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
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For
the fiscal year ended December 31, 2007
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Commission
file number 0-16093
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CONMED
CORPORATION
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(Exact
name of registrant as specified in its charter)
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New
York
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16-0977505
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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525
French Road, Utica, New York
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13502
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(Address
of principal executive offices)
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(Zip
Code)
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(315)
797-8375
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Registrant's
telephone number, including area code
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Securities
registered pursuant to Section 12(g) of the Act:
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Common
Stock, $.01 par value per share
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(Title
of class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer (as defined
in
Rule 405 of the Securities Act).
Yes
S No
£
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
Yes
£ No
S
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
S No
£
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K 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. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act (Check one).
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Large
accelerated filer S
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Accelerated
filer £
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Non-accelerated
filer £
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Smaller
reporting company £
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
£ No
S
As
of
June 30, 2007, 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 $836,455,053
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 19, 2008 was 28,623,715.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions
of the Definitive Proxy Statement or other informational filing for the 2008
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, 2007
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Page
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Business
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2
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Risk
Factors
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20
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Properties
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27
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Legal
Proceedings
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28
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Submission
of Matters to a Vote of Security Holders
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29
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Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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30
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Selected
Financial Data
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32
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Management's
Discussion and Analysis of Financial Condition
and Results of Operations
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34
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Quantitative
and Qualitative Disclosures About Market
Risk
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51
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Financial
Statements and Supplementary Data
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52
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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52
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Controls
and Procedures
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52
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Other
Information
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52
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Directors,
Executive Officers and Corporate Governance
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53
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Executive
Compensation
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53
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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53
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Certain
Relationships and Related Transactions, and Director
Independence
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53
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Principal
Accounting Fees and Services
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53
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Exhibits,
Financial Statement Schedules
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54
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55
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CONMED
CORPORATION
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Item
1.
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Forward Looking Statements
This
Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2007(“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:
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·
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general
economic and business
conditions;
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·
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cyclical
customer purchasing
patterns due to budgetary and other
constraints;
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·
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changes
in customer
preferences;
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·
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competition;
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·
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changes
in
technology;
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·
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the
introduction and
acceptance of new products;
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·
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the
ability to evaluate,
finance and integrate acquired businesses, products and
companies;
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·
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changes
in business
strategy;
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·
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the
availability and cost of
materials;
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·
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the
possibility that United
States or foreign regulatory and/or administrative agencies may initiate
enforcement actions against us or our
distributors;
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·
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future
levels of indebtedness
and capital spending;
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·
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changes
in foreign exchange
and interest rates;
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·
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quality
of our management and
business abilities and the judgment of our
personnel;
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·
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the
availability, terms and
deployment of capital;
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·
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the
risk of litigation,
especially patent litigation as well as the cost associated with
patent
and other litigation;
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·
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changes
in regulatory
requirements; and
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·
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various
other factors
referenced in this Form
10-K.
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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
by
Eugene R. Corasanti, the Company’s founder and Chairman of the
Board. CONMED is a medical technology company with an emphasis on
surgical devices and equipment for minimally invasive procedures and
monitoring. The Company’s products serve the clinical areas of
arthroscopy, powered surgical instruments, electrosurgery, cardiac monitoring
disposables, endosurgery and endoscopic technologies. They are used
by surgeons and physicians in a variety of specialties including orthopedics,
general surgery, gynecology, neurosurgery, and
gastroenterology. Headquartered in Utica, New York, the Company’s
3,200 employees distribute its products worldwide from ten manufacturing
locations. See Note 8 to the Consolidated Financial Statements for
further discussion of our principal operating units.
We
have
historically used strategic business acquisitions and exclusive distribution
relationships to diversify our product offerings, increase our market share
in
certain product lines, realize economies of scale and take advantage of growth
opportunities in the healthcare field. During the last five years, we
have completed a number of acquisitions. These acquisitions,
complemented by internal growth, have resulted in a compound annual growth
rate
in net sales during that period of approximately 7%.
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.
Industry
Market
growth for our products is primarily driven by:
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Favorable
Demographics. The number of surgical procedures
performed is increasing and we believe the long term demographic
trend
will be continued growth in surgical procedures as a result of the
aging
of the population, and technological advancements, which result in
safer
and less invasive (or non-invasive) surgical
procedures. Additionally, as people are living longer, more
active lives, they are engaging in contact sports and activities
such as
running, skiing, rollerblading, golf and tennis which result in injuries
with greater frequency and at an earlier age than ever
before. Sales of surgical products aggregated approximately 90%
of our total net revenues in 2007. See
“Products.”
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Continued
Pressure to Reduce
Health Care Costs. In response to rising health care
costs, managed care companies and other third-party payers have placed
pressures on health care providers to reduce costs. As a
result, health care providers have focused on the high cost areas
such as
surgery. To reduce costs, health care providers use minimally
invasive techniques, which generally reduce patient trauma, recovery
time
and ultimately the length of hospitalization. Approximately 50%
of our products are designed for use in minimally invasive surgical
procedures. See “Products.” Health care providers
are also increasingly purchasing single-use, disposable products,
which
reduce the costs associated with sterilizing surgical instruments
and
products following surgery. The single-use nature of disposable
products lowers the risk of incorrectly sterilized instruments spreading
infection into the patient and increasing the cost of post-operative
care. Approximately 75% of our sales are derived from
single-use disposable products.
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In
the
United States, the pressure on health care providers to contain costs has caused
many health care providers to enter into comprehensive purchasing contracts
with
fewer suppliers, which offer a broader array of products at lower
prices. In addition, many health care providers have aligned
themselves with Group Purchasing Organizations (“GPOs”) or Integrated Health
Networks (“IHNs”), whose stated purpose is to aggregate the purchasing volume of
their members in order to negotiate competitive pricing with suppliers,
including manufacturers of surgical products. We believe that these
trends will favor entities which offer a diverse product
portfolio. See “—Business Strategy”.
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Increased
Global Medical
Spending. We believe that foreign markets offer
significant growth opportunities for our products. We currently
distribute our products through our own sales subsidiaries or through
local dealers in over 100 foreign
countries.
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Competitive
Strengths
Management
believes that we hold a significant market share position in each of our key
product areas including, Arthroscopy, Powered Surgical Instruments,
Electrosurgery, Patient Care, Endosurgery and Endoscopic
Technologies. We have established a leadership position in the
marketplace by capitalizing on the following competitive strengths:
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Brand
Recognition. Our products are marketed under leading
brand names, including CONMED®,
CONMED Linvatec®
and Hall Surgical®. These
brand names are recognized by physicians and healthcare professionals
for
quality and service. It is our belief that brand recognition
facilitates increased demand for our products in the marketplace,
enables
us to build upon the brand’s associated reputation for quality and
service, and realize increased market acceptance of new branded
products.
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Breadth
of Product
Offering. 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, GPOs, IHNs and
other
customers, particularly as institutions seek to reduce costs and
minimize
the number of suppliers.
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Successful
Integration of
Acquisitions. We seek to build growth platforms around our core
markets through focused acquisitions of complementary businesses
and
product lines. During the last five years we have completed a
number of acquisitions. These acquisitions have enabled us to
diversify our product portfolio, expand our sales and marketing
capabilities and strengthen our presence in key geographical
markets.
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Strategic
Marketing and
Distribution Channels. We market our products
domestically through five focused sales force groups consisting of
approximately 170 employee sales representatives and 205 sales
professionals employed by independent sales agent groups. Each
of our dedicated sales professionals are highly knowledgeable in
the
applications and procedures for the products they
sell. Our sales representatives foster close professional
relationships with physicians, surgeons, hospitals, outpatient surgery
centers and physicians’ offices. Additionally, we maintain a
global presence through sales subsidiaries and branches located in
key
international markets. We directly service hospital customers
located in these markets through an employee-based international
sales
force of approximately 180 sales representatives. We also
maintain distributor relationships domestically and in numerous countries
worldwide. See
“—Marketing.”
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Operational
Improvements and
Manufacturing. We are focused on continuously improving
our supply chain effectiveness, strengthening our manufacturing processes
and optimizing our plant network to increase operational efficiencies
within the organization. Substantially all of our
products are manufactured and assembled from components we
produce. Our strategy has historically been to vertically
integrate our manufacturing facilities in order to develop a competitive
advantage. This integration provides us with cost efficient and
flexible manufacturing operations which permit us to allocate capital
more
efficiently. Additionally, we attempt to exploit commercial
synergies between operations, such as the procurement of common raw
materials and components used in
production.
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Technological
Leadership. Research and development efforts are closely
aligned 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. These efforts are evidenced by recent product
introductions, including the following: IM 4000 High Definition
Camera System, Spectrum® MVP™ Shoulder Suture Passer, Shutt® Series 210™
Instruments for Hip Arthroscopy, HD Arthroscope, and Single Chip
Enhanced
Definition Camera System.
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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 superior investment
returns. We intend to achieve future growth and earnings development
through the following initiatives:
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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.
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Pursue
Strategic
Acquisitions. We pursue strategic acquisitions in
existing and new growth markets to achieve 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.
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Realize
Manufacturing and
Operating Efficiencies. We continually review our
production systems for opportunities to reduce operating costs,
consolidate product lines or identical process flows, reduce inventory
requirements and optimize existing processes. Our vertically
integrated manufacturing facilities allow for further opportunities
to
reduce overhead, increase operating efficiencies and capacity
utilization.
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·
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Geographic
Diversification. We believe that significant growth
opportunities exist for our surgical products outside the United
States. Principal foreign markets for our products include
Europe, Latin America and Asia/Pacific Rim. Critical elements
of our future sales growth in these markets include leveraging our
existing relationships with foreign surgeons, hospitals, third-party
payers and foreign distributors, maintaining an appropriate presence
in
emerging market countries and continually evaluating our
routes-to-market.
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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.
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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:
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Year
Ended December 31,
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2005
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2006
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2007
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Arthroscopy
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34 | % | 35 | % | 38 | % | ||||||
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Powered
Surgical Instruments
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22 | 21 | 21 | |||||||||
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Electrosurgery
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14 | 15 | 13 | |||||||||
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Patient
Care
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12 | 12 | 11 | |||||||||
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Endosurgery
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8 | 8 | 9 | |||||||||
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Endoscopic
Technologies
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10 | 9 | 8 | |||||||||
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Total
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100 | % | 100 | % | 100 | % | ||||||
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Net
Sales (in thousands)
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$ | 617,305 | $ | 646,812 | $ | 694,288 | ||||||
Arthroscopy
We
offer
a comprehensive range of devices and products for use in arthroscopic
surgery. Arthroscopy refers to diagnostic and therapeutic surgical
procedures performed on joints with the use of minimally invasive arthroscopes
and related instruments. Minimally invasive arthroscopic procedures
enable surgical repairs to be completed with less trauma to the patient,
resulting in shorter recovery times and cost savings. Arthroscopic
procedures are performed on the knee and shoulder, and smaller joints, such
as
the wrist and ankle.
Our
arthroscopy products include powered resection instruments, arthroscopes,
reconstructive systems, tissue repair sets, metal and bioabsorbable implants
and
related disposable products and fluid management systems. We also
offer a line of video and imaging products suitable for use in multi-specialty
clinical environments beyond arthroscopy, including laparoscopy, ENT, gynecology
and urology as well as integrated operating room systems and
equipment. It is our standard practice to transfer some of these
products, such as shaver consoles and pumps, to certain customers at no
charge. These capital “placements” allow for and accommodate the use
of a variety of disposable products, such as shaver blades, burs and pump
tubing. We have benefited from the introduction of new arthroscopic
products and technologies, such as bioabsorbable screws, ablators, “push-in” and
“screw-in” suture anchors, resection shavers and cartilage repair
implants.
A
significant portion of arthroscopic procedures are performed to repair injuries
which have occurred in the joint areas of the body. Many of these
injuries are the result of sports related events or similar
traumas. For this reason, arthroscopy is often referred to as “sports
medicine.”
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Arthroscopy
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Product
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Description
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Brand
Name
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Ablators
and Shaver Ablators
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Electrosurgical
ablators and resection ablators to resect and remove soft tissue
and bone;
used in knee, shoulder and small joint surgery.
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Advantage®
Lightwave™
Trident®
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Knee
Reconstructive Systems
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Products
used in cruciate reconstructive surgery; includes instrumentation,
screws,
pins and ligament harvesting and preparation devices.
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Paramax®
Pinn-ACL®
Grafix®
Matryx™
Bioscrew®
EndoPearl®
XtraLok®
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Soft
Tissue Repair Systems
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Instrument
systems designed to attach specific torn or damaged soft tissue to
bone or
other soft tissue in the knee, shoulder and wrist; includes
instrumentation, guides, hooks and suture devices.
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Spectrum®
Inteq®
Shuttle
Relay™
Blitz®
Hi-Fi™
Suture
Saver™
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Fluid
Management Systems
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Disposable
tubing sets, disposable and reusable inflow devices, pumps and
suction/waste management systems for use in arthroscopic and general
surgeries.
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Apex®
Quick-Flow®
Quick-Connect®
87K™
10K®
24K™
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Arthroscopy
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Product
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Description
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Brand
Name
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Imaging
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Surgical
video systems for endoscopic procedures; includes autoclavable single
and
three-chip camera heads and consoles, endoscopes, light sources,
monitors,
VCRs and printers.
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Apex®
8180
Series
Envision™
IM3300
Quicklatch®
Shock
Flex™
TrueHDTM
IM4000
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Implants
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Products
including bioabsorbable and metal screws, pins and suture anchors
for
attaching soft tissue to bone in the knee, shoulder and wrist as
well as
miniscal repair.
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BioScrew™
Bio-Anchor®
BioTwist®
UltraFix®
Revo®
Super
Revo®
Bionx™
Meniscus
Arrow™
Smart
Nail®
Smart
Pin®
Smart
Screw®
Smart
Tack®
The
Wedge™
Biostinger®
Hornet®
ThRevo™
Duet™
Impact™
Bio-Mini
RevoTM
XO ButtonTM
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Integrated
operating room systems and equipment
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Centralized
operating room management and control systems, service arms and service
managers.
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CONMED®
Nurse’s
Assistant®
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Arthroscopic
Shaver Systems
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Electrically
powered shaver handpieces that accommodate a large variety of shaver
blade
disposables specific to clinical specialty and technological
precision.
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Advantage®
Turbo™
Gator®
Great
White®
Mako™
Merlin®
Sterling®
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Other
Instruments and Accessories
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Forceps,
graspers, punches, probes, sterilization cases and other general
instruments for arthroscopic procedures.
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Shutt®
Concept®
TractionTower®
Clearflex™
SE™
Dry
Doc®
Cannulae
Hip
Arthroscopy Kit
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Powered
Surgical Instruments
Electric,
battery or pneumatic powered surgical instruments are used to perform
orthopedic, arthroscopic and other surgical procedures, such as cutting,
drilling or reaming. Each instrument consists of one or more
handpieces and related accessories as well as disposable and limited reusable
items (e.g., burs, saw blades, drills and reamers). Powered
instruments are categorized as either small bone, large bone or specialty
powered instruments. Specialty powered instruments are utilized in
procedures such as spinal surgery, neurosurgery, ENT, oral/maxillofacial
surgery, and cardiothoracic surgery.
Our
line
of powered instruments 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. Large bone, neurosurgical, spinal and
cardiothoracic powered instruments are sold primarily to hospitals while small
bone arthroscopic, otolaryngological and oral/maxillofacial powered instruments
are sold to hospitals, outpatient facilities and physicians’
offices. Our CONMED Linvatec subsidiary has devoted significant
resources in the development of new technologies for large bone, small bone,
arthroscopic, neurosurgical, spine and otolaryngological instruments which
may
be easily adapted and modified for new procedures.
Our
powered instruments product line also includes the PowerPro®
Battery
System. This full function orthopedic power system is specifically designed
to
meet the requirements of most orthopedic applications. The
PowerPro®
Battery System has a SureCharge™ option which allows the user to
sterilize the battery before charging. This ensures that the battery
will be fully charged when delivered to the operating room, unlike competitive
battery systems currently available on the market. The PowerPro®
uses
a
proprietary process for maintaining sterility during charging, thus avoiding
the
loss of battery charge during sterilization, which may occur in competing
battery systems.
