,582
$
16,198
$
23,962
$
13,399
$
9,950
See additional discussion in Notes 2 and 12 to the consolidated financial statements.
(4)
(5)
During 2016, we incurred a $2.7 million charge related to commitment fees paid to certain of our lenders, which provided
a financing commitment for the SurgiQuest acquisition and recorded a loss on the early extinguishment of debt of $0.3
million in conjunction with the fifth amended and restated senior credit agreement as further described in Note 6 to the
consolidated financial statements. In 2013, we recorded a $0.3 million charge related to a loss on the early extinguishment
of debt.
In November 2015, the FASB issued ASU No. 2015-17 "Income Taxes (ASC 740): Balance Sheet Classification of
Deferred Taxes". This ASU requires all deferred income tax assets and liabilities be presented as non-current in classified
balance sheets. We adopted this guidance as of January 1, 2016 and applied retrospectively.
Item 6. Selected Financial Data
The following table sets forth selected historical financial data for the years ended December 31, 2016, 2015, 2014, 2013
and 2012. The financial data set forth below should be read in conjunction with the information under “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” included in Item 7 of this Form 10-K and the Consolidated Financial
Statements of the Company and the notes thereto.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
2016
Years Ended December 31,
2014
(In thousands, except per share data)
2015
2013
2012
Statements of Operations Data (1):
Net sales
Cost of sales (2)
Gross profit
Selling and administrative expense (3)
Research and development expense
Income from operations
Other expense (4)
Interest expense
Income before income taxes
Provision for income taxes
Net income
Per Share Data:
Basic earnings per share
Diluted earnings per share
Dividends per share of common stock
Weighted Average Number of Common Shares In
Calculating:
Basic earnings per share
Diluted earnings per share
Other Financial Data:
Depreciation and amortization
Capital expenditures
Balance Sheet Data (at period end):
Cash and cash equivalents
Total assets(5)
Long-term obligations(5)
Total shareholders’ equity
$ 763,520
355,190
408,330
338,400
32,254
37,676
2,942
15,359
19,375
4,711
14,664
$
$ 719,168
337,466
381,702
303,091
27,436
51,175
—
6,031
45,144
14,646
30,498
$
$ 740,055
335,998
404,057
323,492
27,779
52,786
—
6,111
46,675
14,483
32,192
$
$ 762,704
350,287
412,417
330,078
25,831
56,508
263
5,613
50,632
14,693
35,939
$
$ 767,140
361,297
405,843
312,419
28,214
65,210
—
5,730
59,480
18,999
40,481
$
$
$
$
$
$
0.53
0.52
0.80
27,804
27,964
55,309
14,753
27,428
1,328,983
634,455
580,576
$
$
$
$
$
$
$
$
$
$
1.10
1.09
0.80
27,653
27,858
43,879
15,009
72,504
1,101,700
396,909
585,073
1.17
1.16
0.80
27,401
27,769
45,734
15,411
66,332
1,086,703
389,449
581,298
$
$
$
$
$
$
$
$
$
$
1.30
1.28
0.65
27,722
28,114
47,867
18,445
54,443
1,079,881
362,336
606,319
1.43
1.41
0.60
28,301
28,653
46,616
21,532
23,720
1,068,620
336,408
606,998
(1)
(2)
Results of operations of acquired businesses have been recorded in the financial statements since the date of
acquisition. Refer to Note 2 to the consolidated financial statements.
In 2016, 2015, 2014, 2013 and 2012, we incurred charges related to the restructuring of certain of our manufacturing
operations of $3.1 million, $8.0 million, $5.6 million, $6.5 million and $7.1 million, respectively; in 2016 and 2013 we
17
18
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with Selected Financial Data (Item 6), 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 that provides
surgical devices and equipment for minimally invasive procedures. The Company’s products are used by surgeons and physicians
in a variety of specialties including orthopedics, general surgery, gynecology, neurosurgery and gastroenterology.
Our product lines consist of orthopedic surgery, general surgery and surgical visualization. Orthopedic surgery consists
of sports medicine instrumentation and small bone, large bone and specialty powered surgical instruments and service fees related
to the promotion and marketing of sports medicine allograft tissue. General surgery consists of a complete line of endo-mechanical
instrumentation for minimally invasive laparoscopic and gastrointestinal procedures, a line of cardiac monitoring products as well
as electrosurgical generators and related instruments. Surgical visualization consists of imaging systems for use in minimally
invasive orthopedic and general surgery procedures including 2DHD and 3DHD vision technologies. These product lines as a
percentage of consolidated net sales are as follows:
Orthopedic surgery
General surgery
Surgical visualization
Consolidated net sales
2016
2015
2014
48%
45
7
100%
54%
38
8
100%
54%
38
8
100%
A significant amount of our products are used in surgical procedures with approximately 79% 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 and Mexico. We market our products both domestically and internationally directly to customers and
through distributors. International sales approximated 48%, 50% and 51% in 2016, 2015 and 2014, respectively.
Business Environment
On January 4, 2016, we acquired SurgiQuest, Inc. ("SurgiQuest") for $265 million in cash (on a cash-free, debt-free
basis). SurgiQuest develops, manufactures and markets the AirSeal® System, the first integrated access management technology
for use in laparoscopic and robotic procedures. This proprietary and differentiated access system is complementary to our current
general surgery offering. Refer to Note 2 to the consolidated financial statements for further details on this acquisition.
We plan to continue to restructure both operations and administrative functions as necessary throughout the organization.
We have successfully executed our restructuring plans over the past few years, however, we cannot be certain future 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. As discussed in Note 11 to the consolidated
financial statements, on August 1, 2016, we were notified by the FDA that our then outstanding warning letter was closed.
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
19
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 and collectability is reasonably assured.
• We place certain of our capital equipment with customers on a loaned basis in return for commitments to purchase
related single-use products over time periods generally ranging from one to three years. In these circumstances, no
revenue is recognized upon capital equipment shipment as the equipment is loaned and subject to return if certain
minimum single-use purchases are not met. Revenue is recognized upon the sale and shipment of the related single-
use products. The cost of the equipment is amortized over its estimated useful life.
• We recognize revenues related to the promotion and marketing of sports medicine allograft tissue in accordance with
the contractual terms of our agreement with Musculoskeletal Transplant Foundation (“MTF”) on a net basis as our
role is limited to that of an agent earning a commission or fee. MTF records revenue when the tissue is shipped to
the customer. Our services are completed at this time and net revenues for the “Service Fee” for our promotional
and marketing efforts are then recognized based on a percentage of the net amounts billed by MTF to its customers.
The timing of revenue recognition is determined through review of the net billings made by MTF each month. Our
net commission Service Fee is based on the contractual terms of our agreement and is currently 50%. This percentage
can vary over the term of the agreement but is contractually determinable. Our Service Fee revenues are recorded
net of amortization of the acquired assets, which are being amortized over the expected useful life of 25 years.
•
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, $12.6 million and $13.6 million for 2016,
2015 and 2014, 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 $2.0 million at December 31, 2016 is adequate to provide for probable losses
resulting from accounts receivable.
Inventory Valuation
We write-off 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 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.
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. Customer and distributor relationships, trademarks, tradenames, developed technology, patents
20
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with Selected Financial Data (Item 6), 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 that provides
surgical devices and equipment for minimally invasive procedures. The Company’s products are used by surgeons and physicians
in a variety of specialties including orthopedics, general surgery, gynecology, neurosurgery and gastroenterology.
Our product lines consist of orthopedic surgery, general surgery and surgical visualization. Orthopedic surgery consists
of sports medicine instrumentation and small bone, large bone and specialty powered surgical instruments and service fees related
to the promotion and marketing of sports medicine allograft tissue. General surgery consists of a complete line of endo-mechanical
instrumentation for minimally invasive laparoscopic and gastrointestinal procedures, a line of cardiac monitoring products as well
as electrosurgical generators and related instruments. Surgical visualization consists of imaging systems for use in minimally
invasive orthopedic and general surgery procedures including 2DHD and 3DHD vision technologies. These product lines as a
percentage of consolidated net sales are as follows:
Orthopedic surgery
General surgery
Surgical visualization
Consolidated net sales
2016
2015
2014
48%
45
7
100%
54%
38
8
100%
54%
38
8
100%
A significant amount of our products are used in surgical procedures with approximately 79% 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 and Mexico. We market our products both domestically and internationally directly to customers and
through distributors. International sales approximated 48%, 50% and 51% in 2016, 2015 and 2014, respectively.
Business Environment
On January 4, 2016, we acquired SurgiQuest, Inc. ("SurgiQuest") for $265 million in cash (on a cash-free, debt-free
basis). SurgiQuest develops, manufactures and markets the AirSeal® System, the first integrated access management technology
for use in laparoscopic and robotic procedures. This proprietary and differentiated access system is complementary to our current
general surgery offering. Refer to Note 2 to the consolidated financial statements for further details on this acquisition.
We plan to continue to restructure both operations and administrative functions as necessary throughout the organization.
We have successfully executed our restructuring plans over the past few years, however, we cannot be certain future 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. As discussed in Note 11 to the consolidated
financial statements, on August 1, 2016, we were notified by the FDA that our then outstanding warning letter was closed.
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
19
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 and collectability is reasonably assured.
• We place certain of our capital equipment with customers on a loaned basis in return for commitments to purchase
related single-use products over time periods generally ranging from one to three years. In these circumstances, no
revenue is recognized upon capital equipment shipment as the equipment is loaned and subject to return if certain
minimum single-use purchases are not met. Revenue is recognized upon the sale and shipment of the related single-
use products. The cost of the equipment is amortized over its estimated useful life.
• We recognize revenues related to the promotion and marketing of sports medicine allograft tissue in accordance with
the contractual terms of our agreement with Musculoskeletal Transplant Foundation (“MTF”) on a net basis as our
role is limited to that of an agent earning a commission or fee. MTF records revenue when the tissue is shipped to
the customer. Our services are completed at this time and net revenues for the “Service Fee” for our promotional
and marketing efforts are then recognized based on a percentage of the net amounts billed by MTF to its customers.
The timing of revenue recognition is determined through review of the net billings made by MTF each month. Our
net commission Service Fee is based on the contractual terms of our agreement and is currently 50%. This percentage
can vary over the term of the agreement but is contractually determinable. Our Service Fee revenues are recorded
net of amortization of the acquired assets, which are being amortized over the expected useful life of 25 years.
•
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, $12.6 million and $13.6 million for 2016,
2015 and 2014, 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 $2.0 million at December 31, 2016 is adequate to provide for probable losses
resulting from accounts receivable.
Inventory Valuation
We write-off 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 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.
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. Customer and distributor relationships, trademarks, tradenames, developed technology, patents
20
and other intangible assets primarily represent allocations of purchase price to identifiable intangible assets of acquired businesses.
Promotional, marketing and distribution rights represent intangible assets created under our Sports Medicine Joint Development
and Distribution Agreement (the "JDDA") with Musculoskeletal Transplant Foundation (“MTF”). We have goodwill of $397.7
million and other intangible assets of $419.5 million as of December 31, 2016.
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 business. Estimates of fair value are based
on the best information available as of the date of the assessment. During 2016, we completed our goodwill impairment testing
with data as of October 1, 2016. We performed a Step 1 impairment test utilizing the market capitalization approach to determine
whether the fair value of a reporting unit is less than its carrying amount. Based upon our assessment, we believe the fair value
continues to exceed carrying value.
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 as a result of the 1997 acquisition of Linvatec Corporation. The acquisition date
valuation 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. During 2016, we acquired SurgiQuest, Inc.
and recorded customer and distributor relationships with an average useful life of 22 years. Customer and distributor relationship
intangible assets arising as a result of business acquisitions other than Linvatec are being amortized over a weighted average life
of 21 years. The weighted average life for customer and distributor relationship assets in aggregate is 29 years.
We evaluate the remaining useful life of our customer and distributor 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 and distributor relationship intangible assets, we perform an analysis
and assessment of actual customer attrition and activity as events and circumstances warrant.
We test our customer and distributor relationship assets for recoverability whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. Factors specific to our customer and distributor 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.
Our developed technology asset arose as a result of the SurgiQuest, Inc. acquisition. This asset is amortized over a
weighted average useful life of 17 years. We test for impairment whenever events or changes in circumstances indicate the carrying
amount may not be recoverable.
Trademarks and tradenames intangible assets are not amortized. The Company assesses the impairment of indefinite-
lived intangibles annually as of October 1, 2016 and whenever an event or circumstances change that would indicate that the
carrying amount may be impaired. We performed a qualitative assessment, and based upon our assessment, we believe the fair
value continues to exceed carrying value.
For all other indefinite-lived intangible assets, we perform a qualitative impairment test. Based upon this assessment,
date. A change in any of these assumptions would have an effect on net periodic pension costs reported in the consolidated financial
statements.
The weighted-average discount rate used to measure pension liabilities at December 31, 2016 and the estimated 2017
pension expense is set by reference to the Mercer Above Mean Yield Curve. We changed to this curve at the end of 2015 as we
believe it provides a better representation of the yields on bonds if we were to settle the liabilities than the prior use of the Citigroup
Pension Liability Index. The 2015 pension expense was set by reference to the Citigroup Pension Liability Index. When setting
the discount rate, we consider the individual characteristics of the plan, such as projected cash flow patterns. The effective rates
used in determining the December 31, 2016 and 2015 pension liabilities were 4.28% and 4.54%, respectively. Effective rates of
4.54% and 3.81% were used for determining the pension liabilities that are the basis for the 2016 and 2015 pension expense,
respectively. As further discussed in Note 10 to the consolidated financial statements, for 2016 we changed the method used to
estimate the interest cost component of the pension expense to the spot rate approach resulting in an effective rate of interest equal
to 3.77% for 2016. The rate used in determining 2017 estimated pension expense is 4.28% for the benefit obligation and 3.49%
for the effective interest rate on the benefit obligation.
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 2017 is expected to be $1.2 million. Pension expense was $0.9 million in 2016. In addition, we do
not expect to make any contributions to the pension plan for the 2017 plan year.
In performing a sensitivity analysis on our pension plan expense, we do not believe a 0.25% increase or decrease in
discount rate or investment return would have a material impact on our pension expense.
See Note 10 to the consolidated financial statements for further discussion.
Stock-based Compensation
All share-based payments to employees, including stock options, grants of 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
$72.4 million at December 31, 2016. Management believes that earnings during the periods when the temporary differences
become deductible will be sufficient to realize the related future income tax benefits.
The Company is subject to taxation in the United States and various states and foreign jurisdictions. Taxing authority
examinations 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 2013. Tax years subsequent to
2013 are subject to future examination.
Consolidated Results of Operations
we have determined that it is unlikely that our indefinite-lived intangible assets are impaired.
The following table presents, as a percentage of net sales, certain categories included in our consolidated statements of
See Note 5 to the consolidated financial statements for further discussion of goodwill and other intangible assets.
comprehensive income for the periods indicated:
Pension Plan
We sponsor a defined benefit pension plan (the “pension plan”) that was frozen in 2009. It covered substantially all our
United States based employees at the time it was frozen. 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
21
22
and other intangible assets primarily represent allocations of purchase price to identifiable intangible assets of acquired businesses.
Promotional, marketing and distribution rights represent intangible assets created under our Sports Medicine Joint Development
and Distribution Agreement (the "JDDA") with Musculoskeletal Transplant Foundation (“MTF”). We have goodwill of $397.7
million and other intangible assets of $419.5 million as of December 31, 2016.
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 business. Estimates of fair value are based
on the best information available as of the date of the assessment. During 2016, we completed our goodwill impairment testing
with data as of October 1, 2016. We performed a Step 1 impairment test utilizing the market capitalization approach to determine
whether the fair value of a reporting unit is less than its carrying amount. Based upon our assessment, we believe the fair value
continues to exceed carrying value.
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 as a result of the 1997 acquisition of Linvatec Corporation. The acquisition date
valuation 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. During 2016, we acquired SurgiQuest, Inc.
and recorded customer and distributor relationships with an average useful life of 22 years. Customer and distributor relationship
intangible assets arising as a result of business acquisitions other than Linvatec are being amortized over a weighted average life
of 21 years. The weighted average life for customer and distributor relationship assets in aggregate is 29 years.
We evaluate the remaining useful life of our customer and distributor 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 and distributor relationship intangible assets, we perform an analysis
and assessment of actual customer attrition and activity as events and circumstances warrant.
We test our customer and distributor relationship assets for recoverability whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. Factors specific to our customer and distributor 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.
Our developed technology asset arose as a result of the SurgiQuest, Inc. acquisition. This asset is amortized over a
weighted average useful life of 17 years. We test for impairment whenever events or changes in circumstances indicate the carrying
amount may not be recoverable.
Trademarks and tradenames intangible assets are not amortized. The Company assesses the impairment of indefinite-
lived intangibles annually as of October 1, 2016 and whenever an event or circumstances change that would indicate that the
carrying amount may be impaired. We performed a qualitative assessment, and based upon our assessment, we believe the fair
value continues to exceed carrying value.
For all other indefinite-lived intangible assets, we perform a qualitative impairment test. Based upon this assessment,
date. A change in any of these assumptions would have an effect on net periodic pension costs reported in the consolidated financial
statements.
The weighted-average discount rate used to measure pension liabilities at December 31, 2016 and the estimated 2017
pension expense is set by reference to the Mercer Above Mean Yield Curve. We changed to this curve at the end of 2015 as we
believe it provides a better representation of the yields on bonds if we were to settle the liabilities than the prior use of the Citigroup
Pension Liability Index. The 2015 pension expense was set by reference to the Citigroup Pension Liability Index. When setting
the discount rate, we consider the individual characteristics of the plan, such as projected cash flow patterns. The effective rates
used in determining the December 31, 2016 and 2015 pension liabilities were 4.28% and 4.54%, respectively. Effective rates of
4.54% and 3.81% were used for determining the pension liabilities that are the basis for the 2016 and 2015 pension expense,
respectively. As further discussed in Note 10 to the consolidated financial statements, for 2016 we changed the method used to
estimate the interest cost component of the pension expense to the spot rate approach resulting in an effective rate of interest equal
to 3.77% for 2016. The rate used in determining 2017 estimated pension expense is 4.28% for the benefit obligation and 3.49%
for the effective interest rate on the benefit obligation.
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 2017 is expected to be $1.2 million. Pension expense was $0.9 million in 2016. In addition, we do
not expect to make any contributions to the pension plan for the 2017 plan year.
In performing a sensitivity analysis on our pension plan expense, we do not believe a 0.25% increase or decrease in
discount rate or investment return would have a material impact on our pension expense.
See Note 10 to the consolidated financial statements for further discussion.
Stock-based Compensation
All share-based payments to employees, including stock options, grants of 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
$72.4 million at December 31, 2016. Management believes that earnings during the periods when the temporary differences
become deductible will be sufficient to realize the related future income tax benefits.
The Company is subject to taxation in the United States and various states and foreign jurisdictions. Taxing authority
examinations 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 2013. Tax years subsequent to
2013 are subject to future examination.
Consolidated Results of Operations
we have determined that it is unlikely that our indefinite-lived intangible assets are impaired.
The following table presents, as a percentage of net sales, certain categories included in our consolidated statements of
See Note 5 to the consolidated financial statements for further discussion of goodwill and other intangible assets.
comprehensive income for the periods indicated:
Pension Plan
We sponsor a defined benefit pension plan (the “pension plan”) that was frozen in 2009. It covered substantially all our
United States based employees at the time it was frozen. 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
21
22
Year Ended December 31,
2015
2014
2016
Net sales
Cost of sales
Gross profit
Selling and administrative expense
Research and development expense
Income from operations
Other expense
Interest expense
Income before income taxes
Provision for income taxes
Net income
Net Sales
100.0%
46.5
53.5
44.3
4.2
5.0
0.4
2.0
2.6
0.6
2.0%
100.0%
46.9
53.1
42.1
3.8
7.1
—
0.8
6.3
2.0
4.3%
100.0%
45.4
54.6
43.7
3.8
7.1
—
0.8
6.3
2.0
4.3%
Net sales increased 6.2% to $763.5 million in 2016 after a decrease in sales of 2.8% in 2015 to $719.2 million from
$740.1 million in 2014. The increase in 2016 is mainly due to the SurgiQuest acquisition. Excluding SurgiQuest, sales decreased
3.3% in 2016. In local currency, excluding the effects of the hedging program, sales increased 8.6% in 2016. Sales of capital
equipment increased 3.8% to $157.7 million in 2016, while sales of single-use products increased 6.8% to $605.8 million in 2016.
In local currency, excluding the effects of the hedging program, sales of capital equipment increased 6.1% in 2016 and single-use
products increased 9.3% in 2016. The decrease in 2015 sales compared to the same period a year ago occurred across all product
lines. In local currency, excluding the effects of the hedging program, sales increased 0.3% in 2015. Sales of capital equipment
increased 3.8% to $151.9 million in 2015, while sales of single-use products decreased 4.5% to $567.3 million in 2015. In local
currency, excluding the effects of the hedging program, sales of capital equipment increased 7.1% in 2015 while single-use products
decreased 1.3% in 2015.
• Orthopedic surgery sales decreased 4.7% in 2016 to $370.5 million after a decrease of 3.4% in 2015 to $389.0 million
from $402.8 million in 2014. In 2016, the decrease was mainly due to the unfavorable impact of foreign exchange, lower
sales in our capital products and resection product offering offset by increases in our procedure specific product offering.
In 2015, the decrease was mainly due to lower sales in our procedure specific and resection product offerings as well as
our powered instrument burs and blades offset by increases in our powered instrument handpieces. In local currency,
excluding the effects of the hedging program, sales decreased 1.7% in 2016 after an increase of 0.7% in 2015.
• General surgery sales increased 24.5% in 2016 to $341.4 million after a decrease of 1.8% in 2015 to $274.2 million from
$279.4 million in 2014. The increase in 2016 is mainly due to the SurgiQuest acquisition. Excluding SurgiQuest, general
surgery sales decreased 0.4% due primarily to lower sales in our advanced surgical capital equipment products offset by
higher sales in our endoscopic technologies product offering. In local currency, excluding the effects of the hedging
program, sales increased 26.0% in 2016 after a 0.1% decrease in 2015.
•
Surgical visualization sales decreased 7.8% in 2016 to $51.6 million after a decrease of 3.3% to $56.0 million in 2015
from $57.9 million in 2014. In 2016, the decrease is due to lower video system sales. The decrease in 2015 resulted
from the discontinuation of an OEM video product line during 2015 offset by the increase in video system sales of our
new IM8000 2DHD camera system. In local currency, excluding the effects of the hedging program, sales decreased
5.9% in 2016 and 0.1% in 2015.
Cost of Sales
Cost of sales was $355.2 million in 2016, $337.5 million in 2015 and $336.0 million in 2014. Gross profit margins were
53.5% in 2016, 53.1% in 2015 and 54.6% in 2014. The increase in gross profit margins of 0.4 percentage points in 2016 was
mainly a result of the impact of favorable production variances (1.2 percentage points) and product mix (0.3 percentage points),
offset by unfavorable foreign currency exchange rates on sales (1.1 percentage points). The decrease of 1.5 percentage points in
2015 is a result of the impact of unfavorable foreign currency exchange rates on sales (1.5 percentage points) and higher costs
associated with the operational restructuring (0.4 percentage points) offset by favorable production variances (0.3 percentage
points) and product mix (0.1 percentage points).
Selling and Administrative Expense
Selling and administrative expense was $338.4 million in 2016, $303.1 million in 2015 and $323.5 million in 2014.
Selling and administrative expense as a percentage of net sales were 44.3% in 2016, 42.1% in 2015 and 43.7% in 2014. The
factors affecting the $35.3 million increase in 2016 compared to 2015 included $20.6 million in 2016 in investment banking fees,
consulting fees and legal fees associated with the acquisition as well as the Lexion case as further described in Note 11 to the
consolidated financial statements, costs associated with expensing of unvested options acquired and integration related costs
associated with the acquisition of SurgiQuest as further described in Notes 2 and 12 to the consolidated financial statements and
incremental on-going sales and marketing expenses primarily to support the AirSeal
products. These increases were offset by
a $6.8 million decrease in severance and other related costs in 2016 from the restructuring of certain of our sales, marketing and
administrative functions and a $1.9 million gain on the sale of our Centennial, Colorado facility.
®
The factors affecting the $20.4 million decrease in 2015 compared to 2014 included (1) $12.5 million in executive
management restructuring costs in 2014 (2) $4.0 million in shareholder activism related charges in 2014 and (3) $3.4 million in
legal fees associated with a patent infringement claim that we settled in the first quarter of 2014 as well as costs associated with
a legal matter in which we prevailed at trial in the second quarter of 2014 as further described in Note 12 to the consolidated
financial statements (4) lower medical device tax and (5) lower benefit costs offset by higher restructuring costs as also further
described in Note 12 to the consolidated financial statements.
Research and Development Expense
Research and development expense was $32.3 million, $27.4 million and $27.8 million in 2016, 2015 and 2014,
respectively. As a percentage of net sales, research and development expense increased to 4.2% in 2016, compared to 3.8% in
2015 and 2014. The increase of 0.4 percentage points in 2016 is due to higher project and registration related costs as the Company
increased its efforts on new product development and innovation.
Other Expense
Other expense in 2016 related to costs associated with our fifth amended and restated senior credit agreement entered
into on January 4, 2016 as further described in Note 6 to the consolidated financial statements. These costs include a $2.7
million charge related to commitment fees paid to certain of our lenders, which provided a financing commitment for the SurgiQuest
acquisition and a loss on the early extinguishment of debt of $0.3 million.
Interest Expense
Interest expense was $15.4 million in 2016 compared to $6.0 million in 2015 and $6.1 million in 2014. Interest expense
increased in 2016 compared to 2015 due to the additional borrowings and higher interest rates under the fifth amended and restated
senior credit agreement as further described in Note 6 to the consolidated financial statements. Interest expense remained flat in
2015 compared to 2014 as higher weighted average borrowings were offset by lower interest rates. The weighted average interest
rates on our borrowings were 2.93% in 2016 increasing from 2.23% in 2015 and 2.40% in 2014.
Provision for Income Taxes
A provision for income taxes was recorded at an effective rate of 24.3%, 32.4% and 31.0% in 2016, 2015 and 2014,
respectively, as compared to the Federal statutory rate of 35.0%. The effective tax rate in 2016 is lower than that recorded in 2015
due to a higher proportion of earnings in foreign jurisdictions where the tax rates are lower than the statutory federal rate and
benefits recorded in 2016 in connection with the prior year tax return finalization process. These benefits were offset by tax
expense related to nondeductible SurgiQuest acquisition costs recorded in 2016. The effective tax rate in 2015 is higher than that
recorded in 2014 due to the domestic impact, net of foreign tax credits, associated with the repatriation of foreign earnings to the
United States, which increased tax expense by $1.1 million in the fourth quarter of 2015. Additionally, the 2015 rate increased
compared to 2014 as a result of lower foreign tax benefits resulting from the change in the governmental rate upon which European
permanent deductions are calculated and due to benefits recorded in 2014 related to settlements with taxing authorities. These
items are offset by decreases resulting from domestic manufacturing benefits and lower state tax expense as a result of a New
York State legislative change recorded in 2014. A reconciliation of the United States statutory income tax rate to our effective tax
rate is included in Note 7 to the consolidated financial statements.
Non-GAAP Financial Measures
23
24
Year Ended December 31,
2015
2014
2016
Net sales
Cost of sales
Gross profit
Selling and administrative expense
Research and development expense
Income from operations
Other expense
Interest expense
Income before income taxes
Provision for income taxes
Net income
Net Sales
100.0%
46.5
53.5
44.3
4.2
5.0
0.4
2.0
2.6
0.6
2.0%
100.0%
46.9
53.1
42.1
3.8
7.1
—
0.8
6.3
2.0
4.3%
100.0%
45.4
54.6
43.7
3.8
7.1
—
0.8
6.3
2.0
4.3%
Net sales increased 6.2% to $763.5 million in 2016 after a decrease in sales of 2.8% in 2015 to $719.2 million from
$740.1 million in 2014. The increase in 2016 is mainly due to the SurgiQuest acquisition. Excluding SurgiQuest, sales decreased
3.3% in 2016. In local currency, excluding the effects of the hedging program, sales increased 8.6% in 2016. Sales of capital
equipment increased 3.8% to $157.7 million in 2016, while sales of single-use products increased 6.8% to $605.8 million in 2016.
In local currency, excluding the effects of the hedging program, sales of capital equipment increased 6.1% in 2016 and single-use
products increased 9.3% in 2016. The decrease in 2015 sales compared to the same period a year ago occurred across all product
lines. In local currency, excluding the effects of the hedging program, sales increased 0.3% in 2015. Sales of capital equipment
increased 3.8% to $151.9 million in 2015, while sales of single-use products decreased 4.5% to $567.3 million in 2015. In local
currency, excluding the effects of the hedging program, sales of capital equipment increased 7.1% in 2015 while single-use products
decreased 1.3% in 2015.
