Delivering Results
2 0 1 8 A N N U A L R E P O RT
Delivering Results:
The Timeline of a
Transformation
2015. Our work began with investments in human capital from the
executive team down. New marketing and research & development
teams focused on creating a revamped product pipeline inclusive of
strategic acquisitions… but we were “Just Getting Started.”
2016. We began the year with the acquisition of the highly transformative
SurgiQuest Airseal® system, by the time the year was over the Company
outcomes were demonstrating “Progress Through People and Products.”
2017. Smart investments, an accelerating new product introduction
cadence, and a performance-based culture delivered market results
of 4.3% net sales growth… we began “Hitting Our Stride.”
2018. Our momentum continued as strategic investments in people and
products positioned us to achieve 8.4% in adjusted net sales growth,
exceeding the average growth of the sector… the year was defined by
“Delivering Results” across all four quarters.
*Adjusted net sales growth is measured in constant currency and is adjusted for the administrative fees that the Company began recording as a reduction of
revenue under ASC 606, Revenue from Contracts with Customers, effective January 1, 2018. Refer to the “GAAP to Non-GAAP Reconciliations” page for a
reconciliation to the most directly comparable GAAP financial measure, reported net sales.
Dear Shareholder,
Fiscal 2018 was a pivotal year for CONMED Corporation, as our continued financial and
operational execution brought the next phase of our growth trajectory into focus.
I would like to extend my sincere gratitude to the Board of Directors and to the entire CONMED
team, whose commitment and dedication propelled us to the position we are in today.
Our performance in 2018 was the direct result of the purposeful investments made over the
previous four years, as we continued to effectively leverage our improving infrastructure and
our new product development pipeline. We exited 2018 with even deeper belief in our
strategy, looking forward to continued top-line growth and improved profitability in 2019.
We are confident that we can maintain a strong pace of innovation while continuing our
pursuit of organic and inorganic growth opportunities that will augment our existing suite of
products and expose us to new market opportunities. I am thrilled to welcome the Buffalo
Filter team to CONMED, and I am excited by the potential we see in this new addition to
our portfolio.
Our leadership team has clearly demonstrated its ability to both develop and execute a
successful strategic vision for the organization. We are excited about CONMED’s growth
opportunities, as we continue to develop and acquire transformative products that span the
surgical suite and drive growth and improved profitability moving forward.
On behalf of CONMED’s Board of Directors and management team, I would like to thank
our shareholders for their continued support and their trust in us to position the Company
for long-term growth and success.
Sincerely,
Mark Tryniski
Chairman
Dear Shareholder,
Shortly after arriving at CONMED, I outlined a strategy that centered on ensuring we had
the right people across all areas of the Company, as well as focused internal and external
investments in our product pipeline that would re-invigorate our portfolio. Now, four years
later, I am pleased that our commitment to these two strategic pillars is allowing CONMED
to deliver strong results while continuing to strengthen the basis of our third pillar:
increasing profitability.
2018 was a defining year in CONMED Corporation’s history. Our strong financial and
operational performance throughout the year was delivered on the foundation built by our
team’s unwavering dedication to the strategy we introduced four years ago. I want to thank
everyone on the CONMED team for their ongoing passion and commitment. Our success
is dependent on their effort and execution in delivering accessible, customer-driven
innovation to our surgeons and patients around the globe.
Our fiscal year sales totaled $859.6 million, representing a year-over-year increase of 7.9%
as reported and 8.4% in constant currency and as adjusted, exceeding the average
revenue growth of the sector. We used this strong top-line performance to continue to
increase investments in innovation and to get closer to our customers, while still delivering
adjusted net income of $62.8 million, an increase of 17.9%, and adjusted diluted net
earnings per share of $2.18, an increase of 15.3% over the prior year.
We capped off this strong annual performance with our highest total organic revenue
growth quarter since I joined CONMED, delivered against one of our toughest year-over-
year comparable quarters to date. I am confident that we can continue our momentum in
2019, and we expect mid-single digit revenue growth and double-digit earnings growth for
the full year.
Our domestic General Surgery business produced strong results throughout the year as we
continued to introduce new and innovative products to the market. The Company also
experienced solid international performance in both Orthopedics and General Surgery, as
we continued to build out our salesforce. We are excited about what we have planned for
2019, as we capitalize on our expanding commercial presence internationally. Our Domestic
Orthopedics business achieved positive growth during each quarter of 2018, resulting in
positive annual growth in the segment for the first time since 2015.
Throughout 2018, we delivered technologically advanced solutions through a steady cadence
of new product launches, expanding our presence in the surgical suite and driving improved
sales and profitability. Some of these recent examples include our Hall® MicroFree™ Cordless
Small Bone Power System, our Anchor Tissue Retrieval System™ and our TruShot™ with
Y-Knot® All-in-One Soft Tissue Fixation System for Small Joint. Looking ahead, we have
several exciting new products scheduled to launch in 2019 that we expect will continue to
drive growth in the years to come.
We augmented our organic innovation engine with the acquisition of Buffalo Filter, which
uniquely positions us to grow and gain share in the underpenetrated and rapidly developing
global smoke evacuation market. We are excited to integrate this industry-leading product
suite into our existing portfolio, as we believe this acquisition presents near- and long-term
growth opportunities.
While 2018 can be characterized as a strong year by many metrics, we are confident that this
is only the beginning. We believe the Company is better positioned than ever for growth, as our
people remain focused on execution, bringing new and innovative products to the marketplace,
and creating a sustainable business that can deliver increasing profitability.
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 throughout 2019, which I
truly believe will be our best year yet.
Respectfully,
Curt Hartman
President & CEO
*Adjusted net sales growth is measured in constant currency and is adjusted for the administrative fees that the
Company began recording as a reduction of revenue under ASC 606, Revenue from Contracts with Customers,
effective January 1, 2018. Adjusted net income and diluted net earnings per share are non-GAAP financial
measures. Refer to the “GAAP to Non-GAAP Reconciliations” page for reconciliations to the most directly
comparable GAAP financial measures, reported net sales, net income and diluted net earnings per share.
Delivering
Results.
Hall® MicroFree™
Small Joint Innovation
When we asked surgeons how we could make their jobs easier during small bone cases, the
answer was clear – a cordless power handpiece that provides precision without sacrificing
power. With this direction in mind, CONMED Research & Development and Marketing developed
the Hall® MicroFree Cordless Small Bone Power System. The result was a cordless system that
provides freedom of motion in the familiar pencil-grip design.
Redefining efficiency and accuracy in the OR, CONMED’s TruShot™ with Y-Knot® is one of the
first innovations to be produced from our small joint design team. By eliminating unnecessary
steps, this system simplifies anchor placement while the small all-suture anchors provide the
strong1 fixation surgeons need. TruShot’s simple, all-in-one technique, offers surgeons a solution
that works efficiently and effectively.
TruShot™
with Y-Knot®
1 Data on File; TR18-00573.
Beamer®
CE600 System
Beamer ®
Argon Snares
DuraClip™
Success with Hemostasis
CONMED’s hemostasis portfolio has been a growth engine fueled by the launch of our 11 and
16MM DuraClip™ repositionable hemostasis clip and our Beamer® CE600 electrosurgical system
and proprietary devices which include the Beamer Argon Probe and the unique combination
device of the Beamer Argon Snare Probe. All designed to provide GI physicians with treatment
options for their patients.
AirSeal® System
Market Differentiation
Our General Surgery product lines are exceeding market growth rates, led by the differentiated
AirSeal® System product line for laparoscopic and robotic surgery.
1 Data on File; TR18-00573.
2018 Company Snapshot
$860M
FY2018 Revenue
48%
Int’l Rev.
US 52%
Europe 20%
Americas Ex-US 11%
All Other 17%
79%
Recurring, single-use revenue
3,100
Employees globally
1970
Founded and Headquartered in Utica, New York
Orthopedics 52%
General Surgery 48%
Orthopedics
• Surgical devices including capital, single-use, and
implants used in the repair of soft tissue and joint
injuries.
General Surgery
• Low Impact™ Laparoscopy, enabled by the
AirSeal® System
• GI therapeutic and diagnostic products
• ECG, MFE (Multi-Function Electrodes), and other
patient care devices
Additional Information
Independent Registered
Public Accounting Firm
PricewaterhouseCoopers LLP
1200 Bausch & Lomb Place
Rochester, NY 14604
STOCK
CONMED Corporation’s stock
is traded on the NASDAQ
Global Select Stock Market
with the symbol: CNMD
EXECUTIVE OFFICERS
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
Nathan Folkert
Vice President & General
Manager, U.S. Orthopedics
Todd W. Garner
Executive Vice President
& Chief Financial Officer
Daniel S. Jonas, Esq.
Executive Vice President,
Legal Affairs & General
Counsel & Secretary
John E. (Jed) Kennedy
Vice President & General
Manager, U.S. Endoscopic
Technologies
Sarah M. Oliker, Esq.
Assistant General Counsel &
Assistant Secretary
Johonna Pelletier
Treasurer & Vice President, Tax
Stanley W. (Bill) Peters
Vice President & General
Manager, U.S. Advanced Surgical
Wilfredo Ruiz-Caban
Executive Vice President,
Quality Assurance, Regulatory
Affairs & Operations
Peter K. Shagory
Executive Vice President,
Strategy & Corporate
Development
BOARD MEMBERS
Mark E. Tryniski
Chairman of the Board of
Directors
David Bronson
Director
Brian P. Concannon
Director
Charles M. Farkas
Director
Martha Goldberg Aronson
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
SHAREHOLDER
INFORMATION
Interested shareholders may
obtain a copy of the Company’s
Annual Report without charge
upon written request to:
Investor Relations
Department
CONMED Corporation
Attn: Todd Garner
525 French Road
Utica, NY 13502
1-315-624-3317
Transfer Agent/Registrar
Computershare Investor
Services
P.O. Box 505000
Louisville, KY 40233-5000
1-800-368-5948
www.computershare.com/
investor
GAAP to Non-GAAP Reconciliations
Reconciliation of Reported Net Income to Adjusted Net Income*
(in thousands, except per share amounts, unaudited)
Year Ended December 31, 2018
Net Sales
Gross
Profit
Selling &
Administrative
Expense
Research &
Development
Expense
Operating
Income
Tax
Expense/
(Benefit)
Effective
Tax Rate
Net
Income
Diluted
EPS
As reported
% of sales
Impairment charges
Business acquisition costs
Tax reform
Gross profit %
Amortization of intangible assets
Adjusted net income
% of sales
$859,634 $469,110
54.6%
-
-
-
-
-
-
$859,634 $469,110
54.6%
$6,000
$355,617
41.4%
-
(2,372)
-
$353,245
(17,174)
$336,071
39.1%
$42,188
4.9%
(4,212)
-
- -
$71,305
8.3%
4,212
2,372
$37,976
$77,889
-
$37,976
4.4%
23,174
$101,063
11.8%
$9,799
19.3% $40,854
$1.41
2,117
1,155
(912)
$12,159
2,095
1,217
912
$45,078
5,413
$17,572
17,761
21.9% $62,839
0.07
0.05
0.03
$1.56
0.62
$2.18
*
Refer to our 2018 Annual Report on Form 10-K, available both within this document and at www.conmed.com, as well as our Form 8-K filed with the
SEC on January 22, 2019, for additional information regarding our non-GAAP measures.
Sales Summary*
(in millions, unaudited)
2018
2017
As Reported
% Change from
2017 to 2018
ASC 606
Impact
Impact of
Foreign
Currency
Adjusted
(1)
Net Sales
$859.6
$796.4
7.9%
1.2%
-0.7%
8.4%
(1)
Adjusted net sales growth is measured in constant currency and is adjusted for administrative fees that the Company started to
record as a reduction of revenue under ASC 606, Revenue from Contracts with Customers ("ASC 606"), on January 1, 2018.
Reconciliation of Reported Net Income to Adjusted Net Income
(in thousands, except per share amounts, unaudited)
Year Ended December 31, 2018
Net Sales
Gross
Profit
Selling &
Administrative
Expense
Research &
Development
Expense
Operatin
g Income
Tax
Expense/
(Benefit)
Effective
Tax Rate
Net
Income
Diluted
EPS
As reported
% of sales
Impairment charges
Business acquisition costs
Tax reform
Gross profit %
Amortization of intangible assets
Adjusted net income
% of sales
$859,634 $469,110
54.6%
-
-
-
-
-
-
$859,634 $469,110
54.60%
$6,000
$355,617
41.4%
-
(2,372)
-
$353,245
(17,174)
$336,071
39.1%
$9,799
19.3% $40,854
$1.41
$42,188
4.9%
(4,212)
$71,305
8.3%
4,212
2,372
-
- -
$77,889
2,117
1,155
(912)
$12,159
$37,976
2,095
1,217
912
$45,078
0.07
0.05
0.03
$1.56
0.62
$2.18
23,174
-
$37,976 $101,063
11.8%
4.4%
5,413
$17,572
17,761
21.9% $62,839
*
Refer to our 2018 Annual Report on Form 10-K, available both within this document and at www.conmed.com, as well as our Form 8-K filed
with the SEC on January 22, 2019, for additional information regarding our non-GAAP measures.
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, 2018
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 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 every Interactive Data File required to be submitted 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 such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 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, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer", "accelerated filer", "smaller reporting company", and
"emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
No
As of June 29, 2018, 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 $2,057,379,476 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 20, 2019 was 28,150,428.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Definitive Proxy Statement and any other informational filings for the 2019 Annual Meeting of Shareholders are incorporated
by reference into Part III of this report.
CONMED CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 2018
TABLE OF CONTENTS
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
16
17
17
17
18
20
22
32
32
33
33
33
34
34
34
35
35
36
37
79
CONMED CORPORATION
Item 1. Business
Forward Looking Statements
This Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2018 (“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;
compliance with and changes in regulatory requirements;
the possibility that United States or foreign regulatory and/or administrative agencies may initiate enforcement actions
against us or our distributors;
competition;
changes in customer preferences;
changes in technology;
the introduction and acceptance of new products;
the availability and cost of materials;
cyclical customer purchasing patterns due to budgetary and other constraints;
quality of our management and business abilities and the judgment of our personnel;
the availability, terms and deployment of capital;
future levels of indebtedness and capital spending;
changes in foreign exchange and interest rates;
the ability to evaluate, finance and integrate acquired businesses, products and companies;
changes in business strategy;
the risk of an information security breach, including a cybersecurity breach;
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;
the ability to defend and enforce intellectual property;
the risk of litigation, especially patent litigation as well as the cost associated with patent and other litigation;
trade protection measures, tariffs and other border taxes, and import or export licensing 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,
thoracic surgery and gastroenterology. Headquartered in Utica, New York, the Company’s 3,100 employees distribute its products
worldwide from three primary 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
2
of scale and take advantage of growth opportunities in the healthcare field. We consider the February 11, 2019 acquisition of
Buffalo Filter, LLC, as described below under “Buffalo Filter Acquisition,” to be an example of the type of strategic business
acquisition that allows us to diversify our product offerings, realize economies of scale and take advantage of growth opportunities
in the healthcare field.
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"). 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 with the SEC.
Business Strategy
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 favorable 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.
to achieve
• 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") and February 11, 2019 acquisition of Buffalo Filter, LLC ("Buffalo Filter") 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.
• Realize Manufacturing and Operating Efficiencies. We continually review our production systems for opportunities
to reduce operating costs, consolidate product lines or 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.
3
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:
Orthopedic surgery
General surgery
Consolidated net sales
Net sales (in thousands)
Orthopedic Surgery
Year Ended December 31,
2017
2018
2016
52%
48
100%
54%
46
100%
55%
45
100%
$
859,634
$
796,392
$
763,520
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®.
In 2018, approximately 72% of orthopedic surgery revenue came from single-use products that are expected to be recurring.
We offer a comprehensive range of devices and products to repair injuries 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
fluid pumps, with certain customers at no charge in exchange for commitments to purchase disposable products over certain time
periods. We loan this capital equipment, and it is subject to return if the customer does not meet certain minimum single-use
purchases. 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; Johnson & Johnson: DePuy Synthes, Inc.; MicroAire Surgical
Instruments, LLC and Zimmer Biomet, Inc.
Our surgical visualization products offer imaging systems for use in minimally invasive orthopedic and general surgery
procedures including 2DHD and 3DHD vision technologies. In surgical visualization, our competition includes Smith & Nephew,
plc; Arthrex, Inc.; Stryker Corporation; Olympus, Inc.; Richard Wolf and Karl Storz GmbH.