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Powered
Surgical Instruments
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Product
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Description
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Brand
Name
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Large
Bone
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Powered
saws, drills and related disposable accessories for use primarily
in total
knee and hip joint replacements and trauma surgical
procedures.
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Hall®
Surgical
MaxiDriver™
PowerPro®
PowerProMax™
Advantage®
SureCharge®
MPower™
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Small
Bone
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Powered
saws, drills and related disposable accessories for small bone and
joint
related surgical procedures.
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Hall®
Surgical
MicroPower™
Advantage®
Smart
Guard®
PowerProMax™
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Powered
Surgical Instruments
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Product
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Description
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Brand
Name
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Otolaryngology
Neurosurgery Spine
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Specialty
powered saws, drills and related disposable accessories for use in
neurosurgery, spine, and otolaryngologic procedures.
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Hall®
Surgical
E9000®
UltraPower®
Hall
Osteon®
Hall
Ototome®
Coolflex®
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Cardiothoracic
Oral/maxillofacial
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Powered
sternum saws, drills, and related disposable accessories for use
by
cardiothoracic and oral/maxillofacial surgeons.
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Hall®
Surgical
E9000®
UltraPower®
Micro
100TM
VersiPower®
Plus
|
||
Electrosurgery
Electrosurgery
is a technique of using high-frequency electrical energy which, when applied
to
tissues through special instruments, may be used to cut or coagulate
tissues. Radio frequency (“RF”) is the form of high-frequency
electrical energy used in electrosurgery. An electrosurgical system
consists of a generator, an active electrode in the form of an electrosurgical
pencil used to apply concentrated energy from the generator to the target
tissues and a ground pad which returns the energy safely to the
generator. Electrosurgery is routinely used in most forms of surgery,
including general, dermatologic, thoracic, orthopedic, urologic, neurosurgical,
gynecological, laparoscopic, arthroscopic and endoscopic
procedures.
Our
electrosurgical products include electrosurgical pencils and active electrodes,
ground pads, generators, the Argon-Beam Coagulation system (ABC®),
and
related disposable products. ABC®
technology is a special method of electrosurgery, which produces a faster and
more superficial coagulation of tissues as compared to conventional
electrosurgery. Unlike conventional electrosurgery, the electrical
energy travels through an ionized column of argon gas, allowing the energy
to be
applied to the bleeding tissues in a completely non-contact
mode. Clinicians have reported notable benefits of ABC®
over
traditional electrosurgical coagulation in certain clinical situations,
including open-heart, liver, oncology and trauma surgery.
|
Electrosurgery
|
||||
|
Product
|
Description
|
Brand
Name
|
||
|
Pencils
|
Disposable
and reusable surgical instruments designed to deliver high-frequency
electrical energy to cut and/or coagulate tissue.
|
Hand-Trol®
GoldLine™
ClearVac®
|
||
|
Ground
Pads
|
Disposable
ground pads which disperse electrosurgical energy and safely return
it to
the generator; available in adult, pediatric and infant
sizes.
|
MacroLyte®
ThermoGard®
SureFit™
|
||
|
Electrosurgery
|
||||
|
Product
|
Description
|
Brand
Name
|
||
|
Active
Electrodes
|
Surgical
accessory electrodes with and without the proprietary UltraCleanTM
coating which provides an easy to clean electrode surface during
surgery.
|
UltraCleanTM
|
||
|
Generators
|
Monopolar
and bipolar clinical energy sources for surgical procedures performed
in a
hospital, physicians’ office or clinical setting.
|
System
5000TM
System
2450TM
Hyfrecator®2000
|
||
|
Argon
Beam
Coagulation
Systems
|
Specialized
electrosurgical generators, disposable hand pieces and ground pads
for
Argon Enhanced non-contact coagulation of tissues.
|
ABC®
System
7550®
ABC
Flex®
Bend-A-Beam®
|
||
Patient
Care
Our
patient care product line offering includes a line of vital signs and cardiac
monitoring products including pulse oximetry equipment & sensors, ECG
electrodes and cables, cardiac defibrillation & pacing pads and blood
pressure cuffs. We also offer a complete line of suction instruments
& tubing for use in the operating room, as well as a line of IV products for
use in the critical care areas of the hospital.
|
Patient
Care
|
||||
|
Product
|
Description
|
Brand
Name
|
||
|
ECG
Monitoring
|
Line
of disposable electrodes, monitoring cables, lead wire products and
accessories designed to transmit ECG signals from the heart to an
ECG
monitor or recorder.
|
CONMED®
Ultratrace®
Cleartrace®
|
||
|
Patient
Positioners
|
Products
which properly and safely position patients while in
surgery.
|
Airsoft®
|
||
|
Surgical
Suction Instruments and Tubing
|
Disposable
surgical suction instruments and connecting tubing, including Yankauer,
Poole, Frazier and Sigmoidoscopic instrumentation, for use by physicians
in the majority of open surgical procedures.
|
CONMED®
|
||
|
Intravenous
Therapy
|
Disposable
IV drip rate gravity controller and disposable catheter stabilization
dressing designed to hold and secure an IV needle or catheter for
use in
IV therapy.
|
VENI-GARD®
MasterFlow®
Stat
2®
|
||
|
Patient
Care
|
||||
|
Product
|
Description
|
Brand
Name
|
||
|
Defibrillator
Pads and Accessories
|
Stimulation
electrodes for use in emergency cardiac response and conduction studies
of
the heart.
|
PadPro®
R2®
|
||
|
Pulse
Oximetry
|
Used
in critical care to continuously monitor a patient’s arterial blood oxygen
saturation and pulse rate.
|
Dolphin®
Pro2®
|
||
|
Non-invasive
blood pressure cuff
|
Used
in critical care to measure blood pressure.
|
SoftCheck®
UltraCheck® (registered
trademarks of CAS Medical Systems, Inc.)
|
||
Endosurgery
Endosurgery
(also referred to as minimally invasive surgery or laparoscopic surgery) is
surgery performed without a major incision. This surgical specialty results
in
less trauma for the patient and produces important cost savings as a result
of
shorter recovery times and reduced hospitalization. Endosurgery is
performed on organs in the abdominal cavity such as the gallbladder, appendix
and female reproductive organs. During such procedures, devices
called “trocars” are used to puncture the abdominal wall and are then removed,
leaving in place a trocar cannula. The trocar cannula provides access
into the abdomen for camera systems and surgical instruments. Some of
our endosurgical instruments are “reposable”, meaning that the instrument has a
disposable and a reusable component.
Our
Endosurgical products include the Reflex®
and
PermaClip™ clip appliers for vessel and duct ligation, Universal S/ITM
(suction/irrigation) and Universal Plus™ laparoscopic instruments, specialized
suction/irrigation electrosurgical instrument systems for use in laparoscopic
surgery and the TroGard Finesse®
which
incorporates a blunt-tipped version of a trocar. The TroGard
Finesse®
dilates
access through the body wall rather than cutting with the sharp, pointed tips
of
conventional trocars thus resulting in smaller wounds, and less
bleeding. We also offer cutting trocars, suction/irrigation
accessories, laparoscopic scissors, active electrodes, insufflation needles
and
linear cutters and staplers for use in laparoscopic surgery. Our
disposable skin staplers are used to close large skin incisions with surgical
staples, thus eliminating the time consuming suturing process.
|
Endosurgery
|
||||
|
Product
|
Description
|
Brand
Name
|
||
|
Trocars
|
Disposable
and reposable devices used to puncture the abdominal wall providing
access
to the abdominal cavity for camera systems and
instruments.
|
TroGard
Finesse®
Reflex®
Detach
a Port®
OnePort®
CORE
Dynamics®
|
||
|
Multi-functional
Electrosurgery and Suction/Irrigation instruments
|
Instruments
for cutting and coagulating tissue by delivering high-frequency
current. Instruments which deliver irrigating fluid to the
tissue and remove blood and fluids from the internal operating
field.
|
Universal™
Universal
Plus™
FloVac®
|
||
|
Endosurgery
|
||||
|
Product
|
Description
|
Brand
Name
|
||
|
Clip
Appliers
|
Disposable
and reposable devices for ligating blood vessels and ducts by placing
a
titanium clip on the vessel.
|
Reflex®
PermaClip™
|
||
|
Laparoscopic
Instruments
|
Scissors,
graspers
|
DetachaTip®
|
||
|
Skin
Staplers
|
Disposable
devices which place surgical staples for closing a surgical
incision.
|
Reflex®
|
||
|
Microlaparoscopy
scopes and instruments
|
Small
laparoscopes and instruments for performing surgery through very
small
incisions.
|
MicroLap®
|
||
|
Specialty
Laparoscopic Devices
|
Specialized
elevator, retractor for laparoscopic hysterectomy
|
VCARE®
|
||
Endoscopic
Technologies
Gastrointestinal
(GI) endoscopy is the examination of the digestive tract with a flexible,
lighted instrument referred to as an "endoscope". This instrument enables the
physician to directly visualize the esophagus, stomach, portions of the small
intestine, and colon. This technology allows the physician to more accurately
diagnose and treat diseases of the digestive system. Through these scopes a
physician may take biopsies, dilate narrowed areas referred to as strictures,
and remove polyps which are growths in the digestive tract. Some of the more
common conditions which may be diagnosed and treated using this procedure
include ulcers, Crohn's disease, ulcerative colitis and gallbladder
disease.
We
offer
a comprehensive line of minimally invasive diagnostic and therapeutic products
used in conjunction with procedures which require flexible
endoscopy. Our principal customers include GI endoscopists,
pulmonologists, and nurses who perform both diagnostic and therapeutic
endoscopic procedures in hospitals and outpatient clinics.
Our
primary focus is to identify, develop, acquire, manufacture and market
differentiated medical devices, which improve outcomes in the diagnosis and
treatment of gastrointestinal and pulmonary disorders. Our diagnostic
and therapeutic product offerings for GI and pulmonology include forceps,
accessories, bronchoscopy devices, dilatation, hemostasis, biliary devices,
and
polypectomy.
|
Endoscopic
Technologies
|
||||
|
Product
|
Description
|
Brand
Name
|
||
|
Pulmonary
|
Transbronchial
Cytology and Histology Aspiration Needles, Disposable Biopsy Forceps,
Cytology Brushes and Bronchoscope Cleaning Brushes
|
Wang®
Blue
Bullet®
Precisor
BRONCHO®
GARG™
|
||
|
Biopsy
|
Disposable
biopsy forceps, Percutaneous Liver Biopsy instrument, Disposable
Cytology
Brushes
|
Precisor®
Hepacor®
OptiBite®
|
||
|
Polypectomy
|
Disposable
Polypectomy Snares, Retrieval Nets, Polyp Traps
|
Singular®
Optimizer®
Nakao SpidernetTM
|
||
|
Biliary
|
Triple
Lumen Stone Removal Balloons, Advanced Cannulation Triple Lumen
Papillotomes, High Performance Biliary Guidewires, Cannulas, Biliary
Balloon Dilators, Plastic and Metal Endoscopic Biliary
Stents
|
Apollo®
Apollo3®
Apollo3AC®
FXWire™
XWire™
DirecXion®
Director™
Duraglide™
Duraglide
3™
Flexxus™
ProForma®
HYDRODUCT®
Proserve™
|
||
|
Dilation
|
Multi-Stage
Balloon Dilators, American Dilation System
|
Eliminator®
|
||
|
Hemostasis
|
Endoscopic
Injection Needles, Endoscope Ligator, Multiple Band Ligator, Sclerotherapy
Needle, Bipolar Hemostasis Probes
|
SureShot®
Stiegmann-Goff™
Bandito™
RapidFire®
Flexitip™
BICAP®
BICAP
SUPERCONDUCTOR™
|
||
|
Endoscopic
Technologies
|
||||
|
Product
|
Description
|
Brand
Name
|
||
|
Endoscopic
Ultrasound
|
Fine
Needle Aspiration
|
VizeonTM
|
||
|
Enteral
Feeding
|
Initial
Percutaneous Endoscopic Gastrostomy (PEG) systems, Replacement Tri-Funnel
G-Tube
|
EntakeTM
|
||
|
Accessories
|
Disposable
Bite Blocks, Cleaning Brushes
|
Scope
Saver™
Channel
Master™
Blue
Bullet®
Whistle®
|
||
Marketing
A
significant portion of our products are distributed domestically directly to
more than 6,000 hospitals and other healthcare institutions as well as through
medical specialty distributors and surgeons. We are not dependent on
any single customer and no single customer accounted for more than 10% of our
net sales in 2005, 2006 and 2007.
A
significant portion of our U.S. sales are to customers affiliated with GPOs,
IHNs and other large national or regional accounts, as well as to the Veterans
Administration and other hospitals operated by the Federal
government. For hospital inventory management purposes, some of our
customers prefer to purchase our products through independent third-party
medical product distributors.
In
order
to provide a high level of expertise to the medical specialties we serve, our
domestic sales force consists of the following:
|
|
·
|
205 sales
representatives selling arthroscopy and powered surgical instrument
products retained by independent sales agent
groups;
|
|
|
·
|
55 employee
sales representatives selling electrosurgery
products;
|
|
|
·
|
35 employee
sales representatives selling endosurgery
products;
|
|
|
·
|
35 employee
sales representatives selling patient care
products;
|
|
|
·
|
45
employee sales representatives selling endoscopic technologies
products.
|
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. Sales agent groups are used in
the United States to sell our arthroscopy, multi-specialty medical video systems
and powered surgical instrument products. These sales agent groups
are paid a commission for sales made to customers while home office sales and
marketing management provide the overall direction for sales of our
products.
Our
Corporate sales organization is responsible for interacting with large regional
and national accounts (eg. GPOs, IHNs, etc.). We have contracts with
many such organizations and believe that, with certain exceptions, the loss
of
any individual group purchasing contract will not adversely 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.
The
sale
of our products is accompanied by initial and ongoing in-service end-user
training. Each of our dedicated sales professionals are highly
knowledgeable in the applications and procedures for the products they
sell. Our sales professionals, in turn, provide surgeons and medical
personnel with information relating to the technical features and benefits
of
our products.
Maintaining
and 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 or
through direct in country sales. We distribute our products through sales
subsidiaries and branches with offices located in Australia, Austria, Belgium,
Canada, France, Germany, Korea, the Netherlands, Spain, Poland and the United
Kingdom. In these countries, our sales are denominated in the local
currency. In the remaining countries where our products are sold
through independent distributors, sales are denominated in United States
dollars.
We
sell
to a diversified base of customers around the world and, therefore, believe
there is no material concentration of credit risk.
Manufacturing
We
manufacture substantially all of our products and assemble them from components
we produce. Our strategy has historically been to vertically
integrate our manufacturing facilities in order to develop a competitive
advantage. This integration provides us with cost efficient and
flexible manufacturing operations which permit us to allocate capital more
efficiently. Additionally, we attempt to exploit commercial synergies
between operations, such as the procurement of common raw materials and
components used in production.
Raw
material costs constitute a substantial portion of our cost of
production. We use numerous raw materials and components in the
design, development and manufacturing of our products. 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. None of our critical raw materials and components are
procured from single sources for reasons of quality assurance, sole source
availability, cost effectiveness or constraints resulting from regulatory
requirements. The loss of any existing supplier or supplier contract
would not have a material adverse effect on our financial and operational
performance. To date, we have not experienced any protracted
interruption in the availability of raw materials and components necessary
to
fulfill production schedules.
All
of
our products are classified as medical devices subject to regulation by numerous
agencies and legislative bodies, including the United States Food and Drug
Administration (“FDA”) and comparable foreign counter parts. The
FDA’s Quality System Regulations set forth standards for our product design and
manufacturing processes, require the maintenance of certain records and provide
for on-site inspections of our facilities by the FDA. In many of the
foreign countries in which we manufacture and distribute our products we are
subject to regulatory requirements affecting, among other things, product
performance standards, packaging requirements, labeling requirements and import
laws. Regulatory requirements affecting the Company vary from country
to country. The timeframes and costs for regulatory submission and
approval from foreign agencies or legislative bodies may vary from those
required by the FDA. Certain requirements for approval from foreign
agencies or legislative bodies may also differ from those of the
FDA.