• Orthopedic surgery sales decreased 4.7% in 2016 to $370.5 million after a decrease of 3.4% in 2015 to $389.0 million
from $402.8 million in 2014. In 2016, the decrease was mainly due to the unfavorable impact of foreign exchange, lower
sales in our capital products and resection product offering offset by increases in our procedure specific product offering.
In 2015, the decrease was mainly due to lower sales in our procedure specific and resection product offerings as well as
our powered instrument burs and blades offset by increases in our powered instrument handpieces. In local currency,
excluding the effects of the hedging program, sales decreased 1.7% in 2016 after an increase of 0.7% in 2015.
• General surgery sales increased 24.5% in 2016 to $341.4 million after a decrease of 1.8% in 2015 to $274.2 million from
$279.4 million in 2014. The increase in 2016 is mainly due to the SurgiQuest acquisition. Excluding SurgiQuest, general
surgery sales decreased 0.4% due primarily to lower sales in our advanced surgical capital equipment products offset by
higher sales in our endoscopic technologies product offering. In local currency, excluding the effects of the hedging
program, sales increased 26.0% in 2016 after a 0.1% decrease in 2015.
•
Surgical visualization sales decreased 7.8% in 2016 to $51.6 million after a decrease of 3.3% to $56.0 million in 2015
from $57.9 million in 2014. In 2016, the decrease is due to lower video system sales. The decrease in 2015 resulted
from the discontinuation of an OEM video product line during 2015 offset by the increase in video system sales of our
new IM8000 2DHD camera system. In local currency, excluding the effects of the hedging program, sales decreased
5.9% in 2016 and 0.1% in 2015.
Cost of Sales
Cost of sales was $355.2 million in 2016, $337.5 million in 2015 and $336.0 million in 2014. Gross profit margins were
53.5% in 2016, 53.1% in 2015 and 54.6% in 2014. The increase in gross profit margins of 0.4 percentage points in 2016 was
mainly a result of the impact of favorable production variances (1.2 percentage points) and product mix (0.3 percentage points),
offset by unfavorable foreign currency exchange rates on sales (1.1 percentage points). The decrease of 1.5 percentage points in
2015 is a result of the impact of unfavorable foreign currency exchange rates on sales (1.5 percentage points) and higher costs
associated with the operational restructuring (0.4 percentage points) offset by favorable production variances (0.3 percentage
points) and product mix (0.1 percentage points).
Selling and Administrative Expense
Selling and administrative expense was $338.4 million in 2016, $303.1 million in 2015 and $323.5 million in 2014.
Selling and administrative expense as a percentage of net sales were 44.3% in 2016, 42.1% in 2015 and 43.7% in 2014. The
factors affecting the $35.3 million increase in 2016 compared to 2015 included $20.6 million in 2016 in investment banking fees,
consulting fees and legal fees associated with the acquisition as well as the Lexion case as further described in Note 11 to the
consolidated financial statements, costs associated with expensing of unvested options acquired and integration related costs
associated with the acquisition of SurgiQuest as further described in Notes 2 and 12 to the consolidated financial statements and
incremental on-going sales and marketing expenses primarily to support the AirSeal
products. These increases were offset by
a $6.8 million decrease in severance and other related costs in 2016 from the restructuring of certain of our sales, marketing and
administrative functions and a $1.9 million gain on the sale of our Centennial, Colorado facility.
®
The factors affecting the $20.4 million decrease in 2015 compared to 2014 included (1) $12.5 million in executive
management restructuring costs in 2014 (2) $4.0 million in shareholder activism related charges in 2014 and (3) $3.4 million in
legal fees associated with a patent infringement claim that we settled in the first quarter of 2014 as well as costs associated with
a legal matter in which we prevailed at trial in the second quarter of 2014 as further described in Note 12 to the consolidated
financial statements (4) lower medical device tax and (5) lower benefit costs offset by higher restructuring costs as also further
described in Note 12 to the consolidated financial statements.
Research and Development Expense
Research and development expense was $32.3 million, $27.4 million and $27.8 million in 2016, 2015 and 2014,
respectively. As a percentage of net sales, research and development expense increased to 4.2% in 2016, compared to 3.8% in
2015 and 2014. The increase of 0.4 percentage points in 2016 is due to higher project and registration related costs as the Company
increased its efforts on new product development and innovation.
Other Expense
Other expense in 2016 related to costs associated with our fifth amended and restated senior credit agreement entered
into on January 4, 2016 as further described in Note 6 to the consolidated financial statements. These costs include a $2.7
million charge related to commitment fees paid to certain of our lenders, which provided a financing commitment for the SurgiQuest
acquisition and a loss on the early extinguishment of debt of $0.3 million.
Interest Expense
Interest expense was $15.4 million in 2016 compared to $6.0 million in 2015 and $6.1 million in 2014. Interest expense
increased in 2016 compared to 2015 due to the additional borrowings and higher interest rates under the fifth amended and restated
senior credit agreement as further described in Note 6 to the consolidated financial statements. Interest expense remained flat in
2015 compared to 2014 as higher weighted average borrowings were offset by lower interest rates. The weighted average interest
rates on our borrowings were 2.93% in 2016 increasing from 2.23% in 2015 and 2.40% in 2014.
Provision for Income Taxes
A provision for income taxes was recorded at an effective rate of 24.3%, 32.4% and 31.0% in 2016, 2015 and 2014,
respectively, as compared to the Federal statutory rate of 35.0%. The effective tax rate in 2016 is lower than that recorded in 2015
due to a higher proportion of earnings in foreign jurisdictions where the tax rates are lower than the statutory federal rate and
benefits recorded in 2016 in connection with the prior year tax return finalization process. These benefits were offset by tax
expense related to nondeductible SurgiQuest acquisition costs recorded in 2016. The effective tax rate in 2015 is higher than that
recorded in 2014 due to the domestic impact, net of foreign tax credits, associated with the repatriation of foreign earnings to the
United States, which increased tax expense by $1.1 million in the fourth quarter of 2015. Additionally, the 2015 rate increased
compared to 2014 as a result of lower foreign tax benefits resulting from the change in the governmental rate upon which European
permanent deductions are calculated and due to benefits recorded in 2014 related to settlements with taxing authorities. These
items are offset by decreases resulting from domestic manufacturing benefits and lower state tax expense as a result of a New
York State legislative change recorded in 2014. A reconciliation of the United States statutory income tax rate to our effective tax
rate is included in Note 7 to the consolidated financial statements.
Non-GAAP Financial Measures
23
24
Net sales “on a constant currency basis” is a non-GAAP measure. The company analyzes net sales on a constant currency
basis to better measure the comparability of results between periods. To measure percentage sales growth in constant currency,
the Company removes the impact of changes in foreign currency exchange rates that affect the comparability and trend of net
sales.
Because non-GAAP financial measures are not standardized, it may not be possible to compare this financial measure
with other companies' non-GAAP financial measures having the same or similar names. This adjusted financial measure should
not be considered in isolation or as a substitute for reported net sales growth, the most directly comparable GAAP financial measure.
This non-GAAP financial measure is an additional way of viewing net sales that, when viewed with our GAAP results, provides
a more complete understanding of our business. The Company strongly encourages investors and shareholders to review our
financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.
Liquidity and Capital Resources
Our liquidity needs arise primarily from capital investments, working capital requirements and payments on indebtedness
under the fifth amended and restated senior credit agreement, described below. We have historically met these liquidity requirements
with funds generated from operations and borrowings under our revolving credit facility. In addition, we have historically used
term borrowings, including borrowings under the fifth amended and restated 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. Management believes that cash flow from
operations, including cash and cash equivalents on hand and available borrowing capacity under our fifth amended and restated
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.
We had total cash on hand at December 31, 2016 of $27.4 million, of which approximately $25.7 million was held by
our foreign subsidiaries outside the United States with unremitted earnings. We have not repatriated, nor do we anticipate the
need to repatriate, permanently reinvested earnings to the U.S. to satisfy domestic liquidity needs arising in the ordinary course
of business or associated with our domestic debt service requirements. During the fourth quarter of 2015, we redeployed cash
from certain non-U.S. subsidiaries for U.S. debt reduction of $33.0 million which included $9.3 million of 2015 foreign earnings
not previously permanently reinvested and a $23.7 million return of accumulated foreign basis. We recorded a tax charge of $1.1
million and increased foreign borrowings under our revolving credit facility by $33.0 million related to this cash redeployment.
It is our intention to permanently reinvest the remaining amount of unremitted earnings. If we were to repatriate these funds, we
would be required to accrue and pay taxes on such amounts.
Operating Cash Flows
Our net working capital position was $216.6 million at December 31, 2016. Net cash provided by operating activities
was $38.2 million in 2016, $48.1 million in 2015 and $65.2 million in 2014 generated on net income of $14.7 million in 2016,
$30.5 million in 2015 and $32.2 million in 2014.
The decrease in cash provided by operating activities from 2016 to 2015 is mainly related to lower net income due to
costs associated with the SurgiQuest acquisition and related financing costs, as discussed above. In addition, other significant
changes in working capital, principally related to the SurgiQuest acquisition, which impacted cash flow in 2016 included the
following:
• A decrease in cash flows from accounts receivable reflects a $13 million increase in sales in the fourth quarter of 2016
compared to the same period a year ago offset by collections on accounts receivable acquired as a result of the
SurgiQuest acquisition;
• A decrease in cash flows from other assets caused primarily by an increase in field inventories to support the SurgiQuest
acquisition integration and anticipated sales growth; and
• A decrease in cash flows from other liabilities as we had a higher level of accrued expenses at the beginning of the year
due to the SurgiQuest acquisition that was later paid during 2016 as well as payments related to our restructuring.
The decrease in cash provided by operating activities in 2015 compared to 2014 is mainly related to inventory being
higher as of December 31, 2015 compared to the year ended December 31, 2014 as we built additional inventory due to consolidating
the Centennial, Colorado manufacturing facility into other manufacturing facilities, lower than anticipated video sales in the fourth
25
quarter and higher levels of field inventory (included in other assets) to support our salesforce. In addition, we had higher payments
related to our operational and administrative restructuring during 2015 compared to 2014.
Investing Cash Flows
Net cash used in investing activities increased to $266.0 million in 2016 compared to $24.4 million in 2015 primarily
due to the $256.5 million payment for the SurgiQuest acquisition compared to $9.4 million in payments related to acquiring
businesses, assets and a distributor in 2015. The increase was offset by $5.2 million in proceeds from the sale of our Centennial,
Colorado facility during 2016.
Net cash used in investing activities increased to $24.4 million in 2015 compared to $20.7 million in 2014 primarily due
to payments related to acquiring businesses, assets and a distributor of $9.4 million in 2015 compared to payments of $5.0 million
for the purchase of a business in 2014.
Capital expenditures were $14.8 million, $15.0 million and $15.4 million in 2016, 2015 and 2014, respectively. Capital
expenditures are expected to be in the $15.0 million to $20.0 million range for 2017.
Financing Cash Flows
Financing activities in 2016 provided cash of $184.2 million compared to a use of cash of $9.8 million in 2015 and $26.4
million in 2014. Below is a summary of the significant financing activities:
• During 2016, we had borrowings of $175.0 million on our term loan of which $8.8 million was repaid in accordance with
the agreement, as further described below. During 2016, we had net borrowings on our revolving line of credit of $62.7
million compared to $30.7 million in 2015 and $27.0 million in 2014.
• Dividend payments remained consistent at $22.2 million, $22.1 million and $22.0 million in 2016, 2015 and 2014,
respectively.
•
In 2016, 2015 and 2014, we paid $16.7 million associated with the distribution and development agreement with
Musculoskeletal Transplant Foundation. These payments are now complete.
• Debt issuance costs were $5.6 million and $1.5 million in 2016 and 2015, respectively, in conjunction with our fifth and
fourth amended and restated credit agreements, respectively.
•
Finally, during 2014, we repurchased common stock totaling $16.9 million.
On January 4, 2016, we entered into a fifth amended and restated senior credit agreement consisting of: (a) a $175.0
million term loan facility and (b) a $525.0 million revolving credit facility both expiring on January 4, 2021. The term loan is
payable in quarterly installments increasing over the term of the facility. Proceeds from the term loan facility and borrowings
under the revolving credit facility were used to repay the then existing senior credit agreement and to finance the acquisition of
SurgiQuest. Initial interest rates are at LIBOR plus a base rate or a Eurocurrency rate plus an applicable margin (2.77% at
December 31, 2016). The applicable margin for base rate loans is 1.00% and for Eurocurrency rate loans is 2.00%.
There were $166.3 million in borrowings outstanding on the term loan as of December 31, 2016. There were $329.0
million in borrowings outstanding under the revolving credit facility as of December 31, 2016. Our available borrowings on the
revolving credit facility at December 31, 2016 were $191.2 million with approximately $4.8 million of the facility set aside for
outstanding letters of credit.
The fifth amended and restated senior credit agreement is collateralized by substantially all of our personal property and
assets. The fifth amended and restated 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, 2016. 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 Largo, Florida property and facilities 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 $3.9 million at December 31, 2016. The mortgage note is collateralized by the Largo, Florida
26
Net sales “on a constant currency basis” is a non-GAAP measure. The company analyzes net sales on a constant currency
basis to better measure the comparability of results between periods. To measure percentage sales growth in constant currency,
the Company removes the impact of changes in foreign currency exchange rates that affect the comparability and trend of net
sales.
Because non-GAAP financial measures are not standardized, it may not be possible to compare this financial measure
with other companies' non-GAAP financial measures having the same or similar names. This adjusted financial measure should
not be considered in isolation or as a substitute for reported net sales growth, the most directly comparable GAAP financial measure.
This non-GAAP financial measure is an additional way of viewing net sales that, when viewed with our GAAP results, provides
a more complete understanding of our business. The Company strongly encourages investors and shareholders to review our
financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.
Liquidity and Capital Resources
Our liquidity needs arise primarily from capital investments, working capital requirements and payments on indebtedness
under the fifth amended and restated senior credit agreement, described below. We have historically met these liquidity requirements
with funds generated from operations and borrowings under our revolving credit facility. In addition, we have historically used
term borrowings, including borrowings under the fifth amended and restated 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. Management believes that cash flow from
operations, including cash and cash equivalents on hand and available borrowing capacity under our fifth amended and restated
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.
We had total cash on hand at December 31, 2016 of $27.4 million, of which approximately $25.7 million was held by
our foreign subsidiaries outside the United States with unremitted earnings. We have not repatriated, nor do we anticipate the
need to repatriate, permanently reinvested earnings to the U.S. to satisfy domestic liquidity needs arising in the ordinary course
of business or associated with our domestic debt service requirements. During the fourth quarter of 2015, we redeployed cash
from certain non-U.S. subsidiaries for U.S. debt reduction of $33.0 million which included $9.3 million of 2015 foreign earnings
not previously permanently reinvested and a $23.7 million return of accumulated foreign basis. We recorded a tax charge of $1.1
million and increased foreign borrowings under our revolving credit facility by $33.0 million related to this cash redeployment.
It is our intention to permanently reinvest the remaining amount of unremitted earnings. If we were to repatriate these funds, we
would be required to accrue and pay taxes on such amounts.
Operating Cash Flows
Our net working capital position was $216.6 million at December 31, 2016. Net cash provided by operating activities
was $38.2 million in 2016, $48.1 million in 2015 and $65.2 million in 2014 generated on net income of $14.7 million in 2016,
$30.5 million in 2015 and $32.2 million in 2014.
The decrease in cash provided by operating activities from 2016 to 2015 is mainly related to lower net income due to
costs associated with the SurgiQuest acquisition and related financing costs, as discussed above. In addition, other significant
changes in working capital, principally related to the SurgiQuest acquisition, which impacted cash flow in 2016 included the
following:
• A decrease in cash flows from accounts receivable reflects a $13 million increase in sales in the fourth quarter of 2016
compared to the same period a year ago offset by collections on accounts receivable acquired as a result of the
SurgiQuest acquisition;
• A decrease in cash flows from other assets caused primarily by an increase in field inventories to support the SurgiQuest
acquisition integration and anticipated sales growth; and
• A decrease in cash flows from other liabilities as we had a higher level of accrued expenses at the beginning of the year
due to the SurgiQuest acquisition that was later paid during 2016 as well as payments related to our restructuring.
The decrease in cash provided by operating activities in 2015 compared to 2014 is mainly related to inventory being
higher as of December 31, 2015 compared to the year ended December 31, 2014 as we built additional inventory due to consolidating
the Centennial, Colorado manufacturing facility into other manufacturing facilities, lower than anticipated video sales in the fourth
25
quarter and higher levels of field inventory (included in other assets) to support our salesforce. In addition, we had higher payments
related to our operational and administrative restructuring during 2015 compared to 2014.
Investing Cash Flows
Net cash used in investing activities increased to $266.0 million in 2016 compared to $24.4 million in 2015 primarily
due to the $256.5 million payment for the SurgiQuest acquisition compared to $9.4 million in payments related to acquiring
businesses, assets and a distributor in 2015. The increase was offset by $5.2 million in proceeds from the sale of our Centennial,
Colorado facility during 2016.
Net cash used in investing activities increased to $24.4 million in 2015 compared to $20.7 million in 2014 primarily due
to payments related to acquiring businesses, assets and a distributor of $9.4 million in 2015 compared to payments of $5.0 million
for the purchase of a business in 2014.
Capital expenditures were $14.8 million, $15.0 million and $15.4 million in 2016, 2015 and 2014, respectively. Capital
expenditures are expected to be in the $15.0 million to $20.0 million range for 2017.
Financing Cash Flows
Financing activities in 2016 provided cash of $184.2 million compared to a use of cash of $9.8 million in 2015 and $26.4
million in 2014. Below is a summary of the significant financing activities:
• During 2016, we had borrowings of $175.0 million on our term loan of which $8.8 million was repaid in accordance with
the agreement, as further described below. During 2016, we had net borrowings on our revolving line of credit of $62.7
million compared to $30.7 million in 2015 and $27.0 million in 2014.
• Dividend payments remained consistent at $22.2 million, $22.1 million and $22.0 million in 2016, 2015 and 2014,
respectively.
•
In 2016, 2015 and 2014, we paid $16.7 million associated with the distribution and development agreement with
Musculoskeletal Transplant Foundation. These payments are now complete.
• Debt issuance costs were $5.6 million and $1.5 million in 2016 and 2015, respectively, in conjunction with our fifth and
fourth amended and restated credit agreements, respectively.
•
Finally, during 2014, we repurchased common stock totaling $16.9 million.
On January 4, 2016, we entered into a fifth amended and restated senior credit agreement consisting of: (a) a $175.0
million term loan facility and (b) a $525.0 million revolving credit facility both expiring on January 4, 2021. The term loan is
payable in quarterly installments increasing over the term of the facility. Proceeds from the term loan facility and borrowings
under the revolving credit facility were used to repay the then existing senior credit agreement and to finance the acquisition of
SurgiQuest. Initial interest rates are at LIBOR plus a base rate or a Eurocurrency rate plus an applicable margin (2.77% at
December 31, 2016). The applicable margin for base rate loans is 1.00% and for Eurocurrency rate loans is 2.00%.
There were $166.3 million in borrowings outstanding on the term loan as of December 31, 2016. There were $329.0
million in borrowings outstanding under the revolving credit facility as of December 31, 2016. Our available borrowings on the
revolving credit facility at December 31, 2016 were $191.2 million with approximately $4.8 million of the facility set aside for
outstanding letters of credit.
The fifth amended and restated senior credit agreement is collateralized by substantially all of our personal property and
assets. The fifth amended and restated 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, 2016. 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 Largo, Florida property and facilities 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 $3.9 million at December 31, 2016. The mortgage note is collateralized by the Largo, Florida
26
property and facilities.
Our Board of Directors has authorized a $200.0 million share repurchase program. Through December 31, 2016, we
have repurchased a total of 6.1 million shares of common stock aggregating $162.6 million under this authorization and have
$37.4 million remaining available for share repurchases. The repurchase program calls for shares to be purchased in the open
market or in private transactions from time to time. We may suspend or discontinue the share repurchase program at any time. We
did not purchase any shares of common stock under the share repurchase program during 2016. 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 amended and restated 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
“Item 1. Business – Forward Looking Statements.”
Restructuring
During 2016, 2015 and 2014, we continued our operational restructuring plan. The consolidation of our Centennial,
Colorado manufacturing operations into other existing CONMED manufacturing facilities is complete. During 2014, we completed
the consolidation of our Finland operations into our Largo, Florida and Utica, New York manufacturing facilities and the
consolidation of our Westborough, Massachusetts manufacturing operations into our Largo, Florida and Chihuahua, Mexico
facilities. We incurred $3.1 million, $8.0 million, and $5.6 million in costs associated with operational restructuring during the
years ending December 31, 2016, 2015 and 2014, respectively. These costs were charged to cost of goods sold and include
severance and other charges associated with the consolidation of our Finland, Westborough, Massachusetts and Centennial,
Colorado operations.
During 2016, the Company discontinued our Altrus product offering as part of our ongoing restructuring and incurred
$4.5 million in non-cash charges primarily related to inventory and fixed assets which were included in cost of sales.
During 2016, 2015 and 2014, we restructured certain sales, marketing and administrative functions and incurred severance
and other related costs in the amount of $6.9 million, $13.7 million, and $3.4 million. These costs were charged to selling and
administrative expense.
The following table summarizes our contractual obligations for the next five years and thereafter (amounts in thousands)
as of December 31, 2016. 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, 2016.
Payments Due by Period
1-3
Years
Less than
1 Year
3-5
Years
Total
More than
5 Years
Long-term debt
Purchase obligations
Operating lease obligations
Total contractual obligations
$
$
499,112
40,357
23,784
563,253
$
$
10,202
39,536
6,170
55,908
$
$
33,035
821
11,579
45,435
$
$
455,875
—
3,530
459,405
$
$
—
—
2,505
2,505
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 Item 7A. “Quantitative and Qualitative Disclosures About Market Risk—Interest
Rate Risk” and Note 6 to the consolidated financial statements). The above table also does not include unrecognized tax benefits
of approximately $0.6 million, the timing and certainty of recognition for which is not known (See Note 7 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 stock 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 stock 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 8 to the consolidated financial statements). Total pre-tax stock-based compensation expense
recognized in the consolidated statements of comprehensive income was $8.4 million, $7.5 million and $9.3 million for the years
ended December 31, 2016, 2015 and 2014, respectively.
During 2016, we sold our Centennial, Colorado facility. We received net cash proceeds of $5.2 million and recorded a
gain of $1.9 million in selling and administrative expense.
Other Matters
During 2014, we incurred $12.5 million in costs associated with restructuring of executive management. These costs
include severance payments, accelerated vesting of stock-based compensation awards, accrual of the present value of deferred
compensation and other benefits to our then Chief Executive Officer as defined in his termination agreement; accelerated vesting
of stock-based compensation awards to certain members of executive management, consulting fees and other benefits earned as
further described in our Form 8-K filing on July 23, 2014.
We have recorded an accrual in current and other long-term liabilities of $2.6 million at December 31, 2016 mainly related
to severance associated with these restructurings.
During recent years we had a number of initiatives to consolidate manufacturing facilities and restructure our sales and
administrative functions. Although much of this is complete, we will continue to review our operations and sales and administrative
functions to reduce costs and headcount, as necessary. Such cost reductions will result in additional charges, including employee
termination costs and other exit costs that will be charged to cost of sales and selling and administrative expense, as applicable.
During the year ended December 31, 2016, we had approximately $4.0 million in net savings in cost of sales from the
Centennial consolidation principally as a result of lower employee costs.
As of September 8, 2016, our credit facility was amended to allow us to seek to sell products to certain customers in Iran
in compliance with applicable laws and regulations and subject to certain terms and conditions, including pre-approval by us and
our lenders of the identity of any distributor and prior review of each of the end-customers. On September 13, 2016, we entered
into a distribution agreement with a third-party distributor in Iran. We sold to this customer during 2016 and expect and intend
that there will be sales prospectively. We intend to limit sales into Iran to products that qualify as “medical supplies” within the
meaning of the general license provided by the Iranian Transactions and Sanctions Regulations set forth in the regulations
promulgated by the Office of Foreign Assets Control (“OFAC”) of the United States Department of the Treasury set forth at 31
C.F.R. § 560.530. We have implemented certain controls and processes designed to ensure that the ultimate end-users for the
products are those permitted under the OFAC general license, and that the sales and transactions with the Iranian distributor
otherwise comply with the requirements of the OFAC regulations. The expected revenues and net profits associated with sales to
the Iranian distributor are not expected to be material to our results of operations.
We do not believe that our activities to date, and do not expect that our activities in the future, will be subject to required
disclosure under Section 13(r) of the Securities Exchange Act of 1934 (the “Exchange Act”), which, among other things, requires
disclosure of transactions and activities knowingly entered into with the Government of Iran that do not benefit from an OFAC
license and with certain designated parties. If, however, any activities in future periods are within the scope of the transactions
and activities captured by Section 13(r) of the Exchange Act, we will make the required disclosures and notices.
Refer to Note 12 to the consolidated financial statements for further discussions regarding restructuring.
New Accounting Pronouncements
Contractual Obligations
See Note 15 to the consolidated financial statements for a discussion of new accounting pronouncements.
27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
28
property and facilities.
Our Board of Directors has authorized a $200.0 million share repurchase program. Through December 31, 2016, we
have repurchased a total of 6.1 million shares of common stock aggregating $162.6 million under this authorization and have
$37.4 million remaining available for share repurchases. The repurchase program calls for shares to be purchased in the open
market or in private transactions from time to time. We may suspend or discontinue the share repurchase program at any time. We
did not purchase any shares of common stock under the share repurchase program during 2016. 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 amended and restated 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
“Item 1. Business – Forward Looking Statements.”
Restructuring
During 2016, 2015 and 2014, we continued our operational restructuring plan. The consolidation of our Centennial,
Colorado manufacturing operations into other existing CONMED manufacturing facilities is complete. During 2014, we completed
the consolidation of our Finland operations into our Largo, Florida and Utica, New York manufacturing facilities and the
consolidation of our Westborough, Massachusetts manufacturing operations into our Largo, Florida and Chihuahua, Mexico
facilities. We incurred $3.1 million, $8.0 million, and $5.6 million in costs associated with operational restructuring during the
years ending December 31, 2016, 2015 and 2014, respectively. These costs were charged to cost of goods sold and include
severance and other charges associated with the consolidation of our Finland, Westborough, Massachusetts and Centennial,
Colorado operations.
During 2016, the Company discontinued our Altrus product offering as part of our ongoing restructuring and incurred
$4.5 million in non-cash charges primarily related to inventory and fixed assets which were included in cost of sales.
During 2016, 2015 and 2014, we restructured certain sales, marketing and administrative functions and incurred severance
and other related costs in the amount of $6.9 million, $13.7 million, and $3.4 million. These costs were charged to selling and
administrative expense.
The following table summarizes our contractual obligations for the next five years and thereafter (amounts in thousands)
as of December 31, 2016. 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, 2016.
Payments Due by Period
1-3
Years
Less than
1 Year
3-5
Years
Total
More than
5 Years
Long-term debt
Purchase obligations
Operating lease obligations
Total contractual obligations
$
$
499,112
40,357
23,784
563,253
$
$
10,202
39,536
6,170
55,908
$
$
33,035
821
11,579
45,435
$
$
455,875
—
3,530
459,405
$
$
—
—
2,505
2,505
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 Item 7A. “Quantitative and Qualitative Disclosures About Market Risk—Interest
Rate Risk” and Note 6 to the consolidated financial statements). The above table also does not include unrecognized tax benefits
of approximately $0.6 million, the timing and certainty of recognition for which is not known (See Note 7 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 stock 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 stock 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 8 to the consolidated financial statements). Total pre-tax stock-based compensation expense
recognized in the consolidated statements of comprehensive income was $8.4 million, $7.5 million and $9.3 million for the years
ended December 31, 2016, 2015 and 2014, respectively.
During 2016, we sold our Centennial, Colorado facility. We received net cash proceeds of $5.2 million and recorded a
gain of $1.9 million in selling and administrative expense.
Other Matters
During 2014, we incurred $12.5 million in costs associated with restructuring of executive management. These costs
include severance payments, accelerated vesting of stock-based compensation awards, accrual of the present value of deferred
compensation and other benefits to our then Chief Executive Officer as defined in his termination agreement; accelerated vesting
of stock-based compensation awards to certain members of executive management, consulting fees and other benefits earned as
further described in our Form 8-K filing on July 23, 2014.
We have recorded an accrual in current and other long-term liabilities of $2.6 million at December 31, 2016 mainly related
to severance associated with these restructurings.
During recent years we had a number of initiatives to consolidate manufacturing facilities and restructure our sales and
administrative functions. Although much of this is complete, we will continue to review our operations and sales and administrative
functions to reduce costs and headcount, as necessary. Such cost reductions will result in additional charges, including employee
termination costs and other exit costs that will be charged to cost of sales and selling and administrative expense, as applicable.