The Company is party to an agreement with Musculoskeletal Transplant Foundation (“MTF”) for the exclusive worldwide
sales representation, marketing and promotion of MTF's allograft tissues in the field of sports medicine and related areas to
customers through our sales force and marketing. The allograft tissues supplied by MTF under this agreement are used in 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. In 2018, approximately 87% of general surgery revenue came from single-use products that are expected to be
recurring.
Our advanced surgical product offering includes the leading clinical insufflation system (AirSeal®), an extensive energy
line and a broad offering of endomechanical products. AirSeal® includes proprietary valveless access ports to deliver significant
benefits to traditional minimally invasive surgery and robotic surgery. The electrosurgical offering consists of monopolar and
bipolar generators, Argon beam coagulation generators, handpieces, smoke management systems and other accessories. Our
endomechanical products offer a full line of instruments, including tissue retrieval bags, trocars, suction irrigation devices, graspers,
scissors and dissectors, used in minimally invasive surgery. We offer a unique and premium uterine manipulator called VCARE®
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for use in increasing the efficiency of laparoscopic hysterectomies and other gynecologic laparoscopic procedures. Our competition
includes Medtronic plc; Johnson & Johnson: Ethicon Endo-Surgery, Inc.; Stryker Endoscopy, Olympus, ERBE Elektromedizin
GmbH; and Applied Medical Resources Corporation.
Our endoscopic technologies offering includes a comprehensive line of diagnostic and therapeutic products used in
gastroenterology procedures which utilize flexible endoscopes. This offering includes forceps, snares, infection prevention
accessories, and devices for dilatation, stricture management, hemostasis and for the treatment of diseases of the biliary structures.
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 cardiology and critical care offering includes a line of vital signs, cardiac monitoring and patient care products
including ECG electrodes & accessories, cardiac defibrillation & pacing pads and a complete line of suction instruments and
tubing. Finally, we offer a physician's office electrosurgical product mainly used by dermatologists. Cardiology and critical care's
main competition includes Cardinal (formerly Medtronic plc) and 3M Company.
Buffalo Filter Acquisition
On February 11, 2019, we acquired Buffalo Filter and all of the issued and outstanding common stock of Palmerton
Holdings, Inc. from Filtration Group FGC LLC (the “Buffalo Filter Acquisition”) for approximately $365 million, in cash, subject
to customary adjustments for working capital, cash held by Buffalo Filter at closing, indebtedness of Buffalo Filter, expenses
related to the transaction and other related fees and expenses. Buffalo Filter develops, manufactures and markets smoke evacuation
technologies that are complementary to our Advanced Surgical portfolio.
We financed the purchase price for the Buffalo Filter Acquisition using a combination of the issuance of $345 million of
2.625% convertible notes due 2024 issued on January 29, 2019 (the Convertible Notes”) and the incurrence of indebtedness under
our sixth amended and restated senior secured credit agreement, which closed on February 7, 2019.
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, Japan, 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 34% of our total net sales in 2018. In the remaining countries where our products are sold through independent
distributors, sales are denominated in United States dollars.
Competition
We compete in orthopedic 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 2018, 2017 and 2016.
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
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management purposes, some of our customers prefer to purchase our products through independent third-party medical product
distributors.
Our employee sales representatives are extensively 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 and training 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 $1.5 million, $1.8
million and $2.3 million in 2018, 2017 and 2016, respectively.
Amounts expended for Company research and development were approximately $42.2 million, $32.3 million and $32.3
million during 2018, 2017 and 2016, respectively.
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.
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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
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 12 to
the consolidated financial statements for further discussion.
We are also subject to various environmental health and safety laws and regulations both in the United States and
internationally. Our operations involve the use of substances regulated under environmental laws, primarily in manufacturing and
sterilization processes. We believe our policies, practices and procedures are properly designed to comply, in all material respects,
with applicable environmental laws and regulations. We do not expect compliance with these requirements to have a material
effect on purchases of property, plant and equipment, cash flows, net income or our competitive position.
Employees
As of December 31, 2018, we had approximately 3,100 full-time employees, including approximately 1,890 in operations,
150 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”.
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(i) Risks Related to Our Business and the Medical Device Industry
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.
In addition, approximately 21% of our revenues are derived from the sale of capital products. The sales of such products may be
negatively impacted if hospitals and other healthcare providers are unable to secure the financing necessary to purchase these
products or otherwise defer purchases.
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 2020. 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
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. As
a medical device company, CONMED’s operations and interactions with government hospitals, healthcare professionals and
purchasers may be subject to various federal and state regulations, including the federal False Claims Act, which provides, in part,
that the federal government may bring a lawsuit against any person or entity that it believes has knowingly presented, or caused
to be presented, a false or fraudulent request for payment to the government, or has made or used, or caused to be made or used,
a false statement or false record material to a false claim. In addition, in certain circumstances, private parties may bring so-called
Qui Tam claims as plaintiffs purportedly on behalf of the government asserting claims arising under the False Claims Act. A
violation of the False Claims Act may result in fines up to $11,000 for each false claim, plus up to three times the amount of
damages sustained by the government, and may also provide the basis for the imposition of administrative penalties and exclusion
from participation in federal healthcare programs. Many states have enacted false claims acts that are similar to the federal False
Claims Act. No inquiry or claim 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 not become investigations or enforcement actions, or the costs
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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.
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:
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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:
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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
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advances in surgical procedures, discoveries or developments in the healthcare industry.
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 reimbursement for procedures, 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 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.
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:
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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.
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.
(ii) Risks Related to Our Indebtedness
The terms of our indebtedness outstanding from time to time, including our senior credit agreement, may restrict our
current and future operations, particularly our ability to respond to changes or to take certain actions.
The senior credit agreement contains, and future credit facilities are expected to contain, a number of restrictive covenants that
impose significant operating and financial restrictions on us and may limit our ability to respond to changes in our business or
competitive activities, or to otherwise engage in acts that may be in our long-term best interest, including restrictions on our ability
to:
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incur indebtedness;
allow for liens to be placed on our assets;
make investments;
engage in transactions with affiliates;
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make certain restricted payments;
enter into certain restrictive agreements;
enter into certain swap agreements;
change our line of business;
pay dividends or make other distributions on, or redeem or repurchase, capital stock;
consolidate, merge or sell all or substantially all of our assets;
prepay and/or modify the terms of certain indebtedness; 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.
We may not be able to generate sufficient cash to service our indebtedness, and, our leverage and debt service requirements
may require us to adopt alternative business strategies.
As of December 31, 2018, we had $457.2 million of debt outstanding, representing 40% of total capitalization. We may not have
sufficient 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” 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:
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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.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase
significantly.
Borrowings under our senior credit agreement are at variable rates of interest and expose us to interest rate risk. If interest rates
were to increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed
remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly
decrease. In the future, we may enter into interest rate swaps that involve the exchange of floating for fixed rate interest payments
in order to reduce interest rate volatility. However, we may not maintain interest rate swaps with respect to all of our variable rate
indebtedness, and any swaps we enter into may not fully mitigate our interest rate risk.
Despite our current level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt. This
could further exacerbate the risks to our financial condition described above.
We may incur substantial additional indebtedness, including secured indebtedness. As of December 31, 2018 and after giving
effect to the Buffalo Filter acquisition on a pro forma basis, the borrowing under our sixth senior credit agreement, and the
issuance of the notes and the use of proceeds therefrom, we would have had $324.0 million of availability under the senior credit
agreement. If we incur secured indebtedness and such secured indebtedness is either accelerated or becomes subject to a
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bankruptcy, liquidation or reorganization, our assets would be used to satisfy obligations with respect to the indebtedness secured
thereby before any payment could be made on the debt that is not similarly secured. If new debt or other liabilities are added to
our current debt levels, the related risks that we now face could intensify. Our senior credit agreement restricts our ability to
incur additional indebtedness, including secured indebtedness, but if the facilities mature or are repaid, we may not be subject to
such restrictions under the terms of any subsequent indebtedness.
The conditional conversion features of our 2.625% Convertible Notes due 2024 (the “Convertible Notes”), if triggered, may
adversely affect our financial condition.
In the event the conditional conversion features of the Convertible Notes issued on January 29, 2019 are triggered, holders of the
Convertible Notes will be entitled to convert the Convertible Notes at any time during specified periods at their option. If one or
more holders elect to convert their Convertible Notes, unless we elect to satisfy our conversion obligation by delivering solely
shares of our common stock, we would be required to make cash payments to satisfy all or a portion of our conversion obligation
based on the conversion rate, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their
Convertible Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal
of the Convertible Notes as a current rather than long-term liability, which could result in a material reduction of our net working
capital. Refer to Item 7. Management and Discussion and Analysis - Financing Cash Flows and Note 17 for further details on the
Convertible Notes.
The convertible note hedge and warrant transactions that we entered into in connection with the offering of the Convertible
Notes may affect the value of the Convertible Notes and our common stock.
In connection with the offering of the Convertible Notes, we entered into convertible note hedge transactions with certain option
counterparties (each an “option counterparty”). The convertible note hedge transactions are expected generally to reduce the
potential dilution upon conversion of the Convertible Notes and/or offset any cash payments we are required to make in excess
of the principal amount of converted Convertible Notes, as the case may be. We also entered into warrant transactions with each
option counterparty. The warrant transactions could separately have a dilutive effect on our common stock to the extent that the
market price per share of our common stock exceeds the strike price of the warrants, unless we elect to settle the warrants in
cash. In connection with establishing its initial hedge of the convertible note hedge and warrant transactions, each option
counterparty or an affiliate thereof may have entered into various derivative transactions with respect to our common stock
concurrently with or shortly after the pricing of the Convertible Notes. This activity could increase (or reduce the size of any
decrease in) the market price of our common stock or the Convertible Notes at that time. In addition, each option counterparty
or an affiliate thereof may modify its hedge position by entering into or unwinding various derivatives with respect to our common
stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the
maturity of the Convertible Notes (and is likely to do so during any observation period related to a conversion of the Convertible
Notes). This activity could also cause or avoid an increase or a decrease in the market price of our common stock or the Convertible
Notes. In addition, if any such convertible note hedge and warrant transactions fail to become effective, each option counterparty
may unwind its hedge position with respect to our common stock, which could adversely affect the value of our common stock
and the value of the Convertible Notes.
We are subject to counterparty risk with respect to the convertible note hedge transactions.
Each option counterparty to the convertible note hedge transactions is a financial institution whose obligation to perform under
the convertible note hedge transaction will not be secured by any collateral. If an option counterparty becomes subject to insolvency
proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under our
transactions with the option counterparty. Our exposure will generally correlate to the increase in the market price and in the
volatility of our common stock. In addition, upon a default by an option counterparty, we may suffer adverse tax consequences
and more dilution than we currently anticipate with respect to our common stock. Although these counterparties are large, reputable
U.S. financial institutions, we can provide no assurances as to the financial stability or viability of any option counterparty.
(iii) Risks Related to Our Acquisition Strategy
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, including the acquisition of Buffalo Filter. Our success in pursuing this strategy depends on our ability to identify
target companies or product lines that are available for sale, and, negotiating successful terms with the sellers, as the sellers may
also be negotiating with other bidders with greater financial resources than we have. Even when we win a bid, our success is also
12
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 or coverage from representation and warranty insurance 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.
The terms of any future preferred equity or debt financing may give holders of any preferred securities or debt securities rights
that are senior to rights of our common shareholders or impose more stringent operating restrictions on our company.
Debt or equity financing may not be available to us on acceptable terms. If we incur additional debt or raise equity through the
issuance of preferred stock or convertible securities, the terms of the debt or the preferred stock issued may give the holders rights,
preferences and privileges senior to those of holders of our common stock, particularly in the event of liquidation. The terms of
the debt may also impose additional and more stringent restrictions on our operations. If we raise funds through the issuance of
additional equity, the ownership percentage of our existing shareholders would be diluted.
(iv) Other Risks Related to Our Business
We could experience a failure of a key information technology system, process or site or a breach of information security,
including a cybersecurity breach or failure of one or more key information technology systems, networks, processes, associated
sites or service providers.
We rely extensively on information technology (“IT”) systems for the storage, processing, and transmission of our electronic,
business-related, information assets used in or necessary to conduct business. We leverage our internal IT infrastructures, and
those of our business partners, to enable, sustain, and support our global business activities. In addition, we rely on networks and
services, including internet sites, data hosting and processing facilities and tools and other hardware, software and technical
applications and platforms, some of which are managed, hosted, provided and/or used by third-parties or their vendors, to assist
in conducting our business. The data we store and process may include customer payment information, personal information
concerning our employees, confidential financial information, and other types of sensitive business-related information. In limited
instances, we may also come into possession of information related to patients of our physician customers. Numerous and evolving
cybersecurity threats pose potential risks to the security of our IT systems, networks and services, as well as the confidentiality,
availability and integrity of our data. In addition, the laws and regulations governing security of data on IT systems and otherwise
collected, processed, stored, transmitted, disclosed and disposed of by companies are evolving, adding another layer of complexity
in the form of new requirements. We have made, and continue to make investments, seeking to address these threats, including
monitoring of networks and systems, hiring of experts, employee training and security policies for employees and third-party
providers. The techniques used in these attacks change frequently and may be difficult to detect for periods of time and we may
face difficulties in anticipating and implementing adequate preventative measures. While the breaches of our IT systems to date
have not been material to our business or results of operations, the costs of attempting to protect IT systems and data may increase,
and there can be no assurance that these added security efforts will prevent all breaches of our IT systems or thefts of our data. If
our IT systems are damaged or cease to function properly, the networks or service providers we rely upon fail to function properly,
we fail to comply with an applicable law or regulation, such as the General Data Protection Regulation ("GDPR"), or we or one
of our third-party providers suffer a loss or disclosure of our business or stakeholder information due to any number of causes
ranging from catastrophic events or power outages to improper data handling or security breaches and our business continuity
plans do not effectively address these failures on a timely basis, we may be exposed to potential disruption in operations, loss of
customers, reputational, competitive and business harm as well as significant costs from remediation, litigation and regulatory
actions.
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 worldwide sales representation, marketing and 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
13
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 agreement, 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.
We distribute some products for third-party companies, and cannot ensure that our rights to distribute such third-party products
will continue indefinitely.
While we generally own the products' designs and rights to the products we sell, in some cases we distribute products for third-
parties. While these third-parties may have business reasons for contracting with us to distribute their products, we may face the
risk that the third-parties may seek alternate distribution partners when their distribution contracts with us expire or are scheduled
for renewal. If we lose the distribution rights to such products, we may not be able to find replacement products that are acceptable
to our customers, or to us.
If we lose our patents or they are held to be invalid, or if our products or services infringe on third party patents, 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 2019 through 2040 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, and we may not prevail.
While we seek to take reasonable steps to avoid infringing on patents we do not own or license, we cannot be sure that our services
and products do not infringe on the intellectual property rights of third parties, and we may have infringement claims asserted
against us. These claims could cost us money, prevent us from offering some services or products, or damage our reputation. 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.
We can be sued for product liability claims and our insurance coverage may be insufficient to cover the nature and amount of
any product liability claims.
Even if our products are properly designed and perform as intended, we may be sued because 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.
14
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.
Our significant international operations subject us to foreign currency fluctuations and other risks associated with operating
in countries outside the United States.
A significant portion of our revenues, approximately 48% of 2018 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, Japan 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 34% of our total net sales in 2018. The remaining 14% 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 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 2018, 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 2020. 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 and tariffs;
compliance with economic sanctions, trade embargoes, export controls, and the customs laws and regulations of the many
countries in which we operate;
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 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;
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 Board of Directors may, in the future, limit or discontinue payment of a dividend on common stock.
We have paid a regular quarterly dividend to our shareholders since 2012. However, we may not declare or pay such dividends
in the future at the prior rate, or at all. All decisions regarding our payment of dividends will be made by our Board of Directors
from time to time and will be subject to an evaluation of our financial condition, results of operations and capital requirements,
as well as applicable law, regulatory constraints, industry practice, contractual restraints and other business considerations that
15
our Board of Directors considers relevant. In addition, our senior credit agreement contains restrictions on our ability to pay
dividends, and the terms of agreements governing debt that we may incur in the future may also limit or prohibit dividend
payments. We may not have sufficient surplus or net profits under New York law to be able to pay any dividends, which may
result from extraordinary cash expenses, actual expenses exceeding contemplated costs, funding of capital expenditures or
increases in reserves.