We
believe that our production and inventory management practices are
characteristic of those in the medical device industry. Substantially
all of our products are stocked in inventory and are not manufactured to order
or to individual customer specifications. 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. For clinical and commercially promising
disclosures, we seek to obtain rights to these ideas through negotiated
agreements. Such agreements typically compensate the originator
through royalty payments based upon a percentage of licensed product net
sales. Royalty expense approximated $4.6 million, $4.4 million and
$4.4 million in 2005, 2006 and 2007, respectively.
Amounts
expended for Company sponsored research and development was approximately $25.5
million, $30.7 million and $30.4 million during 2005, 2006, and 2007,
respectively.
We
have
rights to significant 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.
Competition
The
market for our products is highly competitive and our customers generally 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, several of our competitors are
large, technically-competent firms with substantial assets.
The
following chart identifies our principal competitors in each of our key business
areas:
|
Business
Area
|
Competitor
|
|
|
Arthroscopy
|
Smith
& Nephew, plc
|
|
|
Arthrex,
Inc.
|
||
|
Stryker
Corporation
|
||
|
ArthroCare
Corporation
|
||
|
Johnson
& Johnson: Mitek Worldwide
|
||
|
Powered
Surgical
|
Stryker
Corporation
|
|
|
Instruments
|
Medtronic,
Inc. Midas Rex and Xomed divisions
|
|
|
The
Anspach Effort, Inc.
|
||
|
MicroAire
Surgical Instruments, LLC
|
||
|
Electrosurgery
|
Covidien
Ltd.; Valleylab
|
|
|
3M
Company
|
||
|
ERBE
Elektromedizin GmbH
|
||
|
Patient
Care
|
Covidien
Ltd.: Kendall
|
|
|
3M
Company
|
||
|
Endosurgery
|
Johnson
& Johnson: Ethicon Endo-Surgery, Inc.
|
|
|
Tyco
International Ltd.; U.S.Surgical
|
||
|
Endoscopic
Technologies
|
Boston
Scientific Corporation – Endoscopy
|
|
|
Wilson-Cook
Medical, Inc.
|
||
|
Olympus
America, Inc.
|
||
|
U.S.
Endoscopy
|
Factors
which affect our competitive posture include product design, customer
acceptance, service and delivery capabilities, pricing and product
development/improvement. In the future, other alternatives such as
new medical procedures or pharmaceuticals may become interchangeable
alternatives to our products.
Government
Regulation and Quality Systems –
Substantially
all of our products are classified as medical devices subject to regulation
by
numerous agencies and legislative bodies, including the FDA and comparable
foreign counterparts. Authorization to commercially distribute our
products in the U.S. is granted by the FDA under a procedure referred to as
510(k) premarket notification. This process requires us to
demonstrate that our new product, line extension or modified product is
substantially equivalent to a legally marketed device which was on the market
prior to May 28, 1976 or is currently on the U.S. market and does not require
premarket approval. Substantially all of our products have been
classified as either Class I or Class II devices with the FDA, indicating that
they are subject to the 510(k) premarketing notification clearance as discussed
above and must continually meet certain FDA standards (Our products are
classified as Class I, IIa and IIb in the European Union (EU) and subject to
regulation by our European Notified Body). Our FDA
clearance is subject to continual review and future discovery of previously
unknown events could result in restrictions being placed on a product’s
marketing or notification from the FDA to halt the distribution of certain
medical devices.
Medical
device regulations continue to evolve world-wide. Products marketed
in the EU and other countries require preparation of technical files and
dossiers which demonstrate compliance with applicable local regulations.
Products marketed in Australia are subject to a new classification system and
have been re-registered under the updated Therapuetics Goods Act in
2007. Products marketed in Japan must be re-registered under the
Ministry of Health’s recently updated Pharmacuetical Affairs Law (PAL). 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 new requirements.
Our
operations are supported by quality assurance/regulatory compliance personnel
tasked with monitoring compliance to design controls, process controls and
the
other relevant government regulations for all of our design, manufacturing,
distribution and servicing activities. We and
substantially all of our products are subject to the provisions of the Federal
Food, Drug and Cosmetic Act of 1938, as amended by the Medical Device Amendments
of 1976, Safe Medical Device Act of 1990, Medical Device Modernization Act
of
1997, Medical User Fee and Modernization Act of 2002 and similar international
regulations, such as the European Union Medical Device Directives.
As
a
manufacturer of medical devices, the FDA’s Quality System Regulations as
specified in Title 21, Code of Federal Regulation (CFR) part 820, set forth
standards 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. Such industry-defined product
standards are generally formulated by committees of the Association for the
Advancement of Medical Instrumentation (AAMI), International Electrotechnical
Commission (IEC) and the International Organization for Standardization
(ISO). We believe that our products and processes presently meet
applicable standards in all material respects.
As
noted
above, our facilities are subject to periodic inspection by the FDA for, among
other things, conformance to Quality System Regulation and Current Good
Manufacturing Practice (“CGMP”) requirements. Following an inspection, the FDA
typically provides its observations, if any, in the form of a Form 483 (Notice
of Inspectional Observations) with specific observations concerning potential
violation of regulations. Although we respond to all Form 483
observations and correct deficiencies expeditiously, there can be no assurance
that the FDA will not take further action including issuing a warning letter,
seizing product and imposing fines. We market our products in several foreign
countries and therefore are subject to regulations affecting, among other
things, product standards, packaging requirements, labeling requirements and
import laws. 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 maintain
quality system certification 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 currently meet applicable standards for the countries in which they
are
marketed.
Our
products may become subject to recall or market withdrawal regulations and
we
have made product recalls in the past. No product recall has had a
material effect on our financial condition or results of operations, however
there can be no assurance that regulatory issues will not have a material
adverse effect in the future.
Any
change in existing federal, state, foreign laws or regulations, or in the
interpretation or enforcement thereof, or the promulgation or any additional
laws or regulations may result in a material adverse effect on our financial
condition or results of operations.
Employees
As
of
December 31, 2007, we had approximately 3,200 full-time employees,
including approximately 2,000 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 employees are represented by a labor union.
|
Item
1A.
|
An
investment in our securities, including our common stock, involves a high degree
of risk. Investors should carefully consider the specific factors set
forth below as well as the other information included or incorporated by
reference in this Form 10-K. See “Forward Looking Statements”.
Our
financial
performance is subject to the risks inherent in our acquisition strategy,
including the effects of increased borrowing and integration of newly acquired
businesses or product lines.
A
key
element of our business strategy has been to expand through acquisitions and
we
may seek to pursue additional acquisitions in the future. Our success
is dependent in part upon our ability to integrate acquired companies or product
lines into our existing operations. We may not have sufficient
management and other resources to accomplish the integration of our past and
future acquisitions and implementing our acquisition strategy may strain our
relationship with customers, suppliers, distributors, manufacturing personnel
or
others. There can be no assurance that we will be able to identify
and make acquisitions on acceptable terms or that we will be able to obtain
financing for such acquisitions on acceptable terms. In addition,
while we are generally entitled to customary indemnification from sellers of
businesses for any difficulties that may have arisen prior to our acquisition
of
each business, acquisitions may involve exposure to unknown liabilities and
the
amount and time for claiming under these indemnification provisions is often
limited. As a result, our financial performance is now and will
continue to be subject to various risks associated with the acquisition of
businesses, including the financial effects associated with any increased
borrowing required to fund such acquisitions or with the integration of such
businesses.
Failure
to comply
with regulatory requirements may result in recalls, fines or materially adverse
implications.
All
of
our products are classified as medical devices subject to regulation by the
FDA. 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. Manufacturing and sales of our products outside the
United States are also subject to foreign 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 approval, and requirements
for foreign approvals may differ from FDA requirements. Failure to
comply with applicable domestic and/or foreign regulatory requirements may
result in:
|
|
·
|
fines
or other enforcement actions;
|
|
|
·
|
recall
or seizure of products;
|
|
|
·
|
total
or partial suspension of
production;
|
|
|
·
|
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 foreign 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 made product recalls in
the
past. Although no recall has had a material adverse effect on our
business, financial condition or results of operations, we cannot assure you
that regulatory issues will not have a material adverse effect 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, several 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 “Competition” for a further discussion of these
competitive forces.
Factors
which may influence our customers’ choice of competitor products
include:
|
|
·
|
changes
in surgeon preferences;
|
|
|
·
|
increases
or decreases in health care spending related to medical
devices;
|
|
|
·
|
our
inability to supply products to them, as a result of product recall,
market withdrawal or back-order;
|
|
|
·
|
the
introduction by competitors of new products or new features to existing
products;
|
|
|
·
|
the
introduction by competitors of alternative surgical technology;
and
|
|
|
·
|
advances
in surgical procedures, discoveries or developments in the health
care
industry.
|
We
use a variety of raw materials in our businesses, and significant shortages
or
price increases could increase our operating costs and adversely impact the
competitive positions of our products.
Our
reliance on certain suppliers and commodity markets to secure raw materials
used
in our products exposes us to volatility in the prices and availability of
raw
materials. In some instances, we participate in commodity markets that may
be
subject to allocations by suppliers. A disruption in deliveries from our
suppliers, price increases, or decreased availability of raw materials or
commodities, could have an adverse effect on our ability to meet our commitments
to customers or increase our operating costs. We believe that our supply
management practices are based on an appropriate balancing of the foreseeable
risks and the costs of alternative practices. Nonetheless, price increases
or
the unavailability of some raw materials may have an adverse effect on our
results of operations or financial condition.
Cost
reduction
efforts in the health care industry could put pressures on our prices and
margins.
In
recent
years, the health care industry has undergone significant change driven by
various efforts to reduce costs. Such efforts include national health
care reform, trends towards managed care, cuts in Medicare, consolidation of
health care distribution companies and collective purchasing arrangements by
GPOs and IHNs. Demand and prices for our products may be adversely
affected by such trends.
We
may not be able to keep pace with technological change or to successfully
develop new products with wide market acceptance, which could cause us to lose
business to competitors.
The
market for our products is characterized by rapidly changing
technology. Our future financial performance will depend in part on
our ability to develop and manufacture new products on a cost-effective basis,
to introduce them to the market on a timely basis, and to have them accepted
by
surgeons.
We
may
not be able to keep pace with technology or to develop viable new
products. Factors which may result in delays of new product
introductions or cancellation of our plans to manufacture and market new
products include:
|
|
·
|
capital
constraints;
|
|
|
·
|
research
and development delays;
|
|
|
·
|
delays
in securing regulatory approvals;
or
|
|
|
·
|
changes
in the competitive landscape, including the emergence of alternative
products or solutions which reduce or eliminate the markets for pending
products.
|
Our
new products may fail to achieve expected levels of market
acceptance.
New
product introductions may fail to achieve market acceptance. The
degree of market acceptance for any of our products will depend upon a number
of
factors, including:
|
|
·
|
our
ability to develop and introduce new products and product enhancements
in
the time frames we currently
estimate;
|
|
|
·
|
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 “Competition” for a
further discussion of these competitive forces.
Our
senior credit
agreement contains covenants which may limit our flexibility or prevent us
from
taking actions.
Our
senior credit agreement contains, and future credit facilities are expected
to
contain, certain restrictive covenants which will affect, and in many respects
significantly limit or prohibit, among other things, our ability
to:
|
|
·
|
incur
indebtedness;
|
|
|
·
|
make
investments;
|
|
|
·
|
engage
in transactions with affiliates;
|
|
|
·
|
pay
dividends or make other distributions on, or redeem or repurchase,
capital
stock;
|
|
|
·
|
sell
assets; and
|
|
|
·
|
pursue
acquisitions.
|
These
covenants, unless waived, may prevent us from pursuing acquisitions,
significantly limit our operating and financial flexibility and limit our
ability to respond to changes in our business or competitive
activities. Our ability to comply with such provisions may be
affected by events beyond our control. In the event of any default
under our credit agreement, the credit agreement lenders may elect to declare
all amounts borrowed under our credit agreement, together with accrued interest,
to be due and payable. If we were unable to repay such borrowings,
the credit agreement lenders could proceed against collateral securing the
credit agreement, which consists of substantially all of our property and
assets, except for our accounts receivable and related rights which are sold
in
connection with the accounts receivable sales agreement. See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources” for a discussion of the accounts
receivable sales agreement. Our credit agreement also contains a
material adverse effect clause which may limit our ability to access additional
funding under our credit agreement should a material adverse change in our
business occur.
Our
substantial
leverage and debt service requirements may require us to adopt alternative
business strategies.
We
have
indebtedness that is substantial in relation to our shareholders’ equity, as
well as interest and debt service requirements that are significant compared
to
our cash flow from operations. As of December 31, 2007, we had $222.8
million of debt outstanding, representing 31% of total capitalization and which
does not include the $45 million of accounts receivable sold under the accounts
receivable sales agreement. See “Management’s Discussion and Analysis
of Financial Condition and Results of Operations—Liquidity and Capital
Resources”.
The
degree to which we are leveraged could have important consequences to investors,
including but not limited to the following:
|
|
·
|
a
substantial portion of our cash flow from operations must be dedicated
to
debt service and will not be available for operations, capital
expenditures, acquisitions, dividends and other
purposes;
|
|
|
·
|
our
ability to obtain additional financing in the future for working
capital,
capital expenditures, acquisitions or general corporate purposes
may be
limited or impaired, or may be at higher interest
rates;
|
|
|
·
|
we
may be at a competitive disadvantage when compared to competitors
that are
less leveraged;
|
|
|
·
|
we
may be hindered in our ability to adjust rapidly to market
conditions;
|
|
|
·
|
our
degree of leverage could make us more vulnerable in the event of
a
downturn in general economic conditions or other adverse circumstances
applicable to us; and
|
|
|
·
|
our
interest expense could increase if interest rates in general increase
because a portion of our borrowings, including our borrowings under
our
credit agreement, are and will continue to be at variable rates of
interest.
|
We
may not be able to generate
sufficient cash to service our indebtedness, which could require us to reduce
our expenditures, sell assets, restructure our indebtedness or seek additional
equity capital.
Our
ability to satisfy our obligations will depend upon our future operating
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, many of which are beyond our
control. We may not have sufficient cash flow available to enable us
to meet our obligations. If we are unable to service our
indebtedness, we will be forced to adopt an alternative strategy that may
include actions such as foregoing acquisitions, reducing or delaying capital
expenditures, selling assets, restructuring or refinancing our indebtedness
or
seeking additional equity capital. We cannot assure you that any of
these strategies could be implemented on terms acceptable to us, if at
all. See “Management’s Discussion and Analysis of Financial Condition
and Results of Operations – Liquidity and Capital Resources” for a discussion of
our indebtedness and its implications.
We
may be unable
to continue to sell our accounts receivable, which could require us to seek
alternative sources of financing.
Under
our
accounts receivable sales agreement, there are certain statistical ratios which
must be maintained relating to the pool of receivables in order for us to
continue selling to the purchaser. These ratios relate to sales
dilution and losses on accounts receivable. If new accounts
receivable arising in the normal course of business do not qualify for sale
or
the purchaser otherwise ceases to purchase our receivables, we may require
access to alternate sources of working capital, which may be more expensive
or
difficult to obtain. Our accounts receivable sales agreement, as
amended, also requires us to obtain a commitment (the “purchaser commitment”)
from the purchaser to fund the purchase of our accounts
receivable. The purchaser commitment was amended effective December
28, 2007 whereby it was extended through October 31, 2009 under substantially
the same terms and conditions. In the event we are unable to renew
our purchaser commitment in the future, we would need to access alternate
sources of working capital which may be more expensive or difficult to
obtain.
If
we infringe third parties’ patents, or if we lose our patents or they are held
to be invalid, we could become subject to liability and our competitive position
could be harmed.
Much
of
the technology used in the markets in which we compete is covered by
patents. We have numerous U.S. patents and corresponding foreign
patents on products expiring at various dates from 2008 through 2028 and have
additional patent applications pending. See “Research and
Development” for a further description of our patents. The loss of
our patents could reduce the value of the related products and any related
competitive advantage. Competitors may also be able to design around
our patents and to compete effectively with our products. In
addition, the cost of enforcing our patents against third parties and defending
our products against patent infringement actions by others could be
substantial. We cannot assure you that:
|
|
·
|
pending
patent applications will result in issued
patents,
|
|
|
·
|
patents
issued to or licensed by us will not be challenged by
competitors,
|
|
|
·
|
our
patents will be found to be valid or sufficiently broad to protect
our
technology or provide us with a competitive advantage,
or
|
|
|
·
|
we
will be successful in defending against pending or future patent
infringement claims asserted against our
products.
|
Ordering
patterns
of our customers may change resulting in reductions in
sales.