During the year ended December 31, 2016, we had approximately $4.0 million in net savings in cost of sales from the
Centennial consolidation principally as a result of lower employee costs.
As of September 8, 2016, our credit facility was amended to allow us to seek to sell products to certain customers in Iran
in compliance with applicable laws and regulations and subject to certain terms and conditions, including pre-approval by us and
our lenders of the identity of any distributor and prior review of each of the end-customers. On September 13, 2016, we entered
into a distribution agreement with a third-party distributor in Iran. We sold to this customer during 2016 and expect and intend
that there will be sales prospectively. We intend to limit sales into Iran to products that qualify as “medical supplies” within the
meaning of the general license provided by the Iranian Transactions and Sanctions Regulations set forth in the regulations
promulgated by the Office of Foreign Assets Control (“OFAC”) of the United States Department of the Treasury set forth at 31
C.F.R. § 560.530. We have implemented certain controls and processes designed to ensure that the ultimate end-users for the
products are those permitted under the OFAC general license, and that the sales and transactions with the Iranian distributor
otherwise comply with the requirements of the OFAC regulations. The expected revenues and net profits associated with sales to
the Iranian distributor are not expected to be material to our results of operations.
We do not believe that our activities to date, and do not expect that our activities in the future, will be subject to required
disclosure under Section 13(r) of the Securities Exchange Act of 1934 (the “Exchange Act”), which, among other things, requires
disclosure of transactions and activities knowingly entered into with the Government of Iran that do not benefit from an OFAC
license and with certain designated parties. If, however, any activities in future periods are within the scope of the transactions
and activities captured by Section 13(r) of the Exchange Act, we will make the required disclosures and notices.
Refer to Note 12 to the consolidated financial statements for further discussions regarding restructuring.
New Accounting Pronouncements
Contractual Obligations
See Note 15 to the consolidated financial statements for a discussion of new accounting pronouncements.
27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
28
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosures
There were no changes in or disagreement with accountants on accounting and financial disclosure.
Item 9A. Controls and Procedures
As of the end of the period covered by this report, an evaluation was carried out by CONMED Corporation’s management,
with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of the
end of the period covered by this report. In addition, no change in our internal control over financial reporting (as defined in Rule
13a-15 under the Securities Exchange Act of 1934) occurred during the fourth quarter of the year ended December 31, 2016 that
has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting and the Report of Independent Registered Public
Accounting Firm thereon are set forth in Part IV, Item 15 of the Annual Report on Form 10-K.
Item 9B. Other Information
Not applicable.
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 2016 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, China and Korea. In those countries in
which we have a direct presence, our sales are denominated in the local currency amounting to approximately 30% of our total
net sales in 2016. The remaining 18% 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 2016, foreign currency exchange rates, including the effects of the hedging program, caused
sales to decrease by approximately $17 million and income before income taxes to decrease by approximately $12 million, compared
to sales and income before income taxes in 2015.
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 or cost of sales when the forecasted transaction
occurs. The notional contract amounts for forward contracts outstanding at December 31, 2016 which have been accounted for
as cash flow hedges totaled $108.1 million. Net realized gains recognized for forward contracts accounted for as cash flow hedges
approximated $1.2 million, $10.4 million and $0.6 million for the years ended December 31, 2016, 2015 and 2014, respectively. Net
unrealized gains on forward contracts outstanding which have been accounted for as cash flow hedges and which have been
included in other comprehensive income totaled $1.5 million at December 31, 2016. It is expected these unrealized gains will be
recognized in the consolidated statement of comprehensive income in 2017 and 2018.
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,
2016 which have not been designated as hedges totaled $18.4 million. Net realized gains (losses) recognized in connection with
those forward contracts not accounted for as hedges approximated $0.0 million, $0.4 million and -$0.2 million for the years ended
December 31, 2016, 2015 and 2014, respectively, offsetting losses on our intercompany receivables of -$0.1 million, -$0.8 million
and -$0.5 million for the years ended December 31, 2016, 2015 and 2014, respectively. These gains and losses have been recorded
in selling and administrative expense in the consolidated statements of comprehensive income.
We record these forward foreign exchange contracts at fair value; the net fair value for forward foreign exchange contracts
outstanding at December 31, 2016 was $2.4 million and is included in prepaids and other current assets in the consolidated balance
sheet.
Refer to Note 14 in the consolidated financial statements for further discussion.
Interest rate risk
At December 31, 2016, we had approximately $495.3 million of variable rate long-term debt outstanding under our senior
credit agreement. Assuming no repayments, if market interest rates for similar borrowings averaged 1.0% more in 2017 than they
did in 2016, interest expense would increase, and income before income taxes would decrease by $5.0 million. Comparatively,
if market interest rates for similar borrowings average 1.0% less in 2017 than they did in 2016, our interest expense would decrease,
and income before income taxes would increase by $5.0 million.
Item 8. Financial Statements and Supplementary Data
Our 2016 Financial Statements are included in this Form 10-K beginning on page 39 and incorporated by reference herein.
29
30
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosures
There were no changes in or disagreement with accountants on accounting and financial disclosure.
Item 9A. Controls and Procedures
As of the end of the period covered by this report, an evaluation was carried out by CONMED Corporation’s management,
with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of the
end of the period covered by this report. In addition, no change in our internal control over financial reporting (as defined in Rule
13a-15 under the Securities Exchange Act of 1934) occurred during the fourth quarter of the year ended December 31, 2016 that
has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting and the Report of Independent Registered Public
Accounting Firm thereon are set forth in Part IV, Item 15 of the Annual Report on Form 10-K.
Item 9B. Other Information
Not applicable.
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 2016 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, China and Korea. In those countries in
which we have a direct presence, our sales are denominated in the local currency amounting to approximately 30% of our total
net sales in 2016. The remaining 18% 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 2016, foreign currency exchange rates, including the effects of the hedging program, caused
sales to decrease by approximately $17 million and income before income taxes to decrease by approximately $12 million, compared
to sales and income before income taxes in 2015.
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 or cost of sales when the forecasted transaction
occurs. The notional contract amounts for forward contracts outstanding at December 31, 2016 which have been accounted for
as cash flow hedges totaled $108.1 million. Net realized gains recognized for forward contracts accounted for as cash flow hedges
approximated $1.2 million, $10.4 million and $0.6 million for the years ended December 31, 2016, 2015 and 2014, respectively. Net
unrealized gains on forward contracts outstanding which have been accounted for as cash flow hedges and which have been
included in other comprehensive income totaled $1.5 million at December 31, 2016. It is expected these unrealized gains will be
recognized in the consolidated statement of comprehensive income in 2017 and 2018.
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,
2016 which have not been designated as hedges totaled $18.4 million. Net realized gains (losses) recognized in connection with
those forward contracts not accounted for as hedges approximated $0.0 million, $0.4 million and -$0.2 million for the years ended
December 31, 2016, 2015 and 2014, respectively, offsetting losses on our intercompany receivables of -$0.1 million, -$0.8 million
and -$0.5 million for the years ended December 31, 2016, 2015 and 2014, respectively. These gains and losses have been recorded
in selling and administrative expense in the consolidated statements of comprehensive income.
We record these forward foreign exchange contracts at fair value; the net fair value for forward foreign exchange contracts
outstanding at December 31, 2016 was $2.4 million and is included in prepaids and other current assets in the consolidated balance
sheet.
Refer to Note 14 in the consolidated financial statements for further discussion.
Interest rate risk
At December 31, 2016, we had approximately $495.3 million of variable rate long-term debt outstanding under our senior
credit agreement. Assuming no repayments, if market interest rates for similar borrowings averaged 1.0% more in 2017 than they
did in 2016, interest expense would increase, and income before income taxes would decrease by $5.0 million. Comparatively,
if market interest rates for similar borrowings average 1.0% less in 2017 than they did in 2016, our interest expense would decrease,
and income before income taxes would increase by $5.0 million.
Item 8. Financial Statements and Supplementary Data
Our 2016 Financial Statements are included in this Form 10-K beginning on page 39 and incorporated by reference herein.
29
30
PART III
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated herein by reference to the section captioned “Principal Accounting
Fees and Services” in CONMED Corporation’s definitive Proxy Statement or other informational filing to be filed with the
Securities and Exchange Commission on or about April 13, 2017.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated herein by reference to the sections captioned “Proposal One: Election
of Directors”, “Directors, Executive Officers, Other Company Officers and Nominees for the Board of Directors”, “Section 16(a)
Beneficial Ownership Reporting Compliance”, “Ethics Disclosure” and "Meetings of Board of Directors and Committees,
Leadership Structure and Risk Oversight” in CONMED Corporation’s definitive Proxy Statement or other informational filing to
be filed with the Securities and Exchange Commission on or about April 13, 2017.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to the sections captioned “Compensation
Discussion and Analysis”, “Compensation Committee Report on Executive Compensation”, “Summary Compensation Table”,
“Grants of Plan-Based Awards”, “Outstanding Equity Awards at Fiscal Year-End”, “Option Exercises and Stock Vested”, “Pension
Benefits”, “Non-Qualified Deferred Compensation”, “Potential Payments on Termination or Change-in-Control”, “Director
Compensation” and “Board of Directors Interlocks and Insider Participation; Certain Relationships and Related Transactions” in
CONMED Corporation’s definitive Proxy Statement or other informational filing to be filed with the Securities and Exchange
Commission on or about April 13, 2017.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to the section captioned “Security Ownership
of Certain Beneficial Owners and Management” in CONMED Corporation’s definitive Proxy Statement or other informational
filing to be filed with the Securities and Exchange Commission on or about April 13, 2017.
Information relating to compensation plans under which equity securities of CONMED Corporation are authorized for
issuance is set forth below:
Equity Compensation Plan Information
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)
1,516,376
$
42.16
1,514,719
—
1,516,376
$
—
42.16
—
1,514,719
Plan category
Equity compensation
plans approved by
security holders
Equity compensation
plans not approved by
security holders
Total
The number of securities included in column (a) above consists of outstanding stock options, share appreciation rights
(“SARs”) and performance share units, however the weighted-average exercise price in column (b) is for stock options and
SARs only.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to the section captioned “Directors, Executive
Officers and Nominees for the Board of Directors” and “Board of Directors Interlocks and Insider Participation; Certain
Relationships and Related Transactions” in CONMED Corporation’s definitive Proxy Statement or other informational filing to
be filed with the Securities and Exchange Commission on or about April 13, 2017.
31
32
PART III
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated herein by reference to the section captioned “Principal Accounting
Fees and Services” in CONMED Corporation’s definitive Proxy Statement or other informational filing to be filed with the
Securities and Exchange Commission on or about April 13, 2017.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated herein by reference to the sections captioned “Proposal One: Election
of Directors”, “Directors, Executive Officers, Other Company Officers and Nominees for the Board of Directors”, “Section 16(a)
Beneficial Ownership Reporting Compliance”, “Ethics Disclosure” and "Meetings of Board of Directors and Committees,
Leadership Structure and Risk Oversight” in CONMED Corporation’s definitive Proxy Statement or other informational filing to
be filed with the Securities and Exchange Commission on or about April 13, 2017.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to the sections captioned “Compensation
Discussion and Analysis”, “Compensation Committee Report on Executive Compensation”, “Summary Compensation Table”,
“Grants of Plan-Based Awards”, “Outstanding Equity Awards at Fiscal Year-End”, “Option Exercises and Stock Vested”, “Pension
Benefits”, “Non-Qualified Deferred Compensation”, “Potential Payments on Termination or Change-in-Control”, “Director
Compensation” and “Board of Directors Interlocks and Insider Participation; Certain Relationships and Related Transactions” in
CONMED Corporation’s definitive Proxy Statement or other informational filing to be filed with the Securities and Exchange
Commission on or about April 13, 2017.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to the section captioned “Security Ownership
of Certain Beneficial Owners and Management” in CONMED Corporation’s definitive Proxy Statement or other informational
filing to be filed with the Securities and Exchange Commission on or about April 13, 2017.
Information relating to compensation plans under which equity securities of CONMED Corporation are authorized for
issuance is set forth below:
Equity Compensation Plan Information
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)
1,516,376
$
42.16
1,514,719
—
1,516,376
$
—
42.16
—
1,514,719
Plan category
Equity compensation
plans approved by
security holders
Equity compensation
plans not approved by
security holders
Total
The number of securities included in column (a) above consists of outstanding stock options, share appreciation rights
(“SARs”) and performance share units, however the weighted-average exercise price in column (b) is for stock options and
SARs only.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to the section captioned “Directors, Executive
Officers and Nominees for the Board of Directors” and “Board of Directors Interlocks and Insider Participation; Certain
Relationships and Related Transactions” in CONMED Corporation’s definitive Proxy Statement or other informational filing to
be filed with the Securities and Exchange Commission on or about April 13, 2017.
31
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized on the date indicated below.
CONMED CORPORATION
By: /s/ Curt R. Hartman
Curt R. Hartman
(President and Chief
Executive Officer)
Date:
February 27, 2017
PART IV
Item 15. Exhibits, Financial Statement Schedules
Index to Financial Statements
(a)(1) List of Financial Statements
Page in Form 10-K
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2016 and 2015
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2016,
2015 and 2014
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2016, 2015
and 2014
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
(2)
List of Financial Statement Schedules
Valuation and Qualifying Accounts (Schedule II)
All other schedules have been omitted because they are not applicable, or the required information
is shown in the financial statements or notes thereto.
(3)
List of Exhibits
The exhibits listed on the accompanying Exhibit Index on page 36 below are filed as part of this
Form 10-K.
39
40
41
42
43
45
47
75
33
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized on the date indicated below.
CONMED CORPORATION
By: /s/ Curt R. Hartman
Curt R. Hartman
(President and Chief
Executive Officer)
Date:
February 27, 2017
PART IV
Item 15. Exhibits, Financial Statement Schedules
Index to Financial Statements
(a)(1) List of Financial Statements
Page in Form 10-K
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2016 and 2015
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2016,
2015 and 2014
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2016, 2015
and 2014
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
(2)
List of Financial Statement Schedules
Valuation and Qualifying Accounts (Schedule II)
All other schedules have been omitted because they are not applicable, or the required information
is shown in the financial statements or notes thereto.
(3)
List of Exhibits
The exhibits listed on the accompanying Exhibit Index on page 36 below are filed as part of this
Form 10-K.
39
40
41
42
43
45
47
75
33
34
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Exhibit Index
Exhibit No.
Description
Signature
Title
Date
/s/ MARK E. TRYNISKI
Mark E. Tryniski
/s/ CURT R. HARTMAN
Curt R. Hartman
/s/ LUKE A. POMILIO
Luke A. Pomilio
Chairman of the Board
of Directors
President, Chief Executive
Officer and Director
February 27, 2017
February 27, 2017
Executive Vice President-Finance
and Chief Financial Officer (Principal Financial Officer)
February 27, 2017
/s/ TERENCE M. BERGE
Terence M. Berge
Vice President-
Corporate Controller
/s/ DAVID BRONSON
David Bronson
/s/ BRIAN CONCANNON
Brian Concannon
/s/ CHARLES M. FARKAS
Charles M. Farkas
Director
Director
Director
February 27, 2017
February 27, 2017
February 27, 2017
February 27, 2017
/s/ MARTHA GOLDBERG ARONSON
Martha Goldberg Aronson
Director
February 27, 2017
/s/ JO ANN GOLDEN
Jo Ann Golden
/s/ DIRK M. KUYPER
Dirk M. Kuyper
/s/ JEROME J. LANDE
Jerome J. Lande
/s/ JOHN WORKMAN
John Workman
Director
Director
Director
Director
February 27, 2017
February 27, 2017
February 27, 2017
February 27, 2017
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
10.1+
10.2+
10.3
-
-
-
-
-
-
-
-
-
-
-
-
Amended and Restated By-Laws, as adopted by the Board of Directors on April 29, 2011 (Incorporated
by reference to the Company’s Current Report on Form 10-Q filed with the Securities and Exchange
Commission on May 2, 2011).
1999 Amendment to Certificate of Incorporation and Restated Certificate of Incorporation of CONMED
Corporation (Incorporated by reference to Exhibit 3.2 of the Company’s Annual Report on Form 10-K
for the year ended December 31, 1999).
See Exhibit 3.1.
See Exhibit 3.2.
Guarantee and Collateral Agreement, dated August 28, 2002, made by CONMED Corporation and
certain of its subsidiaries in favor of JP Morgan Chase Bank (Incorporated by reference to Exhibit 10.2
of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002).
First Amendment to Guarantee and Collateral Agreement, dated June 30, 2003, made by CONMED
Corporation and certain of its subsidiaries in favor of JP Morgan Chase Bank and the several banks and
other financial institutions or entities from time to time parties thereto (Incorporated by reference to
Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003).
Second Amendment to Guarantee and Collateral Agreement, dated April 13, 2006, made by CONMED
Corporation and certain of its subsidiaries in favor of JP Morgan Chase Bank and the several banks and
other financial institutions or entities from time to time parties thereto (Incorporated by reference to the
Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April
19, 2006).
Third Amendment to Guarantee and Collateral Agreement, dated as of January 17, 2013, made by
CONMED Corporation and certain of its subsidiaries in favor of JP Morgan Chase Bank (Incorporated
by reference to Exhibit 4.6 of the Company's Annual Report on Form 10-K for the year ended December
31, 2012).
Fourth Amendment to Guarantee and Collateral Agreement, dated as of January 4, 2016, made by
CONMED Corporation and certain of its subsidiaries in favor of JP Morgan Chase Bank (Incorporated
by reference to Exhibit 10.2 of the Company's Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 4, 2016).
Employment Agreement between the Company and Curt R. Hartman, dated November 9, 2014
(Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 10, 2014).
Amended and Restated Employment Agreement, dated October 30, 2009, by and between CONMED
Corporation and Joseph J. Corasanti, Esq. (Incorporated by reference to the Exhibit 10.1 of the
Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
Amended and Restated 1999 Long Term Incentive Plan (Incorporated by reference to Exhibit 4.3 of the
Company’s Registration Statement on Form S-8 on November 3, 2009).
35
36
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Exhibit Index
Exhibit No.
Description
Signature
Title
Date
/s/ MARK E. TRYNISKI
Mark E. Tryniski
/s/ CURT R. HARTMAN
Curt R. Hartman
/s/ LUKE A. POMILIO
Luke A. Pomilio
Chairman of the Board
of Directors
President, Chief Executive
Officer and Director
February 27, 2017
February 27, 2017
Executive Vice President-Finance
and Chief Financial Officer (Principal Financial Officer)
February 27, 2017
/s/ TERENCE M. BERGE
Terence M. Berge
Vice President-
Corporate Controller
/s/ DAVID BRONSON
David Bronson
/s/ BRIAN CONCANNON
Brian Concannon
/s/ CHARLES M. FARKAS
Charles M. Farkas
Director
Director
Director
February 27, 2017
February 27, 2017
February 27, 2017
February 27, 2017
/s/ MARTHA GOLDBERG ARONSON
Martha Goldberg Aronson
Director
February 27, 2017
/s/ JO ANN GOLDEN
Jo Ann Golden
/s/ DIRK M. KUYPER
Dirk M. Kuyper
/s/ JEROME J. LANDE
Jerome J. Lande
/s/ JOHN WORKMAN
John Workman
Director
Director
Director
Director
February 27, 2017
February 27, 2017
February 27, 2017
February 27, 2017
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
10.1+
10.2+
10.3
-
-
-
-
-
-
-
-
-
-
-
-
Amended and Restated By-Laws, as adopted by the Board of Directors on April 29, 2011 (Incorporated
by reference to the Company’s Current Report on Form 10-Q filed with the Securities and Exchange
Commission on May 2, 2011).
1999 Amendment to Certificate of Incorporation and Restated Certificate of Incorporation of CONMED
Corporation (Incorporated by reference to Exhibit 3.2 of the Company’s Annual Report on Form 10-K
for the year ended December 31, 1999).
See Exhibit 3.1.
See Exhibit 3.2.
Guarantee and Collateral Agreement, dated August 28, 2002, made by CONMED Corporation and
certain of its subsidiaries in favor of JP Morgan Chase Bank (Incorporated by reference to Exhibit 10.2
of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002).
First Amendment to Guarantee and Collateral Agreement, dated June 30, 2003, made by CONMED
Corporation and certain of its subsidiaries in favor of JP Morgan Chase Bank and the several banks and
other financial institutions or entities from time to time parties thereto (Incorporated by reference to
Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003).
Second Amendment to Guarantee and Collateral Agreement, dated April 13, 2006, made by CONMED
Corporation and certain of its subsidiaries in favor of JP Morgan Chase Bank and the several banks and
other financial institutions or entities from time to time parties thereto (Incorporated by reference to the
Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April
19, 2006).
Third Amendment to Guarantee and Collateral Agreement, dated as of January 17, 2013, made by
CONMED Corporation and certain of its subsidiaries in favor of JP Morgan Chase Bank (Incorporated
by reference to Exhibit 4.6 of the Company's Annual Report on Form 10-K for the year ended December
31, 2012).
Fourth Amendment to Guarantee and Collateral Agreement, dated as of January 4, 2016, made by
CONMED Corporation and certain of its subsidiaries in favor of JP Morgan Chase Bank (Incorporated
by reference to Exhibit 10.2 of the Company's Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 4, 2016).
Employment Agreement between the Company and Curt R. Hartman, dated November 9, 2014
(Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 10, 2014).
Amended and Restated Employment Agreement, dated October 30, 2009, by and between CONMED
Corporation and Joseph J. Corasanti, Esq. (Incorporated by reference to the Exhibit 10.1 of the
Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
Amended and Restated 1999 Long Term Incentive Plan (Incorporated by reference to Exhibit 4.3 of the
Company’s Registration Statement on Form S-8 on November 3, 2009).
35
36
14
21*
23*
31.1*
31.2*
32.1*
101*
-
-
-
-
-
-
-
Code of Ethics. The CONMED code of ethics may be accessed via the Company’s website at http://
www.conmed.com/conmed_investor_template.php
Subsidiaries of the Registrant.
Consent of Independent Registered Public Accounting Firm.
Certification of Curt R. Hartman pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Luke A. Pomilio. pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certifications of Curt R. Hartman and Luke A. Pomilio pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The following materials from CONMED Corporation's Annual Report on Form 10-K for the year ended
December 31, 2016 formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated
Statements of Comprehensive Income for the three years ended December 31, 2016, (ii) Consolidated
Balance Sheets at December 31, 2016 and 2015, (iii) Consolidated Statements of Shareholders' Equity
for the three years ended December 31, 2016 (iv) Consolidated Statements of Cash Flows for the three
years ended December 31, 2016, (v) Notes to the Consolidated Financial Statements for the year ended
December 31, 2016 and (vi) Schedule II - Valuation and Qualifying Accounts. In accordance with Rule
406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-
K shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject
to the liability of that section, and shall not be part of any registration statement or other document filed
under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference
in such filing.
Filed herewith
*
+ Management contract or compensatory plan or arrangement
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14+
10.15+
10.16+
10.17
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2002 Employee Stock Purchase Plan (Incorporated by reference to the Company’s Definitive Proxy
Statement for the 2002 Annual Meeting filed with the Securities and Exchange Commission on April 17,
2002).
Amendment to CONMED Corporation 2002 Employee Stock Purchase Plan (Incorporated by reference
to Exhibit 10.11 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005).
2006 Stock Incentive Plan (Incorporated by reference to Exhibit 4.3 of the Company’s Registration
Statement on Form S-8 on August 8, 2006).
Amended and Restated 2007 Non-Employee Director Equity Compensation Plan of CONMED
Corporation (Incorporated by reference to Exhibit 4.3 of the Company’s Registration Statement on Form
S-8 on August 3, 2010).
Amended and Restated Long Term Incentive Plan (Incorporated by reference to Exhibit 4.3 of the
Company’s Registration Statement on Form S-8 on July 27, 2012).
Amended and Restated 2015 Long-Term Incentive Plan (Incorporated by reference to Exhibit 4.3 of the
Company's Registration Statement on Form S-8 on October 23, 2015).
Amended and Restated 2016 Non-Employee Director Equity Compensation Plan (Incorporated by
reference to Exhibit 4.3 of the Company's Registration Statement on Form S-8 on October 28, 2016).
Fifth Amended and Restated Credit Agreement, dated January 4, 2016, among CONMED Corporation,
JP Morgan Chase Bank and the several banks and other financial institutions or entities from time to
time parties thereto (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on January 4, 2016).
First Amendment to the Fifth Amended and Restated Credit Agreement, dated January 4, 2016, among
CONMED Corporation, JP Morgan Chase Bank and the several banks and other financial institutions or
entities from time to time parties thereto (Incorporated by reference to Exhibit 10.1 of the Company’s
Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on October 28,
2016).
Sports Medicine Joint Development and Distribution Agreement by and between Musculoskeletal
Transplant Foundation, Inc. and CONMED Corporation dated as of January 3, 2012 (Incorporated by
reference to Exhibit 10.1 of the Company's Current Report on Form 8-K dated January 3, 2012).
Employment Agreement between the Company and Patrick Beyer, dated December 9, 2014
(Incorporated by reference to Exhibit 10.21 of the Company's Annual Report on Form 10-K for the year
ended December 31, 2014).
Separation Agreement, by and between CONMED Corporation and Joseph J. Corasanti, dated July 22,
2014. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed
with the Securities and Exchange Commission on July 23, 2014).
Retirement Agreement, by and between CONMED Corporation and Robert D. Shallish, Jr., dated
December 9, 2014. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on December 9, 2014).
Agreement and Plan of Merger, dated November 15, 2015, by and among CONMED Corporation, Nemo
Acquisition Sub, Inc., SurgiQuest, Inc. and Shareholder Representative Services LLC (Incorporated by
reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed with the Securities and
Exchange Commission on November 16, 2015).
37
38
14
21*
23*
31.1*
31.2*
32.1*
101*
-
-
-
-
-
-
-
Code of Ethics. The CONMED code of ethics may be accessed via the Company’s website at http://
www.conmed.com/conmed_investor_template.php
Subsidiaries of the Registrant.
Consent of Independent Registered Public Accounting Firm.
Certification of Curt R. Hartman pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Luke A. Pomilio. pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certifications of Curt R. Hartman and Luke A. Pomilio pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The following materials from CONMED Corporation's Annual Report on Form 10-K for the year ended
December 31, 2016 formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated
Statements of Comprehensive Income for the three years ended December 31, 2016, (ii) Consolidated
Balance Sheets at December 31, 2016 and 2015, (iii) Consolidated Statements of Shareholders' Equity
for the three years ended December 31, 2016 (iv) Consolidated Statements of Cash Flows for the three
years ended December 31, 2016, (v) Notes to the Consolidated Financial Statements for the year ended
December 31, 2016 and (vi) Schedule II - Valuation and Qualifying Accounts. In accordance with Rule
406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-
K shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject
to the liability of that section, and shall not be part of any registration statement or other document filed
under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference
in such filing.
Filed herewith
*
+ Management contract or compensatory plan or arrangement
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14+
10.15+
10.16+
10.17
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2002 Employee Stock Purchase Plan (Incorporated by reference to the Company’s Definitive Proxy
Statement for the 2002 Annual Meeting filed with the Securities and Exchange Commission on April 17,
2002).
Amendment to CONMED Corporation 2002 Employee Stock Purchase Plan (Incorporated by reference
to Exhibit 10.11 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005).
2006 Stock Incentive Plan (Incorporated by reference to Exhibit 4.3 of the Company’s Registration
Statement on Form S-8 on August 8, 2006).
Amended and Restated 2007 Non-Employee Director Equity Compensation Plan of CONMED
Corporation (Incorporated by reference to Exhibit 4.3 of the Company’s Registration Statement on Form
S-8 on August 3, 2010).
Amended and Restated Long Term Incentive Plan (Incorporated by reference to Exhibit 4.3 of the
Company’s Registration Statement on Form S-8 on July 27, 2012).
Amended and Restated 2015 Long-Term Incentive Plan (Incorporated by reference to Exhibit 4.3 of the
Company's Registration Statement on Form S-8 on October 23, 2015).
Amended and Restated 2016 Non-Employee Director Equity Compensation Plan (Incorporated by
reference to Exhibit 4.3 of the Company's Registration Statement on Form S-8 on October 28, 2016).
Fifth Amended and Restated Credit Agreement, dated January 4, 2016, among CONMED Corporation,
JP Morgan Chase Bank and the several banks and other financial institutions or entities from time to
time parties thereto (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on January 4, 2016).
First Amendment to the Fifth Amended and Restated Credit Agreement, dated January 4, 2016, among
CONMED Corporation, JP Morgan Chase Bank and the several banks and other financial institutions or
entities from time to time parties thereto (Incorporated by reference to Exhibit 10.1 of the Company’s
Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on October 28,
2016).
Sports Medicine Joint Development and Distribution Agreement by and between Musculoskeletal
Transplant Foundation, Inc. and CONMED Corporation dated as of January 3, 2012 (Incorporated by
reference to Exhibit 10.1 of the Company's Current Report on Form 8-K dated January 3, 2012).