Anti-takeover provisions in our organizational documents and New York law could delay or prevent a change in control.
Provisions of our certificate of incorporation and bylaws may delay or prevent a merger or acquisition that a shareholder may
consider favorable. These provisions include:
• the ability of our board of directors to determine to issue shares of preferred stock and to determine the price and other terms
of those shares, including preferences and voting rights, without shareholder approval, which could be used to significantly
dilute the ownership of a hostile acquirer;
• the requirement that a special meeting of shareholders may be called only by the board of directors, the chairman of the
board of directors or the president, which may delay the ability of our shareholders to force consideration of a proposal or
to take action;
• providing indemnification to our directors and officers;
• providing that directors may be removed prior to the expiration of their terms by shareholders only for cause; and
• advance notice procedures that shareholders must comply with in order to nominate candidates to our board of directors or
to propose matters to be acted upon at a shareholders’ meeting, which may discourage or deter a potential acquiror from
conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of
us.
As a New York corporation, we are also subject to provisions of New York law, including Section 912 of the New York Business
Corporation Law, which prevents some shareholders holding more than 20% of our outstanding common stock from engaging in
certain business combinations without approval of the board of directors or the holders of substantially all of our outstanding
common stock. Any provision of our certificate of incorporation and bylaws or New York law that has the effect of delaying or
deterring a change in control could limit the opportunity for our shareholders to receive a premium for their shares of our common
stock, and could also affect the price that some investors are willing to pay for our common stock.
Item 1B. Unresolved Staff Comments
None.
16
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
Chihuahua, Mexico
Lithia Springs, GA
Brussels, Belgium
Mississauga, Canada
Greenwood Village, CO
Westborough, MA
Frenchs Forest, Australia
Seoul, Korea
Anaheim, CA
Frankfurt, Germany
Milan, Italy
Barcelona, Spain
Swindon, Wiltshire, UK
Askim, Sweden
Lyon, France
Beijing, China
Beijing, China
Shanghai, China
New York, NY
Warsaw, Poland
Espoo, Finland
Copenhagen, Denmark
Innsbruck, Austria
Tokyo, Japan
500,000
278,000
207,720
40,626
188,400
58,276
22,421
22,162
19,515
16,912
15,586
14,037
13,532
13,024
12,820
8,562
8,353
7,492
6,799
3,456
4,308
3,473
3,222
3,078
2,852
1,820
1,753
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
Lease
—
—
October 2019
March 2028
December 2019
June 2024
December 2023
July 2024
June 2020
July 2020
January 2020
August 2021
March 2023
March 2023
December 2023
December 2020
May 2019
December 2022
June 2019
September 2022
August 2021
September 2022
March 2023
January 2020
March 2022
June 2020
December 2020
Our principal manufacturing facilities are located in Utica, NY, Largo, FL and Chihuahua, Mexico. Lithia Springs, GA
and Brussels, Belgium are our principal distribution centers. The remaining facilities are generally 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 12 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.
17
PART II
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, 2019, there were approximately 550 registered holders of our common stock and approximately 9,900 accounts held
in “street name”.
Our Board of Directors has authorized a share repurchase program; see Note 8 to the consolidated financial statements.
The Board of Directors declared a quarterly cash dividend of $0.20 per share in 2017 and 2018. The fourth quarter
dividend for 2018 was paid on January 7, 2019 to shareholders of record as of December 14, 2018. The total dividend payable at
December 31, 2018 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.
18
Performance Graph
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.
19
Item 6. Selected Financial Data
The following table sets forth selected historical financial data for the years ended December 31, 2018, 2017, 2016, 2015
and 2014. 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
2018
Years Ended December 31,
2016
(In thousands, except per share data)
2017
2015
2014
Statements of Operations Data (1):
Net sales (2)
Cost of sales (3)
Gross profit
Selling and administrative expense (4)
Research and development expense (5)
Income from operations
Other expense (6)
Interest expense
Income before income taxes
Provision (benefit) for income taxes (7)
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 (8)
Long-term obligations (8)
Total shareholders’ equity
$ 859,634
390,524
469,110
355,617
42,188
71,305
—
20,652
50,653
9,799
40,854
$
$ 796,392
365,351
431,041
351,799
32,307
46,935
—
18,203
28,732
(26,755)
55,487
$
$ 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
$
$
$
$
$
$
1.45
1.41
0.80
28,118
28,890
61,803
16,507
17,511
1,369,138
545,924
662,270
$
$
$
$
$
1.99
1.97
0.80
27,939
28,171
58,548
12,842
32,622
1,357,961
576,526
631,432
$
$
$
$
$
$
$
$
$
$
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)
(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.
On January 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective
transition approach and began recording certain costs, previously recorded in selling and administrative expense and
principally related to administrative fees paid to group purchasing organizations, as a reduction of revenue. These costs
20
are presented in selling and administrative expense for all preceding years. During 2018, we recorded $8.3 million of
these costs as a reduction of revenue.
(3)
In 2017, 2016, 2015 and 2014, we incurred charges related to the restructuring of certain of our manufacturing operations
of $2.9 million, $3.1 million, $8.0 million and $5.6 million, respectively; in 2016 we incurred charges of $4.5 million
related to the termination of a product offering. See additional discussion in Note 13 to the consolidated financial
statements.
(4)
Acquisition, restructuring and other expense included in selling and administrative costs are the following:
Business acquisition costs
Restructuring costs
Legal matters
Gain on sale of facility
Management restructuring costs
Shareholder activism costs
Patent dispute and other matters
2018
2017
2016
2015
2014
$
$
2,372
—
—
2,336
1,347
17,480
$
—
—
—
—
—
—
—
—
17,029
6,670
3,773
(1,890)
—
—
—
$
$
2,543
13,655
—
—
—
—
—
722
3,354
—
—
12,546
3,966
3,374
Acquisition, restructuring and other expense included in
selling and administrative expense
$
2,372
$
21,163
$
25,582
$
16,198
$
23,962
See additional discussion in Notes 2, 12 and 13 to the consolidated financial statements.
(5)
(6)
(7)
(8)
During 2018, we recorded a net charge of $4.2 million to research and development expense mainly associated with the
impairment of an in-process research and development asset, net of the release of previously accrued contingent
consideration in other current and long-term liabilities, as further described in Notes 12 and 13.
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.
During 2017, we recorded a deferred tax benefit of $31.9 million as a result of the 2017 Tax Cuts and Jobs Act ("Tax
Reform"). During 2018, we recorded Tax Reform measurement period adjustments of $0.9 million to the December
2017 deferred tax balances, resulting in additional income tax expense. Refer to Note 7 to the consolidated financial
statements for further details.
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.
21
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, thoracic surgery and gastroenterology.
Our product lines consist of orthopedic surgery and general surgery. Orthopedic surgery consists of sports medicine
instrumentation and small bone, large bone and specialty powered surgical instruments as well as, imaging systems for use in
minimally invasive surgery procedures including 2DHD and 3DHD vision technologies 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. These product lines as a percentage of consolidated net sales are as follows:
Orthopedic surgery
General surgery
Consolidated net sales
2018
2017
2016
52%
48
100%
54%
46
100%
55%
45
100%
A significant amount of our products are used in surgical procedures with approximately 79% of our revenues derived
from the sale of single-use products. Our capital equipment offerings also facilitate the ongoing sale of related single-use 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% in 2018, 2017 and 2016.
Business Environment
On February 11, 2019, we acquired Buffalo Filter and all of the issued and outstanding common stock of Palmerton
Holdings, Inc. from Filtration Group FGC LLC (the “Buffalo Filter Acquisition”) for approximately $365 million, in cash, subject
to customary adjustments for working capital, cash held by Buffalo Filter at closing, indebtedness of Buffalo Filter, expenses
related to the transaction and other related fees and expenses. Buffalo Filter develops, manufactures and markets smoke evacuation
technologies that are complementary to our Advanced Surgical portfolio.
We financed the purchase price for the Buffalo Filter Acquisition using a combination of the issuance of $345.0 million
of 2.625% convertible notes due 2024 issued on January 29, 2019 (the Convertible Notes”) and the incurrence of indebtedness
under our sixth amended and restated senior secured credit agreement, which closed on February 7, 2019. Refer to Financing
Cash Flows and Note 17 to the consolidated financial statements for further details.
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. Actual results may or may not differ from these estimates.
Inventory Valuation
We value inventory at the lower of cost and net realizable value based on historical experience and life of inventory. 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
22
inventories based on historical experience and expected future trends. Market changes or new product introductions could impact
demand for our products and require inventory write-downs.
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. Factors that contribute to the recognition of goodwill include synergies that are specific to our
business and are expected to increase net sales and profits; acquisition of a talented workforce; cost savings opportunities; the
strategic benefit of expanding our presence in core and adjacent markets; and diversifying our product portfolio. 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. Sales representation, marketing and
promotional rights represent intangible assets created under our agreement with Musculoskeletal Transplant Foundation
(“MTF”). Determining the fair value of intangible assets acquired as part of a business combination requires us to make significant
estimates. These estimates include the amount and timing of projected future cash flows of each project or technology, the discount
rate used to discount those cash flows to present value, the assessment of the asset’s useful life, and the consideration of legal,
technical, regulatory, economic, and competitive risks.
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. We completed our goodwill impairment testing during the
fourth quarter of 2018. We performed our 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, 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.
For all other indefinite-lived intangible assets, we perform a qualitative impairment test. Based upon this assessment,
we have determined that our indefinite-lived intangible assets are not impaired.
See Note 5 to the consolidated financial statements for further discussion of goodwill and other intangible assets.
23
Consolidated Results of Operations
The following table presents, as a percentage of net sales, certain categories included in our consolidated statements of
comprehensive income for the periods indicated:
Years Ended December 31,
2017
2016
2018
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 (benefit) for income taxes
Net income
100.0%
45.4
54.6
41.4
4.9
8.3
—
2.4
5.9
1.1
4.8%
100.0%
45.9
54.1
44.2
4.1
5.9
—
2.3
3.6
(3.4)
7.0%
100.0%
46.5
53.5
44.3
4.2
4.9
0.4
2.0
2.5
0.6
1.9%
24
Net Sales
The following table presents net sales by product line for the years ended December 31, 2018, 2017 and 2016:
% Change from
2017 to 2018
Orthopedic surgery
General surgery
Net sales
Single-use products
Capital products
Net sales
Orthopedic surgery
General surgery
Net sales
Single-use products
Capital products
Net sales
2018
2017
As
Reported
ASC 606
Impact
$
$
$
$
446.7
412.9
859.6
681.1
178.5
859.6
$
$
$
$
428.9
367.5
796.4
637.0
159.4
796.4
4.1%
12.4%
7.9%
6.9%
12.0%
7.9%
0.7%
1.7%
1.2%
1.4%
—%
1.2%
2017
2016
As
Reported
$
$
$
$
428.9
367.5
796.4
637.0
159.4
796.4
$
$
$
$
422.1
341.4
763.5
605.8
157.7
763.5
1.6%
7.6%
4.3%
5.2%
1.1%
4.3%
Impact of
Foreign
Currency Adjusted a
3.9%
-0.9%
-0.3%
-0.7%
-0.7%
-0.5%
-0.7%
-0.1%
0.2%
—%
—%
-0.1%
—%
13.8%
8.4%
7.6%
11.5%
8.4%
7.8%
4.3%
5.2%
1.0%
4.3%
% Change from
2016 to 2017
Impact of
Foreign
Currency Adjusted a
1.5%
(a) Adjusted net sales growth is measured in constant currency and is adjusted for administrative fees that we began recording as a reduction of revenue under
Accounting Standards Codification 606, Revenue from Contracts with Customers ("ASC 606") on January 1, 2018. Refer to Note 16 to the consolidated
financial statements and Non-GAAP Financial Measures below for further details.
Net sales increased 7.9% to $859.6 million in 2018 and 4.3% in 2017 to $796.4 million from $763.5 million in 2016.
The increase in 2018 was due to growth in both the orthopedic and general surgery product lines, as described below. The adoption
of ASC 606 reduced sales by $8.3 million in 2018, as we are required to report certain costs previously recorded in selling and
administrative expense and principally related to administration fees paid to group purchasing organizations, as a reduction of
revenue beginning in 2018. The increase in 2017 was due to the continued growth in general surgery and the return to growth in
orthopedic surgery, as described below.
• Orthopedic surgery sales increased 4.1% in 2018 to $446.7 million and 1.6% in 2017 to $428.9 million from $422.1
million in 2016. In 2018, the increase was primarily due to continued growth in our sports medicine and powered
instrument offerings driven by the introduction of new products. In 2017, the increase was mainly driven by our sports
medicine offerings, including new product introductions, partially offset by lower capital sales.
• General surgery sales increased 12.4% in 2018 to $412.9 million and 7.6% in 2017 to $367.5 million from $341.4 million
in 2016. The increase in 2018 was driven by continued sales growth from all product offerings. New product introductions
and continued strong AirSeal® sales contributed to this growth. The increase in 2017 was driven primarily by sales
growth of our advanced surgical product offering, particularly in AirSeal® and new product introductions, and endoscopic
technologies products, particularly in new product introductions.
25
Cost of Sales
Cost of sales was $390.5 million in 2018, $365.4 million in 2017 and $355.2 million in 2016. Gross profit margins were
54.6% in 2018, 54.1% in 2017 and 53.5% in 2016. The increase in gross profit margin of 0.5 percentage points in 2018 was mainly
the result of a decrease in restructuring costs, product mix and favorable foreign exchange rates on sales offset by the impact of
the adoption of ASC 606. The increase of 0.6 percentage points in 2017 was mainly the result of reduced restructuring costs.
Selling and Administrative Expense
Selling and administrative expense was $355.6 million in 2018, $351.8 million in 2017 and $338.4 million in 2016.
Selling and administrative expense as a percentage of net sales was 41.4% in 2018, 44.2% in 2017 and 44.3% in 2016.
The factors affecting the 2.8 percentage point decrease in selling and administrative expense as a percentage of net sales
in 2018 as compared to the same period a year ago included (1) a $17.5 million (2.2 percentage point) decrease primarily associated
with the $12.2 million SurgiQuest, Inc. vs. Lexion Medical litigation verdict as further described in Notes 12 and 13 and legal
fees associated with this and other legal matters during 2017, (2) an $8.3 million (1.0 percentage point) reduction in selling and
administrative expense due to the adoption of ASC 606 as we are required to report certain costs previously recorded in selling
and administrative expense and (3) a $1.3 million (0.2 percentage point) decrease in selling and administrative restructuring
charges. These decreases were partially offset by incremental compensation costs and investments in our infrastructure.
The factors affecting the 0.1 percentage point decrease in selling and administrative expense as percentage of net sales
in 2017 as compared to 2016 included (1) a $14.7 million decrease in costs associated with the SurgiQuest acquisition as further
described in Notes 2 and 12 and (2) a $5.3 million decrease in severance and other related costs from the restructuring of certain
sales, marketing and administrative functions as further described in Note 13. These decreases were offset by (1) $12.2 million
in costs associated with the SurgiQuest, Inc. vs. Lexion Medical litigation verdict as further described in Notes 12 and 13, (2) the
$1.5 million increase in legal fees associated with this litigation as well as other legal matters as further described in Note 13, (3)
the $1.9 million gain on the sale of our Centennial, CO facility in 2016 as further described in Note 13 and (4) higher selling and
administrative expense to support the growth of the Company.
Research and Development Expense
Research and development expense was $42.2 million, $32.3 million and $32.3 million in 2018, 2017 and 2016,
respectively. As a percentage of net sales, research and development expense was 4.9% in 2018, 4.1% in 2017 and 4.2% in 2016.
The increase in expense during 2018 is due to our continued efforts to increase new product development as well as a net charge
of $4.2 million mainly associated with the impairment of an in-process research and development asset, net of the release of
previously accrued contingent consideration in other current and long-term liabilities, as further described in Note 12. Research
and development expense remained flat in 2017 as compared to 2016 due to the timing of projects
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 $20.7 million in 2018 compared to $18.2 million in 2017 and $15.4 million in 2016. Interest expense
increased in 2018 as compared to 2017 and 2017 as compared to 2016 due to higher interest rates under the fifth amended and
restated senior credit agreement as further described in Note 6 to the consolidated financial statements. The weighted average
interest rates on our borrowings were 4.35% in 2018 increasing from 3.52% in 2017 and 2.93% in 2016.