Our
hospital and surgery center customers purchase our products in quantities
sufficient to meet their anticipated demand. Likewise, our health
care distributor customers purchase our products for ultimate resale to health
care 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.
Our
significant
international operations subject us to risks associated with operating in
foreign countries.
A
significant portion of our revenues are derived from foreign
sales. As a result, our international presence exposes us to certain
inherent risks, including:
|
|
·
|
devaluations
and fluctuations in currency exchange
rates;
|
|
|
·
|
imposition
of limitations on conversions of foreign currencies into dollars
or
remittance of dividends and other payments by international
subsidiaries;
|
|
|
·
|
imposition
or increase of withholding and other taxes on remittances and other
payments by international
subsidiaries;
|
|
|
·
|
trade
barriers;
|
|
|
·
|
political
risks, including political
instability;
|
|
|
·
|
reliance
on third parties to distribute our
products;
|
|
|
·
|
hyperinflation
in certain foreign countries; 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.
We
can be sued
for producing defective products and our insurance coverage may be insufficient
to cover the nature and amount of any product liability
claims.
The
nature of our products as medical devices and today’s litigious environment
should be regarded as potential risks which could significantly and adversely
affect our financial condition and results of operations. The
insurance we maintain to protect against claims associated with the use of
our
products have 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 “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 and coverage for earthquake damage to our
California properties is limited to $10 million. Further, while
insurance reimburses us for our lost gross earnings during a business
interruption, if we are unable to supply our customers with our products for
an
extended period of time, there can be no assurance that we will regain the
customers’ business once the product supply is returned to normal.
|
Item
2.
|
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 (two facilities)
|
650,000
|
Own
|
-
|
|||
|
Largo,
FL
|
278,000
|
Own
|
-
|
|||
|
Rome,
NY
|
120,000
|
Own
|
-
|
|||
|
Centennial,
CO
|
87,500
|
Own
|
-
|
|||
|
Tampere,
Finland
|
5,662
|
Own
|
-
|
|||
|
El
Paso, TX
|
96,000
|
Lease
|
March
2010
|
|||
|
Juarez,
Mexico
|
44,000
|
Lease
|
December
2009
|
|||
|
Brussels,
Belgium
|
39,073
|
Lease
|
June
2015
|
|||
|
Chelmsford,
MA
|
27,911
|
Lease
|
July
2015
|
|||
|
Montreal,
Canada
|
7,232
|
Lease
|
March
2009
|
|||
|
Santa
Barbara, CA
|
18,600
|
Lease
|
December 2008
& September 2013
|
|||
|
Frenchs
Forest, Australia
|
16,909
|
Lease
|
July
2008
|
|||
|
Tampere,
Finland
|
15,457
|
Lease
|
Open
Ended
|
|||
|
Anaheim,
CA
|
14,037
|
Lease
|
October
2012
|
|||
|
Mississauga,
Canada
|
13,500
|
Lease
|
May
2008
|
|||
|
Milan,
Italy
|
13,024
|
Lease
|
March
2013
|
|||
|
Swindon,
Wiltshire, UK
|
10,000
|
Lease
|
December
2015
|
|||
|
Portland,
OR
|
9,107
|
Lease
|
September
2008
|
|||
|
Seoul,
Korea
|
7,513
|
Lease
|
August
2008
|
|||
|
Frankfurt,
Germany
|
6,900
|
Lease
|
December
2012
|
|||
|
Shepshed,
Leicestershire,UK
|
5,000
|
Lease
|
October
2015
|
|||
|
Lodz,
Poland
|
3,222
|
Lease
|
March
2018
|
|||
|
Barcelona,
Spain
|
2,691
|
Lease
|
May
2009
|
|||
|
Rungis
Cedex, France
|
2,637
|
Lease
|
November
2011
|
|||
|
Graz,
Austria
|
2,174
|
Lease
|
October
2008
|
|||
|
San
Juan Capistrano, CA
|
2,000
|
Lease
|
January
2009
|
|
Item
3.
|
From
time
to time, we are a defendant in certain lawsuits alleging product liability,
patent infringement, or other claims incurred in the ordinary course of
business. Likewise, from time to time, the Company may receive a subpoena from
a
government agency such as the Equal Employment Opportunity Commission,
Occupational Safety and Health Administration, the Department of Labor, the
Treasury Department, and other federal and state agencies or foreign governments
or government agencies. These subpoenae may or may not be routine
inquiries, or may begin as routine inquiries and over time develop into
enforcement actions of various types. The product liability claims
are generally covered by various insurance policies, subject to certain
deductible amounts and maximum policy limits. When there is no
insurance coverage, as would typically be the case primarily in lawsuits
alleging patent infringement or in connection with certain government
investigations, we establish reserves sufficient to cover probable losses
associated with such claims. We do not expect that the resolution of
any pending claims or investigations will have a material adverse effect on
our
financial condition, results of operations or cash flows. There can
be no assurance, however, that future claims or investigations, or the costs
associated with responding to such claims or investigations, especially claims
and investigations not covered by insurance, will not have a material adverse
effect on our future performance.
Manufacturers
of medical products may face exposure to significant product liability claims.
To date, we have not experienced any product liability claims that are material
to our financial statements or condition, but any such claims arising in the
future could have a material adverse effect on our business or results of
operations. We currently maintain commercial product liability insurance of
$25
million per incident and $25 million in the aggregate annually, which we believe
is adequate. This coverage is on a claims-made basis. There can be no
assurance that claims will not exceed insurance coverage or that such insurance
will be available in the future at a reasonable cost to us.
Our
operations are subject, and in the past have been subject, to a number of
environmental laws and regulations governing, among other things, air emissions,
wastewater discharges, the use, handling and disposal of hazardous substances
and wastes, soil and groundwater remediation and employee health and safety.
In
some jurisdictions environmental requirements may be expected to become more
stringent in the future. In the United States certain environmental laws can
impose liability for the entire cost of site restoration upon each of the
parties that may have contributed to conditions at the site regardless of fault
or the lawfulness of the party’s activities. While we do not believe
that the present costs of environmental compliance and remediation are material,
there can be no assurance that future compliance or remedial obligations could
not have a material adverse effect on our financial condition, results of
operations or cash flows.
On
April
7, 2006, CONMED received a copy of a complaint filed in the United States
District for the Northern District of New York on behalf of a purported class
of
former CONMED Linvatec sales representatives. The complaint alleges
that the former sales representatives were entitled to, but did not receive,
severance in 2003 when CONMED Linvatec restructured its distribution
channels. Although we do not believe it is probable a loss has been
incurred, it is reasonably possible. The range of loss associated
with this complaint ranges from $0 to $3.0 million, not including any interest,
fees or costs that might be awarded if the five named plaintiffs were to prevail
on their own behalf as well as on behalf of the approximately 70 (or 90 as
alleged by the plaintiffs) other members of the purported
class. CONMED Linvatec did not generally pay severance during
the 2003 restructuring because the former sales representatives were offered
sales positions with CONMED Linvatec’s new manufacturer’s
representatives. Other than three of the five named plaintiffs in the
class action, nearly all of CONMED Linvatec’s former sales representatives
accepted such positions.
The
Company’s motions to dismiss and for summary judgment, which were heard at a
hearing held on January 5, 2007, were denied by a Memorandum Decision and Order
dated May 22, 2007. The District Court also granted the plaintiffs’
motion to certify a class of former CONMED Linvatec sales representatives whose
employment with CONMED Linvatec was involuntarily terminated in 2003 and who
did
not receive severance benefits. Although the Court’s ruling on
the motions to dismiss, for summary judgment and the motion to certify the
class
do not represent final rulings on the merits, the Company had filed a motion
seeking reconsideration of the motions to dismiss, and sought to appeal to
the
United State Court of Appeals for the Second Circuit from the class
certification ruling. The Second Circuit declined to consider the
appeal by Order dated August 28, 2007. In an order dated February 25,
2008, the United States District for the Northern District of New York granted
the Company's motion to reconsider the Company's motions to dismiss portions
of
the complaint and, upon reconsideration, reaffirmed its previous ruling denying
the aforementioned motions. The Company believes there is no merit to
the claims asserted in the Complaint, and plans to vigorously defend the
case. There can be no assurance, however, that the Company will
prevail in the litigation.
The
Company had been defending a product liability claim asserted against it and
several of the Company’s subsidiaries in a case captioned Wehner v. Linvatec
Corp., et al (the “Wehner Case”). Two of the Company’s subsidiaries
settled the case and accrued the expenses, including both the settlement and
certain defense costs, in the fourth quarter of 2007 in the amount of $1.3
million. As a result of the settlement, all of the claims against all
of the Company’s entities will be dismissed with prejudice.
As
the
occurrence giving rise to the Wehner Case occurred in 2002 prior to the
Company’s 2003 acquisition of Bionx Implants, Inc., the Wehner Case is not
covered by the Company’s current product liability insurance
policy. The former product liability insurance carrier has denied
coverage, and the Company and its subsidiaries commenced suit in the United
States District Court for the Eastern District of Pennsylvania seeking a
declaration that the underlying claim is covered by the policy. The
Company and its subsidiaries plan to vigorously pursue the claims for insurance
coverage (i.e., for reimbursement of the costs of defending and settling the
Wehner Case), although there can be no assurance that the Company and its
subsidiaries will prevail.
|
Item
4.
|
Submission
of Matters to a Vote of Security
Holders
|
Not
Applicable.
|
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 February 4, 2008, there were 1,008 registered
holders of our common stock and approximately 13,196 accounts held in “street
name”.
The
following table sets forth quarterly high and low sales prices for the years
ended December 31, 2006 and 2007, as reported by the Nasdaq Stock
Market.
|
2006
|
||||||||
|
Period
|
High
|
Low
|
||||||
|
First
Quarter
|
$ | 24.00 | $ | 18.09 | ||||
|
Second
Quarter
|
22.05 | 18.75 | ||||||
|
Third
Quarter
|
21.29 | 19.19 | ||||||
|
Fourth
Quarter
|
23.32 | 21.10 | ||||||
|
2007
|
||||||||
|
Period
|
High
|
Low
|
||||||
|
First
Quarter
|
$ | 29.23 | $ | 22.84 | ||||
|
Second
Quarter
|
31.85 | 28.73 | ||||||
|
Third
Quarter
|
30.00 | 26.61 | ||||||
|
Fourth
Quarter
|
29.68 | 22.89 | ||||||
We
did
not pay cash dividends on our common stock during 2006 or 2007 and do not
currently intend to pay dividends for the foreseeable future. Future decisions
as to the payment of dividends will be at the discretion of the Board of
Directors, subject to conditions then existing, including our financial
requirements and condition and the limitation and payment of cash dividends
contained in debt agreements.
Our
Board
of Directors has authorized a share repurchase program; see Note 7 to
the Consolidated Financial Statements.
Information
relating to compensation plans under which equity securities of CONMED
Corporation are authorized for issuance is set forth in the section captioned
“Equity Compensation Plans” in CONMED Corporation’s definitive Proxy Statement
or other informational filing for our 2008 Annual Meeting of Stockholders and
all such information is incorporated herein by reference.
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.
|
Item
6.
|
Selected
Financial
Data
|
The
following table sets forth selected historical financial data for the years
ended December 31, 2003, 2004, 2005, 2006 and 2007. 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 Financial Statements of
the Company and the notes thereto.
FIVE
YEAR SUMMARY OF SELECTED FINANCIAL DATA
|
Years
Ended December 31,
|
||||||||||||||||||||
|
2003
|
2004
|
2005
|
2006
|
2007
|
||||||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||||||
|
Statements
of Operations Data (1):
|
||||||||||||||||||||
|
Net
sales
|
$ | 497,130 | $ | 558,388 | $ | 617,305 | $ | 646,812 | $ | 694,288 | ||||||||||
|
Cost
of sales (2)
|
237,433 | 271,496 | 304,284 | 333,966 | 345,163 | |||||||||||||||
|
Gross
profit
|
259,697 | 286,892 | 313,021 | 312,846 | 349,125 | |||||||||||||||
|
Selling
and administrative
|
157,453 | 183,183 | 216,685 | 234,832 | 240,541 | |||||||||||||||
|
Research
and development
|
17,306 | 20,205 | 25,469 | 30,715 | 30,400 | |||||||||||||||
|
Impairment
of goodwill (3)
|
- | - | - | 46,689 | - | |||||||||||||||
|
Write-off
of in-process research and development (4)
|
7,900 | 16,400 | - | - | - | |||||||||||||||
|
Other
expense (income)(5)
|
(2,917 | ) | 3,943 | 7,119 | 5,213 | (2,807 | ) | |||||||||||||
|
Income
(loss) from operations
|
79,955 | 63,161 | 63,748 | (4,603 | ) | 80,991 | ||||||||||||||
|
Loss
on early extinguishment of debt (6)
|
8,078 | 825 | - | 678 | - | |||||||||||||||
|
Interest
expense
|
18,868 | 12,774 | 15,578 | 19,120 | 16,234 | |||||||||||||||
|
Income
(loss) before income taxes
|
53,009 | 49,562 | 48,170 | (24,401 | ) | 64,757 | ||||||||||||||
|
Provision
(benefit) for income taxes
|
20,927 | 16,097 | 16,176 | (11,894 | ) | 23,301 | ||||||||||||||
|
Net
income (loss)
|
$ | 32,082 | $ | 33,465 | $ | 31,994 | (12,507 | ) | 41,456 | |||||||||||
|
Earnings
(loss) Per Share
|
||||||||||||||||||||
|
Basic
|
$ | 1.11 | $ | 1.13 | $ | 1.09 | $ | (.45 | ) | $ | 1.46 | |||||||||
|
Diluted
|
$ | 1.10 | $ | 1.11 | $ | 1.08 | $ | (.45 | ) | $ | 1.43 | |||||||||
|
Weighted
Average Number of Common Shares In Calculating:
|
||||||||||||||||||||
|
Basic
earnings (loss) per share
|
28,930 | 29,523 | 29,300 | 27,966 | 28,416 | |||||||||||||||
|
Diluted
earnings (loss) per share
|
29,256 | 30,105 | 29,736 | 27,966 | 28,965 | |||||||||||||||
|
Other
Financial Data:
|
||||||||||||||||||||
|
Depreciation
and amortization
|
$ | 24,854 | $ | 26,868 | $ | 30,786 | $ | 29,851 | $ | 31,534 | ||||||||||
|
Capital
expenditures
|
9,309 | 12,419 | 16,242 | 21,895 | 20,910 | |||||||||||||||
|
Balance
Sheet Data (at period end):
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 5,986 | $ | 4,189 | $ | 3,454 | $ | 3,831 | $ | 11,695 | ||||||||||
|
Total
assets
|
805,058 | 872,825 | 903,783 | 861,571 | 893,951 | |||||||||||||||
|
Long-term
debt (including current portion)
|
264,591 | 294,522 | 306,851 | 267,824 | 222,834 | |||||||||||||||
|
Total
shareholders’ equity
|
433,490 | 447,983 | 453,006 | 440,354 | 505,002 | |||||||||||||||
|
(1)
|
Results
of operations of acquired businesses have been recorded in the financial
statements since the date of
acquisition.
|
|
(2)
|
Includes
acquisition and acquisition-transition related charges of $4.4 million
in
2004, $7.8 million in 2005, and $10.0 million in 2006. Also
included in 2006 is $1.3 million in charges related to the closing
of our
manufacturing facility in Montreal, Canada. See additional
discussion in Note 11 to the Consolidated Financial
Statements.
|
|
(3)
|
During
2006, we recorded a $46.7 million charge for the impairment of goodwill
related to the Endoscopic Technologies business unit. See
additional discussion in Note 4 to the Consolidated Financial
Statements.
|
|
(4)
|
During
2003, we recorded a $7.9 million charge to write-off in-process research
and development assets acquired as a result of our purchase of Bionx
Implants, Inc. No benefit for income taxes was recorded as
these costs are not deductible for income tax purposes. During
2004, we recorded a $16.4 million charge to write-off the tax-deductible
in-process research and development assets acquired as a result of
our
purchase of the business operations of the Endoscopic Technologies
Division of C.R. Bard, Inc.