Employment Agreement between the Company and Patrick Beyer, dated December 9, 2014
(Incorporated by reference to Exhibit 10.21 of the Company's Annual Report on Form 10-K for the year
ended December 31, 2014).
Separation Agreement, by and between CONMED Corporation and Joseph J. Corasanti, dated July 22,
2014. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed
with the Securities and Exchange Commission on July 23, 2014).
Retirement Agreement, by and between CONMED Corporation and Robert D. Shallish, Jr., dated
December 9, 2014. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on December 9, 2014).
Agreement and Plan of Merger, dated November 15, 2015, by and among CONMED Corporation, Nemo
Acquisition Sub, Inc., SurgiQuest, Inc. and Shareholder Representative Services LLC (Incorporated by
reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed with the Securities and
Exchange Commission on November 16, 2015).
37
38
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,
2016. 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”, released in 2013. Management has concluded
that based on its assessment, CONMED’s internal control over financial reporting was effective as of December 31, 2016. The
effectiveness of the Company’s internal control over financial reporting as of December 31, 2016 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
/s/ Curt R. Hartman
Curt R. Hartman
President and
Chief Executive Officer
/s/ Luke A. Pomilio
Luke A. Pomilio
Executive Vice President-Finance and
Chief Financial Officer
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 comprehensive income,
of shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of CONMED Corporation
and its subsidiaries at December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents
fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial
statements and financial statement schedule, 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, on the financial statement
schedule, 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 15 to the consolidated financial statements, the Company changed the manner in which it accounts for the
classification of deferred taxes in 2016.
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.
/s/ PricewaterhouseCoopers LLP
Rochester, New York
February 27, 2017
39
40
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,
2016. 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”, released in 2013. Management has concluded
that based on its assessment, CONMED’s internal control over financial reporting was effective as of December 31, 2016. The
effectiveness of the Company’s internal control over financial reporting as of December 31, 2016 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
/s/ Curt R. Hartman
Curt R. Hartman
President and
Chief Executive Officer
/s/ Luke A. Pomilio
Luke A. Pomilio
Executive Vice President-Finance and
Chief Financial Officer
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 comprehensive income,
of shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of CONMED Corporation
and its subsidiaries at December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents
fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial
statements and financial statement schedule, 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, on the financial statement
schedule, 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 15 to the consolidated financial statements, the Company changed the manner in which it accounts for the
classification of deferred taxes in 2016.
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.
/s/ PricewaterhouseCoopers LLP
Rochester, New York
February 27, 2017
39
40
CONMED CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2016 and 2015
(In thousands except share and per share amounts)
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2016, 2015 and 2014
(In thousands except per share amounts)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful
accounts of $2,031 in 2016 and $1,336 in 2015
Inventories
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
Other current liabilities
Total current liabilities
Long-term debt
Deferred income taxes
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 11)
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; 31,299,194 issued in 2016 and 2015, respectively
Paid-in capital
Retained earnings
Accumulated other comprehensive loss
Less: Treasury stock, at cost;
3,471,121 and 3,590,409 shares in
2016 and 2015, respectively
Total shareholders' equity
Total liabilities and shareholders' equity
2016
2015
$
27,428
$
72,504
$
$
148,244
135,869
18,971
330,512
122,029
3,712
397,664
419,549
55,517
1,328,983
10,202
41,647
32,036
30,067
113,952
488,288
119,143
27,024
748,407
$
$
133,863
133,361
20,076
359,804
125,452
4,238
260,651
308,171
43,384
1,101,700
1,339
34,720
31,823
51,836
119,718
269,471
103,379
24,059
516,627
—
—
313
329,276
406,932
(58,526)
313
324,915
414,506
(53,894)
(97,419)
580,576
1,328,983
$
(100,767)
585,073
1,101,700
$
Net sales
Cost of sales
Gross profit
Selling and administrative expense
Research and development expense
Operating expenses
Income from operations
Other expense
Interest expense
Income before income taxes
Provision for income taxes
Net income
Per share data:
Basic
Diluted
Dividends per share of common stock
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments
Pension liability
Cash flow hedging gain (loss)
Other comprehensive income, before tax
Provision (benefit) for income taxes related to items of other
comprehensive income
Comprehensive income
2016
2015
2014
$
763,520
355,190
$
719,168
337,466
$
740,055
335,998
408,330
381,702
404,057
338,400
32,254
370,654
37,676
2,942
15,359
303,091
27,436
330,527
51,175
—
6,031
323,492
27,779
351,271
52,786
—
6,111
19,375
45,144
46,675
4,711
14,646
14,483
14,664
$
30,498
$
32,192
0.53
0.52
0.80
$
$
$
(4,501) $
(755)
547
9,955
(77)
10,032
$
1.10
1.09
0.80
$
$
$
(16,775) $
7,578
(3,291)
18,010
1,584
16,426
$
1.17
1.16
0.80
(15,069)
(18,781)
7,393
5,735
(4,207)
9,942
$
$
$
$
$
$
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
41
42
CONMED CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2016 and 2015
(In thousands except share and per share amounts)
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2016, 2015 and 2014
(In thousands except per share amounts)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful
accounts of $2,031 in 2016 and $1,336 in 2015
Inventories
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
Other current liabilities
Total current liabilities
Long-term debt
Deferred income taxes
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 11)
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; 31,299,194 issued in 2016 and 2015, respectively
Paid-in capital
Retained earnings
Accumulated other comprehensive loss
Less: Treasury stock, at cost;
3,471,121 and 3,590,409 shares in
2016 and 2015, respectively
Total shareholders' equity
Total liabilities and shareholders' equity
2016
2015
$
27,428
$
72,504
$
$
148,244
135,869
18,971
330,512
122,029
3,712
397,664
419,549
55,517
1,328,983
10,202
41,647
32,036
30,067
113,952
488,288
119,143
27,024
748,407
$
$
133,863
133,361
20,076
359,804
125,452
4,238
260,651
308,171
43,384
1,101,700
1,339
34,720
31,823
51,836
119,718
269,471
103,379
24,059
516,627
—
—
313
329,276
406,932
(58,526)
313
324,915
414,506
(53,894)
(97,419)
580,576
1,328,983
$
(100,767)
585,073
1,101,700
$
Net sales
Cost of sales
Gross profit
Selling and administrative expense
Research and development expense
Operating expenses
Income from operations
Other expense
Interest expense
Income before income taxes
Provision for income taxes
Net income
Per share data:
Basic
Diluted
Dividends per share of common stock
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments
Pension liability
Cash flow hedging gain (loss)
Other comprehensive income, before tax
Provision (benefit) for income taxes related to items of other
comprehensive income
Comprehensive income
2016
2015
2014
$
763,520
355,190
$
719,168
337,466
$
740,055
335,998
408,330
381,702
404,057
338,400
32,254
370,654
37,676
2,942
15,359
303,091
27,436
330,527
51,175
—
6,031
323,492
27,779
351,271
52,786
—
6,111
19,375
45,144
46,675
4,711
14,646
14,483
14,664
$
30,498
$
32,192
0.53
0.52
0.80
$
$
$
(4,501) $
(755)
547
9,955
(77)
10,032
$
1.10
1.09
0.80
$
$
$
(16,775) $
7,578
(3,291)
18,010
1,584
16,426
$
1.17
1.16
0.80
(15,069)
(18,781)
7,393
5,735
(4,207)
9,942
$
$
$
$
$
$
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
41
42
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 2016, 2015 and 2014
(In thousands)
Common Stock
Shares Amount
313
31,299
$
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury
Stock
Shareholders’
Equity
$326,436
$ 395,889
$
(17,572) $ (98,747) $
606,319
10,519
(6,139)
(16,862)
(16,862)
(16,658)
644
9,330
(21,936)
32,192
(15,069)
(11,842)
4,661
644
9,330
(21,936)
9,942
581,298
Balance at December 31, 2013
Common stock issued
under employee plans
Repurchase of treasury stock
Tax benefit arising from
common stock issued under
employee plans
Stock-based compensation
Dividends on common stock
Comprehensive income (loss):
Foreign currency translation
adjustments
Pension liability (net of
income tax benefit of
$6,939)
Cash flow hedging gain
(net of income tax
expense of $2,732)
Net income
Total comprehensive income
Common Stock
Shares Amount
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury
Stock
Shareholders’
Equity
Net income
Total comprehensive income
30,498
Balance at December 31, 2015
31,299
$
313
$324,915
$ 414,506
$
(53,894) $(100,767) $
16,426
585,073
Common stock issued
under employee plans
Tax benefit arising from
common stock issued
under employee plans
Stock-based compensation
Dividends on common stock
Comprehensive income (loss):
Foreign currency
translation adjustments
Pension liability (net of
income tax benefit of $279)
Cash flow hedging gain (net
of income tax expense of
$202)
Net income
Total comprehensive income
Balance at December 31, 2016
(4,217)
203
8,375
(22,238)
3,348
(869)
203
8,375
(22,238)
(4,501)
(476)
345
14,664
31,299
$
313
$329,276
$ 406,932
$
(58,526) $ (97,419) $
10,032
580,576
The accompanying notes are an integral part of the consolidated financial statements.
Balance at December 31, 2014
31,299
$
313
$319,752
$ 406,145
$
(39,822) $(105,090) $
Common stock issued
under employee plans
Tax benefit arising from
common stock issued under
employee plans
Stock-based compensation
Dividends on common stock
Comprehensive income (loss):
Foreign currency translation
adjustments
Pension liability (net of
income tax expense $2,800)
Cash flow hedging loss (net
of income tax benefit of
$1,216)
(6,297)
3,961
7,499
(22,137)
4,323
(1,974)
3,961
7,499
(22,137)
(16,775)
4,778
(2,075)
43
44
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 2016, 2015 and 2014
(In thousands)
Common Stock
Shares Amount
313
31,299
$
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury
Stock
Shareholders’
Equity
$326,436
$ 395,889
$
(17,572) $ (98,747) $
606,319
10,519
(6,139)
(16,862)
(16,862)
(16,658)
644
9,330
(21,936)
32,192
(15,069)
(11,842)
4,661
644
9,330
(21,936)
9,942
581,298
Balance at December 31, 2013
Common stock issued
under employee plans
Repurchase of treasury stock
Tax benefit arising from
common stock issued under
employee plans
Stock-based compensation
Dividends on common stock
Comprehensive income (loss):
Foreign currency translation
adjustments
Pension liability (net of
income tax benefit of
$6,939)
Cash flow hedging gain
(net of income tax
expense of $2,732)
Net income
Total comprehensive income
Common Stock
Shares Amount
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury
Stock
Shareholders’
Equity
Net income
Total comprehensive income
30,498
Balance at December 31, 2015
31,299
$
313
$324,915
$ 414,506
$
(53,894) $(100,767) $
16,426
585,073
Common stock issued
under employee plans
Tax benefit arising from
common stock issued
under employee plans
Stock-based compensation
Dividends on common stock
Comprehensive income (loss):
Foreign currency
translation adjustments
Pension liability (net of
income tax benefit of $279)
Cash flow hedging gain (net
of income tax expense of
$202)
Net income
Total comprehensive income
Balance at December 31, 2016
(4,217)
203
8,375
(22,238)
3,348
(869)
203
8,375
(22,238)
(4,501)
(476)
345
14,664
31,299
$
313
$329,276
$ 406,932
$
(58,526) $ (97,419) $
10,032
580,576
The accompanying notes are an integral part of the consolidated financial statements.
Balance at December 31, 2014
31,299
$
313
$319,752
$ 406,145
$
(39,822) $(105,090) $
Common stock issued
under employee plans
Tax benefit arising from
common stock issued under
employee plans
Stock-based compensation
Dividends on common stock
Comprehensive income (loss):
Foreign currency translation
adjustments
Pension liability (net of
income tax expense $2,800)
Cash flow hedging loss (net
of income tax benefit of
$1,216)
(6,297)
3,961
7,499
(22,137)
4,323
(1,974)
3,961
7,499
(22,137)
(16,775)
4,778
(2,075)
43
44
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Non-cash investing activities:
Contractual obligations for acquisition of a business
Non-cash financing activities:
Dividends payable
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest
Income taxes
2016
2015
2014
72,504
66,332
54,443
27,428
$
72,504
$
66,332
— $
440
$
10,137
5,566
$
5,542
$
5,510
$
13,758
9,588
$
5,434
10,261
5,532
10,206
$
$
$
$
The accompanying notes are an integral part of the consolidated financial statements.
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2016, 2015 and 2014
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
2016
2015
2014
$
14,664
$
30,498
$
32,192
Depreciation
Amortization
Stock-based compensation
Deferred income taxes
Gain on sale of facility
Income tax benefit of stock option exercises
Excess tax benefit from stock option exercises
Loss on early extinguishment of debt
Increase (decrease) in cash flows from changes in assets and
liabilities, net of acquired assets:
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 and asset acquisitions, net of cash acquired
Proceeds from sale of a facility
Purchases of property, plant and equipment
Net cash used in investing activities
Cash flows from financing activities:
Repurchase of common stock
Excess tax benefit from stock option exercises
Payments on term loan
Proceeds from term loan
Payments on revolving line of credit
Proceeds from revolving line of credit
Payments related to distribution agreement
Payments on mortgage notes
Payments related to debt issuance costs
Dividends paid on common stock
Other, net
Net cash provided by (used in) financing activities
Effect of exchange rate changes
on cash and cash equivalents
20,479
34,830
8,375
(2,871)
(1,890)
203
(483)
254
(6,380)
3,103
2,094
(200)
(2,598)
(23,234)
(8,124)
23,558
38,222
(256,450)
5,178
(14,753)
(266,025)
—
483
(8,750)
175,000
(162,347)
225,000
(16,667)
(1,339)
(5,556)
(22,213)
591
184,202
18,704
25,175
7,499
2,251
—
3,961
(4,081)
—
(9,643)
(18,581)
11,508
(1,357)
(3,964)
(12,005)
(1,897)
17,570
48,068
(9,353)
—
(15,009)
(24,362)
—
4,081
—
—
(112,000)
142,680
(16,667)
(1,234)
(1,485)
(22,105)
(3,043)
(9,773)
19,792
25,942
9,330
(284)
—
644
(922)
—
5,255
(10,449)
(3,449)
5,291
3,572
(11,037)
(10,701)
32,984
65,176
(5,265)
—
(15,411)
(20,676)
(16,862)
922
—
—
(86,000)
113,000
(16,667)
(1,140)
—
(21,959)
2,316
(26,390)
(1,475)
(7,761)
(6,221)
Net increase (decrease) in cash and cash equivalents
(45,076)
6,172
11,889
45
46
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Non-cash investing activities:
Contractual obligations for acquisition of a business
Non-cash financing activities:
Dividends payable
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest
Income taxes
2016
2015
2014
72,504
66,332
54,443
27,428
$
72,504
$
66,332
— $
440
$
10,137
5,566
$
5,542
$
5,510
$
13,758
9,588
$
5,434
10,261
5,532
10,206
$
$
$
$
The accompanying notes are an integral part of the consolidated financial statements.
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2016, 2015 and 2014
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
2016
2015
2014
$
14,664
$
30,498
$
32,192
Depreciation
Amortization
Stock-based compensation
Deferred income taxes
Gain on sale of facility
Income tax benefit of stock option exercises
Excess tax benefit from stock option exercises
Loss on early extinguishment of debt
Increase (decrease) in cash flows from changes in assets and
liabilities, net of acquired assets:
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 and asset acquisitions, net of cash acquired
Proceeds from sale of a facility
Purchases of property, plant and equipment
Net cash used in investing activities
Cash flows from financing activities:
Repurchase of common stock
Excess tax benefit from stock option exercises
Payments on term loan
Proceeds from term loan
Payments on revolving line of credit
Proceeds from revolving line of credit
Payments related to distribution agreement
Payments on mortgage notes
Payments related to debt issuance costs
Dividends paid on common stock
Other, net
Net cash provided by (used in) financing activities
Effect of exchange rate changes
on cash and cash equivalents
20,479
34,830
8,375
(2,871)
(1,890)
203
(483)
254
(6,380)
3,103
2,094
(200)
(2,598)
(23,234)
(8,124)
23,558
38,222
(256,450)
5,178
(14,753)
(266,025)
—
483
(8,750)
175,000
(162,347)
225,000
(16,667)
(1,339)
(5,556)
(22,213)
591
184,202
18,704
25,175
7,499
2,251
—
3,961
(4,081)
—
(9,643)
(18,581)
11,508
(1,357)
(3,964)
(12,005)
(1,897)
17,570
48,068
(9,353)
—
(15,009)
(24,362)
—
4,081
—
—
(112,000)
142,680
(16,667)
(1,234)
(1,485)
(22,105)
(3,043)
(9,773)
19,792
25,942
9,330
(284)
—
644
(922)
—
5,255
(10,449)
(3,449)
5,291
3,572
(11,037)
(10,701)
32,984
65,176
(5,265)
—
(15,411)
(20,676)
(16,862)
922
—
—
(86,000)
113,000
(16,667)
(1,140)
—
(21,959)
2,316
(26,390)
(1,475)
(7,761)
(6,221)
Net increase (decrease) in cash and cash equivalents
(45,076)
6,172
11,889
45
46
CONMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share amounts)
Note 1 — Operations and Significant Accounting Policies
Organization and operations
CONMED Corporation (“CONMED”, the “Company”, “we” or “us”) is a medical technology company that provides
surgical devices and equipment for minimally invasive procedures. The Company’s products are used by surgeons and physicians
in a variety of specialties including orthopedics, general surgery, gynecology, neurosurgery and gastroenterology.
Principles of consolidation
The consolidated financial statements include the accounts of CONMED Corporation and its controlled subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and judgments which affect the reported amounts of assets, liabilities, related
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Estimates are used in accounting for, among other things, allowances for doubtful accounts,
rebates and sales allowances, inventory allowances, purchased in-process research and development, pension benefits, goodwill
and intangible assets, contingent consideration, 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 is 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.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined on the FIFO (first-in, first-out) method of
accounting.
We write-off excess and obsolete inventory resulting from the inability to sell our products at prices in excess of current
carrying costs. 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 and expected future trends.
Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated using the straight-line method over the following estimated
useful lives:
Building and improvements
Leasehold improvements
Machinery and equipment
12 to 40 years
Shorter of life of asset or life of lease
2 to 15 years
Goodwill and other intangible assets
We have a history of growth through acquisitions. Assets and liabilities of acquired businesses are recorded at their
estimated fair values as of the date of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying
net assets of acquired businesses. Customer and distributor relationships, trademarks, tradenames, developed technology, patents
and other intangible assets primarily represent allocations of purchase price to identifiable intangible assets of acquired businesses.
Promotional, marketing and distribution rights represent intangible assets created under our Sports Medicine Joint Development
and Distribution Agreement (the "JDDA") with Musculoskeletal Transplant Foundation (“MTF”). We have goodwill of $397.7
million and other intangible assets of $419.5 million as of December 31, 2016.
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 business. Estimates of fair value are based
on the best information available as of the date of the assessment. During 2016, we completed our goodwill impairment testing
with data as of October 1, 2016. We performed a Step 1 impairment test utilizing the market capitalization approach to determine
whether the fair value of a reporting unit is less than its carrying amount. Based upon our assessment, we believe the fair value
continues to exceed carrying value.
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 as a result of the 1997 acquisition of Linvatec Corporation. The acquisition date
valuation 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. During 2016, we acquired SurgiQuest, Inc.
and recorded customer and distributor relationships with an average useful life of 22 years. Customer and distributor relationship
intangible assets arising as a result of business acquisitions other than Linvatec are being amortized over a weighted average life
of 21 years. The weighted average life for customer and distributor relationship assets in aggregate is 29 years.
We evaluate the remaining useful life of our customer and distributor 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 and distributor relationship intangible assets, we perform an analysis
and assessment of actual customer attrition and activity as events and circumstances warrant.
We test our customer and distributor relationship assets for recoverability whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. Factors specific to our customer and distributor 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.
Our developed technology asset arose as a result of the SurgiQuest, Inc. acquisition. This asset is amortized over a
weighted average useful life of 17 years. We test for impairment whenever events or changes in circumstances indicate the carrying
amount may not be recoverable.
Trademarks and tradenames intangible assets are not amortized. The Company assesses the impairment of indefinite-
lived intangibles annually as of October 1, 2016 and whenever an event or circumstances change that would indicate that the
carrying amount may be impaired. We performed a qualitative assessment, and based upon our assessment, we believe the fair
value continues to exceed carrying value.
For all other indefinite-lived intangible assets, we perform a qualitative impairment test. Based upon this assessment,
we have determined that it is unlikely that our indefinite-lived intangible assets are impaired.
Other long-lived assets
We review other long-lived assets consisting of intangible assets subject to amortization, property, plant and equipment
and field inventory for impairment 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.
47
48
CONMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share amounts)
Note 1 — Operations and Significant Accounting Policies
Organization and operations
CONMED Corporation (“CONMED”, the “Company”, “we” or “us”) is a medical technology company that provides
surgical devices and equipment for minimally invasive procedures. The Company’s products are used by surgeons and physicians
in a variety of specialties including orthopedics, general surgery, gynecology, neurosurgery and gastroenterology.
Principles of consolidation
The consolidated financial statements include the accounts of CONMED Corporation and its controlled subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and judgments which affect the reported amounts of assets, liabilities, related
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Estimates are used in accounting for, among other things, allowances for doubtful accounts,
rebates and sales allowances, inventory allowances, purchased in-process research and development, pension benefits, goodwill
and intangible assets, contingent consideration, 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 is 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.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined on the FIFO (first-in, first-out) method of
accounting.
We write-off excess and obsolete inventory resulting from the inability to sell our products at prices in excess of current
carrying costs. 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 and expected future trends.
Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated using the straight-line method over the following estimated
useful lives:
Building and improvements
Leasehold improvements
Machinery and equipment
12 to 40 years
Shorter of life of asset or life of lease
2 to 15 years
Goodwill and other intangible assets
We have a history of growth through acquisitions. Assets and liabilities of acquired businesses are recorded at their
estimated fair values as of the date of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying
net assets of acquired businesses. Customer and distributor relationships, trademarks, tradenames, developed technology, patents
and other intangible assets primarily represent allocations of purchase price to identifiable intangible assets of acquired businesses.
Promotional, marketing and distribution rights represent intangible assets created under our Sports Medicine Joint Development
and Distribution Agreement (the "JDDA") with Musculoskeletal Transplant Foundation (“MTF”). We have goodwill of $397.7
million and other intangible assets of $419.5 million as of December 31, 2016.
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 business. Estimates of fair value are based
on the best information available as of the date of the assessment. During 2016, we completed our goodwill impairment testing
with data as of October 1, 2016. We performed a Step 1 impairment test utilizing the market capitalization approach to determine
whether the fair value of a reporting unit is less than its carrying amount. Based upon our assessment, we believe the fair value
continues to exceed carrying value.
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 as a result of the 1997 acquisition of Linvatec Corporation. The acquisition date
valuation 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. During 2016, we acquired SurgiQuest, Inc.
and recorded customer and distributor relationships with an average useful life of 22 years. Customer and distributor relationship
intangible assets arising as a result of business acquisitions other than Linvatec are being amortized over a weighted average life
of 21 years. The weighted average life for customer and distributor relationship assets in aggregate is 29 years.
We evaluate the remaining useful life of our customer and distributor 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 and distributor relationship intangible assets, we perform an analysis
and assessment of actual customer attrition and activity as events and circumstances warrant.
We test our customer and distributor relationship assets for recoverability whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. Factors specific to our customer and distributor 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.
Our developed technology asset arose as a result of the SurgiQuest, Inc. acquisition. This asset is amortized over a
weighted average useful life of 17 years. We test for impairment whenever events or changes in circumstances indicate the carrying
amount may not be recoverable.
Trademarks and tradenames intangible assets are not amortized. The Company assesses the impairment of indefinite-
lived intangibles annually as of October 1, 2016 and whenever an event or circumstances change that would indicate that the
carrying amount may be impaired. We performed a qualitative assessment, and based upon our assessment, we believe the fair
value continues to exceed carrying value.
For all other indefinite-lived intangible assets, we perform a qualitative impairment test. Based upon this assessment,
we have determined that it is unlikely that our indefinite-lived intangible assets are impaired.
Other long-lived assets
We review other long-lived assets consisting of intangible assets subject to amortization, property, plant and equipment
and field inventory for impairment 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.
47
48
The Company maintains field inventory consisting of capital equipment for customer demonstration and evaluation
purposes. Field inventory is generally not sold to customers but rather continues to be used over its useful life for demonstration,
evaluation and loaner purposes. An annual wear and tear provision has been recorded on field inventory.
recognized upon capital equipment shipment as the equipment is loaned and subject to return if certain minimum single-
use purchases are not met. Revenue is recognized upon the sale and shipment of the related single-use products. The
cost of the equipment is amortized over its estimated useful life.
In the fourth quarter of 2016 and as a result of the SurgiQuest acquisition, the Company determined it needed to expand
its field inventory and reevaluated its prior accounting classification as inventory. As a result, the equipment is classified as a long
term asset and amortized over its useful life. The net book value of such equipment at December 31, 2016 and 2015 is $44.8
million and $33.5 million, respectively; the prior year balance is presented in other long term assets.
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 or cost 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 comprehensive income.
Income taxes
Deferred income tax assets and liabilities are based on the difference between the financial statement and tax basis of
assets and liabilities and operating loss and tax credit carryforwards as measured by the enacted tax rates that are anticipated to
be in effect in the respective jurisdictions when these differences reverse. The deferred income tax provision generally represents
the net change in the assets and liabilities for deferred income taxes. A valuation allowance is established when it is necessary to
reduce deferred income tax assets to amounts for which realization is likely. 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, reversal of temporary differences and ongoing and future taxable income levels.
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
• We recognize revenues related to the promotion and marketing of sports medicine allograft tissue in accordance with the
contractual terms of our agreement with Musculoskeletal Transplant Foundation (“MTF”) on a net basis as our role is
limited to that of an agent earning a commission or fee. MTF records revenue when the tissue is shipped to the customer.
Our services are completed at this time and net revenues for the “Service Fee” for our promotional and marketing efforts
are then recognized based on a percentage of the net amounts billed by MTF to its customers. The timing of revenue
recognition is determined through review of the net billings made by MTF each month. Our net commission Service
Fee is based on the contractual terms of our agreement and is currently 50%. This percentage can vary over the term of
the agreement but is contractually determinable. Our Service Fee revenues are recorded net of amortization of the acquired
assets, which are being amortized over the expected useful life of 25 years.
•
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, $12.6 million and $13.6 million for 2016, 2015
and 2014, 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 $2.0 million at December 31, 2016 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 common
shares outstanding for the reporting period. Diluted earnings per share (“diluted EPS”) gives effect to all dilutive potential shares
outstanding resulting from employee stock options, restricted stock units, performance share units and stock appreciation rights
during the period. The following table sets forth the computation of basic and diluted earnings per share at December 31, 2016,
2015 and 2014, respectively:
Net income
Basic-weighted average shares outstanding
Effect of dilutive potential securities
2016
2015
2014
$ 14,664
$ 30,498
$ 32,192
27,804
27,653
27,401
160
205
368
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:
Diluted-weighted average shares outstanding
27,964
27,858
27,769
•
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 and collectability is reasonably assured.
Net income (per share)
Basic
Diluted
$
$
0.53
0.52
$
1.10
1.09
1.17
1.16
• We place certain of our capital equipment with customers on a loaned basis in return for commitments to purchase related
single-use products over time periods generally ranging from one to three years. In these circumstances, no revenue is
49
50
The Company maintains field inventory consisting of capital equipment for customer demonstration and evaluation
purposes. Field inventory is generally not sold to customers but rather continues to be used over its useful life for demonstration,
evaluation and loaner purposes. An annual wear and tear provision has been recorded on field inventory.
recognized upon capital equipment shipment as the equipment is loaned and subject to return if certain minimum single-
use purchases are not met. Revenue is recognized upon the sale and shipment of the related single-use products. The
cost of the equipment is amortized over its estimated useful life.
In the fourth quarter of 2016 and as a result of the SurgiQuest acquisition, the Company determined it needed to expand
its field inventory and reevaluated its prior accounting classification as inventory. As a result, the equipment is classified as a long
term asset and amortized over its useful life. The net book value of such equipment at December 31, 2016 and 2015 is $44.8
million and $33.5 million, respectively; the prior year balance is presented in other long term assets.
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 or cost 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 comprehensive income.
Income taxes
Deferred income tax assets and liabilities are based on the difference between the financial statement and tax basis of
assets and liabilities and operating loss and tax credit carryforwards as measured by the enacted tax rates that are anticipated to
be in effect in the respective jurisdictions when these differences reverse. The deferred income tax provision generally represents
the net change in the assets and liabilities for deferred income taxes. A valuation allowance is established when it is necessary to
reduce deferred income tax assets to amounts for which realization is likely. 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, reversal of temporary differences and ongoing and future taxable income levels.