26
Provision (Benefit) for Income Taxes
A provision (benefit) for income taxes was recorded at an effective rate of 19.3%, (93.1)% and 24.3% in 2018, 2017 and
2016, respectively, as compared to the federal statutory rate of 21.0% in 2018 and 35.0% in 2017 and 2016. The effective tax rate
in 2018 is higher than that recorded in 2017 due primarily to the one-time benefit taken related to the Tax Cuts and Jobs Act in
2017 ("Tax Reform"). The effective tax rate in 2017 is lower than that recorded in 2016 due to Tax Reform and consolidated
group restructuring. 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
Net sales on an "adjusted" basis is a non-GAAP measure that presents net sales in "constant currency" and adjusts for
the adoption impact of ASC 606. 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. In addition, the Company adjusts for the
adoption impact of ASC 606. For GAAP purposes, we applied the modified retrospective transition approach which requires
certain costs previously included in selling and administrative expense and principally related to administrative fees paid to group
purchasing organizations, to be recorded as a reduction of revenue for periods subsequent to January 1, 2018. Amounts reported
in prior years remain unchanged with these administrative fees included in selling and administrative expense. To improve
comparability between reporting periods, we assumed ASC 606 had been applied as of January 1, 2017 thereby reducing net sales
by the administrative fees for both periods when calculating adjusted sales growth.
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 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 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, 2018 of $17.5 million, of which approximately $16.1 million was held by
our foreign subsidiaries outside the United States with unremitted earnings. During 2018, we redeployed $25.4 million of cash
from certain non-U.S. subsidiaries primarily for U.S. debt reduction. This cash consisted of earnings that were taxed in 2017 as
part of the deemed repatriation toll charge implemented by Tax Reform. If we were to repatriate the remaining unremitted earnings
that have been taxed as part of the deemed repatriation toll charge, we would be required to accrue and pay withholding taxes in
certain foreign jurisdictions. We have accrued a deferred tax liability for foreign withholding taxes related to the amount of the
remaining cumulative unremitted earnings as of December 31, 2017 as these are not considered permanently reinvested.
It is our intention to permanently reinvest all future foreign earnings for periods occurring after December 31, 2017. The
amount of such untaxed foreign earnings for the periods occurring after December 2017 totaled $18.4 million. If we were to
repatriate these funds, we would be required to accrue and pay taxes on such amounts. The Company has estimated foreign
withholding taxes of $0.6 million would be due if these earnings were repatriated.
Operating Cash Flows
27
Our net working capital position was $213.4 million at December 31, 2018. Net cash provided by operating activities
was $74.7 million in 2018, $65.6 million in 2017 and $39.9 million in 2016 generated on net income of $40.9 million in 2018,
$55.5 million in 2017 and $14.7 million in 2016.
The increase in cash flows from operating activities in 2018 compared to 2017 is primarily due to the increase in net
income (excluding the non-cash impact of Tax Reform) as 2017 included costs associated with restructuring and legal matters as
further described in Note 13 to the consolidated financial statements, including a $12.2 million accrual related to the Lexion trial
verdict. This accrual was subsequently paid during 2018, thereby partially offsetting the increase in operating cash flows in 2018.
In addition, other significant changes in assets and liabilities affecting cash flows include the following:
• A decrease in cash flows from inventory is caused primarily by an increase in production to support new product
introductions and sales growth;
• An increase in cash flows from accounts payable is due to timing of payments and increased raw material purchases;
• An increase in cash flows from accrued compensation and benefits is caused by higher commission and incentive
compensation accruals associated with increased sales; and
• A decrease in cash flows from other liabilities is caused primarily by the aforementioned Lexion trial verdict payment
during 2018.
The increase in cash provided by operating activities from 2017 to 2016 is mainly related to the prior year having significant
cash outflows resulting from the SurgiQuest, Inc. acquisition whereby 2017 had a $12.2 million accrual related to the Lexion trial
verdict, as further described in Notes 12 and 13 to the consolidated financial statements.
Investing Cash Flows
Net cash used in investing activities decreased to $16.5 million in 2018 compared to $29.1 million in 2017 primarily due
to there being no payments related to business and asset acquisitions during 2018 as compared to the $16.2 million in 2017.
Net cash used in investing activities decreased to $29.1 million in 2017 compared to $266.0 million in 2016 primarily
due to the $16.2 million in payments related to acquiring businesses, assets and a distributor in 2017 as compared to the payment
for the SurgiQuest acquisition in 2016 of $256.5 million. This decrease was also offset by $5.2 million in proceeds from the sale
of our Centennial, Colorado facility during 2016.
Capital expenditures were $16.5 million, $12.8 million and $14.8 million in 2018, 2017 and 2016, respectively. Capital
expenditures are expected to be in the $15.0 million to $20.0 million range for 2019.
Financing Cash Flows
Financing activities in 2018 used cash of $72.3 million compared to using cash of $34.9 million in 2017 and providing
cash of $182.5 million in 2016. Below is a summary of the significant financing activities:
• During 2016, we had borrowings of $175.0 million on our term loan. We repaid $13.1 million in 2018 and $8.8 million
in each of 2017 and 2016 in accordance with the agreement, as further described below. During 2018 and 2017, we had
net repayments on our revolving line of credit of $15.0 million and $2.0 million, respectively, as compared to net
borrowings of $62.7 million in 2016.
• Dividend payments remained consistent at $22.4 million, $22.3 million and $22.2 million in 2018, 2017 and 2016,
respectively.
•
•
•
In 2018, we paid $21.3 million in contingent consideration related to a prior asset acquisition.
In 2016, we made the final payment of $16.7 million associated with the distribution and development agreement with
Musculoskeletal Transplant Foundation.
In 2018, debt issuance costs of $0.9 million were related to the sixth amended and restated senior credit agreement
completed in 2019 and $5.6 million in 2016 were paid in conjunction with our fifth and fourth amended and restated
senior credit agreements, respectively.
28
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. Interest rates are at LIBOR plus an interest rate margin (the total of which is equal to 4.405% at December 31, 2018).
For those borrowings where we elect to use the alternate base rate, the base rate is the greatest of (i) the Prime Rate, (ii) the Federal
Funds Rate plus 0.50% or (iii) the one-month Eurocurrency Rate plus 1.00%, plus, in each case, an interest rate margin.
There were $144.4 million in borrowings outstanding on the term loan and $312.0 million in borrowings outstanding
under the revolving credit facility as of December 31, 2018. Our available borrowings on the revolving credit facility at
December 31, 2018 were $210.0 million with approximately $3.0 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, 2018. We are also required, under certain circumstances, to make mandatory prepayments from net cash proceeds
from any issuance of equity and asset sales.
As described in Note 17 to the consolidated financial statements, on February 7, 2019 we entered into a sixth amended
and restated senior credit agreement consisting of: (a) a $265.0 million term loan facility and (b) a $585.0 million revolving credit
facility. The revolving credit facility will terminate and the loans outstanding under the term loan facility will expire on the earlier
of (i) February 7, 2024 or (ii) 91 days prior to the earliest scheduled maturity date of the $345.0 million in 2.625% convertible
notes due in 2024 described below, (if, as of such date, more than $150.0 million in aggregate principal amount of such convertible
notes (or any refinancing thereof) remains outstanding). 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 in part to finance the acquisition of Buffalo Filter. Initial interest rates are at LIBOR
plus an interest rate margin of 1.875%. For those borrowings where we elect to use the alternate base rate, the initial base rate
will be the greatest of (i) the Prime Rate, (ii) the Federal Funds Rate plus 0.50% or (iii) the one-month Eurocurrency Rate plus
1.00%, plus, in each case, an interest rate margin.
As described in Note 17 to the consolidated financial statements, on January 29, 2019, we issued $345.0 million in 2.625%
convertible notes due in 2024 (the "Notes"). Interest is payable semi-annually in arrears on February 1 and August 1 of each year,
commencing August 1, 2019. The Notes will mature on February 1, 2024, unless earlier repurchased or converted. The Notes
represent subordinated unsecured obligations and are convertible under certain circumstances, as defined in the indenture, into a
combination of cash and CONMED common stock. The Notes may be converted at an initial conversion rate of 11.2608 shares
of our common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $88.80 per
share of common stock). Holders of their Notes may convert their Notes at their option at any time on or after November 1, 2023
through the second scheduled trading day preceding the maturity date. Holders of the Notes will also have the right to convert
the Notes prior to November 1, 2023, but only upon the occurrence of specified events. The conversion rate is subject to anti-
dilution adjustments if certain events occur. A portion of the net proceeds from the offering of the notes were used as part of the
financing for the Buffalo Filter acquisition, $21.0 million was used to pay the cost of certain convertible notes hedge transactions
as further described below and we intend to use the remaining proceeds of the Notes for general corporate purposes.
In accordance with ASC 470-20, because the Notes may be wholly or partially settled in cash, we are required to separate
the Notes into a liability and an equity component, such that interest expense reflects the non-convertible debt interest rate. A
debt discount is recognized at issuance as a decrease to the Notes and an increase to equity. This debt discount will be amortized
to interest expense over the expected term of the Notes, thereby accreting the Notes value to the principal amount.
In connection with the offering of the Notes, we entered into convertible note hedge transactions with a number of financial
institutions (each, an “option counterparty”). The convertible note hedge transactions cover, subject to anti-dilution adjustments
substantially similar to those applicable to the Notes, the number of shares of our common stock underlying the Notes. Concurrently
with entering into the convertible note hedge transactions, we also entered into separate warrant transactions with each option
counterparty whereby we sold to such option counterparty warrants to purchase, subject to customary anti-dilution adjustments,
the same number of shares of our common stock.
The convertible note hedge transactions are expected generally to reduce the potential dilution upon conversion of the
Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case
29
may be, in the event that the market price per share of our common stock, as measured under the terms of the convertible note
hedge transactions, is greater than the strike price ($114.92) of the convertible note hedge transactions, which initially corresponds
to the conversion price of the Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the
conversion rate of the Notes. If, however, the market price per share of our common stock, as measured under the terms of the
warrant transactions, exceeds the strike price of the warrants, there would nevertheless be dilution to the extent that such market
price exceeds the strike price of the warrants, unless we elect to settle the warrants in cash.
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 $0.8 million at December 31, 2018. The mortgage note is collateralized by the Largo, Florida
property and facilities.
Our Board of Directors has authorized a $200.0 million share repurchase program. Through December 31, 2018, 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 2018. 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 1A. Risk Factors - Risks Related to Our Indebtedness."
Restructuring
For the years ending December 31, 2017 and 2016, we incurred $2.9 million and $3.1 million, respectively, in costs
associated with operational restructuring. These costs were charged to cost of sales and include severance, inventory and other
charges. As part of this plan, we engaged a consulting firm to assist us in streamlining our product offering and improving our
operational efficiency. As a result, we identified certain catalog numbers to be discontinued and consolidated into existing product
offerings and recorded a $1.3 million charge in the year ended December 31, 2017 to write-off inventory which will no longer be
offered for sale. This amount is included in the above total for 2017.
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 2017 and 2016, we restructured certain sales, marketing and administrative functions and incurred severance and
other related costs in the amount of $1.3 million and $6.7 million. These costs were charged to selling and administrative expense.
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.
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.
Refer to Note 13 to the consolidated financial statements for further discussions regarding restructuring.
30
Contractual Obligations
The following table summarizes our contractual obligations for the next five years and thereafter (amounts in thousands)
as of December 31, 2018. Purchase obligations represent purchase orders for goods and services placed in the ordinary course of
business.
Payments Due by Period
1-3
Years
Less than
1 Year
3-5
Years
More than
5 Years
Total
Long-term debt
Purchase obligations
Lease obligations
Total contractual obligations
$
$
457,211
62,928
23,334
543,473
$
$
18,336
60,517
9,106
87,959
$
$
438,875
1,468
8,687
449,030
$
$
— $
943
4,044
4,987
$
—
—
1,497
1,497
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 $3.1 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 two 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
four to 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 $10.0 million, $8.5 million and $8.4 million for
the years ended December 31, 2018, 2017 and 2016, respectively.
Other Matters
Our credit facility allows 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. We had sales to a third-party distributor in Iran during 2018 and expect there may
be sales prospectively. We intend to limit sales into Iran to products that qualify as “medical supplies” within the meaning of the
general license, or covered by specific licenses, 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.
New Accounting Pronouncements
See Note 16 to the consolidated financial statements for a discussion of new accounting pronouncements.
31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from adverse changes in market rates and prices such as commodity prices, foreign
currency exchange rates and interest rates. In the normal course of business, we are exposed to various market risks, including
changes in foreign currency exchange rates and interest rates. We manage our exposure to these and other market risks through
regular operating and financing activities and as necessary through the use of derivative financial instruments.
Foreign currency risk
Approximately 48% of our total 2018 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, Japan and Korea. In those countries
in which we have a direct presence, our sales are denominated in the local currency amounting to approximately 34% of our total
net sales in 2018. The remaining 14% 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 2018, foreign currency exchange rates, including the effects of the hedging program, caused
sales to increase by approximately $5.1 million and income before income taxes to increase by approximately $3.2 million,
compared to sales and income before income taxes in 2017.
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, 2018 which have been accounted for
as cash flow hedges totaled $155.3 million. Net realized gains (losses) recognized for forward contracts accounted for as cash
flow hedges approximated $(0.9) million, $(0.7) million and $1.2 million for the years ended December 31, 2018, 2017 and 2016,
respectively. At December 31, 2018, $4.1 million of net unrealized gains on forward contracts accounted for as cash flow hedges,
and included in accumulated other comprehensive loss, are expected to be recognized in earnings in the next twelve months.
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,
2018 which have not been designated as hedges totaled $39.6 million. Net realized gains (losses) recognized in connection with
those forward contracts not accounted for as hedges approximated $0.1 million, $(1.6) million and $0.0 million for the years ended
December 31, 2018, 2017 and 2016, respectively, offsetting gains (losses) on our intercompany receivables of $(0.8) million,
$1.1 million and $(0.1) million for the years ended December 31, 2018, 2017 and 2016, 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, 2018 was $5.2 million and is included in prepaids and other current assets in the consolidated balance
sheet.
Refer to Note 15 in the consolidated financial statements for further discussion.
Interest rate risk
At December 31, 2018, we had approximately $456.4 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 2019 than they
did in 2018, interest expense would increase, and income before income taxes would decrease by $4.6 million. Comparatively,
if market interest rates for similar borrowings average 1.0% less in 2019 than they did in 2018, our interest expense would decrease,
and income before income taxes would increase by $4.6 million.
Item 8. Financial Statements and Supplementary Data
Our 2018 Financial Statements are included in this Form 10-K beginning on page 43 and incorporated by reference herein.
32
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, 2018 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.
33
Item 10. Directors, Executive Officers and Corporate Governance
PART III
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 12, 2019.
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”, “Non-
Qualified Deferred Compensation”, “Potential Payments on Termination or Change-in-Control”, “Director Compensation,” “Pay
Ratio Disclosure” 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 12, 2019.
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 12, 2019.
Information relating to shareholder approved 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)
2,113,537
$
47.67
4,716,862
—
2,113,537
$
—
47.67
—
4,716,862
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.
During 2018, the Company granted employment inducement awards in conjunction with the hiring of the Executive Vice
President & Chief Financial Officer. This included 48,000 stock options at an exercise price of $50.56 per share. These shares
are not part of a shareholder approved plan and no shares remain available for future issuance.
34
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 12, 2019.
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 12, 2019.
35
PART IV
Item 15. Exhibits, Financial Statement Schedules
Index to Financial Statements
(a)(1) List of Financial Statements
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2018 and 2017
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2018,
2017 and 2016
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2018, 2017
and 2016
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016
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 39 below are filed as part of this
Form 10-K.
Page in Form 10-K
43
44
46
47
48
50
52
79
36
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 25, 2019
37
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.
Signature
Title
Date
/s/ MARK E. TRYNISKI
Mark E. Tryniski
/s/ CURT R. HARTMAN
Curt R. Hartman
/s/ TODD W. GARNER
Todd W. Garner
Chairman of the Board
of Directors
President, Chief Executive
Officer and Director
Executive Vice President
and Chief Financial Officer
/s/ TERENCE M. BERGE
Terence M. Berge
Vice President-
Corporate Controller
/s/ DAVID BRONSON
David Bronson
/s/ BRIAN P. CONCANNON
Brian P. Concannon
/s/ CHARLES M. FARKAS
Charles M. Farkas
Director
Director
Director
February 25, 2019
February 25, 2019
February 25, 2019
February 25, 2019
February 25, 2019
February 25, 2019
February 25, 2019
/s/ MARTHA GOLDBERG ARONSON
Martha Goldberg Aronson
Director
February 25, 2019
/s/ DIRK M. KUYPER
Dirk M. Kuyper
/s/ JEROME J. LANDE
Jerome J. Lande
/s/ JOHN L. WORKMAN
John L. Workman
Director
Director
Director
February 25, 2019
February 25, 2019
February 25, 2019
38
Exhibit No.