|
|
(5)
|
Other
expense (income) includes the
following:
|
|
2003
|
2004
|
2005
|
2006
|
2007
|
||||||||||||||||
|
Gain
on settlement of a contractual dispute
|
(9,000 | ) | - | - | - | - | ||||||||||||||
|
Pension
settlement
|
2,839 | - | - | - | - | |||||||||||||||
|
Acquisition-transition
related costs
|
3,244 | 1,547 | 4,108 | 2,592 | - | |||||||||||||||
|
Termination
of product offering
|
- | 2,396 | 1,519 | 1,448 | 148 | |||||||||||||||
|
Environmental
settlement
|
- | - | 698 | - | - | |||||||||||||||
|
Loss
on equity investment
|
- | - | 794 | - | - | |||||||||||||||
|
Loss
on settlement of a patent dispute
|
- | - | - | 595 | - | |||||||||||||||
|
Facility
closure costs
|
- | - | - | 578 | 1,822 | |||||||||||||||
|
Gain
on litigation settlement
|
- | - | - | - | (6,072 | ) | ||||||||||||||
|
Product
liability settlement
|
- | - | - | - | 1,295 | |||||||||||||||
|
Other
expense (income)
|
$ | (2,917 | ) | $ | 3,943 | $ | 7,119 | $ | 5,213 | $ | (2,807 | ) | ||||||||
See
additional discussion in Note 11 to the Consolidated Financial
Statements.
|
(6)
|
Includes
in 2003, 2004, and 2006, charges of $8.1 million, $0.8 million, and
$0.7
million, respectively, related to losses on early extinguishment
of
debt. See additional discussion in Note 5 to the Consolidated
Financial Statements.
|
|
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 with an emphasis on surgical devices and equipment for minimally
invasive procedures and monitoring. The Company’s products serve the
clinical areas of arthroscopy, powered surgical instruments, electrosurgery,
cardiac monitoring disposables, endosurgery and endoscopic
technologies. They are used by surgeons and physicians in a variety
of specialties including orthopedics, general surgery, gynecology, neurosurgery,
and gastroenterology. These product lines and the percentage of
consolidated revenues associated with each, are as follows:
|
2005
|
2006
|
2007
|
||||||||||
|
Arthroscopy
|
34 | % | 35 | % | 38 | % | ||||||
|
Powered
Surgical Instruments
|
22 | 21 | 21 | |||||||||
|
Electrosurgery
|
14 | 15 | 13 | |||||||||
|
Patient
Care
|
12 | 12 | 11 | |||||||||
|
Endosurgery
|
8 | 8 | 9 | |||||||||
|
Endoscopic
Technologies
|
10 | 9 | 8 | |||||||||
|
Consolidated
Net Sales
|
100 | % | 100 | % | 100 | % | ||||||
A
significant amount of our products are used in surgical procedures with
approximately 75% of our revenues derived from the sale of disposable
products. Our capital equipment offerings also facilitate the ongoing
sale of related disposable products and accessories, thus providing us with
a
recurring revenue stream. We manufacture substantially all of our
products in facilities located in the United States, Mexico and
Finland. We market our products both domestically and internationally
directly to customers and through distributors. International sales
approximated 37%, 39% and 42% in 2005, 2006 and 2007, respectively.
Business
Environment and Opportunities
The
aging
of the worldwide population along with lifestyle changes, continued cost
containment pressures on healthcare systems and the desire of clinicians and
administrators to use less invasive (or noninvasive) procedures are important
trends which are driving the growth in our industry. We believe that
with our broad product offering of high quality surgical and patient care
products, we can capitalize on this growth for the benefit of the Company and
our shareholders.
In
order to further our growth
prospects, we have historically used strategic business acquisitions and
exclusive distribution relationships to continue to diversify our product
offerings, increase our market share and realize economies of
scale.
We
have a
variety of research and development initiatives focused in each of our principal
product lines. Among the most significant of these efforts is the Endotracheal
Cardiac Output Monitor (“ECOM”). Our ECOM product offering is expected to
provide an innovative alternative to catheter monitoring of cardiac output
with
a specially designed endotracheal tube which utilizes proprietary bio-impedance
technology. Also of significance are our research and development efforts in
the
area of tissue-sealing for electrosurgery.
Continued
innovation and commercialization of new proprietary products and processes
are
essential elements of our long-term growth strategy. In March 2008,
we expect to be unveiling several new products at the American Academy of
Orthopaedic Surgeons Annual Meeting which we believe will further enhance our
arthroscopy and powered surgical instrument product offerings. Our
reputation as an innovator is exemplified by these product introductions, which
include the following: the Spectrum® MVP™ Shoulder Suture Passer, an innovative
suture passing device for arthroscopic shoulder repair; the Sentinel™ Drill Bits
which allows for safe and accurate drilling into the femoral tunnels during
anterior cruciate ligament, or ACL, surgery; the Shutt® Series 210™
Instruments for Hip Arthroscopy, which include nine manual instruments allowing
for working in deep joints such as the hip; EL Microfracture Awls and
Sterilization Tray which is for easier access in difficult-to-reach areas and
use in hip arthroscopy; Smart Screw® II, a comprehensive line of bioabsorbable
bone fixation implants; ThRevo® with HiFi, a shoulder anchor that incorporates
the advantage of the HiFi high strength suture; Cordless Revision Attachment
for
Battery Handpieces, which are the only cordless revision attachments on the
market and are used for cement removal in orthopedic revision surgery; Intrex™
Blade Line, a blade system composed of six blade profiles in seven different
thicknesses for a comprehensive system of large bone saw blades; HD Arthroscope,
the first high definition, or HD, arthroscope on the market ensures maximized
transmission of high contrast light from the arthroscope into the True HD camera
head; and the Single Chip Enhanced Definition Camera System, which incorporates
a camera and image capture in the same device.
Business
Challenges
In
September 2004, we acquired the business operations of the Endoscopic
Technologies Division of C.R. Bard, Inc. (the “Endoscopic Technologies
acquisition”) for aggregate consideration of $81.3 million in
cash. The acquired business has enhanced our product offerings by
adding a comprehensive line of single-use medical devices employed by
gastro-intestinal and pulmonary physicians to diagnose and treat diseases of
the
digestive tract and lungs using minimally invasive endoscopic
techniques. The transfer of the Endoscopic Technologies production
lines from C.R. Bard facilities to CONMED facilities proved to be more
time-consuming, costly and complex than was originally
anticipated. Operational issues associated with the transfer of
production lines resulted in backorders, which, combined with increased
competition and pricing pressures in the marketplace, have resulted in decreased
sales, lower than anticipated gross margins and operating losses. As
a result of these factors, during our fourth quarter 2006 goodwill impairment
testing, we determined that the goodwill of our Endoscopic Technologies business
was impaired and consequently we recorded an impairment charge of $46.7 million
to reduce the carrying amount of this business to its fair value. We
have taken corrective action to resolve the operational issues associated with
product shortages and now believe we have a stable supply of product to meet
customer demand. Although we experienced a sales decline of 4.0% for
the 2007 full year in the Endoscopic Technologies product line, fourth quarter
2007 sales grew 6.3%, which we believe signifies a return to normal growth
patterns.
Our
facilities are subject to periodic inspection by the United States Food and
Drug
Administration (“FDA”) for, among other things, conformance to Quality System
Regulation and Current Good Manufacturing Practice (“CGMP”)
requirements. We are committed to the principles and strategies of
systems-based quality management for improved CGMP compliance, operational
performance and efficiencies through our Company-wide quality systems
initiative. However, there can be no assurance that our actions will
ensure that we will not receive a warning letter or other regulatory action
which may include consent decrees or fines.
Critical
Accounting Policies
Preparation
of our financial statements requires us to make estimates and assumptions which
affect the reported amounts of assets, liabilities, revenues and
expenses. Note 1 to the Consolidated Financial Statements describes
the significant accounting policies used in preparation of the Consolidated
Financial Statements. The most significant areas involving management
judgments and estimates are described below and are considered by management
to
be critical to understanding the financial condition and results of operations
of CONMED Corporation.
Revenue
Recognition
Revenue
is recognized when title has been transferred to the customer which is at the
time of shipment. The following policies apply to our major
categories of revenue transactions:
|
|
·
|
Sales
to customers are evidenced by firm purchase orders. Title and the
risks
and rewards of ownership are transferred to the customer when product
is
shipped under our stated shipping terms. Payment by the
customer is due under fixed payment
terms.
|
|
|
·
|
We
place certain of our capital equipment with customers in return for
commitments to purchase disposable products over time periods generally
ranging from one to three years. In these circumstances, no
revenue is recognized upon capital equipment shipment and we recognize
revenue upon the disposable product shipment. The cost of the
equipment is amortized over the term of individual commitment
agreements.
|
|
|
·
|
Product
returns are only accepted at the discretion of the Company and in
accordance with our “Returned Goods Policy”. Historically the
level of product returns has not been significant. We accrue
for sales returns, rebates and allowances based upon an analysis
of
historical customer returns and credits, rebates, discounts and current
market conditions.
|
|
|
·
|
Our
terms of sale to customers generally do not include any obligations
to
perform future services. Limited warranties are provided for
capital equipment sales and provisions for warranty are provided
at the
time of product sale based upon an analysis of historical
data.
|
|
|
·
|
Amounts
billed to customers related to shipping and handling have been included
in
net sales. Shipping and handling costs included in selling and
administrative expense were $11.2 million, $14.3 million and $14.1
million
for 2005, 2006 and 2007,
respectively.
|
|
|
·
|
We
sell to a diversified base of customers around the world and, therefore,
believe there is no material concentration of credit
risk.
|
|
|
·
|
We
assess the risk of loss on accounts receivable and adjust the allowance
for doubtful accounts based on this risk
assessment. Historically, losses on accounts receivable have
not been material. Management believes that the allowance for
doubtful accounts of $0.8 million at December 31, 2007 is adequate
to
provide for probable losses resulting from accounts
receivable.
|
Inventory
Reserves
We
maintain reserves for excess and obsolete inventory resulting from the inability
to sell our products at prices in excess of current carrying
costs. The markets in which we operate are highly competitive, with
new products and surgical procedures introduced on an on-going
basis. Such marketplace changes may result in our products becoming
obsolete. We make estimates regarding the future recoverability of
the costs of our products and record a provision for excess and obsolete
inventories based on historical experience, expiration of sterilization dates
and expected future trends. If actual product life cycles, product
demand or acceptance of new product introductions are less favorable than
projected by management, additional inventory write-downs may be
required. We believe that our current inventory reserves are
adequate.
Business
Acquisitions
We
have a
history of growth through acquisitions. Assets and liabilities of
acquired businesses are recorded under the purchase method of accounting at
their estimated fair values as of the date of acquisition. Goodwill
represents costs in excess of fair values assigned to the underlying net assets
of acquired businesses. Other intangible assets primarily represent
allocations of purchase price to identifiable intangible assets of acquired
businesses. We have accumulated goodwill of $289.5 million and other
intangible assets of $191.8 million at December 31, 2007.
In
accordance with Statement of Financial Accounting Standards No. 142, “Goodwill
and Other Intangible Assets,” (“SFAS 142”), goodwill and intangible assets
deemed to have indefinite lives are not amortized, but are subject to at least
annual impairment testing. The identification and measurement of
goodwill impairment involves the estimation of the fair value of our
businesses. Estimates of fair value are based on the best information
available as of the date of the assessment, which primarily incorporate
management assumptions about expected future cash flows and contemplate other
valuation techniques. Future cash flows may be affected by changes in
industry or market conditions or the rate and extent to which anticipated
synergies or cost savings are realized with newly acquired
entities.
Intangible
assets with a finite life are amortized over the estimated useful life of the
asset. Intangible assets which continue to be subject to amortization
are also evaluated to determine whether events and circumstances warrant a
revision to the remaining period of amortization. An intangible asset
is determined to be impaired when estimated undiscounted future cash flows
indicate that the carrying amount of the asset may not be
recoverable. An impairment loss is recognized by reducing the
recorded value to its current fair value. It is our policy to perform
annual impairment tests in the fourth quarter.
During
the fourth quarter of 2006, after completing our annual goodwill impairment
analysis, we determined that the goodwill of our CONMED Endoscopic Technologies
business was impaired and consequently we recorded a goodwill impairment charge
of $46.7 million.
See
Note
4 to the Consolidated Financial Statements for further discussion of goodwill
and other intangible assets.
Pension
Plan
We
sponsor a defined benefit pension plan covering substantially all our
employees. Major assumptions used in accounting for the plan include
the discount rate, expected return on plan assets, rate of increase in employee
compensation levels and expected mortality. Assumptions are
determined based on Company data and appropriate market indicators, and are
evaluated annually as of the plan’s measurement date. A change in any
of these assumptions would have an effect on net periodic pension costs reported
in the consolidated financial statements.
The
discount rate was determined by using the Citigroup Pension Liability Index
rate
which, we believe, is a reasonable indicator of our plan’s future benefit
payment stream. This rate, which increased from 5.90% in 2007 to
6.48% in 2008, is used in determining pension expense. This change in
assumption will result in lower pension expense during 2008.
We
have
used an expected rate of return on pension plan assets of 8.0% for purposes
of
determining the net periodic pension benefit cost. In determining the
expected return on pension plan assets, we consider the relative weighting
of
plan assets, the historical performance of total plan assets and individual
asset classes and economic and other indicators of future
performance. In addition, we consult with financial and investment
management professionals in developing appropriate targeted rates of
return.
We
have
estimated our rate of increase in employee compensation levels at 3.0%
consistent with our internal budgeting.
Based
on
these and other factors, 2008 pension expense is estimated at approximately
$6.3
million compared to $6.9 million in 2007. Actual expense may vary
significantly from this estimate.
We
expect
to contribute approximately $12.0 million to our pension plan in
2008.
See
Note
9 to the Consolidated Financial Statements for further discussion.
Stock
Based Compensation
We
adopted Statement of Financial Accounting Standards No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123R”) effective January 1, 2006. SFAS
123R requires that all share-based payments to employees, including grants
of
employee stock options, restricted stock units, and stock appreciation rights
be
recognized in the financial statements based on their fair
values. Prior to January 1, 2006, we accounted for stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25
“Accounting for Stock Issued to Employees” (“APB 25”). No
compensation expense was recognized for stock options under the provisions
of
APB 25 since all options granted had an exercise price equal to the market
value
of the underlying stock on the grant date.
SFAS
123R
was adopted using the modified prospective transition method. Under this method,
the provisions of SFAS 123R apply to all awards granted or modified after the
date of adoption. In addition, compensation expense must be recognized for
any
nonvested stock option awards outstanding as of the date of
adoption. We recognize such expense using a straight-line method over
the vesting period. Prior periods have not been
restated.
We
elected to adopt the alternative transition method, as permitted by FASB Staff
Position No. FAS 123R-3 “Transition Election Related to Accounting for Tax
Effects of Share-Based Payment Awards,” to calculate the tax effects of
stock-based compensation pursuant to SFAS 123R for those employee awards that
were outstanding upon adoption of SFAS 123R. The alternative
transition method allows the use of a simplified method to calculate the
beginning pool of excess tax benefits available to absorb tax deficiencies
recognized subsequent to the adoption of SFAS 123R.
See
Note
7 to the Consolidated Financial Statements for further discussion.
Income
Taxes
The
recorded future tax benefit arising
from net deductible temporary differences and tax carryforwards is approximately
$24.9 million at December 31, 2007. Management believes that our
earnings during the periods when the temporary differences become deductible
will be sufficient to realize the related future income tax
benefits.
We
operate in multiple taxing jurisdictions, both within and outside the United
States. We face audits from these various tax authorities regarding
the amount of taxes due. Such audits can involve complex issues and
may require an extended period of time to resolve. Our Federal income
tax returns have been examined by the Internal Revenue Service (“IRS”) for
calendar years ending through 2006. During 2007, Internal Revenue
Service examinations were settled for tax years 2005 and 2006. The net effect
of
the settlement of these examinations, was a $0.6 million reduction in income
tax
expense in 2007.