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
• We recognize revenues related to the promotion and marketing of sports medicine allograft tissue in accordance with the
contractual terms of our agreement with Musculoskeletal Transplant Foundation (“MTF”) on a net basis as our role is
limited to that of an agent earning a commission or fee. MTF records revenue when the tissue is shipped to the customer.
Our services are completed at this time and net revenues for the “Service Fee” for our promotional and marketing efforts
are then recognized based on a percentage of the net amounts billed by MTF to its customers. The timing of revenue
recognition is determined through review of the net billings made by MTF each month. Our net commission Service
Fee is based on the contractual terms of our agreement and is currently 50%. This percentage can vary over the term of
the agreement but is contractually determinable. Our Service Fee revenues are recorded net of amortization of the acquired
assets, which are being amortized over the expected useful life of 25 years.
•
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, $12.6 million and $13.6 million for 2016, 2015
and 2014, 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 $2.0 million at December 31, 2016 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 common
shares outstanding for the reporting period. Diluted earnings per share (“diluted EPS”) gives effect to all dilutive potential shares
outstanding resulting from employee stock options, restricted stock units, performance share units and stock appreciation rights
during the period. The following table sets forth the computation of basic and diluted earnings per share at December 31, 2016,
2015 and 2014, respectively:
Net income
Basic-weighted average shares outstanding
Effect of dilutive potential securities
2016
2015
2014
$ 14,664
$ 30,498
$ 32,192
27,804
27,653
27,401
160
205
368
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:
Diluted-weighted average shares outstanding
27,964
27,858
27,769
•
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 and collectability is reasonably assured.
Net income (per share)
Basic
Diluted
$
$
0.53
0.52
$
1.10
1.09
1.17
1.16
• We place certain of our capital equipment with customers on a loaned basis in return for commitments to purchase related
single-use products over time periods generally ranging from one to three years. In these circumstances, no revenue is
49
50
The shares used in the calculation of diluted EPS exclude options and stock appreciation rights ("SARs") to purchase
shares where the exercise price was greater than the average market price of common shares for the year and the effect of the
inclusion would be anti-dilutive. Such shares aggregated approximately 1.4 million, 0.5 million and 0.0 million at December 31,
2016, 2015 and 2014, respectively.
Cash Flow
Hedging
Gain (Loss)
Pension
Liability
Cumulative
Translation
Adjustments
Accumulated
Other
Comprehensive
Loss
Stock-based compensation
Balance, December 31, 2013
$
(1,385) $
(18,918) $
2,731
$
(17,572)
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.
Accumulated other comprehensive loss
Accumulated other comprehensive loss consists of the following:
Other comprehensive income (loss)
before reclassifications, net of tax
Amounts reclassified from accumulated other
comprehensive income (loss) before taxa
Income tax provision (benefit)
5,061
(10,551)
(15,069)
(20,559)
(635)
235
(2,048)
757
—
—
(2,683)
992
Net current-period other comprehensive income (loss)
4,661
(11,842)
(15,069)
(22,250)
Balance, December 31, 2014
$
3,276
$
(30,760) $
(12,338) $
(39,822)
Other comprehensive income (loss)
before reclassifications, net of tax
Amounts reclassified from accumulated other
comprehensive income (loss) before taxa
Income tax provision (benefit)
4,482
2,739
(16,775)
(10,399)
3,842
3,233
(1,194)
—
—
(9,554)
(7,166)
2,648
Net current-period other comprehensive income (loss)
(2,075)
4,778
(16,775)
(14,072)
Balance, December 31, 2015
$
1,201
$
(25,982) $
(29,113) $
(53,894)
Other comprehensive income (loss)
before reclassifications, net of tax
Amounts reclassified from accumulated other
comprehensive income (loss) before taxa
Income tax provision (benefit)
1,088
(2,229)
(4,501)
(5,642)
(1,179)
436
2,780
(1,027)
—
—
1,601
(591)
Net current-period other comprehensive income (loss)
345
(476)
(4,501)
(4,632)
Balance, December 31, 2016
$
1,546
$
(26,458) $
(33,614) $
(58,526)
(a) The cash flow hedging gain (loss) and pension liability accumulated other comprehensive income components are included in sales or cost of sales and as a
component of net periodic pension cost, respectively. Refer to Note 14 and Note 10, respectively, for further details.
Note 2 – Business Acquisition
On January 4, 2016, we acquired all of the stock of SurgiQuest, Inc. ("SurgiQuest") for $257.7 million in cash (based on
an aggregate purchase price of $265 million as adjusted pursuant to the merger agreement governing the acquisition). SurgiQuest
developed, manufactured and marketed the AirSeal® System, the first integrated access management technology for use in
laparoscopic and robotic procedures. This proprietary and differentiated access system is complementary to our current general
surgery offering. The acquisition was funded through a combination of cash on hand and long-term borrowings.
The following table summarizes the fair values of the assets acquired and liabilities assumed as a result of the SurgiQuest
acquisition.
51
52
The shares used in the calculation of diluted EPS exclude options and stock appreciation rights ("SARs") to purchase
shares where the exercise price was greater than the average market price of common shares for the year and the effect of the
inclusion would be anti-dilutive. Such shares aggregated approximately 1.4 million, 0.5 million and 0.0 million at December 31,
2016, 2015 and 2014, respectively.
Cash Flow
Hedging
Gain (Loss)
Pension
Liability
Cumulative
Translation
Adjustments
Accumulated
Other
Comprehensive
Loss
Stock-based compensation
Balance, December 31, 2013
$
(1,385) $
(18,918) $
2,731
$
(17,572)
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.
Accumulated other comprehensive loss
Accumulated other comprehensive loss consists of the following:
Other comprehensive income (loss)
before reclassifications, net of tax
Amounts reclassified from accumulated other
comprehensive income (loss) before taxa
Income tax provision (benefit)
5,061
(10,551)
(15,069)
(20,559)
(635)
235
(2,048)
757
—
—
(2,683)
992
Net current-period other comprehensive income (loss)
4,661
(11,842)
(15,069)
(22,250)
Balance, December 31, 2014
$
3,276
$
(30,760) $
(12,338) $
(39,822)
Other comprehensive income (loss)
before reclassifications, net of tax
Amounts reclassified from accumulated other
comprehensive income (loss) before taxa
Income tax provision (benefit)
4,482
2,739
(16,775)
(10,399)
3,842
3,233
(1,194)
—
—
(9,554)
(7,166)
2,648
Net current-period other comprehensive income (loss)
(2,075)
4,778
(16,775)
(14,072)
Balance, December 31, 2015
$
1,201
$
(25,982) $
(29,113) $
(53,894)
Other comprehensive income (loss)
before reclassifications, net of tax
Amounts reclassified from accumulated other
comprehensive income (loss) before taxa
Income tax provision (benefit)
1,088
(2,229)
(4,501)
(5,642)
(1,179)
436
2,780
(1,027)
—
—
1,601
(591)
Net current-period other comprehensive income (loss)
345
(476)
(4,501)
(4,632)
Balance, December 31, 2016
$
1,546
$
(26,458) $
(33,614) $
(58,526)
(a) The cash flow hedging gain (loss) and pension liability accumulated other comprehensive income components are included in sales or cost of sales and as a
component of net periodic pension cost, respectively. Refer to Note 14 and Note 10, respectively, for further details.
Note 2 – Business Acquisition
On January 4, 2016, we acquired all of the stock of SurgiQuest, Inc. ("SurgiQuest") for $257.7 million in cash (based on
an aggregate purchase price of $265 million as adjusted pursuant to the merger agreement governing the acquisition). SurgiQuest
developed, manufactured and marketed the AirSeal® System, the first integrated access management technology for use in
laparoscopic and robotic procedures. This proprietary and differentiated access system is complementary to our current general
surgery offering. The acquisition was funded through a combination of cash on hand and long-term borrowings.
The following table summarizes the fair values of the assets acquired and liabilities assumed as a result of the SurgiQuest
acquisition.
51
52
Cash
Accounts receivable
Inventory
Other current assets
Current assets acquired
Property, plant & equipment
Goodwill
Customer and distributor relationships
Developed technology
Trademarks and tradenames
Other non-current assets
Total assets acquired
Accounts payable
Other current liabilities
Current liabilities assumed
Deferred income taxes
Other long-term liabilities
Total liabilities assumed
Net assets acquired
$
$
$
$
1,305
10,032
4,267
728
16,332
3,332
136,687
76,420
49,600
4,780
1,553
288,704
5,012
6,004
11,016
19,505
454
30,975
257,729
The goodwill recorded as part of the acquisition primarily represents revenue synergies, as well as operating efficiencies
and cost savings. Goodwill deductible for tax purposes is $11.5 million. The weighted amortization period for intangibles acquired
is 20 years. Customer and distributor relationships, developed technology and trademarks and tradenames are being amortized
over a weighted average life of 22, 17 and 23 years, respectively.
The unaudited pro forma information for the years ended December 31, 2016 and 2015, assuming SurgiQuest occurred
as of January 1, 2015 are presented below. This information has been prepared for comparative purposes only and does not purport
to be indicative of the results of operations which actually would have resulted had the SurgiQuest acquisition occurred on the
dates indicated, or which may result in the future.
Net sales
Net income
December 31,
2016
2015
$ 763,520
29,153
$ 768,726
(9,673)
These pro forma results include certain adjustments, primarily due to increases in amortization expense due to fair value
adjustments of intangible assets, increases in interest expense due to additional borrowings incurred to finance the acquisition,
and acquisition related costs including transaction costs such as legal, accounting, valuation and other professional services as
well as integration costs such as severance and retention.
Acquisition related costs included in the determination of pro forma net income for the year ended December 31, 2015
totaled $20.6 million. Such amounts are excluded from the determination of pro forma net income for the year ended December 31,
2016.
Net sales associated with SurgiQuest of $68.4 million have been recorded in the consolidated statement of comprehensive
income for the year ended December 31, 2016. It is impracticable to determine the earnings recorded in the consolidated statement
of comprehensive income associated with the SurgiQuest acquisition for the year ended December 31, 2016 as these amounts are
not separately measured.
Note 3 — Inventories
53
Inventories consist of the following at December 31:
Raw materials
Work in process
Finished goods
Note 4 — Property, Plant and Equipment
Property, plant and equipment consist of the following at December 31:
Land
Building and improvements
Machinery and equipment
Construction in progress
Less: Accumulated depreciation
2016
2015
$
$
42,821
13,315
79,733
135,869
$
$
47,681
13,922
71,758
133,361
2016
2015
$
$
4,027
90,780
205,674
7,229
307,710
(185,681)
122,029
$
$
4,027
90,272
193,630
5,281
293,210
(167,758)
125,452
We lease various manufacturing facilities, office facilities and equipment under operating leases. Leasehold
improvements related to these facilities are included in building and improvements above. Rental expense on these operating
leases was approximately $6,043, $5,464 and $5,897 for the years ended December 31, 2016, 2015 and 2014, respectively. The
aggregate future minimum lease commitments for operating leases at December 31, 2016 are as follows:
2017
2018
2019
2020
2021
Thereafter
$
6,170
5,862
5,717
2,348
1,182
2,505
Note 5 – Goodwill and Other Intangible Assets
The changes in the net carrying amount of goodwill for the years ended December 31, are as follows:
Balance as of January 1,
Goodwill resulting from business acquisitions
Reduction in goodwill resulting from a business acquisition purchase price allocation adjustment
Foreign currency translation
Balance as of December 31,
54
2016
260,651
$
2015
256,232
$
136,687
5,369
—
326
(525)
(425)
$
397,664
$
260,651
Cash
Accounts receivable
Inventory
Other current assets
Current assets acquired
Property, plant & equipment
Goodwill
Customer and distributor relationships
Developed technology
Trademarks and tradenames
Other non-current assets
Total assets acquired
Accounts payable
Other current liabilities
Current liabilities assumed
Deferred income taxes
Other long-term liabilities
Total liabilities assumed
Net assets acquired
$
$
$
$
1,305
10,032
4,267
728
16,332
3,332
136,687
76,420
49,600
4,780
1,553
288,704
5,012
6,004
11,016
19,505
454
30,975
257,729
The goodwill recorded as part of the acquisition primarily represents revenue synergies, as well as operating efficiencies
and cost savings. Goodwill deductible for tax purposes is $11.5 million. The weighted amortization period for intangibles acquired
is 20 years. Customer and distributor relationships, developed technology and trademarks and tradenames are being amortized
over a weighted average life of 22, 17 and 23 years, respectively.
The unaudited pro forma information for the years ended December 31, 2016 and 2015, assuming SurgiQuest occurred
as of January 1, 2015 are presented below. This information has been prepared for comparative purposes only and does not purport
to be indicative of the results of operations which actually would have resulted had the SurgiQuest acquisition occurred on the
dates indicated, or which may result in the future.
Net sales
Net income
December 31,
2016
2015
$ 763,520
29,153
$ 768,726
(9,673)
These pro forma results include certain adjustments, primarily due to increases in amortization expense due to fair value
adjustments of intangible assets, increases in interest expense due to additional borrowings incurred to finance the acquisition,
and acquisition related costs including transaction costs such as legal, accounting, valuation and other professional services as
well as integration costs such as severance and retention.
Acquisition related costs included in the determination of pro forma net income for the year ended December 31, 2015
totaled $20.6 million. Such amounts are excluded from the determination of pro forma net income for the year ended December 31,
2016.
Net sales associated with SurgiQuest of $68.4 million have been recorded in the consolidated statement of comprehensive
income for the year ended December 31, 2016. It is impracticable to determine the earnings recorded in the consolidated statement
of comprehensive income associated with the SurgiQuest acquisition for the year ended December 31, 2016 as these amounts are
not separately measured.
Note 3 — Inventories
53
Inventories consist of the following at December 31:
Raw materials
Work in process
Finished goods
Note 4 — Property, Plant and Equipment
Property, plant and equipment consist of the following at December 31:
Land
Building and improvements
Machinery and equipment
Construction in progress
Less: Accumulated depreciation
2016
2015
$
$
42,821
13,315
79,733
135,869
$
$
47,681
13,922
71,758
133,361
2016
2015
$
$
4,027
90,780
205,674
7,229
307,710
(185,681)
122,029
$
$
4,027
90,272
193,630
5,281
293,210
(167,758)
125,452
We lease various manufacturing facilities, office facilities and equipment under operating leases. Leasehold
improvements related to these facilities are included in building and improvements above. Rental expense on these operating
leases was approximately $6,043, $5,464 and $5,897 for the years ended December 31, 2016, 2015 and 2014, respectively. The
aggregate future minimum lease commitments for operating leases at December 31, 2016 are as follows:
2017
2018
2019
2020
2021
Thereafter
$
6,170
5,862
5,717
2,348
1,182
2,505
Note 5 – Goodwill and Other Intangible Assets
The changes in the net carrying amount of goodwill for the years ended December 31, are as follows:
Balance as of January 1,
Goodwill resulting from business acquisitions
Reduction in goodwill resulting from a business acquisition purchase price allocation adjustment
Foreign currency translation
Balance as of December 31,
54
2016
260,651
$
2015
256,232
$
136,687
5,369
—
326
(525)
(425)
$
397,664
$
260,651
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. During 2016, the Company
acquired SurgiQuest, Inc. (SurgiQuest) as further described in Note 2. Goodwill resulting from the acquisition amounted to $136.7
million and acquired amortizing intangible assets including customer and distributor relationships, developed technology and
trademarks and tradenames amounted to $130.8 million. During 2015, the Company entered into three acquisitions totaling a cash
purchase price of $6.1 million. The purchase price in a prior acquisition was allocated based on information available at the acquisition
date. During the quarter ended March 31, 2015, we recorded a measurement period adjustment, which reduced goodwill by $0.5
million. The amount was not considered material and therefore prior periods have not been revised.
Total accumulated impairment losses aggregated $106,991 at December 31, 2016 and 2015, respectively.
2017
2018
2019
2020
2021
Other intangible assets consist of the following:
Note 6 — Long Term Debt
Amortization
included in
expense
Amortization
recorded as a
reduction of
revenue
15,539
15,857
15,711
15,732
14,356
6,000
6,000
6,000
6,000
6,000
$
$
$
$
$
Total
21,539
21,857
21,711
21,732
20,356
December 31, 2016
December 31, 2015
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
Amortized intangible assets:
Customer and distributor relationships
$
213,259
$
(75,164) $
136,871
$
(64,423)
Promotional, marketing and distribution rights
149,376
(30,000)
149,376
(24,000)
Patents and other intangible assets
67,509
(40,335)
66,688
(42,885)
Developed technology
49,600
(1,240)
—
Unamortized intangible assets:
Trademarks and tradenames
86,544
—
86,544
—
—
$
566,288
$
(146,739) $
439,479
$
(131,308)
On January 3, 2012, the Company entered into the JDDA with MTF to obtain MTF's worldwide promotion rights with
respect to allograft tissues within the field of sports medicine and related products. The initial consideration from the Company
included a $63.0 million up-front payment for the rights and certain assets, with an additional $84.0 million contingently payable
over a four year period depending on MTF meeting supply targets for tissue. On January 6, 2016, January 5, 2015 and January 3,
2014, we paid equal installments of $16.7 million and on January 3, 2013, we paid $34.0 million of the additional consideration.
Amortization expense related to intangible assets which are subject to amortization totaled $20.0 million, $12.6 million
and $13.0 million for the years ending December 31, 2016, 2015 and 2014, respectively, and is included as a reduction of revenue
(for amortization related to our promotional, marketing and distribution rights) and in selling and administrative expense (for all
other intangible assets) in the consolidated statements of comprehensive income. The weighted average amortization period for
intangible assets which are amortized is 25 years. Customer and distributor relationships are being amortized over a weighted average
life of 29 years. Developed technology is being amortized over a weighted average life of 17 years. Promotional, marketing and
distribution rights are being amortized over a weighted average life of 25 years. Patents and other intangible assets are being amortized
over a weighted average life of 13 years. Included in patents and other intangible assets at December 31, 2016 is an in-process
research and development asset that is not currently amortized.
The estimated amortization expense related to intangible assets at December 31, 2016 and for each of the five succeeding
years is as follows:
Long-term debt consists of the following at December 31:
Revolving line of credit
Term loan, net of deferred debt issuance costs of $622 and $0 in
2016 and 2015, respectively
Mortgage notes
Total debt
Less: Current portion
Total long-term debt
2016
2015
$
329,000
$
265,609
165,628
3,862
498,490
10,202
488,288
$
—
5,201
270,810
1,339
269,471
$
On January 4, 2016, we entered into a fifth amended and restated senior credit agreement consisting of: (a) a $175.0
million term loan facility and (b) a $525.0 million revolving credit facility both expiring on January 4, 2021. The term loan is
payable in quarterly installments increasing over the term of the facility. Proceeds from the term loan facility and borrowings
under the revolving credit facility were used to repay the then existing senior credit agreement and to finance the acquisition of
SurgiQuest. Initially, the interest rates were at LIBOR plus a base rate or a Eurocurrency rate plus an applicable margin. The
applicable margin for base rate loans is 1.00% and for Eurocurrency rate loans is 2.00% (2.77% at December 31, 2016). In
conjunction with this agreement, we incurred charges included in other expense in the statements of comprehensive income related
to commitment fees paid to certain of our lenders, which provided a financing commitment for the SurgiQuest acquisition totaling
$2.7 million and recorded a loss on the early extinguishment of debt of $0.3 million.
There were $166.3 million in borrowings outstanding on the term loan as of December 31, 2016. There were $329.0
million in borrowings outstanding under the revolving credit facility as of December 31, 2016. Our available borrowings on the
revolving credit facility at December 31, 2016 were $191.2 million with approximately $4.8 million of the facility set aside for
outstanding letters of credit.
The fifth amended and restated senior credit agreement is collateralized by substantially all of our personal property and
assets. The fifth amended and restated 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, 2016. 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 Largo, Florida property and facilities 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 $3.9 million at December 31, 2016. The mortgage note is collateralized by the Largo, Florida
property and facilities.
The scheduled maturities of long-term debt outstanding at December 31, 2016 are as follows:
55
56
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. During 2016, the Company
acquired SurgiQuest, Inc. (SurgiQuest) as further described in Note 2. Goodwill resulting from the acquisition amounted to $136.7
million and acquired amortizing intangible assets including customer and distributor relationships, developed technology and
trademarks and tradenames amounted to $130.8 million. During 2015, the Company entered into three acquisitions totaling a cash
purchase price of $6.1 million. The purchase price in a prior acquisition was allocated based on information available at the acquisition
date. During the quarter ended March 31, 2015, we recorded a measurement period adjustment, which reduced goodwill by $0.5
million. The amount was not considered material and therefore prior periods have not been revised.
Total accumulated impairment losses aggregated $106,991 at December 31, 2016 and 2015, respectively.
2017
2018
2019
2020
2021
Other intangible assets consist of the following:
Note 6 — Long Term Debt
Amortization
included in
expense
Amortization
recorded as a
reduction of
revenue
15,539
15,857
15,711
15,732
14,356
6,000
6,000
6,000
6,000
6,000
$
$
$
$
$
Total
21,539
21,857
21,711
21,732
20,356
December 31, 2016
December 31, 2015
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
Amortized intangible assets:
Customer and distributor relationships
$
213,259
$
(75,164) $
136,871
$
(64,423)
Promotional, marketing and distribution rights
149,376
(30,000)
149,376
(24,000)
Patents and other intangible assets
67,509
(40,335)
66,688
(42,885)
Developed technology
49,600
(1,240)
—
Unamortized intangible assets:
Trademarks and tradenames
86,544
—
86,544
—
—
$
566,288
$
(146,739) $
439,479
$
(131,308)
On January 3, 2012, the Company entered into the JDDA with MTF to obtain MTF's worldwide promotion rights with
respect to allograft tissues within the field of sports medicine and related products. The initial consideration from the Company
included a $63.0 million up-front payment for the rights and certain assets, with an additional $84.0 million contingently payable
over a four year period depending on MTF meeting supply targets for tissue. On January 6, 2016, January 5, 2015 and January 3,
2014, we paid equal installments of $16.7 million and on January 3, 2013, we paid $34.0 million of the additional consideration.
Amortization expense related to intangible assets which are subject to amortization totaled $20.0 million, $12.6 million
and $13.0 million for the years ending December 31, 2016, 2015 and 2014, respectively, and is included as a reduction of revenue
(for amortization related to our promotional, marketing and distribution rights) and in selling and administrative expense (for all
other intangible assets) in the consolidated statements of comprehensive income. The weighted average amortization period for
intangible assets which are amortized is 25 years. Customer and distributor relationships are being amortized over a weighted average
life of 29 years. Developed technology is being amortized over a weighted average life of 17 years. Promotional, marketing and
distribution rights are being amortized over a weighted average life of 25 years. Patents and other intangible assets are being amortized
over a weighted average life of 13 years. Included in patents and other intangible assets at December 31, 2016 is an in-process
research and development asset that is not currently amortized.
The estimated amortization expense related to intangible assets at December 31, 2016 and for each of the five succeeding
years is as follows:
Long-term debt consists of the following at December 31:
Revolving line of credit
Term loan, net of deferred debt issuance costs of $622 and $0 in
2016 and 2015, respectively
Mortgage notes
Total debt
Less: Current portion
Total long-term debt
2016
2015
$
329,000
$
265,609
165,628
3,862
498,490
10,202
488,288
$
—
5,201
270,810
1,339
269,471
$
On January 4, 2016, we entered into a fifth amended and restated senior credit agreement consisting of: (a) a $175.0
million term loan facility and (b) a $525.0 million revolving credit facility both expiring on January 4, 2021. The term loan is
payable in quarterly installments increasing over the term of the facility. Proceeds from the term loan facility and borrowings
under the revolving credit facility were used to repay the then existing senior credit agreement and to finance the acquisition of
SurgiQuest. Initially, the interest rates were at LIBOR plus a base rate or a Eurocurrency rate plus an applicable margin. The
applicable margin for base rate loans is 1.00% and for Eurocurrency rate loans is 2.00% (2.77% at December 31, 2016). In
conjunction with this agreement, we incurred charges included in other expense in the statements of comprehensive income related
to commitment fees paid to certain of our lenders, which provided a financing commitment for the SurgiQuest acquisition totaling
$2.7 million and recorded a loss on the early extinguishment of debt of $0.3 million.
There were $166.3 million in borrowings outstanding on the term loan as of December 31, 2016. There were $329.0
million in borrowings outstanding under the revolving credit facility as of December 31, 2016. Our available borrowings on the
revolving credit facility at December 31, 2016 were $191.2 million with approximately $4.8 million of the facility set aside for
outstanding letters of credit.
The fifth amended and restated senior credit agreement is collateralized by substantially all of our personal property and
assets. The fifth amended and restated 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, 2016. 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 Largo, Florida property and facilities 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 $3.9 million at December 31, 2016. The mortgage note is collateralized by the Largo, Florida
property and facilities.
The scheduled maturities of long-term debt outstanding at December 31, 2016 are as follows:
55
56
2017
2018
2019
2020
2021
Thereafter
Note 7 — Income Taxes
$
10,202
14,699
18,336
17,500
438,375
—
The provision for income taxes for the years ended December 31, 2016, 2015 and 2014 consists of the following:
Current tax expense:
Federal
State
Foreign
Deferred income tax expense (benefit)
Provision for income taxes
2016
2015
2014
$
$
312
159
7,111
7,582
(2,871)
4,711
$
$
4,208
1,238
6,949
12,395
2,251
14,646
$
$
2,256
516
11,995
14,767
(284)
14,483
A reconciliation between income taxes computed at the statutory federal rate and the provision for income taxes for the
years ended December 31, 2016, 2015 and 2014 follows:
Assets:
Inventory
Net operating losses
Capitalized research and development
Deferred compensation
Accounts receivable
Compensation and benefits
Accrued pension
Research and development credit
Other
Foreign tax credit
Less: valuation allowances
Liabilities:
Goodwill and intangible assets
Depreciation
State taxes
Contingent interest
Tax provision at statutory rate based on income before income taxes
35.0%
35.0%
35.0%
Income before income taxes consists of the following U.S. and foreign income:
2016
2015
2014
Net liability
$
2016
2015
$
3,769
34,669
6,257
2,544
3,186
6,645
4,530
8,164
2,001
1,112
(441)
72,436
168,509
9,099
10,123
136
3,938
6,421
5,733
2,557
2,938
7,365
3,944
7,094
3,245
—
(124)
43,111
122,623
11,999
7,427
203
187,867
142,252
$
(115,431) $
(99,141)
Foreign income taxes
Federal research credit
Settlement of taxing authority examinations
European permanent deduction
Non deductible/non-taxable items
State income taxes, net of federal tax benefit
Impact of repatriation of foreign earnings
New York State corporate tax reform
Stock-based compensation
Other, net
(6.8)
(5.6)
(3.5)
(3.4)
7.2
1.7
—
—
—
(3.6)
(2.0)
(0.6)
(2.1)
1.8
3.2
2.5
—
—
(0.3)
(1.8)
(4.8)
(2.1)
(3.7)
(3.8)
1.8
1.7
—
5.5
(0.2)
1.6
The tax effects of the significant temporary differences which comprise the deferred income tax assets and liabilities at
December 31, 2016 and 2015 are as follows:
24.3%
32.4%
31.0%
U.S. income
Foreign income
Total income
2016
2015
2014
(6,128) $
25,503
$
18,119
27,025
12,374
34,301
19,375
$
45,144
$
46,675
$
$
As of December 31, 2016, the amount of federal net operating loss carryforward was $99.3 million and begins to expire
in 2026. As of December 31, 2016, the amount of federal research credit carryforward available was $8.1 million. These credits
begin to expire in 2027.
In New York State, corporate tax reform enacted in March 2014 changed the tax rate of a manufacturing company such
as our Company to essentially 0%. Previously recorded New York State net deferred tax assets of $2.3 million, including $3.3
million of future tax benefits associated with state tax credits, have been written off as a non-cash charge to income tax expense.
During the fourth quarter of 2015, the Company repatriated $9.3 million of 2015 foreign earnings and recorded a tax
charge of $1.1 million. The repatriated earnings represented a portion of the 2015 earnings of certain foreign subsidiaries and
affiliates and thus were not previously permanently reinvested. There has been no change in our longer term international plans
as our intent to indefinitely reinvest the remaining foreign earnings accumulated through the year ended December 31, 2016 has
not changed.
U.S. income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting
over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. The amount of such temporary
differences totaled $108.8 million as of December 31, 2016. It is not practicable given the complexities of the hypothetical foreign
tax credit calculation to determine the tax liability on this temporary difference.