Description
Exhibit Index
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
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).
Indenture, dated as of January 29, 2019, by and between CONMED Corporation and MUFG Union
Bank, N.A., as trustee (Incorporated by reference to Exhibit 4.1 of the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission on January 29, 2019).
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).
39
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+
10.18+
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
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).
2018 Long-Term Incentive Plan (incorporated by reference to Exhibit 4.3 of the Registrants Form S-8
filed on November 5, 2018).
Sixth Amended and Restated Credit Agreement, dated February 7, 2019, among CONMED Corporation,
the foreign subsidiary borrowers from time to time party thereto, the several lenders from time to time
party thereto and JPMorgan Chase Bank, N.A., as administrative agent (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 February 7, 2019).
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).
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).
Separation Agreement, by and between CONMED Corporation and Luke A. Pomilio, dated November 1,
2017. (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 2, 2017).
Offer Letter from CONMED Corporation to Todd W. Garner dated January 2, 2018. (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 2, 2018).
40
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Stock Option Inducement Award (incorporated by reference to Exhibit 4.3 of the Registrants Form S-8
filed on February 27, 2018).
Restricted Stock Unit Inducement Award (incorporated by reference to Exhibit 4.4 of the Registrants
Form S-8 filed on February 27, 2018).
Securities Purchase Agreement, dated as of December 13, 2018, by and between CONMED Corporation
and Filtration Group FGC 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 December 13, 2018).
Base Note Hedge Transaction Confirmation, dated as of January 24, 2019, between CONMED
Corporation and Barclays Bank PLC (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 29, 2019).
Base Note Hedge Transaction Confirmation, dated as of January 24, 2019, between CONMED
Corporation and Bank of America, N.A (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 29, 2019).
Base Note Hedge Transaction Confirmation, dated as of January 24, 2019, between CONMED
Corporation and Wells Fargo Bank, National Association (Incorporated by reference to Exhibit 10.3 of
the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on
January 29, 2019).
Base Note Hedge Transaction Confirmation, dated as of January 24, 2019, between CONMED
Corporation and J.P. Morgan Securities LLC, as agent for JPMorgan Chase Bank, National Association,
London Branch (Incorporated by reference to Exhibit 10.4 of the Company's Current Report on Form 8-
K filed with the Securities and Exchange Commission on January 29, 2019).
Base Warrant Transaction Confirmation, dated as of January 24, 2019, between CONMED Corporation
and Barclays Bank PLC (Incorporated by reference to Exhibit 10.5 of the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission on January 29, 2019).
Base Warrant Transaction Confirmation, dated as of January 24, 2019, between CONMED Corporation
and Bank of America, N.A (Incorporated by reference to Exhibit 10.6 of the Company's Current Report
on Form 8-K filed with the Securities and Exchange Commission on January 29, 2019).
Base Warrant Transaction Confirmation, dated as of January 24, 2019, between CONMED Corporation
and Wells Fargo Bank, National Association (Incorporated by reference to Exhibit 10.7 of the
Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on January
29, 2019).
Base Warrant Transaction Confirmation, dated as of January 24, 2019, between CONMED Corporation
and J.P. Morgan Securities LLC, as agent for JPMorgan Chase Bank, National Association, London
Branch (Incorporated by reference to Exhibit 10.8 of the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission on January 29, 2019).
Additional Note Hedge Transaction Confirmation, dated as of January 25, 2019, between CONMED
Corporation and Barclays Bank PLC (Incorporated by reference to Exhibit 10.9 of the Company's
Current Report on Form 8-K filed with the Securities and Exchange Commission on January 29, 2019).
Additional Note Hedge Transaction Confirmation, dated as of January 25, 2019, between CONMED
Corporation and Bank of America, N.A. (Incorporated by reference to Exhibit 10.10 of the Company's
Current Report on Form 8-K filed with the Securities and Exchange Commission on January 29, 2019).
Additional Note Hedge Transaction Confirmation, dated as of January 25, 2019, between CONMED
Corporation and Wells Fargo Bank, National Association (Incorporated by reference to Exhibit 10.11 of
the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on
January 29, 2019).
Additional Note Hedge Transaction Confirmation, dated as of January 25, 2019, between CONMED
Corporation and J.P. Morgan Securities LLC, as agent for JPMorgan Chase Bank, National Association,
London Branch (Incorporated by reference to Exhibit 10.12 of the Company's Current Report on Form
8-K filed with the Securities and Exchange Commission on January 29, 2019).
41
10.34
10.35
10.36
10.37
14
21*
23*
31.1*
31.2*
32.1*
101*
-
-
-
-
-
-
-
-
-
-
-
Additional Warrant Transaction Confirmation, dated as of January 25, 2019, between CONMED
Corporation and Barclays Bank PLC (Incorporated by reference to Exhibit 10.13 of the Company's
Current Report on Form 8-K filed with the Securities and Exchange Commission on January 29, 2019).
Additional Warrant Transaction Confirmation, dated as of January 25, 2019, between CONMED
Corporation and Bank of America, N.A. (Incorporated by reference to Exhibit 10.14 of the Company's
Current Report on Form 8-K filed with the Securities and Exchange Commission on January 29, 2019).
Additional Warrant Transaction Confirmation, dated as of January 25, 2019, between CONMED
Corporation and Wells Fargo Bank, National Association (Incorporated by reference to Exhibit 10.15 of
the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on
January 29, 2019).
Additional Warrant Transaction Confirmation, dated as of January 25, 2019, between CONMED
Corporation and J.P. Morgan Securities LLC, as agent for JPMorgan Chase Bank, National Association,
London Branch (Incorporated by reference to Exhibit 10.16 of the Company's Current Report on Form
8-K filed with the Securities and Exchange Commission on January 29, 2019).
Code of Ethics. The CONMED code of ethics may be accessed via the Company’s website at http://
www.conmed.com/en/about-us/investors/investor-relations
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 Todd W. Garner. 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 Todd W. Garner 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, 2018 formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated
Statements of Comprehensive Income for the three years ended December 31, 2018, (ii) Consolidated
Balance Sheets at December 31, 2018 and 2017, (iii) Consolidated Statements of Shareholders' Equity
for the three years ended December 31, 2018 (iv) Consolidated Statements of Cash Flows for the three
years ended December 31, 2018, (v) Notes to the Consolidated Financial Statements for the year ended
December 31, 2018 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
42
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,
2018. 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, 2018. The
effectiveness of the Company’s internal control over financial reporting as of December 31, 2018 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/ Todd W. Garner
Todd W. Garner
Executive Vice President and
Chief Financial Officer
43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of CONMED Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of CONMED Corporation and its subsidiaries (the "Company")
as of December 31, 2018 and 2017, and the related consolidated statements of comprehensive income, shareholders’ equity and
cash flows for each of the three years in the period ended December 31, 2018, including the related notes and financial statement
schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”).
We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established
in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of the Company as of December 31, 2018 and 2017, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2018 based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on
the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. 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.
Definition and Limitations of Internal Control over Financial Reporting
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.
44
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 25, 2019
We have served as the Company’s auditor since 1982.
45
CONMED CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2018 and 2017
(In thousands except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful
accounts of $2,660 in 2018 and $2,137 in 2017
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 12)
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 2018 and 2017, respectively
Paid-in capital
Retained earnings
Accumulated other comprehensive loss
Less: Treasury stock, at cost;
3,167,422 and 3,338,015 shares in
2018 and 2017, respectively
Total shareholders' equity
Total liabilities and shareholders' equity
2018
2017
$
17,511
$
32,622
$
$
181,550
154,599
20,691
374,351
113,245
5,162
400,440
413,193
62,747
1,369,138
18,336
53,498
42,924
46,186
160,944
438,564
81,061
26,299
706,868
$
$
167,037
141,436
15,688
356,783
116,229
4,721
401,954
414,940
63,334
1,357,961
14,699
42,044
34,258
59,002
150,003
471,744
77,668
27,114
726,529
—
—
313
341,738
464,851
(55,737)
313
333,795
440,085
(49,078)
(88,895)
662,270
1,369,138
$
(93,683)
631,432
1,357,961
$
The accompanying notes are an integral part of the consolidated financial statements.
46
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2018, 2017 and 2016
(In thousands except per share amounts)
Net sales
Cost of sales
Gross profit
2018
2017
2016
$
859,634
$
796,392
$
763,520
390,524
365,351
355,190
469,110
431,041
408,330
Selling and administrative expense
355,617
351,799
338,400
Research and development expense
42,188
32,307
32,254
Operating expenses
Income from operations
Other expense
Interest expense
397,805
384,106
370,654
71,305
46,935
37,676
—
—
2,942
20,652
18,203
15,359
Income before income taxes
50,653
28,732
19,375
Provision (benefit) for income taxes
9,799
(26,755)
4,711
Net income
Per share data:
Basic
Diluted
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
$
$
$
$
$
40,854
$
55,487
$
14,664
$
$
$
1.45
1.41
$
$
1.99
1.97
(8,369) $
(885)
10,985
42,585
13,879
1,023
(8,051)
62,338
0.53
0.52
(4,501)
(755)
547
9,955
2,441
40,144
$
(2,597)
64,935
$
(77)
10,032
The accompanying notes are an integral part of the consolidated financial statements.
47
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 2018, 2017 and 2016
(In thousands)
Common Stock
Shares Amount
313
31,299
$
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury
Stock
Shareholders’
Equity
$324,915
$ 414,506
$
(53,894) $(100,767) $
585,073
3,348
(869)
Balance at December 31, 2015
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
(4,217)
203
8,375
(22,238)
14,664
(4,501)
(476)
345
Balance at December 31, 2016
31,299
$
313
$329,276
$ 406,932
$
(58,526) $ (97,419) $
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 of $378)
Cash flow hedging loss (net
of income tax benefit of
$2,975)
Net income
Total comprehensive income
(3,953)
8,472
(22,334)
3,736
13,879
645
(5,076)
55,487
Balance at December 31, 2017
31,299
$
313
$333,795
$ 440,085
$
(49,078) $ (93,683) $
48
203
8,375
(22,238)
10,032
580,576
(217)
8,472
(22,334)
64,935
631,432
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 $213)
Cash flow hedging gain (net
of income tax expense of
$2,654)
Net income
Total comprehensive income
Cumulative effect of change
in accounting principle(1)
Common Stock
Shares Amount
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury
Stock
Shareholders’
Equity
(2,094)
10,037
(22,477)
4,788
2,694
10,037
(22,477)
(8,369)
(672)
8,331
40,144
(5,949)
(55,737) $ (88,895) $
440
662,270
40,854
6,389
Balance at December 31, 2018
31,299
$
313
$341,738
$ 464,851
$
(1) We recorded the cumulative impact of adopting ASU 2014-09, Revenue from Contracts with Customers, (and its amendments) and ASU 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220) in 2018. See Note 16 to the consolidated financial statements for further
discussion regarding the adoption of accounting standards during 2018.
The accompanying notes are an integral part of the consolidated financial statements.
49
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2018, 2017 and 2016
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
2018
2017
2016
$
40,854
$
55,487
$
14,664
Depreciation
Amortization
Stock-based compensation
Impairment charges
Deferred income taxes
Gain on sale of facility
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:
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 contingent consideration
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
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Non-cash investing and financing activities:
Contractual obligations from asset acquisition
Dividends payable
50
18,530
43,273
10,037
4,212
2,063
—
(17,460)
(15,037)
12,109
(2,193)
9,044
(24,216)
(6,515)
33,847
74,701
—
—
(16,507)
(16,507)
(13,125)
—
(168,000)
153,000
—
(1,574)
(21,323)
(913)
(22,443)
2,113
(72,265)
(1,040)
(15,111)
20,079
38,469
8,472
—
(40,021)
—
(13,631)
(3,926)
(286)
4,288
336
(22,401)
18,700
10,079
65,566
(16,212)
—
(12,842)
(29,054)
(8,750)
—
(157,000)
155,000
—
(1,452)
—
—
(22,307)
(372)
(34,881)
3,563
5,194
20,479
34,830
8,375
—
(2,871)
(1,890)
(6,380)
3,103
2,094
(200)
(2,598)
(23,234)
(6,491)
25,217
39,881
(256,450)
5,178
(14,753)
(266,025)
(8,750)
175,000
(162,347)
225,000
(16,667)
(1,339)
—
(5,556)
(22,213)
(585)
182,543
(1,475)
(45,076)
$
$
32,622
27,428
72,504
17,511
$
32,622
$
27,428
$
8,360
5,626
— $
5,592
—
5,566
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest
Income taxes
2018
2017
2016
$
$
19,660
11,048
$
16,157
8,869
13,758
9,588
The accompanying notes are an integral part of the consolidated financial statements.
51
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, thoracic surgery 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. Due to the inherent uncertainty involved in making estimates, actual results reported in
future periods may differ from those estimates.
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 and net realizable value determined on the FIFO (first-in, first-out) cost method.
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. Factors that contribute to the recognition of goodwill include synergies that are specific to our
business and are expected to increase net sales and profits; acquisition of a talented workforce; cost savings opportunities; the
strategic benefit of expanding our presence in core and adjacent markets; and diversifying our product portfolio. 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. Sales representation, marketing and
promotional rights represent intangible assets created under our agreement with Musculoskeletal Transplant Foundation (“MTF”).
52
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. We completed our goodwill impairment testing during the
fourth quarter of 2018. We performed our 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, 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.
For all other indefinite-lived intangible assets, we perform a qualitative impairment test. Based upon this assessment,
we have determined that our indefinite-lived intangible assets are not impaired.
Other long-lived assets
We review other long-lived assets consisting of 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.
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. The net book value of
such equipment at December 31, 2018 and 2017 is $50.4 million and $52.4 million, respectively.
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
53
carryforwards following tax law ordering rules. 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 earned
after December 31, 2017 as 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
The Company recognizes revenue when we have satisfied a performance obligation by transferring a promised good or
service (that is an asset) to a customer. An asset is transferred when the customer obtains control of that asset. The following
policies apply to our major categories of revenue transactions:
• Revenue is recognized when product is shipped at which point the performance obligation is satisfied and the customer
obtains control of the product.
• We place certain of our capital equipment with customers on a loaned basis and at no charge in exchange 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 which is generally five
years.
• We recognize revenues in accordance with the terms of our agreement with MTF on a net basis as our role is that of an
agent earning a commission or fee. MTF is responsible for the sourcing, processing and distribution of allograft tissue
for sports medicine procedures while the Company represents, markets and promotes MTF’s sports medicine allograft
tissues to customers. The Company is paid a Fee by MTF which is calculated as a percentage of the net amounts invoiced
by MTF to customers for sports medicine allograft tissues. The Company accounts for the services provided to MTF as
a series of distinct performance obligations and each service is recognized over time as MTF simultaneously receives
and consumes the benefit.
•
Product returns are only accepted at the discretion of the Company and in accordance with our “Returned Goods
Policy”. Historically, the level of product returns has not been significant. We accrue for sales returns, rebates and
allowances based upon an analysis of historical customer returns and credits, rebates, discounts and current market
conditions.
• Our terms of sale to customers generally do not include any obligations to perform future services. Limited warranties
are provided for capital equipment sales and provisions for warranty are provided at the time of product sale based upon
an analysis of historical data.
• Amounts billed to customers related to shipping and handling have been included in net sales. Shipping and handling
costs included in selling and administrative expense were $14.0 million, $13.1 million and $13.4 million for 2018, 2017
and 2016, 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 is adequate to provide for probable losses resulting from accounts receivable.
• We sell extended warranties to customers that are typically for a period of one to three years. The related revenue is
recorded as a contract liability and recognized over the life of the contract on a straight-line basis, which is reflective of
our obligation to stand ready to provide repair services.
54
Please refer to Note 9 and Note 16 for further detail on revenue and the impact of adopting Accounting Standards Update
("ASU") No. 2014-09, Revenue from Contracts with Customers, during 2018.