We
have
established a valuation allowance to reflect the uncertainty of realizing the
benefits of certain net operating loss carryforwards recognized in connection
with an acquisition. Any subsequently recognized tax benefits
associated with the valuation allowance would be allocated to reduce
goodwill. However, upon adoption of Statement of Financial Accounting
Standards No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”) on
January 1, 2009, changes in deferred tax valuation allowances and income tax
uncertainties after the acquisition date, including those associated with
acquisitions that closed prior to the effective date of SFAS 141(R), generally
will affect income tax expense. In assessing the need for a valuation allowance,
we estimate future taxable income, considering the feasibility of ongoing tax
planning strategies and the realizability of tax loss
carryforwards. Valuation allowances related to deferred tax assets
may be impacted by changes to tax laws, changes to statutory tax rates and
future taxable income levels.
On
January 1, 2007 we adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, (“FIN 48”). FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. The impact of this pronouncement was not
material to the Company’s consolidated financial statements. See Note
6 to the Consolidated Financial Statements for further discussion.
Consolidated
Results of Operations
The
following table presents, as a percentage of net sales, certain categories
included in our consolidated statements of income (loss) for the periods
indicated:
|
Year
Ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost
of sales
|
49.3 | 51.6 | 49.7 | % | ||||||||
|
Gross
margin
|
50.7 | 48.4 | 50.3 | |||||||||
|
Selling
and administrative expense
|
35.1 | 36.3 | 34.6 | |||||||||
|
Research
and development expense
|
4.1 | 4.7 | 4.4 | |||||||||
|
Goodwill
impairment
|
- | 7.2 | - | |||||||||
|
Other
expense (income), net
|
1.0 | 0.8 | (0.4 | ) | ||||||||
|
Income
(loss) from operations
|
10.5 | (0.6 | ) | 11.7 | ||||||||
|
Loss
on early extinguishment of debt
|
- | 0.1 | - | |||||||||
|
Interest
expense
|
2.6 | 3.0 | 2.3 | |||||||||
|
Income
(loss) before income taxes
|
7.9 | (3.7 | ) | 9.4 | ||||||||
|
Provision
(benefit) for income taxes
|
2.7 | (1.8 | ) | 3.4 | ||||||||
|
Net
income (loss)
|
5.2 | % | (1.9 | )% | 6.0 | % | ||||||
2007
Compared to 2006
Sales
for
2007 were $694.3 million, an increase of $47.5 million (7.3%) compared to
sales of $646.8 million in 2006 with the increase occurring in all product
lines except Electrosurgery and Endoscopic Technologies. Favorable
foreign currency exchange rates in 2007 compared to 2006 accounted for $15.2
million of the increase.
Cost
of
sales increased to $345.2 million in 2007 compared to $334.0 million in 2006,
primarily as a result of the increased sales volumes discussed
above. Gross profit margins increased 1.9 percentage
points from 48.4% in 2006 to 50.3% in 2007. The increase of 1.9
percentage points is comprised of improved gross margins in our Endoscopic
Technologies product lines (0.9 percentage points) as a result of the completion
of the transfer of production lines from C.R. Bard to CONMED during 2006 and
improved gross margins in our Patient Care, Electrosurgery and Endosurgery
product lines as a result of higher selling prices (0.9 percentage points)
offsetting a decline in our Arthroscopy and Powered Instrument product lines
(0.2 percentage points) caused by higher production
variances. Improved product mix also contributed to the increase in
gross profit margins (0.3 percentage points).
Selling
and administrative expense increased to $240.5 million in 2007 compared to
$234.8 million in 2006. Selling and administrative expense as a
percentage of net sales decreased to 34.6% in 2007 from 36.3% in
2006. This decrease of 1.7 percentage points is primarily
attributable to greater leveraging of our cost structure as benefit costs (0.5
percentage points), selling expense related to our Endoscopic Technologies
division (0.5 percentage points), distribution expense (0.1 percentage points)
and other administrative costs (0.6 percentage points) declined as a percentage
of net sales.
Research
and development expense was $30.4 million in 2007 compared to $30.7 million
in
2006. As a percentage of net sales, research and development expense
decreased to 4.4% in 2007 from 4.7% in 2006. The decrease of 0.3
percentage points results from lower spending in our Endoscopic Technologies
division as certain biliary and other projects near completion (0.3 percentage
points).
During
our fourth quarter 2006 goodwill impairment testing, we determined that the
goodwill of our Endoscopic Technologies business was impaired and consequently
we recorded an impairment charge of $46.7 million to reduce the carrying amount
of this business to its fair value.
As
discussed in Note 11 to the Consolidated Financial Statements, other expense
in
2007 consisted of the following: $1.8 million charge related to the
closing of our manufacturing facility in Montreal, Canada and a sales office
in
France, a $0.1 million charge related to the termination of our surgical lights
product offering, $6.1 million in income related to the settlement of the
antitrust case with Johnson & Johnson, and a $1.3 million charge related to
the settlement of a product liability claim and defense related
costs. Other expense in 2006 consisted of the
following: $0.6 million in costs related to the closing of our
manufacturing facility in Montreal, Canada; $0.6 million in costs related to
the
write-off of inventory in settlement of a patent dispute; a $1.4 million charge
related to the termination of our surgical lights product offering; and $2.6
million in Endoscopic Technologies acquisition and transition-integration
related charges.
During
2006, we recorded $0.7 million in losses on the early extinguishment of debt
in
connection with the refinancing of our senior credit agreement. See
additional discussion under Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Liquidity and Capital Resources
and Note 5 to the Consolidated Financial Statements.
Interest
expense in 2007 was $16.2 million compared to $19.1 million in
2006. The decrease in interest expense is primarily a result of lower
weighted average borrowings outstanding in 2007 as compared to
2006. The weighted average interest rates on our borrowings
(inclusive of the finance charge on our accounts receivable sale facility)
decreased to 5.51% in 2007 as compared to 5.53% in 2006.
A
provision for income taxes was recorded at an effective rate of 36.0% in 2007
and (48.7)% in 2006 as compared to the Federal statutory rate of
35.0%. The effective tax rate was lower in 2006 than in 2007 as a
result of certain adjustments to income tax expense. In 2006, we
settled our 2001 through 2004 income taxes as a result of IRS examinations.
We
adjusted our reserves to consider positions taken in our income tax returns
for
periods subsequent to 2004. The settlement and adjustment to our
reserves resulted in a $1.5 million reduction in income tax expense in
2006. During the third quarter of 2006, we filed our United States
federal income tax return for 2005. As a result of the filing, we
identified a greater benefit than was originally anticipated associated with
the
extraterritorial income exclusion rules and research and development tax credit
resulting in a $0.7 million reduction in income tax expense in
2006. The net effect of these adjustments was a $2.2 million
reduction in income tax expense in 2006. A reconciliation of the
United States statutory income tax rate to our effective tax rate is included
in
Note 6 to the Consolidated Financial Statements.
2006
Compared to 2005
Sales
for
2006 were $646.8 million, an increase of $29.5 million (4.8%) compared to
sales of $617.3 million in 2005 with the increase occurring in all product
lines except Endoscopic Technologies. Favorable foreign currency
exchange rates in 2006 compared to 2005 accounted for $4.5 million of the
increase.
Cost
of
sales increased to $334.0 million in 2006 compared to $304.3 million in 2005,
primarily as a result of the increased sales volumes discussed
above. Gross profit margins decreased 2.3 percentage
points from 50.7% in 2005 to 48.4% in 2006. The total decrease of 2.3
percentage points is comprised of 1.2 percentage points attributable to
decreased gross margins in our Endoscopic Technologies business, 0.7 percentage
points attributable to decreased gross margins in our Patient Care business
with
the remaining 0.4 percentage point decrease attributable to decreased gross
margins in our Endosurgery business. The Endoscopic Technologies
business was acquired as a result of the Endoscopic Technologies acquisition
and
involved the transfer of substantially all of the Endoscopic Technologies
production lines from C.R. Bard facilities to CONMED facilities. This
transfer proved to be more time-consuming, costly and complex than was
originally anticipated. In addition, production and operational
issues at an assembly operation in Mexico under contract to CONMED resulted
in
product shortages and backorders. These operational issues, in
combination with increased competition and pricing pressures in the marketplace
resulted in decreased sales and gross margins. The decreases in gross
margin percentage attributable to Patient Care and Endosurgery are primarily
a
result of significant cost increases experienced in the second half of 2005
and
in 2006 with respect to certain commodity and petroleum-based raw materials
such
as plastic resins and polymers used in the production of many of our products
as
well as higher spending related to quality assurance.
Selling
and administrative expense increased to $234.8 million in 2006 compared to
$216.7 million in 2005. Selling and administrative expense as a
percentage of net sales increased to 36.3% in 2006 from 35.1% in
2005. This increase of 1.2 percentage points is primarily
attributable to expensing stock options and other share-based payments in 2006
(0.6 percentage points) due to the adoption of SFAS 123R (see Note 7 to the
Consolidated Financial Statements); increased administrative expenses associated
with higher distribution costs (0.2 percentage points) due in part to higher
petroleum prices; higher pension costs (0.2 percentage points) due primarily
as
a result of a decrease in the pension discount rate; increased spending on
corporate quality systems and management (0.1 percentage points) in order to
continue to maintain appropriate regulatory compliance; and other increases
in
selling and administrative costs (0.1 percentage points).
Research
and development expense was $30.7 million in 2006 compared to $25.5 million
in
2005. As a percentage of net sales, research and development expense
increased to 4.7% in 2006 from 4.1% in 2005. The increase of 0.6
percentage points reflects an increased emphasis on new product development
across all of our product lines with the most significant increases occurring
in
the areas of arthroscopy and powered instruments (0.3 percentage
points).
As
discussed above, the transfer of the Endoscopic Technologies production lines
from C.R. Bard facilities to CONMED facilities proved to be more time-consuming,
costly and complex than was originally anticipated. In addition,
production and operational issues at an assembly operation in Mexico under
contract to CONMED resulted in product shortages and
backorders. These operational issues, in combination with increased
competition and pricing pressures in the marketplace resulted in decreased
sales
and gross margins and operating losses. As a result of these factors,
during our fourth quarter 2006 goodwill impairment testing, we determined that
the goodwill of our Endoscopic Technologies business was impaired and
consequently we recorded an impairment charge of $46.7 million to reduce the
carrying amount of this business to its fair value. We estimated the
fair value of the Endoscopic Technologies business using a discounted cash
flow
valuation methodology and measured the goodwill impairment in accordance with
SFAS 142.
As
discussed in Note 11 to the Consolidated Financial Statements, other expense
in
2006 consisted of the following: $0.6 million in costs related to the
closing of our manufacturing facility in Montreal, Canada; $0.6 million in
costs
related to the write-off of inventory in settlement of a patent dispute; a
$1.4
million charge related to the termination of our surgical lights product
offering; and $2.6 million in Endoscopic Technologies acquisition and
transition-integration related charges. Other expense in 2005
consisted of $1.5 million of expenses associated with the termination of our
surgical lights product offering; $4.1 million in Endoscopic Technologies
acquisition and transition-integration related charges; $0.7 million in
environmental settlement costs; and $0.8 million of expense related to the
loss
on an equity investment.
During
2006, we recorded $0.7 million in losses on the early extinguishment of debt
in
connection with the refinancing of our senior credit agreement. See
additional discussion under Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Liquidity and Capital Resources
and Note 5 to the Consolidated Financial Statements.
Interest
expense in 2006 was $19.1 million compared to $15.6 million in
2005. The increase in interest expense is primarily a result of
higher weighted average borrowings outstanding in 2006 as compared to 2005
and
higher weighted average interest rates on our borrowings (5.53% in 2006 as
compared to 4.69% in 2005) inclusive of the finance charge on our accounts
receivable sale facility. The increase in weighted average interest
rates on our borrowings is primarily a result of market increases in interest
rates on our variable rate debt.
A
provision for income taxes was recorded at an effective rate of (48.7)% in
2006
and 33.6% in 2005 as compared to the Federal statutory rate of
35.0%. The effective tax rate was lower in 2006 than in 2005 as a
result of certain adjustments to income tax expense. In 2006, we
settled our 2001 through 2004 income taxes as a result of IRS
examinations. We adjusted our reserves to consider positions taken in
our income tax returns for periods subsequent to 2004. The settlement
and adjustment to our reserves resulted in a $1.5 million reduction in income
tax expense in 2006. During the third quarter of 2006, we filed our
United States federal income tax return for 2005. As a result of the
filing, we identified a greater benefit than was originally anticipated
associated with the extraterritorial income exclusion rules and research and
development tax credit resulting in a $0.7 million reduction in income tax
expense. The net effect of these adjustments was a $2.2 million
reduction in income tax expense in 2006 as compared to the same period a year
ago. A reconciliation of the United States statutory income tax rate
to our effective tax rate is included in Note 6 to the Consolidated Financial
Statements.
Operating
Segment Results:
Segment
information is prepared on the same basis that we review financial information
for operational decision-making purposes. We conduct our business
through five principal operating segments: CONMED Endoscopic Technologies,
CONMED Endosurgery, CONMED Electrosurgery, CONMED Linvatec and CONMED Patient
Care. Based upon the aggregation criteria for segment reporting under
Statement of Financial Accounting Standards No. 131 “Disclosures about Segments
of an Enterprise and Related Information” (“SFAS 131”), we have grouped our
CONMED Endosurgery, CONMED Electrosurgery and CONMED Linvatec operating segments
into a single reporting segment. The economic characteristics of
CONMED Patient Care and CONMED Endoscopic Technologies do not meet the criteria
for aggregation due to the lower overall operating income (loss) of these
segments.
The
following tables summarize the Company’s results of operations by segment for
2005, 2006 and 2007:
|
CONMED
Endosurgery, CONMED Electrosurgery and CONMED Linvatec
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
Net
sales
|
$ | 482,591 | $ | 515,937 | $ | 564,834 | ||||||
|
Income
from operations
|
69,295 | 70,193 | 87,569 | |||||||||
|
Operating
margin
|
14.4 | % | 13.6 | % | 15.5 | % | ||||||
Product
offerings include a complete line of endo-mechanical instrumentation for
minimally invasive laparoscopic procedures, electrosurgical generators and
related surgical instruments, arthroscopic instrumentation for use in orthopedic
surgery and small bone, large bone and specialty powered surgical
instruments.
|
·
|
Arthroscopy
sales increased $36.3 million (15.9%) in 2007 to $264.5 million from
$228.2 million in 2006, on increased sales of our procedure specific,
resection and video imaging products for arthroscopy and general
surgery; Arthroscopy sales increased $16.8 million (7.9%) in
2006 to $228.2 million from $211.4 million in 2005, on increased
sales of our resection and video imaging products for arthroscopy
and
general surgery, and our integrated operating room systems and
equipment.
|
|
·
|
Powered
Surgical Instrument sales increased $12.1 million (8.8%) in 2007 to
$149.3 million from $137.2 million in 2006, on increased sales of
small
bone and large bone powered instrument products; Powered
Surgical Instrument sales increased $5.1 million (3.9%) in 2006 to
$137.2 million from $132.0 million in 2005, on increased sales of
small
bone and large bone powered instrument products offset by slight
decreases
in our specialty powered instrument
products.
|
|
·
|
Electrosurgery
sales decreased $5.7 million (5.8%) in 2007 to $92.1 million from
$97.8
million in 2006 principally as a result of decreased sales of our
System 5000™ electrosurgical generators and pencils offset by increased
sales of our ABC® handpieces; Electrosurgery sales increased $9.3 million
(10.6%) in 2006 to $97.8 million from $88.5 million in 2005, on increased
sales of our System 5000™ electrosurgical generator, ABC® and UltraClean™
disposable surgical products.
|
|
·
|
Endosurgery
sales increased $6.1 million (11.6%) in 2007 to $58.9 million from
$52.8
million in 2006, as a result of increased sales of our hand held
instruments and suction/irrigation products; Endosurgery sales
increased $2.1 million (4.1%) in 2006 to $52.8 million from $50.7
million
in 2005, as a result of increased sales of our hand held instruments,
skin
staplers, suction/irrigation products and various laparoscopic instrument
products and systems.
|
|
·
|
Operating
margins as a percentage of net sales increased 1.9 percentage points
to
15.5% in 2007 compared to 13.6% in 2006. The increase in
operating margins are due to higher gross margins (0.3 percentage
points)
as result of higher selling prices, lower costs in 2007 associated
with
the termination of our surgical lights product offering and closing
of a
manufacturing facility in Montreal, Canada as discussed in Note 11
to the
Consolidated Financial Statements (0.3 percentage points), lower
benefit
costs (0.4 percentage points), lower selling costs in our Electrosurgery
division (0.5 percentage points) and lower administrative expenses
(0.4
percentage points).
|
|
·
|
Operating
margins as a percentage of net sales decreased 0.8 percentage points
to
13.6% in 2006 compared to 14.4% in 2005 largely as a result of increased
research and development spending (0.6 percentage points) in the
CONMED
Linvatec product lines. The remaining 0.2 percentage point
decline in operating margin is due to decreased gross margins in
the
CONMED Endosurgery product lines as a result of significant cost
increases
experienced in the second half of 2005 and in 2006 with respect to
certain
commodity and petroleum-based raw materials such as plastic resins
and
polymers used in the production of the Endosurgery product lines
as well
as higher spending related to quality
assurance.
|
|
CONMED
Patient Care
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
Net
sales
|
$ | 75,879 | $ | 75,883 | $ | 76,711 | ||||||
|
Income
(loss) from operations
|
5,734 | (759 | ) | 2,003 | ||||||||
|
Operating
margin
|
7.6 | % | (1.0 | )% | 2.6 | % | ||||||
Product
offerings include a line of vital signs and cardiac monitoring products
including pulse oximetry equipment & sensors, ECG electrodes and cables,
cardiac defibrillation & pacing pads and blood pressure cuffs. We
also offer a complete line of reusable surgical patient positioners and suction
instruments & tubing for use in the operating room, as well as a line of IV
products.
|
|
·
|
Patient
Care sales increased $0.9 million (1.2%) in 2007 to $76.8 million
compared
to $75.9 million in 2006 on increased sales of defibrillator pads.