57
58
2017
2018
2019
2020
2021
Thereafter
Note 7 — Income Taxes
$
10,202
14,699
18,336
17,500
438,375
—
The provision for income taxes for the years ended December 31, 2016, 2015 and 2014 consists of the following:
Current tax expense:
Federal
State
Foreign
Deferred income tax expense (benefit)
Provision for income taxes
2016
2015
2014
$
$
312
159
7,111
7,582
(2,871)
4,711
$
$
4,208
1,238
6,949
12,395
2,251
14,646
$
$
2,256
516
11,995
14,767
(284)
14,483
A reconciliation between income taxes computed at the statutory federal rate and the provision for income taxes for the
years ended December 31, 2016, 2015 and 2014 follows:
Assets:
Inventory
Net operating losses
Capitalized research and development
Deferred compensation
Accounts receivable
Compensation and benefits
Accrued pension
Research and development credit
Other
Foreign tax credit
Less: valuation allowances
Liabilities:
Goodwill and intangible assets
Depreciation
State taxes
Contingent interest
Tax provision at statutory rate based on income before income taxes
35.0%
35.0%
35.0%
Income before income taxes consists of the following U.S. and foreign income:
2016
2015
2014
Net liability
$
2016
2015
$
3,769
34,669
6,257
2,544
3,186
6,645
4,530
8,164
2,001
1,112
(441)
72,436
168,509
9,099
10,123
136
3,938
6,421
5,733
2,557
2,938
7,365
3,944
7,094
3,245
—
(124)
43,111
122,623
11,999
7,427
203
187,867
142,252
$
(115,431) $
(99,141)
Foreign income taxes
Federal research credit
Settlement of taxing authority examinations
European permanent deduction
Non deductible/non-taxable items
State income taxes, net of federal tax benefit
Impact of repatriation of foreign earnings
New York State corporate tax reform
Stock-based compensation
Other, net
(6.8)
(5.6)
(3.5)
(3.4)
7.2
1.7
—
—
—
(3.6)
(2.0)
(0.6)
(2.1)
1.8
3.2
2.5
—
—
(0.3)
(1.8)
(4.8)
(2.1)
(3.7)
(3.8)
1.8
1.7
—
5.5
(0.2)
1.6
The tax effects of the significant temporary differences which comprise the deferred income tax assets and liabilities at
December 31, 2016 and 2015 are as follows:
24.3%
32.4%
31.0%
U.S. income
Foreign income
Total income
2016
2015
2014
(6,128) $
25,503
$
18,119
27,025
12,374
34,301
19,375
$
45,144
$
46,675
$
$
As of December 31, 2016, the amount of federal net operating loss carryforward was $99.3 million and begins to expire
in 2026. As of December 31, 2016, the amount of federal research credit carryforward available was $8.1 million. These credits
begin to expire in 2027.
In New York State, corporate tax reform enacted in March 2014 changed the tax rate of a manufacturing company such
as our Company to essentially 0%. Previously recorded New York State net deferred tax assets of $2.3 million, including $3.3
million of future tax benefits associated with state tax credits, have been written off as a non-cash charge to income tax expense.
During the fourth quarter of 2015, the Company repatriated $9.3 million of 2015 foreign earnings and recorded a tax
charge of $1.1 million. The repatriated earnings represented a portion of the 2015 earnings of certain foreign subsidiaries and
affiliates and thus were not previously permanently reinvested. There has been no change in our longer term international plans
as our intent to indefinitely reinvest the remaining foreign earnings accumulated through the year ended December 31, 2016 has
not changed.
U.S. income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting
over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. The amount of such temporary
differences totaled $108.8 million as of December 31, 2016. It is not practicable given the complexities of the hypothetical foreign
tax credit calculation to determine the tax liability on this temporary difference.
57
58
The Company is subject to taxation in the United States and various states and foreign jurisdictions. Taxing authority
examinations 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 2013.
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,
$
616
$
581
$
1,689
2016
2015
2014
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
—
1,584
(361)
100
—
—
Decreases in unrecorded tax positions related to lapse of statute of
limitations
—
(65)
Balance as of December 31,
$
1,839
$
616
$
45
—
(1,073)
(80)
581
If the total unrecognized tax benefits of $1.8 million at December 31, 2016 were recognized, it would reduce our annual
effective tax rate. The amount of interest accrued in 2016 related to these unrecognized tax benefits was not material and is
included in the provision for income taxes in the consolidated statements of comprehensive income.
Note 8 – Shareholders’ Equity
On February 29, 2012, the Board of Directors adopted a cash dividend policy and declared an initial quarterly dividend
of $0.15 per share. On October 28, 2013, the Board of Directors increased the quarterly dividend to $0.20 per share. The fourth
quarter dividend for 2016 was paid on January 5, 2017 to shareholders of record as of December 15, 2016. The total dividend
payable was $5.6 million and $5.5 million at December 31, 2016 and 2015, respectively, and is included in other current liabilities
in the consolidated balance sheet.
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, 2016 and 2015, no
preferred stock had been issued.
Our Board of Directors has authorized a $200.0 million share repurchase program. Through December 31, 2016, we have
repurchased a total of 6.1 million shares of common stock aggregating $162.6 million under this authorization and have $37.4
million remaining available for share repurchases. 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
2016 and 2015 we did not repurchase any shares. During 2014, we repurchased 0.4 million shares for an aggregate cost of $16.9
million.
We have reserved 8.9 million shares of common stock for issuance to employees and directors under three shareholder
approved share-based compensation plans (the "Plans") of which approximately 1.5 million shares remain available for grant at
December 31, 2016. The exercise price on all outstanding stock 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 comprehensive income
was $8.4 million, $7.5 million and $9.3 million for the years ended December 31, 2016, 2015 and 2014, respectively. These
amounts are included in selling and administrative expenses, and in 2016, 2015 and 2014, $0.7 million, $1.0 million and $3.9
million, respectively, of the total relates to acceleration of awards associated with the Company's restructuring as further described
in Note 12. Tax related benefits of $3.1 million, $2.7 million and $3.4 million were also recognized for the years ended
December 31, 2016, 2015 and 2014, respectively. Cash received from the exercise of stock options was $0.0 million, $0.2 million
and $1.8 million for the years ended December 31, 2016, 2015 and 2014, respectively, and is reflected in cash flows from financing
activities in the consolidated statements of cash flows.
The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options and SARs at the
date of grant. Use of a valuation model requires management to make certain assumptions with respect to select model inputs.
Expected volatilities are based upon historical volatility of the Company’s stock over a period equal to the expected life of each
stock option and SAR grant. The risk free interest rate is based on the stock option and SAR grant date for a traded U.S. Treasury
bond with a maturity date closest to the expected life. The expected annual dividend yield is based on the Company's anticipated
cash dividend payouts. The expected life represents the period of time that the stock 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 assumptions used in estimating fair value in the years ended December 31, 2016, 2015
and 2014:
Grant date fair value of stock options and SARs
Expected stock price volatility
Risk-free interest rate
Expected annual dividend yield
Expected life of options & SARs (years)
$
2016
2015
2014
$
8.61
26.88%
1.45%
2.10%
6.0
$
11.37
25.96%
1.49%
1.55%
5.7
13.40
34.85%
1.53%
1.80%
6.4
The following table illustrates the stock option and SAR activity for the year ended December 31, 2016:
Outstanding at December 31, 2015
Granted
Forfeited
Exercised
Outstanding at December 31, 2016
Exercisable at December 31, 2016
Stock options & SARs expected to vest
Number
of
Shares
(in 000’s)
Weighted-
Average
Exercise
Price
920
$
1,001
$
(93) $
(75) $
1,753
340
1,414
$
$
$
43.47
39.99
46.78
23.55
42.16
37.96
43.17
The weighted average remaining contractual term for SARs and stock options outstanding and exercisable at December 31,
2016 was 8.0 years and 4.8 years, respectively. The aggregate intrinsic value of SARs and stock options outstanding and exercisable
at December 31, 2016 was $7.5 million and $3.2 million, respectively. The aggregate intrinsic value of stock options and SARs
exercised during the years ended December 31, 2016, 2015 and 2014 was $1.4 million, $2.8 million and $10.7 million, respectively.
The following table illustrates the RSU and PSU activity for the year ended December 31, 2016:
59
60
The Company is subject to taxation in the United States and various states and foreign jurisdictions. Taxing authority
examinations 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 2013.
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,
$
616
$
581
$
1,689
2016
2015
2014
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
—
1,584
(361)
100
—
—
Decreases in unrecorded tax positions related to lapse of statute of
limitations
—
(65)
Balance as of December 31,
$
1,839
$
616
$
45
—
(1,073)
(80)
581
If the total unrecognized tax benefits of $1.8 million at December 31, 2016 were recognized, it would reduce our annual
effective tax rate. The amount of interest accrued in 2016 related to these unrecognized tax benefits was not material and is
included in the provision for income taxes in the consolidated statements of comprehensive income.
Note 8 – Shareholders’ Equity
On February 29, 2012, the Board of Directors adopted a cash dividend policy and declared an initial quarterly dividend
of $0.15 per share. On October 28, 2013, the Board of Directors increased the quarterly dividend to $0.20 per share. The fourth
quarter dividend for 2016 was paid on January 5, 2017 to shareholders of record as of December 15, 2016. The total dividend
payable was $5.6 million and $5.5 million at December 31, 2016 and 2015, respectively, and is included in other current liabilities
in the consolidated balance sheet.
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, 2016 and 2015, no
preferred stock had been issued.
Our Board of Directors has authorized a $200.0 million share repurchase program. Through December 31, 2016, we have
repurchased a total of 6.1 million shares of common stock aggregating $162.6 million under this authorization and have $37.4
million remaining available for share repurchases. 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
2016 and 2015 we did not repurchase any shares. During 2014, we repurchased 0.4 million shares for an aggregate cost of $16.9
million.
We have reserved 8.9 million shares of common stock for issuance to employees and directors under three shareholder
approved share-based compensation plans (the "Plans") of which approximately 1.5 million shares remain available for grant at
December 31, 2016. The exercise price on all outstanding stock 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 comprehensive income
was $8.4 million, $7.5 million and $9.3 million for the years ended December 31, 2016, 2015 and 2014, respectively. These
amounts are included in selling and administrative expenses, and in 2016, 2015 and 2014, $0.7 million, $1.0 million and $3.9
million, respectively, of the total relates to acceleration of awards associated with the Company's restructuring as further described
in Note 12. Tax related benefits of $3.1 million, $2.7 million and $3.4 million were also recognized for the years ended
December 31, 2016, 2015 and 2014, respectively. Cash received from the exercise of stock options was $0.0 million, $0.2 million
and $1.8 million for the years ended December 31, 2016, 2015 and 2014, respectively, and is reflected in cash flows from financing
activities in the consolidated statements of cash flows.
The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options and SARs at the
date of grant. Use of a valuation model requires management to make certain assumptions with respect to select model inputs.
Expected volatilities are based upon historical volatility of the Company’s stock over a period equal to the expected life of each
stock option and SAR grant. The risk free interest rate is based on the stock option and SAR grant date for a traded U.S. Treasury
bond with a maturity date closest to the expected life. The expected annual dividend yield is based on the Company's anticipated
cash dividend payouts. The expected life represents the period of time that the stock 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 assumptions used in estimating fair value in the years ended December 31, 2016, 2015
and 2014:
Grant date fair value of stock options and SARs
Expected stock price volatility
Risk-free interest rate
Expected annual dividend yield
Expected life of options & SARs (years)
$
2016
2015
2014
$
8.61
26.88%
1.45%
2.10%
6.0
$
11.37
25.96%
1.49%
1.55%
5.7
13.40
34.85%
1.53%
1.80%
6.4
The following table illustrates the stock option and SAR activity for the year ended December 31, 2016:
Outstanding at December 31, 2015
Granted
Forfeited
Exercised
Outstanding at December 31, 2016
Exercisable at December 31, 2016
Stock options & SARs expected to vest
Number
of
Shares
(in 000’s)
Weighted-
Average
Exercise
Price
920
$
1,001
$
(93) $
(75) $
1,753
340
1,414
$
$
$
43.47
39.99
46.78
23.55
42.16
37.96
43.17
The weighted average remaining contractual term for SARs and stock options outstanding and exercisable at December 31,
2016 was 8.0 years and 4.8 years, respectively. The aggregate intrinsic value of SARs and stock options outstanding and exercisable
at December 31, 2016 was $7.5 million and $3.2 million, respectively. The aggregate intrinsic value of stock options and SARs
exercised during the years ended December 31, 2016, 2015 and 2014 was $1.4 million, $2.8 million and $10.7 million, respectively.
The following table illustrates the RSU and PSU activity for the year ended December 31, 2016:
59
60
Outstanding at December 31, 2015
Granted
Vested
Forfeited
Outstanding at December 31, 2016
Number
of
Shares
(in 000’s)
Weighted-
Average
Grant-Date
Fair Value
353
$
83
$
(110) $
(29) $
297
$
41.23
40.27
43.16
39.62
41.01
United States
Americas (excluding the United States)
Europe, Middle East & Africa
Asia Pacific
Total
2016
2015
2014
$
$
399,107
87,532
147,985
128,896
763,520
$
$
361,452
86,867
145,565
125,284
719,168
$
$
360,960
94,770
158,040
126,285
740,055
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, 2016 and 2015. No single customer represented over 10% of our
consolidated net sales for the years ended December 31, 2016, 2015 and 2014.
The weighted average fair value of awards of RSUs and PSUs granted in the years ended December 31, 2016, 2015 and
Note 10 — Employee Benefit Plans
2014 was $40.27, $45.75 and $43.21, respectively.
The total fair value of shares vested was $4.7 million, $6.0 million and $11.6 million for the years ended December 31,
2016, 2015 and 2014, respectively.
As of December 31, 2016, there was $18.8 million of total unrecognized compensation cost related to nonvested stock
options, SARs, RSUs and PSUs granted under the Plans which is expected to be recognized over a weighted average period of
3.2 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 at a purchase
price equal to 95% of the fair market value of the common stock on the exercise date. During 2016, we issued approximately
19,300 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 9 — Business Segments and Geographic Areas
We are accounting and reporting for our business as a single operating segment entity engaged in the development,
manufacturing and sale on a global basis of surgical devices and related equipment. Our chief operating decision maker (the
executive management team) evaluates the various global product portfolios on a net sales basis and evaluates profitability,
investment and cash flow metrics on a consolidated worldwide basis due to shared infrastructure and resources.
Our product lines consist of orthopedic surgery, general surgery and surgical visualization. Orthopedic surgery consists
of sports medicine instrumentation and small bone, large bone and specialty powered surgical instruments and service fees related
to the promotion and marketing of sports medicine allograft tissue. General surgery consists of a complete line of endo-mechanical
instrumentation for minimally invasive laparoscopic and gastrointestinal procedures, a line of cardiac monitoring products as well
as electrosurgical generators and related instruments. Surgical visualization consists of imaging systems for use in minimally
invasive orthopedic and general surgery procedures including 2DHD and 3DHD vision technologies. These product lines' net
sales are as follows:
Orthopedic surgery
General surgery
Surgical visualization
Consolidated net sales
2016
2015
2014
$
$
370,472
341,417
51,631
763,520
$
$
388,948
274,190
56,030
719,168
$
$
402,750
279,356
57,949
740,055
We sponsor an employee savings plan (“401(k) plan”) covering substantially all of our United States based employees.
We also sponsor a defined benefit pension plan (the “pension plan”) that was frozen in 2009. It covered substantially all our United
States based employees at the time it was frozen.
Total employer contributions to the 401(k) plan were $7.1 million, $7.6 million and $6.9 million during the years ended
December 31, 2016, 2015 and 2014, respectively.
We use a December 31, measurement date for our pension plan. Gains and losses are amortized on a straight-line basis
over the average remaining service period of active participants.
The following table provides a reconciliation of the projected benefit obligation, plan assets and funded status of the
pension plan at December 31:
Accumulated Benefit Obligation
Change in benefit obligation
Projected benefit obligation at beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Settlement
Projected benefit obligation at end of year
Change in plan assets
Fair value of plan assets at beginning of year
Actual gain (loss) on plan assets
Benefits paid
Settlement
Fair value of plan assets at end of year
Funded status
2016
2015
82,005
$
78,437
78,437
452
2,878
4,844
(1,814)
(2,792)
82,005
67,168
6,499
(1,814)
(2,792)
69,061
$
$
$
$
91,107
240
3,394
(11,806)
(1,620)
(2,878)
78,437
73,431
(1,765)
(1,620)
(2,878)
67,168
(12,944) $
(11,269)
$
$
$
$
$
$
Net sales information for geographic areas consists of the following:
Amounts recognized in the consolidated balance sheets consist of the following at December 31,:
61
62
Outstanding at December 31, 2015
Granted
Vested
Forfeited
Outstanding at December 31, 2016
Number
of
Shares
(in 000’s)
Weighted-
Average
Grant-Date
Fair Value
353
$
83
$
(110) $
(29) $
297
$
41.23
40.27
43.16
39.62
41.01
United States
Americas (excluding the United States)
Europe, Middle East & Africa
Asia Pacific
Total
2016
2015
2014
$
$
399,107
87,532
147,985
128,896
763,520
$
$
361,452
86,867
145,565
125,284
719,168
$
$
360,960
94,770
158,040
126,285
740,055
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, 2016 and 2015. No single customer represented over 10% of our
consolidated net sales for the years ended December 31, 2016, 2015 and 2014.
The weighted average fair value of awards of RSUs and PSUs granted in the years ended December 31, 2016, 2015 and
Note 10 — Employee Benefit Plans
2014 was $40.27, $45.75 and $43.21, respectively.
The total fair value of shares vested was $4.7 million, $6.0 million and $11.6 million for the years ended December 31,
2016, 2015 and 2014, respectively.
As of December 31, 2016, there was $18.8 million of total unrecognized compensation cost related to nonvested stock
options, SARs, RSUs and PSUs granted under the Plans which is expected to be recognized over a weighted average period of
3.2 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 at a purchase
price equal to 95% of the fair market value of the common stock on the exercise date. During 2016, we issued approximately
19,300 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 9 — Business Segments and Geographic Areas
We are accounting and reporting for our business as a single operating segment entity engaged in the development,
manufacturing and sale on a global basis of surgical devices and related equipment. Our chief operating decision maker (the
executive management team) evaluates the various global product portfolios on a net sales basis and evaluates profitability,
investment and cash flow metrics on a consolidated worldwide basis due to shared infrastructure and resources.
Our product lines consist of orthopedic surgery, general surgery and surgical visualization. Orthopedic surgery consists
of sports medicine instrumentation and small bone, large bone and specialty powered surgical instruments and service fees related
to the promotion and marketing of sports medicine allograft tissue. General surgery consists of a complete line of endo-mechanical
instrumentation for minimally invasive laparoscopic and gastrointestinal procedures, a line of cardiac monitoring products as well
as electrosurgical generators and related instruments. Surgical visualization consists of imaging systems for use in minimally
invasive orthopedic and general surgery procedures including 2DHD and 3DHD vision technologies. These product lines' net
sales are as follows:
Orthopedic surgery
General surgery
Surgical visualization
Consolidated net sales
2016
2015
2014
$
$
370,472
341,417
51,631
763,520
$
$
388,948
274,190
56,030
719,168
$
$
402,750
279,356
57,949
740,055
We sponsor an employee savings plan (“401(k) plan”) covering substantially all of our United States based employees.
We also sponsor a defined benefit pension plan (the “pension plan”) that was frozen in 2009. It covered substantially all our United
States based employees at the time it was frozen.
Total employer contributions to the 401(k) plan were $7.1 million, $7.6 million and $6.9 million during the years ended
December 31, 2016, 2015 and 2014, respectively.
We use a December 31, measurement date for our pension plan. Gains and losses are amortized on a straight-line basis
over the average remaining service period of active participants.
The following table provides a reconciliation of the projected benefit obligation, plan assets and funded status of the
pension plan at December 31:
Accumulated Benefit Obligation
Change in benefit obligation
Projected benefit obligation at beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Settlement
Projected benefit obligation at end of year
Change in plan assets
Fair value of plan assets at beginning of year
Actual gain (loss) on plan assets
Benefits paid
Settlement
Fair value of plan assets at end of year
Funded status
2016
2015
82,005
$
78,437
78,437
452
2,878
4,844
(1,814)
(2,792)
82,005
67,168
6,499
(1,814)
(2,792)
69,061
$
$
$
$
91,107
240
3,394
(11,806)
(1,620)
(2,878)
78,437
73,431
(1,765)
(1,620)
(2,878)
67,168
(12,944) $
(11,269)
$
$
$
$
$
$
Net sales information for geographic areas consists of the following:
Amounts recognized in the consolidated balance sheets consist of the following at December 31,:
61
62
Other long-term liabilities
Accumulated other comprehensive loss
2016
2015
$
(12,944) $
(41,960)
(11,269)
(41,205)
The following actuarial assumptions were used to determine our accumulated and projected benefit obligations as of
December 31,:
Discount rate
2016
2015
4.28%
4.54%
Accumulated other comprehensive loss for the years ended December 31, 2016 and 2015 consists of net actuarial losses
of $41,960 and $41,205, 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 2016 are as follows:
Current year actuarial loss
Amortization of actuarial loss
Total recognized in other comprehensive loss
$
$
(3,535)
2,780
(755)
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 2017 is $2.8 million.
Net periodic pension cost for the years ended December 31, consists of the following:
Service cost
Interest cost on projected benefit obligation
Expected return on plan assets
Amortization of loss
Net periodic pension (income) cost
2016
2015
2014
$
$
452
2,878
(5,189)
2,780
921
$
$
240
3,394
(5,697)
3,233
1,170
$
$
271
3,465
(2,297)
(2,048)
(609)
In determining the expected return on pension plan assets, we consider the relative weighting of plan assets, the historical
performance of total plan assets and individual asset classes and economic and other indicators of future performance. In addition,
we consult with financial and investment management professionals in developing appropriate targeted rates of return.
Asset management objectives include maintaining an adequate level of diversification to reduce interest rate and market
risk and providing adequate liquidity to meet immediate and future benefit payment requirements.
The allocation of pension plan assets by category is as follows at December 31,:
Equity securities
Debt securities
Total
Percentage of Pension
Plan Assets
2016
2015
Target
Allocation
2017
86%
14
100%
86%
14
100%
75%
25
100%
As of December 31, 2016, the Plan held 27,562 shares of our common stock, which had a fair value of $1.2 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.
FASB guidance defines fair value and 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, 2016 and 2015:
Common
Stock:
Common stock is valued at the closing price reported on the common stock’s respective stock exchange
and is classified within level 1 of the valuation hierarchy.
The following actuarial assumptions were used to determine our net periodic pension benefit cost for the years ended
December 31,:
Money
Market Fund:
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.
Discount rate on benefit obligation
Effective rate for interest on benefit obligation
Expected return on plan assets
2016
2015
2014
4.54%
3.77%
8.00%
3.81%
3.81%
8.00%
4.75%
4.75%
8.00%
In 2016, we changed the method we used to estimate the interest cost component of net periodic pension cost. Historically,
we estimated the interest cost component using a single weighted-average discount rate derived from the yield curve used to
measure the benefit obligation at the beginning of the period. We have elected to use a full yield curve approach in the estimation
of this component of benefit cost by applying the specific spot rates along the yield curve used in the determination of the benefit
obligation that correlate to the relevant projected cash flows ("spot rate approach"). This change provides a more precise
measurement of interest cost. This change did not affect the measurement of our total benefit obligation. We have accounted for
this change as a change in estimate and therefore accounted for it prospectively in 2016.
Mutual
Funds:
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.
Fixed Income
Securities:
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 pension 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 pension plan's assets at fair value as of
December 31, 2016 and December 31, 2015:
63
64
Other long-term liabilities
Accumulated other comprehensive loss
2016
2015
$
(12,944) $
(41,960)
(11,269)
(41,205)
The following actuarial assumptions were used to determine our accumulated and projected benefit obligations as of
December 31,:
Discount rate
2016
2015
4.28%
4.54%
Accumulated other comprehensive loss for the years ended December 31, 2016 and 2015 consists of net actuarial losses
of $41,960 and $41,205, 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 2016 are as follows:
Current year actuarial loss
Amortization of actuarial loss
Total recognized in other comprehensive loss
$
$
(3,535)
2,780
(755)
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 2017 is $2.8 million.
Net periodic pension cost for the years ended December 31, consists of the following:
Service cost
Interest cost on projected benefit obligation
Expected return on plan assets
Amortization of loss
Net periodic pension (income) cost
2016
2015
2014
$
$
452
2,878
(5,189)
2,780
921
$
$
240
3,394
(5,697)
3,233
1,170
$
$
271
3,465
(2,297)
(2,048)
(609)
In determining the expected return on pension plan assets, we consider the relative weighting of plan assets, the historical
performance of total plan assets and individual asset classes and economic and other indicators of future performance. In addition,
we consult with financial and investment management professionals in developing appropriate targeted rates of return.
Asset management objectives include maintaining an adequate level of diversification to reduce interest rate and market
risk and providing adequate liquidity to meet immediate and future benefit payment requirements.
The allocation of pension plan assets by category is as follows at December 31,:
Equity securities
Debt securities
Total
Percentage of Pension
Plan Assets
2016
2015
Target
Allocation
2017
86%
14
100%
86%
14
100%
75%
25
100%
As of December 31, 2016, the Plan held 27,562 shares of our common stock, which had a fair value of $1.2 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.
FASB guidance defines fair value and 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, 2016 and 2015:
Common
Stock:
Common stock is valued at the closing price reported on the common stock’s respective stock exchange
and is classified within level 1 of the valuation hierarchy.
The following actuarial assumptions were used to determine our net periodic pension benefit cost for the years ended
December 31,:
Money
Market Fund:
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.
Discount rate on benefit obligation
Effective rate for interest on benefit obligation
Expected return on plan assets
2016
2015
2014
4.54%
3.77%
8.00%
3.81%
3.81%
8.00%
4.75%
4.75%
8.00%
In 2016, we changed the method we used to estimate the interest cost component of net periodic pension cost. Historically,
we estimated the interest cost component using a single weighted-average discount rate derived from the yield curve used to
measure the benefit obligation at the beginning of the period. We have elected to use a full yield curve approach in the estimation
of this component of benefit cost by applying the specific spot rates along the yield curve used in the determination of the benefit
obligation that correlate to the relevant projected cash flows ("spot rate approach"). This change provides a more precise
measurement of interest cost. This change did not affect the measurement of our total benefit obligation. We have accounted for
this change as a change in estimate and therefore accounted for it prospectively in 2016.
Mutual
Funds:
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.
Fixed Income
Securities:
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 pension 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 pension plan's assets at fair value as of
December 31, 2016 and December 31, 2015:
63
64
December 31, 2016
Common Stock
Money Market Fund
Mutual Funds
Fixed Income Securities
December 31, 2015
Common Stock
Money Market Fund
Mutual Funds
Fixed Income Securities
Level 1
Level 2
Total
34,856
—
24,626
7,869
67,351
$
$
— $
1,710
—
—
1,710
$
34,856
1,710
24,626
7,869
69,061
Level 1
Level 2
Total
34,466
$
— $
—
23,576
7,824
65,866
$
1,302
—
—
1,302
$
34,466
1,302
23,576
7,824
67,168
$
$
$
$
We do not expect to make any contributions to our pension plan for 2017.
The following table summarizes the benefits and settlements 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 payments are estimated based on the same assumptions
used to measure the Company’s projected benefit obligation at December 31, 2016 and reflect the impact of expected future
employee service.
2017
2018
2019
2020
2021
2022-2026
$5,033
5,368
5,465
5,696
5,545
25,194
Note 11 — Legal Matters and Contingencies
From time to time, we are subject to claims alleging product liability, patent infringement or other claims incurred in the
ordinary course of business. These may involve our United States or international operations, or sales by foreign distributors.
Likewise, from time to time, the Company may receive an informal information request or subpoena from a government agency
such as the Securities and Exchange Commission, Department of Justice, Equal Employment Opportunity Commission, the
Occupational Safety and Health Administration, the Department of Labor, the Treasury Department or other federal and state
agencies or foreign governments or government agencies. These information requests or subpoenas may or may not be routine
inquiries, or may begin as informal or routine inquiries and over time develop into enforcement actions of various types. Likewise,
we receive reports of alleged misconduct from employees and third parties, which we investigate as appropriate.
Manufacturers of medical devices have been the subject of various enforcement actions relating to interactions with health
care providers domestically or internationally whereby Companies are claimed to have provided health care providers inappropriate
incentives to purchase their products. Similarly, the Foreign Corrupt Practices Act (“FCPA”) imposes obligations on manufacturers
with respect to interactions with health care providers who may be considered government officials if they are affiliated with
public hospitals. The FCPA also requires publicly listed manufacturers to maintain accurate books and records, and maintain
internal accounting controls sufficient to provide assurance that transactions are accurately recorded, lawful and in accordance
with management’s authorization. The FCPA poses unique challenges both because manufacturers operate in foreign cultures in
which conduct illegal under the FCPA may not be illegal in local jurisdictions, and because, in some cases, a United States
manufacturer may face risks under the FCPA based on the conduct of third parties over whom the manufacturer may not have
complete control.
Manufacturers of medical products may face exposure to significant product liability claims. To date, we have not
experienced any product liability claims that have been material to our financial statements or financial 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.