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, 2018,
2017 and 2016, respectively:
Net income
Basic-weighted average shares outstanding
Effect of dilutive potential securities
2018
2017
2016
$ 40,854
$ 55,487
$ 14,664
28,118
27,939
27,804
772
232
160
Diluted-weighted average shares outstanding
28,890
28,171
27,964
Net income (per share)
Basic
Diluted
$
$
1.45
1.41
$
1.99
1.97
0.53
0.52
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 0.7 million, 1.2 million and 1.4 million at December 31,
2018, 2017 and 2016, respectively.
Stock-based compensation
All share-based payments to employees, including grants of employee stock options, restricted stock units, performance
share units and stock appreciation rights are recognized in the financial statements based at their fair values. Compensation expense
is generally recognized using a straight-line method over the vesting period. Compensation expense for performance share units
is recognized using the graded vesting method.
We issue shares under our stock based compensation plans out of treasury stock whereby treasury stock is reduced by
the weighted average cost of such treasury stock. To the extent there is a difference between the cost of the treasury stock and the
exercise price of shares issued under stock based compensation plans, we record gains to paid in capital; losses are recorded to
paid in capital to the extent any gain was previously recorded, otherwise the loss is recorded to retained earnings.
55
Accumulated other comprehensive loss
Accumulated other comprehensive loss consists of the following:
Cash Flow
Hedging
Gain (Loss)
Pension
Liability
Foreign
Currency
Translation
Adjustments
Accumulated
Other
Comprehensive
Loss
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 tax(a)
Income tax
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)
Other comprehensive income (loss)
before reclassifications, net of tax
Amounts reclassified from accumulated other
comprehensive income (loss) before tax(a)
Income tax
(5,529)
(1,142)
13,879
718
(265)
2,835
(1,048)
—
—
7,208
3,553
(1,313)
Net current-period other comprehensive income (loss)
(5,076)
645
13,879
9,448
Balance, December 31, 2017
$
(3,530) $
(25,813) $
(19,735) $
(49,078)
Other comprehensive income (loss)
before reclassifications, net of tax
Amounts reclassified from accumulated other
comprehensive income (loss) before tax(a)
Income tax
7,197
(2,711)
(8,369)
(3,883)
913
221
2,689
(650)
—
—
3,602
(429)
(710)
Net current-period other comprehensive income (loss)
8,331
(672)
(8,369)
Cumulative effect of change in accounting principle(b)
(716)
(5,233)
—
(5,949)
Balance, December 31, 2018
$
4,085
$
(31,718) $
(28,104) $
(55,737)
(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 15 and Note 11, respectively, for further details.
(b) We recorded the cumulative impact of adopting ASU 2018-02 in 2018, which allows for the elimination of the stranded tax effects of Tax Reform through a
reclassification between accumulated other comprehensive income (loss) and retained earnings. See Note 16 to the consolidated financial statements for
further discussion regarding the adoption of this accounting standard.
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.
56
The unaudited pro forma information for the year ended December 31, 2016, 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
$
763,520
29,153
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.
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.
On February 11, 2019, we acquired Buffalo Filter and all of the issued and outstanding common stock of Palmerton
Holdings, Inc. from Filtration Group FGC LLC (the “Buffalo Filter Acquisition”) for approximately $365 million, in cash, subject
to customary adjustments for working capital, cash held by Buffalo Filter at closing, indebtedness of Buffalo Filter, expenses
related to the transaction and other related fees and expenses. Refer to Note 17 for further details.
Note 3 — Inventories
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
2018
45,898
15,000
93,701
154,599
2018
4,027
92,470
227,795
8,043
332,335
(219,090)
113,245
$
$
$
$
$
$
$
$
2017
41,844
14,666
84,926
141,436
2017
4,027
91,766
219,675
7,837
323,305
(207,076)
116,229
Internal-use software, included in gross machinery and equipment at December 31, 2018 and 2017 was $47.8 million
and $45.3 million, respectively, with related accumulated depreciation of $34.5 million and $30.4 million, respectively. Internal
use software depreciation expense was $4.7 million, $4.5 million and $4.0 million for the years ended December 31, 2018, 2017
and 2016, respectively.
57
We lease various manufacturing facilities, office facilities and equipment under operating and capital leases. Leasehold
improvements related to these facilities are included in building and improvements above. Rental expense on operating leases
was approximately $8.7 million, $6.5 million and $6.0 million for the years ended December 31, 2018, 2017 and 2016, respectively.
During 2018 and 2017, we entered into capital lease obligations of $0.2 million and $0.8 million in connection with the purchase
of equipment.
The aggregate future minimum lease commitments for leases at December 31, 2018 are as follows:
2019
2020
2021
2022
2023
Thereafter
Operating
Leases
Capital
Leases
$
8,759 $
5,520
2,929
2,406
1,563
1,497
347
217
21
75
—
—
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 combinations
Foreign currency translation
Balance as of December 31,
2018
401,954
2017
397,664
$
$
—
2,209
(1,514)
2,081
$
400,440
$
401,954
During 2017, we entered into a business combination for which we recorded $2.2 million to goodwill. Total accumulated
goodwill impairment losses aggregated $107.0 million at December 31, 2018 and 2017, respectively.
58
Other intangible assets consist of the following:
Intangible assets with definite lives:
Customer and distributor relationships
Sales representation, marketing and promotional
rights
Patents and other intangible assets
Developed technology
Intangible assets with indefinite lives:
December 31, 2018
December 31, 2017
Weighted
Average
Amortization
Period
(Years)
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
29
25
14
16
$ 214,577
$
(97,131) $ 214,685
$
(86,137)
149,376
(42,000)
149,376
(36,000)
61,473
(44,242)
69,668
(42,127)
91,965
(7,369)
62,283
(3,352)
Trademarks and tradenames
86,544
—
86,544
—
24
$ 603,935
$
(190,742) $ 582,556
$
(167,616)
On January 3, 2012, the Company entered into an agreement with MTF to obtain the right to represent, market, and promote
MTF's allograft tissues within the field of sports medicine. 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, we paid the final $16.7 million additional consideration
installment.
Amortization expense related to intangible assets which are subject to amortization totaled $23.2 million, $21.3 million
and $20.0 million for the years ending December 31, 2018, 2017 and 2016, respectively, and is included as a reduction of revenue
(for amortization related to our sales representation, marketing and promotional rights) and in selling and administrative expense
(for all other intangible assets) in the consolidated statements of comprehensive income. Included in developed technology is $21.3
million of earn-out consideration that was paid during 2018 and an additional accrual of $8.4 million that is considered probable as
of December 31, 2018 associated with a prior asset acquisition. The accrual is recorded in other current liabilities at December 31,
2018. This developed technology has a weighted average useful life of 15 years.
During the year ended December 31, 2018, the Company wrote off $9.5 million related to an in-process research and
development asset and recorded the net charge to research and development expense. Refer to Notes 12 and 13 for further details.
The estimated amortization expense related to intangible assets at December 31, 2018 and for each of the five succeeding
years is as follows:
2019
2020
2021
2022
2023
Amortization
included in
expense
Amortization
recorded as a
reduction of
revenue
17,978
17,995
17,042
15,583
14,879
6,000
6,000
6,000
6,000
6,000
$
$
$
$
$
Total
23,978
23,995
23,042
21,583
20,879
59
Note 6 — Long Term Debt
Long-term debt consists of the following at December 31:
Revolving line of credit
Term loan, net of deferred debt issuance costs of $311 and $467 in 2018 and 2017,
respectively
Mortgage notes
Total debt
Less: Current portion
Total long-term debt
2018
2017
$
312,000
$
327,000
144,064
836
456,900
18,336
438,564
$
157,033
2,410
486,443
14,699
471,744
$
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. Interest rates are at LIBOR plus an interest rate margin (the total of which is equal to 4.405% at December 31, 2018).
For those borrowings where we elect to use the alternate base rate, the base rate is the greatest of (i) the Prime Rate, (ii) the Federal
Funds Rate plus 0.50% or (iii) the one-month Eurocurrency Rate plus 1.00%, plus, in each case, an interest rate margin.
In conjunction with this agreement, we incurred charges included in other expense in the 2016 statement 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 $144.4 million in borrowings outstanding on the term loan as of December 31, 2018. There were $312.0
million in borrowings outstanding under the revolving credit facility as of December 31, 2018. Our available borrowings on the
revolving credit facility at December 31, 2018 were $210.0 million with approximately $3.0 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, 2018. We are also required, under certain circumstances, to make mandatory prepayments from net cash proceeds
from any issuance of equity and asset sales.
As described in Note 17, on February 7, 2019 we entered into a sixth amended and restated senior credit agreement
consisting of: (a) a $265.0 million term loan facility and (b) a $585.0 million revolving credit facility. The revolving credit facility
will terminate and the loans outstanding under the term loan facility will expire on the earlier of (i) February 7, 2024 or (ii) 91
days prior to the earliest scheduled maturity date of the $345.0 million in 2.625% convertible notes due in 2024 described below,
(if, as of such date, more than $150.0 million in aggregate principal amount of such convertible notes (or any refinancing thereof)
remains outstanding). The term loan is payable in quarterly installments increasing over the term of the facility and borrowing.
As further described in Note 17, on January 29, 2019, we issued $345.0 million in 2.625% convertible notes due in 2024.
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 $0.8 million at December 31, 2018. The mortgage note is collateralized by the Largo, Florida
property and facilities.
60
The scheduled maturities of long-term debt outstanding at December 31, 2018 are as follows:
2019
2020
2021
2022
2023
Thereafter
Note 7 — Income Taxes
$
18,336
17,500
421,375
—
—
—
The provision (benefit) for income taxes for the years ended December 31, 2018, 2017 and 2016 consists of the
following:
Current tax expense:
Federal
State
Foreign
Deferred income tax expense (benefit)
Provision (benefit) for income taxes
2018
2017
2016
$
$
(1,077) $
777
8,036
7,736
2,063
9,799
$
$
1,744
2,101
9,421
13,266
(40,021)
(26,755) $
312
159
7,111
7,582
(2,871)
4,711
61
A reconciliation between income taxes computed at the statutory federal rate and the provision (benefit) for income taxes
for the years ended December 31, 2018, 2017 and 2016 follows:
Tax provision at statutory rate based on income before income taxes
21.0%
35.0 %
35.0%
2018
2017
2016
US tax reform
International tax reform
Consolidated group restructuring
Foreign income taxes
Federal research credit
Settlement of taxing authority examinations
Stock-based compensation
European permanent deduction
Non deductible/non-taxable items
State income taxes, net of federal tax benefit
US tax on worldwide earnings at different rates
Other, net
1.8
(3.6)
—
3.6
(2.8)
(0.7)
(1.6)
(0.2)
(1.2)
1.6
2.9
(1.5)
(111.0)
—
(7.4)
(5.3)
(2.8)
(2.1)
(2.1)
(0.5)
(0.5)
2.8
—
0.8
—
—
—
(6.8)
(5.6)
(3.5)
—
(3.4)
7.2
1.7
—
(0.3)
19.3%
(93.1)%
24.3%
The 2017 Tax Cuts and Jobs Act ("Tax Reform") was enacted on December 22, 2017. The Tax Reform included a number
of changes in existing tax law impacting businesses, including a one-time deemed repatriation of cumulative undistributed foreign
earnings and a permanent reduction in the U.S. federal statutory rate from 35% to 21%, effective on January 1, 2018. Under U.S.
GAAP, changes in tax rates and tax law were accounted for in 2017, the period of enactment, and deferred tax assets and liabilities
were measured at the enacted tax rate. The 2017 rate reconciliation included the Company’s assessment of the accounting under
the Tax Reform which was preliminary based on information that was available to management at the time the consolidated
financial statements were prepared. Estimated provisional amounts were recorded for the deemed repatriation toll charge
implemented by the Tax Reform, related foreign tax credits, deferred tax revaluation amounts and deferred tax liabilities on
unremitted earnings. Accordingly, the Company had determined a preliminary $31.9 million of tax benefit related to Tax Reform.
Staff Accounting Bulletin No. 118 provided for a one-year measurement period to finalize these estimated provisional
amounts. During 2018, the Company finalized its accounting and recorded $1.3 million of tax expense related to the revaluation
of certain deferred tax items. This expense was offset in part by $0.4 million of tax benefit primarily resulting from finalization
of the deemed repatriation toll charge, related foreign tax credits and adjustments to foreign withholding amounts. The final tax
benefit related to Tax Reform was $31.0 million.
FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, ("GILTI") allows for an
election to account for GILTI under the deferred method, which requires recognizing deferred taxes for basis differences which
will impact the GILTI inclusion upon reversal, or as a period cost. The Company has completed its evaluation of this election to
account for GILTI and has adopted the period cost method. The net impact of GILTI including the allowable GILTI deduction
62
is presented in the rate reconciliation as a component of “US tax on worldwide earnings at different rates” and is offset in part by
the Foreign Derived Intangible Income deduction (“FDII”).
The tax effects of the significant temporary differences which comprise the deferred income tax assets and liabilities at
December 31, 2018 and 2017 are as follows:
Assets:
Inventory
Net operating losses
Capitalized research and development
Deferred compensation
Accounts receivable
Compensation and benefits
Accrued pension
Research and development credit
Other
Less: valuation allowances
Liabilities:
Goodwill and intangible assets
Depreciation
State taxes
Unremitted foreign earnings
Contingent interest
$
2018
2017
$
4,096
7,358
7,214
2,085
2,296
5,434
3,205
8,585
2,235
(1,159)
41,349
100,108
1,345
12,212
3,583
—
117,248
2,420
11,091
8,557
1,749
1,855
4,138
2,695
8,957
9,342
(570)
50,234
102,099
3,333
11,709
6,000
40
123,181
Net liability
$
(75,899) $
(72,947)
Income before income taxes consists of the following U.S. and foreign income:
U.S. income (loss)
Foreign income
Total income
2018
2017
2016
$
$
24,320
26,333
50,653
$
$
1,492
27,240
28,732
$
$
(6,128)
25,503
19,375
As of December 31, 2018, the amount of federal net operating loss carryforward was $29.5 million and begins to expire
in 2026. As of December 31, 2018, the amount of federal research credit carryforward available was $8.6 million. These credits
begin to expire in 2027.
In accordance with Tax Reform and SAB 118 measurement period adjustments, the Company has finalized the federal
and state tax liabilities accrued on cumulative foreign subsidiary earnings at December 31, 2017. In addition, we have accrued a
liability for foreign withholding taxes related to the amount of unremitted earnings at December 31, 2017 as they are not considered
permanently reinvested. However, it is our intention to indefinitely reinvest all future foreign earnings for all periods occurring
after December 31, 2017. The amount of such untaxed foreign earnings for the periods occurring after December 2017 totaled
$18.4 million. If we were to repatriate these funds, we would be required to accrue and pay taxes on such amounts. The Company
has estimated foreign withholding taxes of $0.6 million would be due if these earnings were repatriated.
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 2016.
63
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,
2018
2017
2016
$
2,943
$
1,839
$
Increases (decreases) for positions taken in prior periods
(250)
(246)
616
—
Increases for positions taken in current periods
1,017
1,957
1,584
Decreases in unrecorded tax positions related to settlement with the
taxing authorities
(370)
(607)
(361)
Decreases in unrecorded tax positions related to lapse of statute of
limitations
(267)
—
—
Balance as of December 31,
$
3,073
$
2,943
$
1,839
If the total unrecognized tax benefits of $3.1 million at December 31, 2018 were recognized, it would reduce our annual
effective tax rate. The amount of interest accrued in 2016, 2017 and 2018 related to these unrecognized tax benefits was not
material and is included in the provision (benefit) 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 total
dividend per share was $0.80 for each of 2018, 2017 and 2016. The fourth quarter dividend for 2018 was paid on January 7, 2019
to shareholders of record as of December 14, 2018. The total dividend payable was $5.6 million at both December 31, 2018 and
2017, 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, 2018 and 2017, no
preferred stock had been issued.
Our Board of Directors has authorized a $200.0 million share repurchase program. Through December 31, 2018, 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 2018, 2017, and 2016 we did not repurchase any shares.
We have reserved 13.3 million shares of common stock for issuance to employees and directors under two shareholder
approved share-based compensation plans (the "Plans") of which approximately 4.7 million shares remain available for grant at
December 31, 2018. 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 four to 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 $10.0 million, $8.5 million and $8.4 million for the years ended December 31, 2018, 2017 and 2016, respectively. These
amounts are included in selling and administrative expenses, and in 2016 $0.7 million of the total relates to acceleration of awards
associated with the Company's restructuring as further described in Note 13. Tax related benefits of $2.3 million, $2.0 million
64
and $3.1 million were also recognized for the years ended December 31, 2018, 2017 and 2016, respectively. Cash received from
the exercise of stock options was $3.5 million, $1.0 million and $0.0 million for the years ended December 31, 2018, 2017 and
2016, 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. Forfeitures are recognized as
incurred.