Patient
Care net sales and the net sales of its principal ECG and suction
instruments product lines remained flat in 2006 when compared to
2005
while increased sales of defibrillator pads and blood pressure cuffs
have
offset decreases in other patient care
products.
|
|
|
·
|
Operating
margins as a percentage of net sales increased 3.6% percentage points
to
2.6% in 2007 compared to (1.0%) in 2006. The increases in operating
margins are primarily due to increases in gross margins of 4.0 percentage
points in 2007 compared to 2006 as a result of higher selling
prices. In addition, lower costs in 2007 are associated with
the write-off of inventory in settlement of a patent dispute (0.8
percentage points) in 2006, offset by higher distribution costs (0.2
percentage points) and higher selling and administrative expenses
(1.0
percentage points).
|
|
|
·
|
Operating
margins as a percentage of net sales decreased 8.6 percentage points
to
(1.0%) in 2006 compared to 7.6% in 2005 primarily as a result of
decreased
gross margins. Gross margins declined 6.1 percentage points in
2006 as compared to 2005 as a result of significant cost increases
experienced in the second half of 2005 and in 2006 with respect to
certain
commodity and petroleum-based raw materials such as plastic resins
and
polymers as well as higher spending related to quality assurance. In
addition, as a percentage of net sales, research and development
expense
increased 0.9 percentage points in 2006 compared to 2005 as a
result of increased spending on the development of our Pro2Ò
reflectance pulse oximetry system and ECOM endotracheal cardiac output
monitor. Selling and administrative expenses increased 1.6
percentage points in 2006 compared to 2005 as a result of higher
distribution costs (0.5 percentage points), a charge to write-off
inventory in settlement of a patent dispute (0.8 percentage points)
and
other increases (0.3 percentage
points).
|
CONMED
Endoscopic Technologies
|
2005
|
2006
|
2007
|
||||||||||
|
Net
sales
|
$ | 58,835 | $ | 54,992 | $ | 52,743 | ||||||
|
Income
(loss) from operations
|
(5,513 | ) | (63,399 | ) | (6,250 | ) | ||||||
|
Operating
Margin
|
(9.4 | %) | (115.3 | %) | (11.8 | %) | ||||||
Product
offerings include a comprehensive line of minimally invasive endoscopic
diagnostic and therapeutic instruments used in procedures which require
examination of the digestive tract.
|
|
·
|
Endoscopic
Technologies net sales declined $2.2 million (4.0%) in 2007 to $52.7
million from $54.9 million in 2006, principally due to decreased
sales of
forceps and biliary products as a result of increased competition
and
pricing pressures as well as production and operational issues which
resulted in product shortages and backorders during the first half of
2007. Endoscopic Technologies net sales declined $3.8 million
(6.5%) in 2006 to $54.9 million from $58.8 million in 2005, principally
due to lower sales in our forceps products as a result of increased
competition and pricing pressures as well as production and operational
issues which resulted in product shortages and backorders. In
addition, we experienced lower sales as a result of the discontinuation
of
our agreement with Xillix Technologies Corporation to distribute
the
ONCO-Life™ product.
|
|
|
·
|
Operating
margins as a percentage of net sales increased to (11.8%) in 2007
from
(115.3%) in 2006. The increase in operating margins of 103.5
percentage points in 2007 is primarily a result of the $46.7 million
goodwill impairment charge (85.0 percentage points) in 2006. In addition,
gross margins increased 12.2 percentage points as a result of the
completion of the transfer of production lines from C.R. Bard to
CONMED during 2006. The remaining increases in operating
margins of 6.3 percentage points are attributable to lower costs
in 2007
associated with acquisition-related costs (4.6 percentage points),
lower
research and development expenses as certain biliary and other projects
near completion (2.0 percentage points) and other selling and
administrative expenses (2.6 percentage points) offset by charges
related
to closure of a sales office in France (2.9 percentage points).
|
|
|
·
|
Operating
margins as a percentage of net sales declined to (115.3%) in 2006
from
(9.4%) in 2005. Selling and administrative and research and
development expenses increased 5.0 and 1.4 percentage points,
respectively, as expenses increased while net sales
declined. Additionally, as discussed above, production and
operational issues associated with the transfer of production lines
from
C.R. Bard to CONMED resulted in product shortages and backorders,
reduced sales and a decrease in gross margin of 14.5 percentage
points. As a result of these factors and the resulting
operating losses, we determined during our testing of goodwill in
the
fourth quarter of 2006, that the goodwill of our Endoscopic Technologies
business was impaired, resulting in an impairment charge of $46.7
million
(85.0 percentage points).
|
Liquidity
and Capital Resources
Our
liquidity needs arise primarily from capital investments, working capital
requirements and payments on indebtedness under our senior credit
agreement. We have historically met these liquidity requirements with
funds generated from operations, including sales of accounts receivable and
borrowings under our revolving credit facility. In addition, we use
term borrowings, including borrowings under our senior credit agreement and
borrowings under separate loan facilities, in the case of real property
purchases, to finance our acquisitions. We also have the ability to
raise funds through the sale of stock or we may issue debt through a private
placement or public offering. We generally attempt to minimize our
cash balances on-hand and use available cash to pay down debt or repurchase
our
common stock.
Operating
cash flows
Our
net
working capital position was $201.7 million at December 31, 2007. Net
cash provided by operating activities was $42.4 million, $64.7 million and
$65.9
million for 2005, 2006 and 2007, respectively.
Net
cash
provided by operating activities increased $1.2 million in 2007 as compared
to
2006. The increase in net income in 2007 did not translate directly
into a significant increase in operating cash flows given the non-cash nature
of
the goodwill impairment charge recognized in 2006. The increase in
net income was further offset by increases in inventory levels from their 2006
levels mainly in our arthroscopy and powered instrument product lines in
anticipation of continued sales growth and to accommodate sales orders for
new
products as well as a $7.0 million increase in funding of the pension plan
in
2007.
Investing
cash flows
Capital
expenditures were $16.2 million, $21.9 million and $20.9 million for 2005,
2006
and 2007, respectively. Capital expenditures in 2007 were consistent
with 2006 levels and higher than 2005 primarily due to technology upgrades
including the ongoing implementation of an enterprise business software
application. Capital expenditures are expected to approximate $21.0
million in 2008.
The
purchase of a business resulted in a $4.6 million payment while a purchase
price
adjustment resulted in a payment of $1.3 million in additional consideration
in
2007. The sale of an equity investment resulted in proceeds of $1.2
million in 2006. The purchase of a distributor’s business resulted in a $2.5
million payment in 2006. Payments related to business acquisitions in
2005 totaled $0.4 million and are additional cash consideration paid for a
business acquisition as a result of a purchase price adjustment.
Financing
cash flows
Net
cash
provided by (used in) financing activities during 2007 consisted of the
following: $11.4 million in proceeds from the issuance of common
stock under our equity compensation plans and employee stock purchase plan
(See
Note 7 to the Consolidated Financial Statements), $44.0 million in repayments
of
term borrowings under our senior credit agreement, a $1.8 million net change
in
cash overdrafts and $1.0 million in payments on mortgage notes.
During
2006, we entered into an amended and restated $235.0 million senior credit
agreement (the "amended and restated senior credit agreement"). The amended
and
restated senior credit agreement consists of a $100.0 million revolving credit
facility and a $135.0 million term loan. There were no borrowings outstanding
on
the revolving credit facility as of December 31, 2007. Our available
borrowings on the revolving credit facility at December 31, 2007 were $95.0
million with approximately $5.0 million of the facility set aside for
outstanding letters of credit. There were $59.0 million in borrowings
outstanding on the term loan at December 31, 2007. The proceeds of
the term loan portion of the amended and restated senior credit agreement were
used to repay borrowings outstanding on the term loan and revolving credit
facility of $142.5 million under the previously existing senior credit
agreement. In connection with the refinancing, we recorded a $0.7 million loss
on early extinguishment of debt of which $0.2 million related to the write-off
of unamortized deferred financing costs under the previously existing senior
credit agreement and $0.5 million related to financing costs associated with
the
amended and restated senior credit agreement.
The
scheduled principal payments on the term loan portion of the senior credit
agreement are $1.4 million annually through December 2011, increasing to $53.6
million in 2012 with the remaining balance outstanding due and payable on April
12, 2013. We may also be required, under certain circumstances, to
make additional principal payments based on excess cash flow as defined in
the
senior credit agreement. Interest rates on the term loan portion of
the senior credit agreement are at LIBOR plus 1.50% (6.34% at December 31,
2007)
or an alternative base rate; interest rates on the revolving credit facility
portion of the senior credit agreement are at LIBOR plus 1.375% or an
alternative base rate. For those borrowings where the Company elects
to use the alternative base rate, the base rate will be the greater of the
Prime
Rate or the Federal Funds Rate in effect on such date plus 0.50%, plus a margin
of 0.50% for term loan borrowings or 0.375% for borrowings under the revolving
credit facility.
The
senior credit agreement is collateralized by substantially all of our personal
property and assets, except for our accounts receivable and related rights
which
are pledged in connection with our accounts receivable sales
agreement. The senior credit agreement contains covenants and
restrictions which, among other things, require the maintenance of certain
financial ratios, and restrict dividend payments and the incurrence of certain
indebtedness and other activities, including acquisitions and
dispositions. We were in full compliance with these covenants and
restrictions as of December 31, 2007. We are also required, under
certain circumstances, to make mandatory prepayments from net cash proceeds
from
any issue of equity and asset sales.
Mortgage
notes outstanding in connection with the property and facilities utilized by
our
CONMED Linvatec subsidiary consist of a note bearing interest at 7.50% per
annum
with semiannual payments of principal and interest through June 2009 (the "Class
A note"); and a note bearing interest at 8.25% per annum compounded semiannually
through June 2009, after which semiannual payments of principal and interest
will commence, continuing through June 2019 (the "Class C note"). The
principal balances outstanding on the Class A note and Class C note aggregated
$3.4 million and $10.4 million, respectively, at December 31,
2007. These mortgage notes are secured by the CONMED Linvatec
property and facilities.
We
have
outstanding $150.0 million in 2.50% convertible senior subordinated notes (the
“Notes”) due 2024. The Notes represent subordinated unsecured
obligations and are convertible under certain circumstances, as defined in
the
bond indenture, into a combination of cash and CONMED common
stock. Upon conversion, the holder of each Note will receive the
conversion value of the Note payable in cash up to the principal amount of
the
Note and CONMED common stock for the Note’s conversion value in excess of such
principal amount. Amounts in excess of the principal amount are at an
initial conversion rate, subject to adjustment, of 26.1849 shares per $1,000
principal amount of the Note (which represents an initial conversion price
of
$38.19 per share). As of December 31, 2007, there was no value
assigned to the conversion feature because the Company’s share price was below
the conversion price. The Notes mature on November 15, 2024 and are
not redeemable by us prior to November 15, 2011. Holders of the Notes
will be able to require that we repurchase some or all of the Notes on November
15, 2011, 2014 and 2019.
The
Notes
contain two embedded derivatives. The embedded derivatives are
recorded at fair value in other long-term liabilities and changes in their
value
are recorded through the consolidated statements of operations. The
embedded derivatives have a nominal value, and it is our belief that any change
in their fair value would not have a material adverse effect on our business,
financial condition, results of operations or cash flows.
Our
Board
of Directors has authorized a share repurchase program under which we may
repurchase up to $50.0 million of our common stock in any calendar
year. We did not repurchase any shares during 2007. In the
past, we have financed the repurchases and may finance additional repurchases
through the proceeds from the issuance of common stock under our stock option
plans, from operating cash flow and from available borrowings under our
revolving credit facility.
Management
believes that cash flow from operations, including accounts receivable sales,
cash and cash equivalents on hand and available borrowing capacity under our
senior credit agreement will be adequate to meet our anticipated operating
working capital requirements, debt service, funding of capital expenditures
and
common stock repurchases in the foreseeable future. See “Item 1. Business –
Forward Looking Statements.”
Off-Balance
Sheet Arrangements
We
have
an accounts receivable sales agreement pursuant to which we and certain of
our
subsidiaries sell on an ongoing basis certain accounts receivable to CONMED
Receivables Corporation (“CRC”), a wholly-owned, bankruptcy-remote,
special-purpose subsidiary of CONMED Corporation. CRC may in turn
sell up to an aggregate $50.0 million undivided percentage ownership interest
in
such receivables (the “asset interest”) to a bank (the
“purchaser”). The purchaser’s share of collections on accounts
receivable are calculated as defined in the accounts receivable sales agreement,
as amended. Effectively, collections on the pool of receivables flow
first to the purchaser and then to CRC, but to the extent that the purchaser’s
share of collections may be less than the amount of the purchaser’s asset
interest, there is no recourse to CONMED or CRC for such
shortfall. For receivables which have been sold, CONMED Corporation
and its subsidiaries retain collection and administrative responsibilities
as
agent for the purchaser. As of December 31, 2006 and 2007, the
undivided percentage ownership interest in receivables sold by CRC to the
purchaser aggregated $44.0 million and $45.0 million, respectively, which has
been accounted for as a sale and reflected in the balance sheet as a reduction
in accounts receivable. Expenses associated with the sale of accounts
receivable, including the purchaser’s financing costs to purchase the accounts
receivable, were $1.9 million, $2.3 million and $2.9 million, in 2005, 2006
and
2007, respectively, and are included in interest expense.
There
are
certain statistical ratios, primarily related to sales dilution and losses
on
accounts receivable, which must be calculated and maintained on the pool of
receivables in order to continue selling to the purchaser. The pool
of receivables is in full compliance with these ratios. Management
believes that additional accounts receivable arising in the normal course of
business will be of sufficient quality and quantity to meet the requirements
for
sale under the accounts receivables sales agreement. In the event
that new accounts receivable arising in the normal course of business do not
qualify for sale, then collections on sold receivables will flow to the
purchaser rather than being used to fund new receivable purchases. To
the extent that such collections would not be available to CONMED in the form
of
new receivables purchases, we would need to access an alternate source of
working capital, such as our $100 million revolving credit
facility. Our accounts receivable sales agreement, as amended, also
requires us to obtain a commitment (the “purchaser commitment”) from the
purchaser to fund the purchase of our accounts receivable. The
purchaser commitment was amended effective December 28, 2007 whereby it was
extended through October 31, 2009 under substantially the same terms and
conditions.