We establish reserves sufficient to cover probable losses associated with any such pending claims. We do not expect that
the resolution of any pending claims, investigations or reports of alleged misconduct 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, investigations or reports of misconduct, 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.
Our operations are subject, and in the past have been subject, to a number of environmental laws and regulations governing,
among other things, air emissions; wastewater discharges; the use, handling and disposal of hazardous substances and wastes; soil
and groundwater remediation and employee health and safety. In some jurisdictions, environmental requirements may be expected
to become more stringent in the future. In the United States, certain environmental laws can impose liability for the entire cost of
site restoration upon each of the parties that may have contributed to conditions at the site regardless of fault or the lawfulness of
the party’s activities. While we do not believe that the present costs of environmental compliance and remediation are material,
there can be no assurance that future compliance or remedial obligations would not have a material adverse effect on our financial
condition, results of operations or cash flows.
The FDA inspected our Centennial, Colorado facility in 2013 and 2014 and ultimately issued a Warning Letter on January
30, 2014. Accordingly, we took corrective action and, on August 1, 2016, we received notification from the FDA that the Warning
Letter was closed. The costs of remediation relating to the January 30, 2014 warning letter were not material to our
consolidated results of operations. We may have future inspections at other sites and there can be no assurance that the costs
of responding to such inspections will not be material.
In September 2013, Lexion Medical ("Lexion") filed suit against SurgiQuest in federal court in the District of Minnesota
alleging false advertising under the Lanham Act, as well as various state law claims, including common law trade libel and unfair
competition. In March 2014, SurgiQuest’s motion to dismiss for lack of personal jurisdiction was granted and that same day,
SurgiQuest filed suit against Lexion in federal court in the District of Delaware seeking, among other claims, a declaratory judgment
that SurgiQuest’s actions did not violate the Lanham Act. Lexion filed an answer generally denying SurgiQuest’s claims, and
asserted counterclaims that were substantially similar to the claims Lexion brought in the Minnesota action. On January 4, 2016,
SurgiQuest became a subsidiary of CONMED as further described in Note 2, and we assumed the costs and liabilities related to
the Lexion lawsuit subject to the terms of the merger agreement referenced in Note 2. Discovery is now largely complete, and
the case is currently scheduled to go to trial on April 3, 2017. Based on its expert's reports, Lexion is seeking damages of $14.8
million for alleged lost profits and $18.7 million for costs related to alleged “corrective advertising” as well as an unspecified sum
for disgorgement of SurgiQuest’s alleged profit. We believe that there is no factual and/or legal merit to Lexion’s claims against
SurgiQuest, and intend to vigorously defend the claims asserted by Lexion.
In 2014, the Company acquired EndoDynamix, Inc. The agreements governing the terms of the acquisition provide that,
if various conditions are met, certain contingent payments relating to the first commercial sale of the products (the milestone
payment), as well as royalties based on sales (the revenue based payments), are due to the seller. We have notified the seller that
there is a need to redesign the product, and that as a consequence, the first commercial sale has been delayed. Consequently, the
payment of contingent milestone and revenue-based payments have been delayed. On January 18, 2017, the seller provided notice
("the Notice") seeking $12.7 million, which essentially represents the sum of the projected contingent milestone and revenue-
based payments on an accelerated basis. CONMED responded to the Notice denying that there was any basis for acceleration of
the payments due under the acquisition agreements. On February 22, 2017, the representative of the former shareholders of
EndoDynamix filed a complaint in Delaware Chancery Court claiming breach of contract and seeking the contingent payments
on an accelerated basis. We do not believe that there is a legitimate basis for seeking the acceleration of the contingent payments,
and expect to defend the claims asserted by the sellers of EndoDynamix in the Delaware Court.
Note 12 — Acquisition, Restructuring and Other Expense
Acquisition, restructuring and other expense for the year ended December 31, consists of the following:
65
66
December 31, 2016
Common Stock
Money Market Fund
Mutual Funds
Fixed Income Securities
December 31, 2015
Common Stock
Money Market Fund
Mutual Funds
Fixed Income Securities
Level 1
Level 2
Total
34,856
—
24,626
7,869
67,351
$
$
— $
1,710
—
—
1,710
$
34,856
1,710
24,626
7,869
69,061
Level 1
Level 2
Total
34,466
$
— $
—
23,576
7,824
65,866
$
1,302
—
—
1,302
$
34,466
1,302
23,576
7,824
67,168
$
$
$
$
We do not expect to make any contributions to our pension plan for 2017.
The following table summarizes the benefits and settlements 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 payments are estimated based on the same assumptions
used to measure the Company’s projected benefit obligation at December 31, 2016 and reflect the impact of expected future
employee service.
2017
2018
2019
2020
2021
2022-2026
$5,033
5,368
5,465
5,696
5,545
25,194
Note 11 — Legal Matters and Contingencies
From time to time, we are subject to claims alleging product liability, patent infringement or other claims incurred in the
ordinary course of business. These may involve our United States or international operations, or sales by foreign distributors.
Likewise, from time to time, the Company may receive an informal information request or subpoena from a government agency
such as the Securities and Exchange Commission, Department of Justice, Equal Employment Opportunity Commission, the
Occupational Safety and Health Administration, the Department of Labor, the Treasury Department or other federal and state
agencies or foreign governments or government agencies. These information requests or subpoenas may or may not be routine
inquiries, or may begin as informal or routine inquiries and over time develop into enforcement actions of various types. Likewise,
we receive reports of alleged misconduct from employees and third parties, which we investigate as appropriate.
Manufacturers of medical devices have been the subject of various enforcement actions relating to interactions with health
care providers domestically or internationally whereby Companies are claimed to have provided health care providers inappropriate
incentives to purchase their products. Similarly, the Foreign Corrupt Practices Act (“FCPA”) imposes obligations on manufacturers
with respect to interactions with health care providers who may be considered government officials if they are affiliated with
public hospitals. The FCPA also requires publicly listed manufacturers to maintain accurate books and records, and maintain
internal accounting controls sufficient to provide assurance that transactions are accurately recorded, lawful and in accordance
with management’s authorization. The FCPA poses unique challenges both because manufacturers operate in foreign cultures in
which conduct illegal under the FCPA may not be illegal in local jurisdictions, and because, in some cases, a United States
manufacturer may face risks under the FCPA based on the conduct of third parties over whom the manufacturer may not have
complete control.
Manufacturers of medical products may face exposure to significant product liability claims. To date, we have not
experienced any product liability claims that have been material to our financial statements or financial 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.
We establish reserves sufficient to cover probable losses associated with any such pending claims. We do not expect that
the resolution of any pending claims, investigations or reports of alleged misconduct 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, investigations or reports of misconduct, 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.
Our operations are subject, and in the past have been subject, to a number of environmental laws and regulations governing,
among other things, air emissions; wastewater discharges; the use, handling and disposal of hazardous substances and wastes; soil
and groundwater remediation and employee health and safety. In some jurisdictions, environmental requirements may be expected
to become more stringent in the future. In the United States, certain environmental laws can impose liability for the entire cost of
site restoration upon each of the parties that may have contributed to conditions at the site regardless of fault or the lawfulness of
the party’s activities. While we do not believe that the present costs of environmental compliance and remediation are material,
there can be no assurance that future compliance or remedial obligations would not have a material adverse effect on our financial
condition, results of operations or cash flows.
The FDA inspected our Centennial, Colorado facility in 2013 and 2014 and ultimately issued a Warning Letter on January
30, 2014. Accordingly, we took corrective action and, on August 1, 2016, we received notification from the FDA that the Warning
Letter was closed. The costs of remediation relating to the January 30, 2014 warning letter were not material to our
consolidated results of operations. We may have future inspections at other sites and there can be no assurance that the costs
of responding to such inspections will not be material.
In September 2013, Lexion Medical ("Lexion") filed suit against SurgiQuest in federal court in the District of Minnesota
alleging false advertising under the Lanham Act, as well as various state law claims, including common law trade libel and unfair
competition. In March 2014, SurgiQuest’s motion to dismiss for lack of personal jurisdiction was granted and that same day,
SurgiQuest filed suit against Lexion in federal court in the District of Delaware seeking, among other claims, a declaratory judgment
that SurgiQuest’s actions did not violate the Lanham Act. Lexion filed an answer generally denying SurgiQuest’s claims, and
asserted counterclaims that were substantially similar to the claims Lexion brought in the Minnesota action. On January 4, 2016,
SurgiQuest became a subsidiary of CONMED as further described in Note 2, and we assumed the costs and liabilities related to
the Lexion lawsuit subject to the terms of the merger agreement referenced in Note 2. Discovery is now largely complete, and
the case is currently scheduled to go to trial on April 3, 2017. Based on its expert's reports, Lexion is seeking damages of $14.8
million for alleged lost profits and $18.7 million for costs related to alleged “corrective advertising” as well as an unspecified sum
for disgorgement of SurgiQuest’s alleged profit. We believe that there is no factual and/or legal merit to Lexion’s claims against
SurgiQuest, and intend to vigorously defend the claims asserted by Lexion.
In 2014, the Company acquired EndoDynamix, Inc. The agreements governing the terms of the acquisition provide that,
if various conditions are met, certain contingent payments relating to the first commercial sale of the products (the milestone
payment), as well as royalties based on sales (the revenue based payments), are due to the seller. We have notified the seller that
there is a need to redesign the product, and that as a consequence, the first commercial sale has been delayed. Consequently, the
payment of contingent milestone and revenue-based payments have been delayed. On January 18, 2017, the seller provided notice
("the Notice") seeking $12.7 million, which essentially represents the sum of the projected contingent milestone and revenue-
based payments on an accelerated basis. CONMED responded to the Notice denying that there was any basis for acceleration of
the payments due under the acquisition agreements. On February 22, 2017, the representative of the former shareholders of
EndoDynamix filed a complaint in Delaware Chancery Court claiming breach of contract and seeking the contingent payments
on an accelerated basis. We do not believe that there is a legitimate basis for seeking the acceleration of the contingent payments,
and expect to defend the claims asserted by the sellers of EndoDynamix in the Delaware Court.
Note 12 — Acquisition, Restructuring and Other Expense
Acquisition, restructuring and other expense for the year ended December 31, consists of the following:
65
66
Consolidation costs
Termination of a product offering
Restructuring costs included in cost of sales
Restructuring costs
Business and asset acquisition costs
Gain on sale of facility
Management restructuring costs
Shareholder activism costs
Patent dispute and other matters
Acquisition, restructuring and other expense included in selling and
administrative expense
Debt refinancing costs included in other expense
2016
2015
2014
$
$
$
$
$
3,066
4,546
7,612
6,873
20,599
(1,890)
—
—
—
25,582
2,942
$
$
$
$
$
$
$
$
8,016
—
8,016
13,655
2,543
—
—
—
—
5,612
—
5,612
3,354
722
—
12,546
3,966
3,374
16,198
$
23,962
— $
—
During 2016, we incurred $20.6 million in costs associated with the January 4, 2016 acquisition of SurgiQuest, Inc. as
further described in Note 2. These costs include investment banking fees, consulting fees, legal fees associated with the acquisition
as well as the Lexion case as further described in Note 11, costs associated with expensing of unvested options acquired and
integration related costs. During 2015, we incurred $2.5 million in costs associated with the acquisition of SurgiQuest and other
acquisitions during the year. During 2014, we incurred $0.7 million in costs associated with the purchase of a business.
During 2014, we incurred $4.0 million in professional fees related to shareholder activism.
During 2014, we incurred $3.4 million, in legal and settlement costs. The 2014 patent infringement claim costs totaled
$1.9 million, including $0.9 million in settlement costs during the first quarter of 2014. The remaining $1.5 million in 2014 legal
costs were associated with a legal matter in which we prevailed at trial, and consulting fees.
During 2016, we incurred a $2.7 million charge related to commitment fees paid to certain of our lenders, which provided
a financing commitment for the SurgiQuest acquisition and recorded a loss on the early extinguishment of debt of $0.3 million in
conjunction with the fifth amended and restated senior credit agreement as further described in Note 6.
During 2016, 2015 and 2014, we continued our operational restructuring plan. The consolidation of our Centennial,
Colorado manufacturing operations into other existing CONMED manufacturing facilities is complete. During 2014, we completed
the consolidation of our Finland operations into our Largo, Florida and Utica, New York manufacturing facilities and the
consolidation of our Westborough, Massachusetts manufacturing operations into our Largo, Florida and Chihuahua, Mexico
facilities. We incurred $3.1 million, $8.0 million and $5.6 million in costs associated with the operational restructuring during
the years ending December 31, 2016, 2015 and 2014, respectively. These costs were charged to cost of sales and include severance
and other charges associated with the consolidation of operations.
We have recorded an accrual in current and other long term liabilities of $2.6 million at December 31, 2016 mainly related
to severance costs associated with restructuring. Below is a rollforward of the costs incurred and cash expenditures associated
with these activities during 2016, 2015 and 2014:
Balance as of January 1, 2014
$
3,128
Expenses incurred
Payments made
Balance as of December 31, 2014
Expenses incurred
Payments made
Balance as of December 31, 2015
Expenses incurred
Payments made
21,512
(16,386)
8,254
21,671
(22,750)
7,175
9,939
(14,471)
Balance as of December 31, 2016
$
2,643
A significant portion of this accrual will be paid out in 2017.
Note 13 — Guarantees
We provide warranties on certain of our products at the time of sale and sell extended warranties. The standard warranty
period for our capital and reusable equipment is generally one year and our extended warranties can vary in length. Liability under
service and warranty policies is based upon a review of historical warranty and service claim experience. Adjustments are made
to accruals as claim data and historical experience warrant.
Changes in the carrying amount of service and product warranties for the year ended December 31, are as follows:
During 2016, the Company discontinued our Altrus product offering as part of our ongoing restructuring and incurred
$4.5 million in non-cash charges primarily related to inventory and fixed assets which were included in cost of sales during 2016.
During 2016, we sold our Centennial, Colorado facility. We received net cash proceeds of $5.2 million and recorded a
gain of $1.9 million on the sale.
Balance as of January 1,
Provision for warranties
Claims made
During 2016, 2015 and 2014, we restructured certain selling and administrative functions and incurred $6.9 million,
Balance as of December 31,
$13.7 million and $3.4 million, respectively, in related costs consisting principally of severance charges.
2016
2015
2014
2,509
$
2,286
$
2,422
2,967
(3,522)
3,836
(3,613)
3,492
(3,628)
1,954
$
2,509
$
2,286
$
$
During 2014, we incurred $12.5 million in costs associated with restructuring of executive management. These costs
include severance payments, accelerated vesting of stock-based compensation awards, accrual of the present value of deferred
compensation and other benefits to our then Chief Executive Officer as defined in his termination agreement; accelerated vesting
of stock-based compensation awards to certain members of executive management, consulting fees and other benefits earned as
further described in our Form 8-K filing on July 23, 2014.
Note 14 – 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.
67
68
Consolidation costs
Termination of a product offering
Restructuring costs included in cost of sales
Restructuring costs
Business and asset acquisition costs
Gain on sale of facility
Management restructuring costs
Shareholder activism costs
Patent dispute and other matters
Acquisition, restructuring and other expense included in selling and
administrative expense
Debt refinancing costs included in other expense
2016
2015
2014
$
$
$
$
$
3,066
4,546
7,612
6,873
20,599
(1,890)
—
—
—
25,582
2,942
$
$
$
$
$
$
$
$
8,016
—
8,016
13,655
2,543
—
—
—
—
5,612
—
5,612
3,354
722
—
12,546
3,966
3,374
16,198
$
23,962
— $
—
During 2016, we incurred $20.6 million in costs associated with the January 4, 2016 acquisition of SurgiQuest, Inc. as
further described in Note 2. These costs include investment banking fees, consulting fees, legal fees associated with the acquisition
as well as the Lexion case as further described in Note 11, costs associated with expensing of unvested options acquired and
integration related costs. During 2015, we incurred $2.5 million in costs associated with the acquisition of SurgiQuest and other
acquisitions during the year. During 2014, we incurred $0.7 million in costs associated with the purchase of a business.
During 2014, we incurred $4.0 million in professional fees related to shareholder activism.
During 2014, we incurred $3.4 million, in legal and settlement costs. The 2014 patent infringement claim costs totaled
$1.9 million, including $0.9 million in settlement costs during the first quarter of 2014. The remaining $1.5 million in 2014 legal
costs were associated with a legal matter in which we prevailed at trial, and consulting fees.
During 2016, we incurred a $2.7 million charge related to commitment fees paid to certain of our lenders, which provided
a financing commitment for the SurgiQuest acquisition and recorded a loss on the early extinguishment of debt of $0.3 million in
conjunction with the fifth amended and restated senior credit agreement as further described in Note 6.
During 2016, 2015 and 2014, we continued our operational restructuring plan. The consolidation of our Centennial,
Colorado manufacturing operations into other existing CONMED manufacturing facilities is complete. During 2014, we completed
the consolidation of our Finland operations into our Largo, Florida and Utica, New York manufacturing facilities and the
consolidation of our Westborough, Massachusetts manufacturing operations into our Largo, Florida and Chihuahua, Mexico
facilities. We incurred $3.1 million, $8.0 million and $5.6 million in costs associated with the operational restructuring during
the years ending December 31, 2016, 2015 and 2014, respectively. These costs were charged to cost of sales and include severance
and other charges associated with the consolidation of operations.
We have recorded an accrual in current and other long term liabilities of $2.6 million at December 31, 2016 mainly related
to severance costs associated with restructuring. Below is a rollforward of the costs incurred and cash expenditures associated
with these activities during 2016, 2015 and 2014:
Balance as of January 1, 2014
$
3,128
Expenses incurred
Payments made
Balance as of December 31, 2014
Expenses incurred
Payments made
Balance as of December 31, 2015
Expenses incurred
Payments made
21,512
(16,386)
8,254
21,671
(22,750)
7,175
9,939
(14,471)
Balance as of December 31, 2016
$
2,643
A significant portion of this accrual will be paid out in 2017.
Note 13 — Guarantees
We provide warranties on certain of our products at the time of sale and sell extended warranties. The standard warranty
period for our capital and reusable equipment is generally one year and our extended warranties can vary in length. Liability under
service and warranty policies is based upon a review of historical warranty and service claim experience. Adjustments are made
to accruals as claim data and historical experience warrant.
Changes in the carrying amount of service and product warranties for the year ended December 31, are as follows:
During 2016, the Company discontinued our Altrus product offering as part of our ongoing restructuring and incurred
$4.5 million in non-cash charges primarily related to inventory and fixed assets which were included in cost of sales during 2016.
During 2016, we sold our Centennial, Colorado facility. We received net cash proceeds of $5.2 million and recorded a
gain of $1.9 million on the sale.
Balance as of January 1,
Provision for warranties
Claims made
During 2016, 2015 and 2014, we restructured certain selling and administrative functions and incurred $6.9 million,
Balance as of December 31,
$13.7 million and $3.4 million, respectively, in related costs consisting principally of severance charges.
2016
2015
2014
2,509
$
2,286
$
2,422
2,967
(3,522)
3,836
(3,613)
3,492
(3,628)
1,954
$
2,509
$
2,286
$
$
During 2014, we incurred $12.5 million in costs associated with restructuring of executive management. These costs
include severance payments, accelerated vesting of stock-based compensation awards, accrual of the present value of deferred
compensation and other benefits to our then Chief Executive Officer as defined in his termination agreement; accelerated vesting
of stock-based compensation awards to certain members of executive management, consulting fees and other benefits earned as
further described in our Form 8-K filing on July 23, 2014.
Note 14 – 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.
67
68
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. The notional contract amounts for forward contracts outstanding at December 31, 2016
which have been accounted for as cash flow hedges totaled $108.1 million. Net realized gains recognized for forward contracts
accounted for as cash flow hedges approximated $1.2 million, $10.4 million and $0.6 million for the years ended December 31,
2016, 2015 and 2014, respectively. Net unrealized gains on forward contracts outstanding which have been accounted for as cash
flow hedges and which have been included in other comprehensive income totaled $1.5 million at December 31, 2016. It is
expected these unrealized gains will be recognized in the consolidated statement of comprehensive income in 2017 and 2018.
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. The notional contract amounts for forward
contracts outstanding at December 31, 2016 which have not been designated as hedges totaled $18.4 million. Net realized gains
(losses) recognized in connection with those forward contracts not accounted for as hedges approximated $0.0 million, $0.4 million
and -$0.2 million for the years ended December 31, 2016, 2015 and 2014, respectively, offsetting losses on our intercompany
receivables of -$0.1 million, -$0.8 million and -$0.5 million for the years ended December 31, 2016, 2015 and 2014,
respectively. These gains and losses have been recorded in selling and administrative expense in the consolidated statements of
comprehensive income.
We record these forward foreign exchange contracts at fair value; the following tables summarize the fair value for forward
foreign exchange contracts outstanding at December 31, 2016 and 2015:
December 31, 2016
Derivatives designated as hedged instruments:
Asset Fair
Value
Liabilities
Fair
Value
Net
Fair
Value
Foreign exchange contracts
$
3,962
$
(1,510) $
2,452
Derivatives not designated as hedging instruments:
Foreign exchange contracts
48
(54)
(6)
Total derivatives
$
4,010
$
(1,564) $
2,446
December 31, 2015
Derivatives designated as hedged instruments:
Asset Fair
Value
Liabilities
Fair
Value
Net
Fair
Value
Foreign exchange contracts
$
2,931
$
(1,026) $
1,905
Derivatives not designated as hedging instruments:
Foreign exchange contracts
4
(38)
(34)
Total derivatives
$
2,935
$
(1,064) $
1,871
Our forward foreign exchange contracts are subject to a master netting agreement and qualify for netting in the consolidated
balance sheets. Accordingly, at December 31, 2016 and December 31, 2015 we have recorded the net fair value of $2.4 million
and $1.9 million, respectively, in prepaids and other current assets.
Fair Value Disclosure. FASB guidance defines fair value and 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.
69
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. There have been no significant changes in the
assumptions since the acquisition.
Valuation Techniques. Assets and liabilities carried at fair value and measured on a recurring basis as of December 31,
2016 consist of forward foreign exchange contracts and contingent liabilities associated with a business acquisition. The Company
values its forward foreign exchange contracts using quoted prices for similar assets. The most significant assumption is quoted
currency rates. The value of the forward foreign exchange contract assets and liabilities were valued using Level 2 inputs and are
listed in the table above.
Certain acquisitions involve the potential for the payment of future contingent consideration upon the achievement of
certain product development milestones and revenue based payments. Contingent consideration is recorded at the estimated fair
value of the contingent milestone and revenue based payments on the acquisition date. The fair value of the contingent consideration
is remeasured at the estimated fair value at each reporting period with the change in fair value recognized as income or expense
within selling and administrative expenses in the consolidated statements of comprehensive income. We remeasure the liability
on a recurring basis using Level 3 inputs as defined under authoritative guidance for fair value measurements.
The carrying amounts reported in our balance sheets for cash and cash equivalents, accounts receivable, accounts payable
and long-term debt approximate fair value.
Note 15 - New Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with
Customers. This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue when it
transfers promised goods or services to customers in an amount that reflects the consideration the company expects to receive in
exchange for those goods or services. In March, April and May 2016, the FASB issued ASU 2016-08 related to principal versus
agent considerations; ASU 2016-10 related to identifying performance obligations and licensing; and ASU 2016-12 clarifying the
guidance on assessing collectability, presenting sales taxes, measuring noncash consideration, and certain transition matters,
respectively. These additional ASUs provide supplemental adoption guidance and clarification to ASU 2014-09. The guidance
in these ASUs is effective for annual reporting periods beginning after December 15, 2017 and early adoption is permitted as of
January 1, 2017. The standard allows the option of either a full retrospective adoption, meaning the standard is applied to all
periods presented, or a modified retrospective adoption, meaning the standard is applied only to the most current period. The
Company will adopt the new standard on January 1, 2018. The Company is currently evaluating the impact of adopting this new
guidance on the consolidated financial statements, however we currently anticipate applying the modified retrospective approach.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a
Going Concern. This ASU establishes specific guidance to an organization's management on their responsibility to evaluate whether
there is substantial doubt about the organization's ability to continue as a going concern. The provisions of this ASU are effective
for annual periods ending after December 15, 2016, and interim periods thereafter. We implemented this guidance in 2016 and it
did not impact our financial statements or disclosures.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. An entity should measure
inventory within the scope of this Update at the lower of cost and net realizable value. Net realizable value is the estimated selling
prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent
measurement is unchanged for inventory measured using LIFO or the retail inventory method. This ASU is effective for annual
periods beginning after December 15, 2016. The Company does not believe this new guidance will have a material impact on the
consolidated financial statements.
In August 2015, the FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs
Associated with Line-of-Credit Arrangements. This ASU was issued to clarify the guidance included in ASU 2015-03 "Simplifying
the Presentation of Debt Issuance Costs", which requires entities to present debt issuance costs related to a recognized debt liability
as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 does not address presentation or subsequent
70
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. The notional contract amounts for forward contracts outstanding at December 31, 2016
which have been accounted for as cash flow hedges totaled $108.1 million. Net realized gains recognized for forward contracts
accounted for as cash flow hedges approximated $1.2 million, $10.4 million and $0.6 million for the years ended December 31,
2016, 2015 and 2014, respectively. Net unrealized gains on forward contracts outstanding which have been accounted for as cash
flow hedges and which have been included in other comprehensive income totaled $1.5 million at December 31, 2016. It is
expected these unrealized gains will be recognized in the consolidated statement of comprehensive income in 2017 and 2018.
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. The notional contract amounts for forward
contracts outstanding at December 31, 2016 which have not been designated as hedges totaled $18.4 million. Net realized gains
(losses) recognized in connection with those forward contracts not accounted for as hedges approximated $0.0 million, $0.4 million
and -$0.2 million for the years ended December 31, 2016, 2015 and 2014, respectively, offsetting losses on our intercompany
receivables of -$0.1 million, -$0.8 million and -$0.5 million for the years ended December 31, 2016, 2015 and 2014,
respectively. These gains and losses have been recorded in selling and administrative expense in the consolidated statements of
comprehensive income.
We record these forward foreign exchange contracts at fair value; the following tables summarize the fair value for forward
foreign exchange contracts outstanding at December 31, 2016 and 2015:
December 31, 2016
Derivatives designated as hedged instruments:
Asset Fair
Value
Liabilities
Fair
Value
Net
Fair
Value
Foreign exchange contracts
$
3,962
$
(1,510) $
2,452
Derivatives not designated as hedging instruments:
Foreign exchange contracts
48
(54)
(6)
Total derivatives
$
4,010
$
(1,564) $
2,446
December 31, 2015
Derivatives designated as hedged instruments:
Asset Fair
Value
Liabilities
Fair
Value
Net
Fair
Value
Foreign exchange contracts
$
2,931
$
(1,026) $
1,905
Derivatives not designated as hedging instruments:
Foreign exchange contracts
4
(38)
(34)
Total derivatives
$
2,935
$
(1,064) $
1,871
Our forward foreign exchange contracts are subject to a master netting agreement and qualify for netting in the consolidated
balance sheets. Accordingly, at December 31, 2016 and December 31, 2015 we have recorded the net fair value of $2.4 million
and $1.9 million, respectively, in prepaids and other current assets.
Fair Value Disclosure. FASB guidance defines fair value and 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.
69
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. There have been no significant changes in the
assumptions since the acquisition.
Valuation Techniques. Assets and liabilities carried at fair value and measured on a recurring basis as of December 31,
2016 consist of forward foreign exchange contracts and contingent liabilities associated with a business acquisition. The Company
values its forward foreign exchange contracts using quoted prices for similar assets. The most significant assumption is quoted
currency rates. The value of the forward foreign exchange contract assets and liabilities were valued using Level 2 inputs and are
listed in the table above.
Certain acquisitions involve the potential for the payment of future contingent consideration upon the achievement of
certain product development milestones and revenue based payments. Contingent consideration is recorded at the estimated fair
value of the contingent milestone and revenue based payments on the acquisition date. The fair value of the contingent consideration
is remeasured at the estimated fair value at each reporting period with the change in fair value recognized as income or expense
within selling and administrative expenses in the consolidated statements of comprehensive income. We remeasure the liability
on a recurring basis using Level 3 inputs as defined under authoritative guidance for fair value measurements.
The carrying amounts reported in our balance sheets for cash and cash equivalents, accounts receivable, accounts payable
and long-term debt approximate fair value.