The following table illustrates the assumptions used in estimating fair value in the years ended December 31, 2018, 2017
and 2016:
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)
$
2018
2017
2016
$
14.78
25.69%
2.62%
1.34%
5.7
$
10.07
27.63%
2.11%
1.87%
5.8
8.61
26.88%
1.45%
2.10%
6.0
The following table illustrates the stock option and SAR activity for the year ended December 31, 2018:
Outstanding at December 31, 2017
Granted
Forfeited
Exercised
Outstanding at December 31, 2018
Exercisable at December 31, 2018
Stock options & SARs expected to vest
Number
of
Shares
(in 000’s)
Weighted-
Average
Exercise
Price
2,308
$
839
$
(123) $
(173) $
2,851
797
2,053
$
$
$
42.75
59.64
44.59
42.20
47.67
43.23
49.40
The weighted average remaining contractual term for SARs and stock options outstanding and exercisable at December 31,
2018 was 7.8 years and 6.7 years, respectively. The aggregate intrinsic value of SARs and stock options outstanding and exercisable
at December 31, 2018 was $47.2 million and $16.7 million, respectively. The aggregate intrinsic value of stock options and SARs
exercised during the years ended December 31, 2018, 2017 and 2016 was $4.2 million, $2.7 million and $1.4 million, respectively.
The following table illustrates the RSU and PSU activity for the year ended December 31, 2018:
Outstanding at December 31, 2017
Granted
Vested
Forfeited
Outstanding at December 31, 2018
65
Number
of
Shares
(in 000’s)
Weighted-
Average
Grant-Date
Fair Value
228
$
31
$
(66) $
(6) $
187
$
41.66
61.76
45.81
45.03
43.46
The weighted average fair value of awards of RSUs granted in the years ended December 31, 2018, 2017 and 2016 was
$61.76, $48.32 and $40.27, respectively.
The total fair value of RSUs and PSUs vested was $3.0 million, $3.4 million and $4.7 million for the years ended
December 31, 2018, 2017 and 2016, respectively.
As of December 31, 2018, there was $21.3 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
3.3 years.
We offer to our employees a shareholder-approved Employee Stock Purchase Plan (the “Employee Plan”), under which
we have reserved 1.0 million shares of common stock for issuance to our employees. The Employee Plan provides employees
with the opportunity to invest from 1% to 10% of their annual salary to purchase shares of CONMED common stock at a purchase
price equal to 95% of the fair market value of the common stock on the exercise date. During 2018, we issued approximately
16,800 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 — Revenues
The following tables present revenue disaggregated by product line and timing of revenue recognition for the years ended
December 31, 2018, 2017 and 2016:
Orthopedic Surgery
General Surgery
Total
2018
Timing of Revenue Recognition
Goods transferred at a point in time
Services transferred over time
Total sales from contracts with customers
$
$
413,630
33,098
446,728
$
$
411,391
1,515
412,906
Orthopedic Surgery
General Surgery
2017
Timing of Revenue Recognition
Goods transferred at a point in time
Services transferred over time
Total sales from contracts with customers
$
$
396,147
32,797
428,944
$
$
366,672
776
367,448
Orthopedic Surgery
General Surgery
2016
Timing of Revenue Recognition
Goods transferred at a point in time
Services transferred over time
Total sales from contracts with customers
$
$
391,114
30,989
422,103
$
$
341,276
141
341,417
$
$
$
$
$
$
825,021
34,613
859,634
762,819
33,573
796,392
732,390
31,130
763,520
Total
Total
Revenue disaggregated by primary geographic market where the products are sold is included in Note 10.
Contract liability balances related to the sale of extended warranties to customers are as follows:
December 31, 2018 December 31, 2017
Contract Liability
$
11,043
$
7,786
66
Revenue recognized during years ended December 31, 2018, 2017 and 2016 from amounts included in contract liabilities
at the beginning of the period were $5.0 million, $3.9 million and $3.5 million, respectively. There were no material contract assets
as of December 31, 2018 and December 31, 2017.
Note 10 — 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 CEO)
evaluates the various global product portfolios on a net sales basis and evaluates profitability, investment, cash flow metrics and
allocates resources on a consolidated worldwide basis due to shared infrastructure and resources. Our product lines consist of
orthopedic surgery and general surgery. Orthopedic surgery consists of sports medicine instrumentation and small bone, large
bone and specialty powered surgical instruments as well as imaging systems for use in minimally invasive surgery procedures
including 2DHD and 3DHD vision technologies and fees related to sales representation, 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. These product lines' net sales and primary geographic market where the products are sold, are as follows for the
years ended December 31, 2018, 2017 and 2016:
Orthopedic Surgery
General Surgery
Total
2018
Primary Geographic Markets
United States
Americas (excluding the United States)
Europe, Middle East & Africa
Asia Pacific
$
172,462
$
276,186
$
66,519
112,998
94,749
31,009
53,565
52,146
Total sales from contracts with customers
$
446,728
$
412,906
$
Orthopedic Surgery
General Surgery
Total
2017
Primary Geographic Markets
United States
Americas (excluding the United States)
Europe, Middle East & Africa
Asia Pacific
$
167,602
$
243,439
$
60,439
106,921
93,982
30,730
48,928
44,351
Total sales from contracts with customers
$
428,944
$
367,448
$
Orthopedic Surgery
General Surgery
Total
2016
Primary Geographic Markets
United States
Americas (excluding the United States)
Europe, Middle East & Africa
Asia Pacific
$
171,158
$
227,949
$
56,773
103,709
90,463
30,759
44,276
38,433
Total sales from contracts with customers
$
422,103
$
341,417
$
448,648
97,528
166,563
146,895
859,634
411,041
91,169
155,849
138,333
796,392
399,107
87,532
147,985
128,896
763,520
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, 2018 and 2017. No single customer represented over 10% of our
consolidated net sales for the years ended December 31, 2018, 2017 and 2016.
67
Note 11 — Employee Benefit Plans
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 $8.3 million, $7.5 million and $7.1 million during the years ended
December 31, 2018, 2017 and 2016, respectively.
We use a December 31, measurement date for our pension plan. Cumulative gains and losses in excess of 10% of the
greater of the benefit obligation or the market-related value of assets are amortized on a straight-line basis over the lesser of the
expected average remaining life expectancy of the plan's participants or 12 years. The limit of 12 years is adjusted to reflect the
percentage change in the average remaining service period for the plan's active membership.
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
Settlements
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
Settlements
Fair value of plan assets at end of year
Funded status
2018
2017
80,776
$
87,765
87,765
675
2,806
(7,430)
(2,104)
(936)
80,776
74,932
(5,585)
(2,104)
(936)
66,307
$
$
$
$
82,005
603
2,773
6,556
(1,976)
(2,196)
87,765
69,061
10,043
(1,976)
(2,196)
74,932
(14,469) $
(12,833)
$
$
$
$
$
$
Amounts recognized in the consolidated balance sheets consist of the following at December 31,:
Other long-term liabilities
Accumulated other comprehensive loss
2018
2017
$
(14,469) $
(41,822)
(12,833)
(40,937)
Accumulated other comprehensive loss for the years ended December 31, 2018 and 2017 consists of net actuarial losses
not yet recognized in net periodic pension cost (before income taxes).
The following actuarial assumptions were used to determine our accumulated and projected benefit obligations as of
December 31,:
Discount rate
2018
2017
4.37%
3.69%
68
Other changes in plan assets and benefit obligations recognized in other comprehensive income in 2018 and 2017 are as
follows:
Current year actuarial loss
Amortization of actuarial loss
Total recognized in other comprehensive loss
2018
2017
$
$
(3,574) $
2,689
(885) $
(1,812)
2,835
1,023
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 2019 is $2.9 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 cost
2018
2017
2016
$
$
675
2,806
(5,418)
2,689
752
$
$
603
2,773
(5,300)
2,835
911
$
$
452
2,878
(5,189)
2,780
921
The following actuarial assumptions were used to determine our net periodic pension benefit cost for the years ended
December 31,:
Discount rate on benefit obligation
Effective rate for interest on benefit obligation
Expected return on plan assets
2018
2017
2016
3.69%
3.28%
7.50%
4.28%
3.49%
8.00%
4.54%
3.77%
8.00%
We use a full yield curve approach in the estimation of the interest cost component of net periodic pension cost by applying
the specific spot rates along the yield curve used in the determination of the benefit obligation that correlates to the relevant
projected cash flows ("spot rate approach").
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
2018
2017
Target
Allocation
2019
71%
29
100%
87%
13
100%
70%
30
100%
As of December 31, 2018, the pension plan held 27,562 shares of our common stock, which had a fair value of $1.8
million. We believe that our long-term asset allocation on average will approximate the targeted allocation. We regularly review
69
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
as described in Note 15. Following is a description of the valuation methodologies used for our pension assets. There have been
no changes in the methodologies used at December 31, 2018 and 2017:
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.
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.
Money
Market Fund:
Mutual
Funds:
These investments are public investment vehicles valued using the Net Asset Value (NAV).
These investments are public investment vehicles valued using the Net Asset Value (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 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 the value of the pension plan's assets as of December 31, 2018 and December 31, 2017:
Investments measured at fair value:
Level 1
Common Stock
Fixed Income Securities
Total Investments measured at fair value
Investments measured at NAV:
Money Market Fund
Mutual Funds
Total Investments measured at NAV
2018
2017
$
$
6,362
17,640
24,002
1,385
40,920
42,305
36,643
7,974
44,617
1,517
28,798
30,315
Total Investments
$
66,307
$
74,932
We do not expect to make any contributions to our pension plan for 2019.
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, 2018 and reflect the impact of expected future
employee service.
2019
2020
2021
2022
2023
2024-2028
70
$5,602
5,651
4,901
5,249
5,294
25,688
Note 12 — 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 foreign operations, or sales by foreign distributors. Likewise,
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. These information requests or subpoenas may or may not be routine inquiries, or may begin as 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 with
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 based on
their affiliation 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. While CONMED has not experienced any material enforcement action to date, there can be no assurance
that the Company will not be subject to a material enforcement action in the future, or that the Company will not incur costs
including, in the form of fees for lawyers and other consultants, that are material to the Company’s results of operations in the
course of responding to a future inquiry or investigation.
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, results of operations or cash flows. We currently
maintain commercial product liability insurance of $30 million per incident and $30 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 record reserves sufficient to cover probable and estimable 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.
In April 2017, the previously disclosed lawsuit involving a false advertising claim by Lexion Medical ("Lexion") against
SurgiQuest arising prior to the acquisition of SurgiQuest by CONMED went to trial in federal court in the District of Delaware.
The claims arose under the Lanham Act, as well as Delaware state laws. Lexion sought damages of $22.0 million for alleged lost
profits and $18.7 million for costs related to alleged “corrective advertising,” as well as damages claimed for disgorgement of
SurgiQuest’s alleged profits and attorneys' fees. On January 4, 2016, SurgiQuest became a subsidiary of CONMED, and we
assumed the costs and liabilities related to the Lexion lawsuit subject to the terms of the merger agreement. On April 11, 2017, a
jury returned a verdict finding SurgiQuest liable for $2.2 million in compensatory damages with an additional $10.0 million in
punitive damages. These costs were recorded in selling and administrative expense during 2017. The District Court entered
judgment on April 13, 2017. SurgiQuest and Lexion each filed post-verdict motions. Lexion sought an equitable award for
disgorgement of SurgiQuest’s alleged profits, for so-called corrective advertising and for attorney’s fees. CONMED sought to
71
vacate the award of punitive damages. By memorandum decision dated May 16, 2018, the District Court denied both Lexion's
and SurgiQuest's post-verdict motions. The period within which either Lexion or SurgiQuest was able to pursue an appeal expired
in June without either party seeking to appeal the judgment. CONMED paid the judgment, together with post-judgment interest,
in a total amount of $12.3 million on July 10, 2018.
In 2014, the Company acquired EndoDynamix, Inc. The agreement governing the terms of the acquisition provides 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. In 2016, we notified the seller
that there was a need to redesign the product, and that, as a consequence, the first commercial sale had been delayed. Consequently,
the payment of contingent milestone and revenue-based payments were delayed. On January 18, 2017, the seller provided notice
("the Notice") seeking $12.7 million, which essentially represents the seller’s view as to 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 agreement. On February 22, 2017, the representative of the former
shareholders of EndoDynamix filed a complaint in Delaware Chancery Court claiming breach of contract with respect to the duty
to commercialize the product and seeking the contingent payments on an accelerated basis. We believe that there was a substantive
contractual basis to support the Company’s decision to redesign the product, such that there was no legitimate basis for seeking
the acceleration of the contingent payments at that time. The Company recently decided to halt the development of the EndoDynamix
clip applier. While we recorded a charge to write off assets and released previously accrued contingent consideration as described
in Note 13, we expect to defend the claims asserted by the sellers of EndoDynamix in the Delaware Court, although there can be
no assurance that we will prevail in the litigation.
Note 13 — Acquisition, Restructuring and Other Expense
Acquisition, restructuring and other expense for the year ended December 31, consists of the following:
Consolidation costs
Termination of a product offering
Restructuring costs included in cost of sales
Business acquisition costs
Restructuring costs
Legal matters
Gain on sale of facility
Acquisition, restructuring and other expense included in selling and
administrative expense
Impairment charges included in research and development expense
Debt refinancing costs included in other expense
2018
2017
2016
— $
—
— $
2,372
—
—
—
2,372
4,212
$
$
$
$
$
$
2,903
—
2,903
2,336
1,347
17,480
—
3,066
4,546
7,612
17,029
6,670
3,773
(1,890)
21,163
$
25,582
— $
—
— $
— $
2,942
$
$
$
$
$
$
During 2018, 2017 and 2016 we incurred $1.1 million, $2.3 million and $17.0 million respectively, in costs associated
with the January 4, 2016 acquisition of SurgiQuest, Inc. as further described in Note 2. The costs incurred in 2018 consist of a
charge to selling and administrative expense associated with a vacant lease related to the acquisition. The costs incurred in 2017
consist of costs associated with expensing of unvested options acquired and integration related costs. The costs incurred in 2016
consist of investment banking fees, consulting fees, legal fees associated with the acquisition, costs associated with expensing of
unvested options acquired and integration related costs.
During 2018, we incurred $1.3 million in consulting, legal and other costs associated with the February 11, 2019 acquisition
of Buffalo Filter as further described in Note 17.
During 2018, we recorded a net charge of $4.2 million to research and development expense mainly associated with the
impairment of an in-process research and development asset, net of the release of previously accrued contingent consideration in
other current and long-term liabilities, as further described in Note 12.
During 2017, we incurred $12.2 million in costs associated with the SurgiQuest, Inc. vs. Lexion Medical litigation verdict
72
whereby SurgiQuest was found liable for $2.2 million in compensatory damages with an additional $10.0 million in punitive
damages as further described in Note 12. These costs were paid on July 10, 2018. In addition, during the years ended December 31,
2017 and 2016, we incurred $5.3 million and $3.8 million, respectively, in costs associated with this litigation and other legal
matters.
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.
For the years ending December 31, 2017 and 2016, we incurred $2.9 million and $3.1 million, respectively, in costs
associated with operational restructuring. These costs were charged to cost of sales and included severance, inventory and other
charges. As part of this plan, we engaged a consulting firm to assist us in streamlining our product offering and improving our
operational efficiency. As a result, we identified certain catalog numbers to be discontinued and consolidated into existing product
offerings and recorded a $1.3 million charge in the year ended December 31, 2017 to write-off inventory which will no longer be
offered for sale. This amount is included in the above total for 2017.
During 2016, we 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.
During 2017 and 2016, we restructured certain selling and administrative functions and incurred $1.3 million and $6.7
million, respectively, in related costs consisting principally of severance charges.
Note 14 — 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 equipment is generally one year and our extended warranties typically vary from one to three years. 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 standard warranties for the year ended December 31, are as
follows:
Balance as of January 1,
Provision for warranties
Claims made
Balance as of December 31,
2018
2017
2016
1,750
$
1,954
$
2,509
1,099
(1,264)
1,034
(1,238)
610
(1,165)
1,585
$
1,750
$
1,954
$
$
Costs associated with extended warranty repairs are recorded as incurred and amounted to $4.9 million, $4.6 million and
$4.1 million for the years ended December 31, 2018, 2017 and 2016 respectively.