Note 15 - New Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with
Customers. This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue when it
transfers promised goods or services to customers in an amount that reflects the consideration the company expects to receive in
exchange for those goods or services. In March, April and May 2016, the FASB issued ASU 2016-08 related to principal versus
agent considerations; ASU 2016-10 related to identifying performance obligations and licensing; and ASU 2016-12 clarifying the
guidance on assessing collectability, presenting sales taxes, measuring noncash consideration, and certain transition matters,
respectively. These additional ASUs provide supplemental adoption guidance and clarification to ASU 2014-09. The guidance
in these ASUs is effective for annual reporting periods beginning after December 15, 2017 and early adoption is permitted as of
January 1, 2017. The standard allows the option of either a full retrospective adoption, meaning the standard is applied to all
periods presented, or a modified retrospective adoption, meaning the standard is applied only to the most current period. The
Company will adopt the new standard on January 1, 2018. The Company is currently evaluating the impact of adopting this new
guidance on the consolidated financial statements, however we currently anticipate applying the modified retrospective approach.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a
Going Concern. This ASU establishes specific guidance to an organization's management on their responsibility to evaluate whether
there is substantial doubt about the organization's ability to continue as a going concern. The provisions of this ASU are effective
for annual periods ending after December 15, 2016, and interim periods thereafter. We implemented this guidance in 2016 and it
did not impact our financial statements or disclosures.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. An entity should measure
inventory within the scope of this Update at the lower of cost and net realizable value. Net realizable value is the estimated selling
prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent
measurement is unchanged for inventory measured using LIFO or the retail inventory method. This ASU is effective for annual
periods beginning after December 15, 2016. The Company does not believe this new guidance will have a material impact on the
consolidated financial statements.
In August 2015, the FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs
Associated with Line-of-Credit Arrangements. This ASU was issued to clarify the guidance included in ASU 2015-03 "Simplifying
the Presentation of Debt Issuance Costs", which requires entities to present debt issuance costs related to a recognized debt liability
as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 does not address presentation or subsequent
70
measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within
Update 2015-03 for debt issuance costs related to line-of-credit arrangements, ASU 2015-15 was issued to clarify that the SEC
staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred
debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding
borrowings on the line-of-credit arrangement. This ASU is effective for financial statements issued for fiscal years beginning
after December 15, 2015, and interim periods within those fiscal years. The Company adopted this guidance as of January 1,
2016, continuing to account for debt issuance costs related to the line-of-credit arrangement as an asset, and it did not have a
material impact on our consolidated financial statements.
In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period
Adjustments. This ASU simplifies the accounting for changes in measurement period adjustments associated with a business
combination. It requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement
period in the reporting period in which the adjustment amounts are determined. This ASU is effective for annual periods beginning
after December 15, 2015. The Company adopted this guidance as of January 1, 2016 and it did not have a material impact on our
consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (ASC 740): Balance Sheet Classification of
Deferred Taxes. This ASU requires all deferred income tax assets and liabilities be presented as non-current in classified balance
sheets. This can be applied prospectively or retrospectively and we must disclose the reason for the change in accounting principle,
the application applied and if applied retrospectively, include quantitative information about the effects of the change on prior
periods. This standard is effective for annual and interim periods beginning after December 15, 2016. The Company retrospectively
implemented this new guidance in the first quarter of 2016. The table below summarizes the adjustments made to conform prior
period classification with the new guidance:
Current deferred income tax assets
Long-term deferred income tax assets
Long-term deferred income tax liabilities
December 31, 2015
As Previously
Filed
$
$
14,150
$
1,332
(114,623)
(99,141) $
Reclass
As Adjusted
(14,150) $
2,906
11,244
— $
—
4,238
(103,379)
(99,141)
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU requires lessees to put most leases
on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. It states
that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to
use the underlying asset for the lease term. The new standard is effective for interim and annual periods beginning after December
15, 2018 and early adoption is permitted. The Company is currently evaluating the impact of of adopting this new guidance on
the consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. This
ASU requires all tax effects to run through the statement of operations, where historically tax benefits in excess of compensation
cost ran through equity. It also allows employers to withhold the maximum amount of individual tax withholdings without resulting
in liability accounting. Finally, the ASU allows companies to make an accounting policy election regarding the impact of forfeitures
on expense related to share based awards. This new guidance is effective for periods beginning after December 15, 2016, however
early adoption is permitted. The Company is currently evaluating the impact of adopting this new guidance on the consolidated
financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments (A Consensus of the FASB Emerging Issues Task Force). This ASU provides amendments to
specific statement of cash flows classification issues. This new guidance is effective for periods beginning after December 15,
2017, however early adoption is permitted. The Company does not believe this new guidance will have a material impact on the
consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The
amendments in this Update require that a statement a of cash flows explain the change during the period in the total cash, cash
equivalents and amounts generally described as restricted cash or restricted cash equivalents. The ASU is effective for periods
beginning after December 15, 2017, however early adoption is permitted. The Company is currently assessing the impact of this
guidance on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business. This ASU states when
substantially all of the fair value of gross assets acquired is concentrated in a single asset (or a group of similar assets), the assets
acquired would not represent a business. In addition, this guidance states in order to be a business, an input and a substantive
process must significantly contribute to the ability to produce outputs. This new guidance is effective for periods beginning after
December 15, 2017, however early adoption is permitted. The Company is currently assessing the impact of this guidance on our
consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the
Accounting for Goodwill Impairment. This ASU removes Step 2 of the goodwill impairment test, which requires hypothetical
purchase price allocation. A goodwill impairment will now be the amount by which the reporting unit's carrying value exceeds
its fair value, not to exceed the carrying amount of goodwill. The Company is currently assessing the impact of this guidance on
our consolidated financial statements.
Note 16 — Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data for 2016 and 2015 are as follows:
2016
Net sales
Gross profit
Net income (loss)
EPS:
Basic
Diluted
2015
Net sales
Gross profit
Net income
EPS:
Basic
Diluted
March
Three Months Ended
June
September
December
$
$
$
$
$
181,201
97,740
(2,265)
193,433
102,422
2,884
(.08) $
(.08)
.10
.10
$
$
184,792
101,209
7,337
.26
.26
March
Three Months Ended
June
September
177,940
92,282
6,312
.23
.23
$
$
181,027
93,498
7,461
.27
.27
$
$
169,184
93,546
8,873
.32
.32
$
$
$
$
204,094
106,959
6,708
.24
.24
December
191,017
102,376
7,852
.28
.28
Items Included In Selected Quarterly Financial Data:
2016
First Quarter
During the first quarter of 2016, we incurred $0.9 million in costs associated with the consolidation of our Centennial,
Colorado manufacturing operations into other existing CONMED manufacturing facilities. These costs were charged to cost of
sales and include severance and other charges associated with the consolidation – see Note 12.
During the first quarter of 2016, we incurred $9.0 million in costs associated with the January 4, 2016 acquisition of
SurgiQuest, Inc. These costs include investment banking fees, consulting fees, legal fees associated with the acquisition as well
as the Lexion case as further described in Note 11, costs associated with expensing of unvested options acquired and integration
related costs and were charged to selling and administrative expense - see Note 2 and 12.
71
72
measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within
Update 2015-03 for debt issuance costs related to line-of-credit arrangements, ASU 2015-15 was issued to clarify that the SEC
staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred
debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding
borrowings on the line-of-credit arrangement. This ASU is effective for financial statements issued for fiscal years beginning
after December 15, 2015, and interim periods within those fiscal years. The Company adopted this guidance as of January 1,
2016, continuing to account for debt issuance costs related to the line-of-credit arrangement as an asset, and it did not have a
material impact on our consolidated financial statements.
In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period
Adjustments. This ASU simplifies the accounting for changes in measurement period adjustments associated with a business
combination. It requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement
period in the reporting period in which the adjustment amounts are determined. This ASU is effective for annual periods beginning
after December 15, 2015. The Company adopted this guidance as of January 1, 2016 and it did not have a material impact on our
consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (ASC 740): Balance Sheet Classification of
Deferred Taxes. This ASU requires all deferred income tax assets and liabilities be presented as non-current in classified balance
sheets. This can be applied prospectively or retrospectively and we must disclose the reason for the change in accounting principle,
the application applied and if applied retrospectively, include quantitative information about the effects of the change on prior
periods. This standard is effective for annual and interim periods beginning after December 15, 2016. The Company retrospectively
implemented this new guidance in the first quarter of 2016. The table below summarizes the adjustments made to conform prior
period classification with the new guidance:
Current deferred income tax assets
Long-term deferred income tax assets
Long-term deferred income tax liabilities
December 31, 2015
As Previously
Filed
$
$
14,150
$
1,332
(114,623)
(99,141) $
Reclass
As Adjusted
(14,150) $
2,906
11,244
— $
—
4,238
(103,379)
(99,141)
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU requires lessees to put most leases
on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. It states
that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to
use the underlying asset for the lease term. The new standard is effective for interim and annual periods beginning after December
15, 2018 and early adoption is permitted. The Company is currently evaluating the impact of of adopting this new guidance on
the consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. This
ASU requires all tax effects to run through the statement of operations, where historically tax benefits in excess of compensation
cost ran through equity. It also allows employers to withhold the maximum amount of individual tax withholdings without resulting
in liability accounting. Finally, the ASU allows companies to make an accounting policy election regarding the impact of forfeitures
on expense related to share based awards. This new guidance is effective for periods beginning after December 15, 2016, however
early adoption is permitted. The Company is currently evaluating the impact of adopting this new guidance on the consolidated
financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments (A Consensus of the FASB Emerging Issues Task Force). This ASU provides amendments to
specific statement of cash flows classification issues. This new guidance is effective for periods beginning after December 15,
2017, however early adoption is permitted. The Company does not believe this new guidance will have a material impact on the
consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The
amendments in this Update require that a statement a of cash flows explain the change during the period in the total cash, cash
equivalents and amounts generally described as restricted cash or restricted cash equivalents. The ASU is effective for periods
beginning after December 15, 2017, however early adoption is permitted. The Company is currently assessing the impact of this
guidance on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business. This ASU states when
substantially all of the fair value of gross assets acquired is concentrated in a single asset (or a group of similar assets), the assets
acquired would not represent a business. In addition, this guidance states in order to be a business, an input and a substantive
process must significantly contribute to the ability to produce outputs. This new guidance is effective for periods beginning after
December 15, 2017, however early adoption is permitted. The Company is currently assessing the impact of this guidance on our
consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the
Accounting for Goodwill Impairment. This ASU removes Step 2 of the goodwill impairment test, which requires hypothetical
purchase price allocation. A goodwill impairment will now be the amount by which the reporting unit's carrying value exceeds
its fair value, not to exceed the carrying amount of goodwill. The Company is currently assessing the impact of this guidance on
our consolidated financial statements.
Note 16 — Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data for 2016 and 2015 are as follows:
2016
Net sales
Gross profit
Net income (loss)
EPS:
Basic
Diluted
2015
Net sales
Gross profit
Net income
EPS:
Basic
Diluted
March
Three Months Ended
June
September
December
$
$
$
$
$
181,201
97,740
(2,265)
193,433
102,422
2,884
(.08) $
(.08)
.10
.10
$
$
184,792
101,209
7,337
.26
.26
March
Three Months Ended
June
September
177,940
92,282
6,312
.23
.23
$
$
181,027
93,498
7,461
.27
.27
$
$
169,184
93,546
8,873
.32
.32
$
$
$
$
204,094
106,959
6,708
.24
.24
December
191,017
102,376
7,852
.28
.28
Items Included In Selected Quarterly Financial Data:
2016
First Quarter
During the first quarter of 2016, we incurred $0.9 million in costs associated with the consolidation of our Centennial,
Colorado manufacturing operations into other existing CONMED manufacturing facilities. These costs were charged to cost of
sales and include severance and other charges associated with the consolidation – see Note 12.
During the first quarter of 2016, we incurred $9.0 million in costs associated with the January 4, 2016 acquisition of
SurgiQuest, Inc. These costs include investment banking fees, consulting fees, legal fees associated with the acquisition as well
as the Lexion case as further described in Note 11, costs associated with expensing of unvested options acquired and integration
related costs and were charged to selling and administrative expense - see Note 2 and 12.
71
72
During the first quarter of 2016, we incurred a $2.7 million charge related to commitment fees paid to certain of our
lenders, which provided a financing commitment for the SurgiQuest acquisition and recorded a loss on the early extinguishment
of debt of $0.3 million in conjunction with the fifth amended and restated senior credit agreement. These costs were charged to
other expense - see Note 6 and 12.
During the first quarter of 2016, we recorded a charge of $2.8 million to selling and administrative expense related to
the restructuring of certain selling and administrative functions which includes severance costs and other related costs - see Note
12.
During the first quarter of 2015, we incurred $2.3 million in costs associated with the consolidation of our Centennial,
Colorado manufacturing operations into other existing CONMED manufacturing facilities. These costs were charged to cost of
sales and include severance and other charges associated with the consolidation – see Note 12.
During the first quarter of 2015, we recorded a charge of $6.2 million to selling and administrative expense related to
the restructuring of certain selling and administrative functions which includes severance costs and other related costs - see Note
12.
Second Quarter
Second Quarter
During the second quarter of 2016, we incurred $0.1 million in costs associated with the consolidation of our Centennial,
Colorado manufacturing operations into other existing CONMED manufacturing facilities. These costs were charged to cost of
sales and include severance and other charges associated with the consolidation – see Note 12.
During the second quarter of 2015, we incurred $1.5 million in costs associated with the consolidation of our Centennial,
Colorado manufacturing operations into other existing CONMED manufacturing facilities. These costs were charged to cost of
sales and include severance and other charges associated with the consolidation – see Note 12.
During the second quarter of 2015, we recorded a charge of $2.2 million to selling and administrative expense related to
the restructuring of certain selling and administrative functions which includes severance costs and other related costs - see Note
12.
Third Quarter
During the third quarter of 2015, we incurred $1.3 million in costs associated with the consolidation of our Centennial,
Colorado manufacturing operations into our other existing CONMED manufacturing facilities. These costs were charged to cost
of sales and include severance and other charges associated with the consolidation – see Note 12.
During the third quarter of 2015, we recorded a charge of $1.1 million to selling and administrative expense related to
the restructuring of certain selling and administrative functions which includes severance costs and other related costs - see Note
12.
Fourth Quarter
During the fourth quarter of 2015, we incurred $2.8 million in costs associated with the consolidation of our Centennial,
Colorado manufacturing operations into our other existing CONMED manufacturing facilities. These costs were charged to cost
of sales and include severance and other charges associated with the consolidation – see Note 12.
During the fourth quarter of 2015, we recorded a charge of $4.3 million to selling and administrative expense related to
the restructuring of certain selling and administrative functions which includes severance costs and other related costs - see Note
12.
During the fourth quarter of 2015, we recorded a charge of $2.1 million to selling and administrative expense associated
with the purchase of SurgiQuest, Inc and other acquisitions - see Note 2 and Note 12.
During the second quarter of 2016, the Company discontinued our Altrus product offering as part of our ongoing
restructuring and incurred $4.5 million in non-cash charges which were included in cost of sales - see Note 12.
During the second quarter of 2016, we incurred $5.0 million in costs associated with the acquisition of SurgiQuest, Inc.
which include consulting fees, legal fees associated with the acquisition as well as the Lexion case as further described in Note
11, costs associated with expensing of unvested options acquired and integration related costs and were charged to selling and
administrative expense - see Note 2 and 12.
During the second quarter of 2016, we recorded a charge of $1.0 million to selling and administrative expense related to
the restructuring of certain selling and administrative functions which includes severance costs and other related costs - see Note
12.
Third Quarter
During the third quarter of 2016, we incurred $3.3 million in costs associated with the acquisition of SurgiQuest, Inc.
which include consulting fees, legal fees associated with the Lexion case as further described in Note 11, costs associated with
expensing of unvested options acquired and integration related costs and were charged to selling and administrative expense - see
Note 2 and 12.
During the third quarter of 2016, we sold our Centennial, Colorado facility. We received net cash proceeds of $5.2 million
and recorded a gain of $1.9 million on the sale of our facility in selling and administrative expense - see Note 12.
During the third quarter of 2016, we recorded a charge of $0.4 million to selling and administrative expense related to
the restructuring of certain selling and administrative functions which includes severance costs and other related costs - see Note
12.
Fourth Quarter
During the fourth quarter of 2016, we incurred $2.1 million in severance and other related costs associated with
restructuring. These costs were charged to cost of sales - see Note 12.
During the fourth quarter of 2016, we incurred $3.2 million in costs associated with the acquisition of SurgiQuest, Inc.
which include consulting fees, legal fees associated with the Lexion case as further described in Note 11, costs associated with
expensing of unvested options acquired and integration related costs and were charged to selling and administrative expense - see
Note 2 and Note 12.
During the fourth quarter of 2016, we recorded a charge of $2.8 million to selling and administrative expense related to
the restructuring of certain selling and administrative functions which includes severance costs and other related costs - see Note
12.
2015
First Quarter
73
74
During the first quarter of 2016, we incurred a $2.7 million charge related to commitment fees paid to certain of our
lenders, which provided a financing commitment for the SurgiQuest acquisition and recorded a loss on the early extinguishment
of debt of $0.3 million in conjunction with the fifth amended and restated senior credit agreement. These costs were charged to
other expense - see Note 6 and 12.
During the first quarter of 2016, we recorded a charge of $2.8 million to selling and administrative expense related to
the restructuring of certain selling and administrative functions which includes severance costs and other related costs - see Note
12.
During the first quarter of 2015, we incurred $2.3 million in costs associated with the consolidation of our Centennial,
Colorado manufacturing operations into other existing CONMED manufacturing facilities. These costs were charged to cost of
sales and include severance and other charges associated with the consolidation – see Note 12.
During the first quarter of 2015, we recorded a charge of $6.2 million to selling and administrative expense related to
the restructuring of certain selling and administrative functions which includes severance costs and other related costs - see Note
12.
Second Quarter
Second Quarter
During the second quarter of 2016, we incurred $0.1 million in costs associated with the consolidation of our Centennial,
Colorado manufacturing operations into other existing CONMED manufacturing facilities. These costs were charged to cost of
sales and include severance and other charges associated with the consolidation – see Note 12.
During the second quarter of 2015, we incurred $1.5 million in costs associated with the consolidation of our Centennial,
Colorado manufacturing operations into other existing CONMED manufacturing facilities. These costs were charged to cost of
sales and include severance and other charges associated with the consolidation – see Note 12.
During the second quarter of 2015, we recorded a charge of $2.2 million to selling and administrative expense related to
the restructuring of certain selling and administrative functions which includes severance costs and other related costs - see Note
12.
Third Quarter
During the third quarter of 2015, we incurred $1.3 million in costs associated with the consolidation of our Centennial,
Colorado manufacturing operations into our other existing CONMED manufacturing facilities. These costs were charged to cost
of sales and include severance and other charges associated with the consolidation – see Note 12.
During the third quarter of 2015, we recorded a charge of $1.1 million to selling and administrative expense related to
the restructuring of certain selling and administrative functions which includes severance costs and other related costs - see Note
12.
Fourth Quarter
During the fourth quarter of 2015, we incurred $2.8 million in costs associated with the consolidation of our Centennial,
Colorado manufacturing operations into our other existing CONMED manufacturing facilities. These costs were charged to cost
of sales and include severance and other charges associated with the consolidation – see Note 12.
During the fourth quarter of 2015, we recorded a charge of $4.3 million to selling and administrative expense related to
the restructuring of certain selling and administrative functions which includes severance costs and other related costs - see Note
12.
During the fourth quarter of 2015, we recorded a charge of $2.1 million to selling and administrative expense associated
with the purchase of SurgiQuest, Inc and other acquisitions - see Note 2 and Note 12.
During the second quarter of 2016, the Company discontinued our Altrus product offering as part of our ongoing
restructuring and incurred $4.5 million in non-cash charges which were included in cost of sales - see Note 12.
During the second quarter of 2016, we incurred $5.0 million in costs associated with the acquisition of SurgiQuest, Inc.
which include consulting fees, legal fees associated with the acquisition as well as the Lexion case as further described in Note
11, costs associated with expensing of unvested options acquired and integration related costs and were charged to selling and
administrative expense - see Note 2 and 12.
During the second quarter of 2016, we recorded a charge of $1.0 million to selling and administrative expense related to
the restructuring of certain selling and administrative functions which includes severance costs and other related costs - see Note
12.
Third Quarter
During the third quarter of 2016, we incurred $3.3 million in costs associated with the acquisition of SurgiQuest, Inc.
which include consulting fees, legal fees associated with the Lexion case as further described in Note 11, costs associated with
expensing of unvested options acquired and integration related costs and were charged to selling and administrative expense - see
Note 2 and 12.
During the third quarter of 2016, we sold our Centennial, Colorado facility. We received net cash proceeds of $5.2 million
and recorded a gain of $1.9 million on the sale of our facility in selling and administrative expense - see Note 12.
During the third quarter of 2016, we recorded a charge of $0.4 million to selling and administrative expense related to
the restructuring of certain selling and administrative functions which includes severance costs and other related costs - see Note
12.
Fourth Quarter
During the fourth quarter of 2016, we incurred $2.1 million in severance and other related costs associated with
restructuring. These costs were charged to cost of sales - see Note 12.
During the fourth quarter of 2016, we incurred $3.2 million in costs associated with the acquisition of SurgiQuest, Inc.
which include consulting fees, legal fees associated with the Lexion case as further described in Note 11, costs associated with
expensing of unvested options acquired and integration related costs and were charged to selling and administrative expense - see
Note 2 and Note 12.
During the fourth quarter of 2016, we recorded a charge of $2.8 million to selling and administrative expense related to
the restructuring of certain selling and administrative functions which includes severance costs and other related costs - see Note
12.
2015
First Quarter
73
74
SCHEDULE II—Valuation and Qualifying Accounts
(In thousands)
Description
2016
Allowance for bad debts
Sales returns and
allowance
Deferred tax asset
valuation allowance
2015
Allowance for bad debts
Sales returns and
allowance
Deferred tax asset
valuation allowance
2014
Allowance for bad debts
Sales returns and
allowance
Deferred tax asset
valuation allowance
Balance at
Beginning of
Period
Additions
Charged to
Costs and
Expenses
Deductions
Balance at End
of Period
$
1,336
$
983
$
(288) $
3,417
124
254
317
(315)
—
$
1,239
$
493
$
(396) $
3,081
293
521
—
(185)
(169)
$
1,384
$
517
$
(662) $
3,098
—
252
293
(269)
—
2,031
3,356
441
1,336
3,417
124
1,239
3,081
293
Item 16. Form 10-K Summary
Registrants may voluntarily provide a summary of information required by Form 10-K under this Item 16. The
Company has elected not to include such summary information.
CONMED Corporation
Subsidiaries of the Registrant
EXHIBIT 21
Name
State or Country of Incorporation
Aspen Laboratories, Inc.
CONMED Andover Medical, Inc.
CONMED Austria GmbH
CONMED Denmark ApS
CONMED Deutschland GmbH
CONMED Endoscopic Technologies, Inc.
CONMED Finland Oy
CONMED France SAS
CONMED Iberia SL
CONMED Italia SrL
CONMED Japan K. K.
CONMED Linvatec Australia PTY Ltd
CONMED Linvatec (Beijing) Medical Appliances Co., Ltd
CONMED Linvatec Biomaterials Oy
CONMED U.K. Ltd.
Consolidated Medical Equipment Company S. de R.L. de C.V.
EndoDynamix, Inc.
GWH Limited Partnership
Largo Lakes I Limited Partnership
Linvatec Corporation
Linvatec Belgium NV
Linvatec Canada ULC
Linvatec Europe SPRL
Linvatec Korea Ltd.
Linvatec Nederland B.V.
Linvatec Polska Sp. z.o.o
Linvatec Sweden AB
SurgiQuest, Inc.
Viking Systems, Inc.
Colorado
New York
Austria
Denmark
Germany
Massachusetts
Finland
France
Spain
Italy
Japan
Australia
China
Finland
United Kingdom
Mexico
Delaware
Florida
Delaware
Florida
Belgium
Canada
Belgium
Korea
Netherlands
Poland
Sweden
Delaware
Delaware
75
SCHEDULE II—Valuation and Qualifying Accounts
(In thousands)
Description
2016
Allowance for bad debts
Sales returns and
allowance
Deferred tax asset
valuation allowance
2015
Allowance for bad debts
Sales returns and
allowance
Deferred tax asset
valuation allowance
2014
Allowance for bad debts
Sales returns and
allowance
Deferred tax asset
valuation allowance
Balance at
Beginning of
Period
Additions
Charged to
Costs and
Expenses
Deductions
Balance at End
of Period
$
1,336
$
983
$
(288) $
3,417
124
254
317
(315)
—
$
1,239
$
493
$
(396) $
3,081
293
521
—
(185)
(169)
$
1,384
$
517
$
(662) $
3,098
—
252
293
(269)
—
2,031
3,356
441
1,336
3,417
124
1,239
3,081
293
Item 16. Form 10-K Summary
Registrants may voluntarily provide a summary of information required by Form 10-K under this Item 16. The
Company has elected not to include such summary information.
CONMED Corporation
Subsidiaries of the Registrant
EXHIBIT 21
Name
State or Country of Incorporation
Aspen Laboratories, Inc.
CONMED Andover Medical, Inc.
CONMED Austria GmbH
CONMED Denmark ApS
CONMED Deutschland GmbH
CONMED Endoscopic Technologies, Inc.
CONMED Finland Oy
CONMED France SAS
CONMED Iberia SL
CONMED Italia SrL
CONMED Japan K. K.
CONMED Linvatec Australia PTY Ltd
CONMED Linvatec (Beijing) Medical Appliances Co., Ltd
CONMED Linvatec Biomaterials Oy
CONMED U.K. Ltd.
Consolidated Medical Equipment Company S. de R.L. de C.V.
EndoDynamix, Inc.
GWH Limited Partnership
Largo Lakes I Limited Partnership
Linvatec Corporation
Linvatec Belgium NV
Linvatec Canada ULC
Linvatec Europe SPRL
Linvatec Korea Ltd.
Linvatec Nederland B.V.
Linvatec Polska Sp. z.o.o
Linvatec Sweden AB
SurgiQuest, Inc.
Viking Systems, Inc.
Colorado
New York
Austria
Denmark
Germany
Massachusetts
Finland
France
Spain
Italy
Japan
Australia
China
Finland
United Kingdom
Mexico
Delaware
Florida
Delaware
Florida
Belgium
Canada
Belgium
Korea
Netherlands
Poland
Sweden
Delaware
Delaware
75
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-78987, 333-90444,
333-124202, 333-136453, 333-145150, 333-162834, 333-168493, 333-182878, 333-207852 and 333-214299) of CONMED
Corporation of our report dated February 27, 2017 relating to the consolidated financial statements, financial statement schedule
and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
EXHIBIT 23
/s/ PricewaterhouseCoopers LLP
Rochester, New York
February 27, 2017
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Curt R. Hartman, certify that:
1.
I have reviewed this annual report on Form 10-K of CONMED Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, 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;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
February 27, 2017
/s/ Curt R. Hartman
Curt R. Hartman
President and
Chief Executive Officer
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-78987, 333-90444,
333-124202, 333-136453, 333-145150, 333-162834, 333-168493, 333-182878, 333-207852 and 333-214299) of CONMED
Corporation of our report dated February 27, 2017 relating to the consolidated financial statements, financial statement schedule
and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
EXHIBIT 23
/s/ PricewaterhouseCoopers LLP
Rochester, New York
February 27, 2017
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Curt R. Hartman, certify that:
1.
I have reviewed this annual report on Form 10-K of CONMED Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, 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;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
February 27, 2017
/s/ Curt R. Hartman
Curt R. Hartman
President and
Chief Executive Officer
Exhibit 32.1
CERTIFICATIONS
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title
18, United States Code), each of the undersigned officers of CONMED Corporation, a New York corporation (the
“Corporation”), does hereby certify that:
The Annual Report on Form 10-K for the year ended December 31, 2016 (the “Form 10-K”) of the Corporation fully
complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in
the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Corporation.
Date: February 27, 2017
Date: February 27, 2017
/s/ Curt R. Hartman
Curt R. Hartman
President and
Chief Executive Officer
/s/ Luke A. Pomilio
Luke A. Pomilio
Executive Vice President-Finance and
Chief Financial Officer
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Luke A. Pomilio, certify that:
1.
I have reviewed this annual report on Form 10-K of CONMED Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, 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;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
February 27, 2017
/s/ Luke A. Pomilio
Luke A. Pomilio
Executive Vice President - Finance and
Chief Financial Officer
Exhibit 32.1
CERTIFICATIONS
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title
18, United States Code), each of the undersigned officers of CONMED Corporation, a New York corporation (the
“Corporation”), does hereby certify that:
The Annual Report on Form 10-K for the year ended December 31, 2016 (the “Form 10-K”) of the Corporation fully
complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in
the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Corporation.
Date: February 27, 2017
Date: February 27, 2017
/s/ Curt R. Hartman
Curt R. Hartman
President and
Chief Executive Officer
/s/ Luke A. Pomilio
Luke A. Pomilio
Executive Vice President-Finance and
Chief Financial Officer
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Luke A. Pomilio, certify that:
1.
I have reviewed this annual report on Form 10-K of CONMED Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, 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;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
February 27, 2017
/s/ Luke A. Pomilio
Luke A. Pomilio
Executive Vice President - Finance and
Chief Financial Officer
Company Notes
Company Notes
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