Note 15 – Fair Value Measurement
We enter into derivative instruments for risk management purposes only. We operate internationally and, in the normal
course of business, are exposed to fluctuations in interest rates, foreign exchange rates and commodity prices. These fluctuations
can increase the costs of financing, investing and operating the business. We use forward contracts, a type of derivative instrument,
to manage certain foreign currency exposures.
By nature, all financial instruments involve market and credit risks. We enter into forward contracts with major investment
grade financial institutions and have policies to monitor the credit risk of those counterparties. While there can be no assurance,
we do not anticipate any material non-performance by any of these counterparties.
73
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, 2018
which have been accounted for as cash flow hedges totaled $155.3 million. Net realized gains (losses) recognized for forward
contracts accounted for as cash flow hedges approximated $(0.9) million, $(0.7) million and $1.2 million for the years ended
December 31, 2018, 2017 and 2016, respectively. At December 31, 2018, $4.1 million of net unrealized gains on forward contracts
accounted for as cash flow hedges, and included in accumulated other comprehensive loss, are expected to be recognized in
earnings in the next twelve months.
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, 2018 which have not been designated as hedges totaled $39.6 million. Net realized gains
(losses) recognized in connection with those forward contracts not accounted for as hedges approximated $0.1 million, $(1.6)
million and $0.0 million for the years ended December 31, 2018, 2017 and 2016, respectively, offsetting gains (losses) on our
intercompany receivables of $(0.8) million, $1.1 million and $(0.1) million for the years ended December 31, 2018, 2017 and
2016, 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, 2018 and 2017:
December 31, 2018
Derivatives designated as hedging instruments:
Asset Fair
Value
Liabilities
Fair
Value
Net
Fair
Value
Foreign exchange contracts
$
5,817
$
(431) $
5,386
Derivatives not designated as hedging instruments:
Foreign exchange contracts
19
(217)
(198)
Total derivatives
$
5,836
$
(648) $
5,188
December 31, 2017
Derivatives designated as hedging instruments:
Asset Fair
Value
Liabilities
Fair
Value
Net
Fair
Value
Foreign exchange contracts
$
346
$
(5,945) $
(5,599)
Derivatives not designated as hedging instruments:
Foreign exchange contracts
4
(78)
(74)
Total derivatives
$
350
$
(6,023) $
(5,673)
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, 2018 and December 31, 2017 we have recorded the net fair value of $5.2 million
in prepaid expenses and other current assets and $5.7 million in other current liabilities, respectively.
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.
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
74
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.
Valuation Techniques. Assets and liabilities carried at fair value and measured on a recurring basis as of December 31,
2018 consist of forward foreign exchange contracts. 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.
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 16 - New Accounting Pronouncements
Recently Adopted Accounting Standards
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, along with amendments
issued in 2015 and 2016, which is codified in Accounting Standards Codification ("ASC") 606. The Company adopted ASC 606
effective January 1, 2018. ASC 606 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. The Company has applied the modified retrospective approach to adoption
whereby the standard is applied only to the current period.
Adoption of ASC 606 did not have a material impact on our consolidated financial statements. Certain costs previously
included in selling and administrative expense and principally related to administrative fees paid to group purchasing organizations
are required to be recorded as a reduction of revenue under the new standard. These costs amounted to $8.3 million, $8.2
million and $7.9 million for 2018, 2017 and 2016, respectively. These costs are included as a reduction in net sales during 2018 and
as selling and administrative expense during 2017 and 2016. There is no impact on net income or earnings per share as a result of
this change.
The Company previously expensed as incurred commissions paid for the sale of extended warranty contracts to customers.
Under the new guidance, the Company capitalizes these contract acquisition costs and realizes the expense in line with the related
extended warranty contract revenue recognition. Upon adoption of the new standard, we recorded a cumulative adjustment of $0.4
million net of income taxes to beginning shareholders’ equity in order to capitalize costs incurred to obtain contracts with customers.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The
amendments in this ASU require that a statement of cash flows explain the change during the period in 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 adopted this new guidance effective January 1, 2018
and it did not have a material impact on the consolidated financial statements.
In January 2017, the FASB issued ASU No. 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. This new guidance is effective for periods beginning after December
15, 2019, however early adoption is permitted. The Company adopted this guidance in conjunction with our annual impairment
testing during the fourth quarter of 2018.
In March 2017, the FASB issued ASU No. 2017-07 Compensation Retirement Benefits (ASC 715) - Improving the
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires companies to record
the service component of net periodic pension cost in the same income statement line as other compensation costs arising from
services rendered by the pertinent employees during the period. The other components of net periodic pension cost would be
presented in the income statement separately from the service cost component and outside the subtotal of income from operations,
if one is presented. The Company adopted this new guidance effective January 1, 2018 and it did not have a material impact on
the consolidated financial statements.
75
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Based Compensation (ASC 718) - Scope of
Modification Accounting. This ASU does not change the accounting for modifications but clarifies that modification accounting
guidance should be applied if there is a change to the value, vesting conditions, or award classification and would not be required
if the changes are considered non-substantive. The Company adopted this new guidance effective January 1, 2018 and it did not
have a material impact on the consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220).
This ASU provides entities with the option to eliminate the stranded tax effects associated with the change in tax rates under Tax
Reform through a reclassification of the stranded tax effects from accumulated other comprehensive income to retained earnings.
The Company adopted this guidance during the fourth quarter of 2018 and reclassified $5.9 million from accumulated other
comprehensive loss to retained earnings. The reclassification was primarily comprised of amounts relating to our pension plan
and unrealized hedging gains and losses. The Company generally releases income tax effects from accumulated other
comprehensive loss once the reason for the tax effects ceases to exist.
In June 2018, the FASB issued ASU 2018-07 Compensation - Stock Compensation (Topic 718), Improvements to
Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued
to non-employees by making the guidance consistent with accounting for employee share-based compensation. This guidance is
effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is
permitted. We early adopted this update on October 1, 2018 and it did not have a material impact on our consolidated financial
statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic
350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service
Contract. This guidance requires companies to determine if costs associated with hosted cloud computing services are capitalized
or expensed depending on the nature of the cost and the project stage during which they are incurred. Generally, companies will
only capitalize costs related to the development and implementation of the cloud computing arrangement. This guidance is effective
for fiscal years beginning after December 15, 2019 and early adoption is permitted in any interim period. We early adopted this
new guidance, on a prospective basis, effective July 1, 2018 and it did not have a material impact on the consolidated financial
statements.
Recently Issued Accounting Standards, Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), along with amendments
issued in 2017 and 2018. This ASU requires lessees to record leases on their balance sheets but recognize the expenses on their
income statements in a manner similar to current practice. ASU 2016-02 states that a lessee would recognize a lease liability for
the obligation to make lease payments and a right-of-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 adopted the new standard on January 1, 2019, and is applying the modified retrospective approach along
with the package of transition practical expedients. The Company has lease agreements with lease and non-lease components,
which we plan to account for separately. For certain equipment leases, we expect to apply a portfolio approach to efficiently
account for the operating lease ROU assets and lease liabilities. We also plan to elect the short-term lease exemption and not
recognize leases with terms less than one year on the balance sheet.
We have assessed the impact of adopting this ASU and performed a detailed review of our lease portfolio. As a result
of the assessment, we expect to record right-of-use assets and lease liabilities, that were previously unrecorded under prior GAAP,
in the range of $17 million to $19 million. We do not expect this update to have a material impact on our net income, earnings
per share or cash flows.
In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments which requires instruments measured at amortized cost, including accounts receivable, to
be presented at the net amount expected to be collected. The new model requires an entity to estimate credit losses based on
historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. The
update is effective for fiscal years beginning after December 31, 2019 and early adoption is permissible during any interim period
after December 31, 2018. The Company is currently assessing the impact of this guidance on our consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to
Accounting for Hedging Activities. This ASU makes more financial and non-financial hedging strategies eligible for hedge
accounting. It also amends the presentation and disclosure requirements and changes how companies assess effectiveness. It is
76
intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge
accounting, and increase transparency as to the scope and results of hedging programs. This guidance is effective for fiscal years
beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. We adopted
this update on January 1, 2019 and we do not expect this guidance to have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes
to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value
measurements. This update is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The
Company is currently assessing the impact of this guidance on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General
(Topic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the
disclosure requirements for defined benefit pension plans and other postretirement plans. This ASU is effective for fiscal years
beginning after December 15, 2020 and early adoption is permitted. The Company is currently assessing the impact of this guidance
on our consolidated financial statements.
Note 17 - Subsequent Events
On February 11, 2019, we acquired Buffalo Filter and all of the issued and outstanding common stock of Palmerton
Holdings, Inc. from Filtration Group FGC LLC (the “Buffalo Filter Acquisition”) for approximately $365 million in cash, subject
to customary adjustments for working capital, cash held by Buffalo Filter at closing, indebtedness of Buffalo Filter, expenses
related to the transaction and other related fees and expenses. Buffalo Filter develops, manufactures and markets smoke evacuation
technologies that are complementary to our Advanced Surgical portfolio. The acquisition was funded through a combination of
cash on hand and long-term borrowings as further described below.
In 2018, we incurred pre-tax transaction costs of $1.3 million associated with the Buffalo Filter acquisition which are
recorded in selling and administrative expense. We are in the process of completing our accounting and valuation of this acquisition
and accordingly, more detailed disclosures will be provided in future filings. Supplemental pro forma information has not been
provided as we deem it impracticable given the timing of the closing of the transaction and availability of Buffalo Filter financial
information.
On February 7, 2019, we entered into a sixth amended and restated senior credit agreement consisting of: (a) a $265.0
million term loan facility and (b) a $585.0 million revolving credit facility. The revolving credit facility will terminate and the
loans outstanding under the term loan facility will expire on the earlier of (i) February 7, 2024 or (ii) the date that is 91 days prior
to the earliest scheduled maturity date of the $345.0 million in 2.625% convertible notes due in 2024 described below, (if, as of
such date, more than $150.0 million in aggregate principal amount of such convertible notes (or any refinancing thereof) remains
outstanding). 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
in part to finance the acquisition of Buffalo Filter. Initial interest rates are at LIBOR plus an interest rate margin of 1.875%. For
those borrowings where we elect to use the alternate base rate, the initial base rate will be the greatest of (i) the Prime Rate, (ii)
the Federal Funds Rate plus 0.50% or (iii) the one-month Eurocurrency Rate plus 1.00%, plus, in each case, an interest rate margin.
On January 29, 2019, we issued $345.0 million in 2.625% convertible notes due in 2024 (the "Notes"). Interest is payable
semi-annually in arrears on February 1 and August 1 of each year, commencing August 1, 2019. The Notes will mature on February
1, 2024, unless earlier repurchased or converted. The Notes represent subordinated unsecured obligations and are convertible
under certain circumstances, as defined in the indenture, into a combination of cash and CONMED common stock. The Notes
may be converted at an initial conversion rate of 11.2608 shares of our common stock per $1,000 principal amount of Notes
(equivalent to an initial conversion price of approximately $88.80 per share of common stock). Holders of the Notes may convert
their Notes at their option at any time on or after November 1, 2023 through the second scheduled trading day preceding the
maturity date. Holders of their Notes will also have the right to convert the Notes prior to November 1, 2023, but only upon the
occurrence of specified events. The conversion rate is subject to anti-dilution adjustments if certain events occur. A portion of
the net proceeds from the offering of the notes were used as part of the financing for the Buffalo Filter acquisition, $21.0 million
were used to pay the cost of certain convertible notes hedge transactions as further described below and we intend to use the
remaining proceeds of the Notes for general corporate purposes.
In connection with the offering of the Notes, we entered into convertible note hedge transactions with a number of financial
institutions (each, an “option counterparty”). The convertible note hedge transactions cover, subject to anti-dilution adjustments
substantially similar to those applicable to the Notes, the number of shares of our common stock underlying the Notes. Concurrently
with entering into the convertible note hedge transactions, we also entered into separate warrant transactions with each option
77
counterparty whereby we sold to such option counterparty warrants to purchase, subject to customary anti-dilution adjustments,
the same number of shares of our common stock.
The convertible note hedge transactions are expected generally to reduce the potential dilution upon conversion of the
Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case
may be, in the event that the market price per share of our common stock, as measured under the terms of the convertible note
hedge transactions, is greater than the strike price ($114.92) of the convertible note hedge transactions, which initially corresponds
to the conversion price of the Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the
conversion rate of the Notes. If, however, the market price per share of our common stock, as measured under the terms of the
warrant transactions, exceeds the strike price of the warrants, there would nevertheless be dilution to the extent that such market
price exceeds the strike price of the warrants, unless we elect to settle the warrants in cash.
Note 18 — Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data for 2018 and 2017 are as follows:
2018
Net sales
Gross profit
Net income
EPS:
Basic
Diluted
2017
Net sales
Gross profit
Net income (loss)
EPS:
Basic
Diluted
March
Three Months Ended
June
September(1)
December(2)
$
$
$
$
202,064
109,557
10,657
.38
.37
$
$
212,820
116,271
8,719
.31
.30
$
$
202,307
110,627
5,825
.21
.20
March(3)
Three Months Ended
June(4)
September(5)
$
186,567
99,885
(4,545)
197,154
104,652
6,139
(.16) $
(.16)
.22
.22
$
$
190,117
102,547
7,197
.26
.26
$
$
$
$
242,444
132,655
15,653
.56
.54
December(6)
222,555
123,958
46,696
1.67
1.65
Items Included In Selected Quarterly Financial Data:
(1) The third quarter of 2018 includes pre-tax business acquisition costs of $1.1 million and in-process research and development
impairment charges of $4.2 million.
(2) The fourth quarter of 2018 includes pre-tax business acquisition costs of $1.3 million.
(3) The first quarter of 2017 includes pre-tax business acquisition costs of $0.5 million, restructuring costs of $2.5 million and
charges related to legal matters of $14.2 million.
(4) The second quarter of 2017 includes pre-tax business acquisition costs of $0.4 million, restructuring costs of $0.3 million and
charges related to legal matters of $2.5 million.
(5) The third quarter of 2017 includes pre-tax business acquisition costs of $0.1 million, restructuring costs of $1.3 million and
charges related to legal matters of $0.3 million.
(6) The fourth quarter of 2017 includes pre-tax business acquisition costs of $1.3 million, restructuring costs of $0.1 million and
charges related to legal matters of $0.4 million as well as an income tax benefit of $31.9 million resulting from the 2017 Tax
Cuts and Jobs Act.
78
SCHEDULE II—Valuation and Qualifying Accounts
(In thousands)
Description
Balance at
Beginning of
Period
Additions
Charged to
Costs and
Expenses
Deductions
Balance at End
of Period
2018
Allowance for bad debts
Sales returns and
allowance
Deferred tax asset
valuation allowance
2017
Allowance for bad debts
Sales returns and
allowance
Deferred tax asset
valuation allowance
2016
Allowance for bad debts
Sales returns and
allowance
Deferred tax asset
valuation allowance
Item 16. Form 10-K Summary
$
2,137
$
1,485
$
(962) $
2,219
1,050
570
589
(23)
—
$
2,031
$
1,031
$
(925) $
1,817
441
424
129
(22)
—
$
1,336
$
983
$
(288) $
1,814
124
268
317
(265)
—
2,660
3,246
1,159
2,137
2,219
570
2,031
1,817
441
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.
79
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
CONMED Korea Ltd.
Linvatec Nederland B.V.
Linvatec Polska Sp. z.o.o
Linvatec Conmed Sweden AB
SurgiQuest, Inc.
Viking Systems, Inc.
Linvatec India Private Limited
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
India
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, 333-207582, 333-214299, 333-223258 and
333-228171) of CONMED Corporation of our report dated February 25, 2019 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 25, 2019
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 25, 2019
/s/ Curt R. Hartman
Curt R. Hartman
President and
Chief Executive Officer
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Todd W. Garner, 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 25, 2019
/s/ Todd W. Garner
Todd W. Garner
Executive Vice President 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, 2018 (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 25, 2019
Date: February 25, 2019
/s/ Curt R. Hartman
Curt R. Hartman
President and
Chief Executive Officer
/s/ Todd W. Garner
Todd W. Garner
Executive Vice President and
Chief Financial Officer
Company Notes
Delivering Results
CONMED Corporation
525 French Road, Utica, NY 13502 | USA
©2019 CONMED Corporation.