Contractual
Obligations
The
following table summarizes our contractual obligations for the next five years
and thereafter (amounts in thousands). Purchase obligations represent
purchase orders for goods and services placed in the ordinary course of
business. There were no capital lease obligations as of December
31, 2007.
|
Payments
Due by Period
|
||||||||||||||||||||
|
Less
than
|
1-3
|
3-5
|
More
than
|
|||||||||||||||||
|
Total
|
1
Year
|
Years
|
Years
|
5
Years
|
||||||||||||||||
|
Long-term
debt
|
$ | 222,834 | $ | 3,349 | $ | 5,359 | $ | 56,801 | $ | 157,325 | ||||||||||
|
Purchase
obligations
|
54,697 | 54,021 | 676 | - | - | |||||||||||||||
|
Operating
lease
obligations
|
16,558 | 3,984 | 5,260 | 3,824 | 3,490 | |||||||||||||||
|
Total
contractual obligations
|
$ | 294,089 | $ | 61,354 | $ | 11,295 | $ | 60,625 | $ | 160,815 | ||||||||||
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 5 to the Consolidated Financial
Statements). The above table does not include required contributions
to our pension plan in 2008, which are expected to be in the range of $1.6
million to $7.1 million. (See Note 9 to the Consolidated Financial
Statements). The above table also does not include unrecognized tax
benefits of approximately $0.4 million, the timing and certainty of recognition
for which is uncertain. (See Note 6 to the Consolidated Financial
Statements).
Stock-based
Compensation
We
have
reserved shares of common stock for issuance to employees and directors
under three shareholder-approved share-based compensation plans (the
"Plans"). The Plans provide for grants of options, stock appreciation
rights (“SARs”), dividend equivalent rights, restricted stock, restricted stock
units (“RSUs”), and other equity-based and equity-related awards. The
exercise price on all outstanding options and SARs is equal to the quoted fair
market value of the stock at the date of grant. RSUs are valued at
the market value of the underlying stock on the date of grant. Stock
options, SARs and RSUs are non-transferable other than on death and generally
become exercisable over a five year period from date of grant. Stock
options and SARs expire ten years from date of grant. SARs are only
settled in shares of the Company’s stock. (See Note 7 to the
Consolidated Financial Statements).
New
Accounting Pronouncements
See
Note
13 to the Consolidated Financial Statements for a discussion of new accounting
pronouncements.
|
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
A
significant portion of our operations consist of sales activities in foreign
jurisdictions. As a result, our financial results may be affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in the markets in which we distribute products. As of
December 31, 2007, we had entered into foreign exchange forward contracts to
exchange Canadian dollars for United States dollars to hedge our intercompany
exposure related to our Canadian subsidiary. These forward contracts settle
each
month at month-end, at which time we enter into new forward
contracts. We have not designated these forward contracts as hedges
and have not entered into any other foreign exchange forward or option
contracts. We have mitigated the effect of foreign currency exchange
rate risk by transacting a significant portion of our foreign sales in United
States dollars. During 2007, changes in foreign currency exchange
rates increased sales by approximately $15.2 million and income (loss) before
income taxes by approximately $12.2 million. In the future, we will
continue to evaluate our foreign currency exposure and assess the need to enter
into derivative contracts which hedge foreign currency
transactions.
Interest
rate risk
At
December 31, 2007, we had approximately $59.0 million of variable rate long-term
debt outstanding under our senior credit agreement and an additional $45.0
million in accounts receivable sold under our accounts receivable sales
agreement; we are not a party to any interest rate swap agreements as of
December 31, 2007. Assuming no repayments other than our 2008
scheduled term loan payments, if market interest rates for similar borrowings
and accounts receivable sales averaged 1.0% more in 2008 than they did in 2007,
interest expense would increase, and income (loss) before income taxes would
decrease by $1.0 million. Comparatively, if market interest rates for
similar borrowings average 1.0% less in 2008 than they did in 2007, our interest
expense would decrease, and income (loss) before income taxes would increase
by
$1.0 million.
|
Item
8.
|
Financial
Statements
and Supplementary
Data
|
Our
2007
Financial Statements, as well as the report thereon of PricewaterhouseCoopers
LLP dated February 26, 2008, are included elsewhere herein.
|
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(f) under the Securities Exchange
Act of 1934) occurred during the fourth quarter of the year ended December
31,
2007 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
II,
Item 8 of the Annual Report on Form 10-K.
|
Item
9B.
|
Other
Information
|
Not
applicable.
|
Item
10.
|
Directors,
Executive Officers and Corporate
Governance
|
The
information required by this item is incorporated herein by reference to the
sections captioned “Proposal One: Election of Directors” and “Directors,
Executive Officers, Senior Officers, and Nominees for the Board of Directors” in
CONMED Corporation’s definitive Proxy Statement or other informational filing to
be filed with the Securities and Exchange Commission on or about April 14,
2008.
|
Item
11.
|
Executive
Compensation
|
The
information required by this item is incorporated herein by reference to the
sections captioned “Compensation Discussion and Analysis”, “Summary Compensation
Table”, “Grants of Plan-Based Awards”, “Outstanding Equity Awards at Fiscal
Year-End”, “Option Exercises and Stock Vested”, “Pension Benefits”,
“Nonqualified Deferred Compensation”, “Potential Payments upon Termination or
Change in Control”, “Director Compensation” and “Board of Directors Interlocks
and Insider Participation; Certain Relationships and Related Transactions” in
CONMED Corporation’s definitive Proxy Statement or other informational filing to
be filed with the Securities and Exchange Commission on or about April 14,
2008.
|
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 14, 2008.
|
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 “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 14,
2008.
|
Item
14.
|
Principal
Accounting Fees and
Services
|
The
information required by this item is incorporated herein
by reference to the section captioned “Audit Fees”, “Audit Related Fees”, “Tax
Fees” and “All Other Fees” in CONMED Corporation’s definitive Proxy Statement or
other informational filing to be filed with the Securities and Exchange
Commission on or about April 14, 2008.
|
Item
15.
|
Exhibits,
Financial Statement
Schedules
|
|
Index
to Financial Statements
|
|||
|
(a)(1)
|
List
of Financial Statements
|
Page
in Form
10-K
|
|
|
Management’s
Report on Internal Control Over Financial Reporting
|
60
|
||
|
Report
of Independent Registered Public Accounting Firm
|
61
|
||
|
Consolidated
Balance Sheets at December 31, 2006 and 2007
|
63
|
||
|
Consolidated
Statements of Operations for the Years Ended December 31, 2005, 2006
and
2007
|
64
|
||
|
Consolidated
Statements of Shareholders’ Equity for the Years Ended December 31, 2005,
2006 and 2007
|
65
|
||
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2005, 2006
and
2007
|
67
|
||
|
Notes
to Consolidated Financial Statements
|
69
|
||
|
(2)
|
List
of Financial Statement Schedules
|
||
|
Valuation
and Qualifying Accounts (Schedule II)
|
97
|
||
|
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 56 below
are
filed as part of this Form 10-K.
|
|||
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/
Joseph J. Corasanti
|
|
|
Joseph J. Corasanti
|
|
|
(President
and Chief
|
|
|
Executive
Officer)
|
|
|
Date: February
26, 2008
|
Pursuant
to the requirements of the Securities 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/
EUGENE R. CORASANTI
|
Chairman
of the Board
|
February
26,2008
|
||
|
Eugene
R. Corasanti
|
of
Directors
|
|
||
|
/s/
JOSEPH J. CORASANTI
|
President,
Chief Executive
|
February
26,2008
|
||
|
Joseph J. Corasanti
|
Officer
and Director
|
|||
|
|
||||
|
/s/
ROBERT D. SHALLISH, JR.
|
Vice
President-Finance and
Chief Financial Officer
|
February
26,2008
|
||
|
Robert D. Shallish,
Jr.
|
(Principal
Financial Officer)
|
|||
|
|
||||
|
/s/
LUKE A. POMILIO
|
Vice
President – Corporate Controller
|
February
26,2008
|
||
|
Luke A. Pomilio
|
(Principal
Accounting Officer)
|
|||
|
/s/
BRUCE F. DANIELS
|
Director
|
February
26,2008
|
||
|
Bruce F. Daniels
|
||||
|
/s/
Jo ANN GOLDEN
|
Director
|
February
26,2008
|
||
|
Jo Ann Golden
|
||||
|
/s/
STEPHEN M. MANDIA
|
Director
|
February
26,2008
|
||
|
Stephen M. Mandia
|
||||
|
/s/
WILLIAM D. MATTHEWS
|
Director
|
February
26,2008
|
||
|
William D. Matthews
|
||||
|
/s/
STUART J. SCHWARTZ
|
Director
|
February
26,2008
|
||
|
Stuart J. Schwartz
|
||||
|
/s/
MARK E. TRYNISKI
|
Director
|
February
26,2008
|
||
|
Mark E. Tryniski
|
||||
Exhibit
Index
|
Exhibit
No.
|
Description
|
|
|
3.1
|
–
|
Amended
and Restated By-Laws, as adopted by the Board of Directors on November
5,
2007 (Incorporated by reference to the Company’s Current Report on Form
10-Q filed with the Securities and Exchange Commission on November
5,
2007).
|
|
3.2
|
–
|
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).
|
|
4.1
|
–
|
See
Exhibit 3.1.
|
|
4.2
|
–
|
See
Exhibit 3.2.
|
|
|
||
|
4.3
|
–
|
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).
|
|
4.4
|
–
|
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).
|
|
4.5
|
–
|
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).
|
|
4.6
|
–
|
Indenture
dated November 10, 2004 between CONMED Corporation and The Bank of
New
York, as Trustee (Incorporated by reference to the Company’s Current
Report on Form 8-K filed with the Securities and Exchange Commission
on
November 16, 2004).
|
|
10.1+
|
–
|
Employment
Agreement between the Company and Eugene R. Corasanti, dated October
31, 2006 (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 November 2, 2006).
|
|
Exhibit
No.
|
Description
|
|
|
10.2+
|
–
|
Amended
and restated Employment Agreement, dated November 12, 2004, by and
between
CONMED Corporation and Joseph J. Corasanti, Esq. (Incorporated by
reference to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 16,
2004).
|
|
10.3+
|
–
|
Amendment
No. 1 to the November 12, 2004 Employment Agreement between the Company
and Joseph J. Corasanti, Esq., dated October 31, 2006
(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, 2006).
|
|
10.4
|
–
|
1992
Stock Option Plan (including form of Stock Option Agreement) (Incorporated
by reference to the Company’s Annual Report on Form 10-K for the year
ended December 25, 1992).
|
|
10.5
|
–
|
Amended
and Restated Employee Stock Option Plan (including form of Stock
Option
Agreement) (Incorporated by reference to Exhibit 10.6 of the
Company’s Annual Report on Form 10-K for the year ended
December 31, 1996).
|
|
10.6
|
–
|
Stock
Option Plan for Non-Employee Directors of CONMED Corporation (Incorporated
by reference to Exhibit 10.5 of the Company’s Annual Report on Form 10-K
for the year ended December 31, 1996).
|
|
10.7
|
–
|
Amendment
to Stock Option Plan for Non-employee Directors of CONMED Corporation
(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).
|
|
10.8
|
–
|
1999
Long-term Incentive Plan (Incorporated by reference to the Company’s
Definitive Proxy Statement for the 1999 Annual Meeting filed with
the
Securities and Exchange Commission on April 16, 1999).
|
|
10.9
|
–
|
Amendment
to 1999 Long-term Incentive 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).
|
|
10.10
|
–
|
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).
|
|
10.11
|
–
|
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).
|
|
Exhibit
No.
|
Description
|
|
|
10.12
|
–
|
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)
|
|
10.13
|
–
|
2007
Non-Employee Director Equity Compensation Plan (Incorporated by reference
to Exhibit 4.3 of the Company’s Registration Statement on Form S-8 on
August 8, 2007)
|
|
10.14
|
–
|
Amended
and Restated Credit Agreement, dated April 13, 2006, among CONMED
Corporation, JP Morgan Chase Bank and the several banks and other
financial institutions or entities from time to time parties thereto
(Incorporated by reference to the Company’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on April
19,
2006).
|
|
10.15
|
–
|
Registration
Rights Agreement, dated November 10, 2004, among CONMED
Corporation and UBS Securities LLC on behalf of Several Initial Purchasers
(Incorporated by reference to the Company’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on November 16,
2004).
|
|
10.16
|
–
|
Purchase
and Sale Agreement dated November 1, 2001 among CONMED Corporation,
et al
and CONMED Receivables Corporation (Incorporated by reference to
Exhibit
10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001).
|
|
10.17
|
–
|
Amendment
No. 1 dated October 23, 2003 to the Purchase and Sale Agreement dated
November 1, 2001 among CONMED Corporation, et al and CONMED Receivables
Corporation (Incorporated by reference to Exhibit 10.2 of the
Company’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2003).
|
|
10.18
|
–
|
Amended
and Restated Receivables Purchase Agreement, dated October 23, 2003,
among
CONMED Receivables Corporation, CONMED Corporation, and Fleet National
Bank (Incorporated by reference to Exhibit 10.1 of the
Company’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2003).
|
|
10.19
|
–
|
Amendment
No. 1, dated October 20, 2004 to the Amended and Restated Receivables
Purchase Agreement, dated October 23, 2003, among CONMED Receivables
Corporation, CONMED Corporation and Fleet Bank (Incorporated by reference
to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004).
|
|
10.20
|
–
|
Amendment
No. 2, dated October 21, 2005 to the Amended and Restated Receivables
Purchase Agreement, dated October 23, 2003, among CONMED Receivables
Corporation, CONMED Corporation and Fleet Bank (Incorporated by reference
to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2005).
|
|
Exhibit
No.
|
Description
|
|
|
10.21
|
–
|
Amendment
No. 3, dated October 24, 2006 to the Amended and Restated Receivables
Purchase Agreement, dated October 23, 2003, among CONMED Receivables
Corporation, CONMED Corporation and Fleet Bank (Incorporated by reference
to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated October
30, 2006).
|
|
10.22
|
–
|
Amendment
No. 4, dated January 31, 2008 to the Amended and Restated Receivables
Purchase Agreement, dated October 23, 2003, among CONMED Receivables
Corporation, CONMED Corporation and Fleet Bank (Incorporated by reference
to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated January
31, 2008).
|
|
14
|
–
|
Code
of Ethics. The CONMED code of ethics may be accessed via the
Company’s website at http://www.CONMED.com/
investor-ethics.htm
|
|
–
|
Subsidiaries
of the Registrant.
|
|
|
–
|
Consent
of Independent Registered Public Accounting Firm.
|
|
|
–
|
Certification
of Joseph J. Corasanti pursuant to Rule 13a-15(f) and Rule
15d-15(f) of the Securities Exchange Act, as adopted pursuant to
Section
302 of the Sarbanes-Oxley Act of 2002.
|
|
|
–
|
Certification
of Robert D. Shallish, Jr. pursuant to Rule 13a-15(f) and Rule 15d-15(f)
of the Securities Exchange Act, as adopted pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002.
|
|
|
–
|
Certifications
of Joseph J. Corasanti and Robert D. Shallish, Jr. pursuant to 18
U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002.
|
* Filed
herewith
+ Management
contract or compensatory plan or arrangement.
MANAGEMENT’S
REPORT ON INTERNAL CONTROL
OVER
FINANCIAL REPORTING
The
management of CONMED Corporation is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control
over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external reporting purposes in accordance with
generally accepted accounting principles. Our internal control over
financial reporting includes policies and procedures that pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
transactions and dispositions of assets; provide reasonable assurances that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the
United States of America, and that receipts and expenditures are being made
only
in accordance with authorizations of management and the directors of the
Company; and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on our financial statements. Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Management assessed the
effectiveness of CONMED’s internal control over financial reporting as of
December 31, 2007. In making its assessment, management utilized the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) in “Internal Control-Integrated
Framework”. Management has concluded that based on its assessment,
CONMED’s internal control over financial reporting was effective as of December
31, 2007. The effectiveness of the Company’s internal control over
financial reporting as of December 31, 2007 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
as
stated in their report which appears herein.
/s/ Joseph
J.
Corasanti
Joseph
J.
Corasanti
President
and
Chief
Executive Officer
/s/ Robert
D.
Shallish, Jr.
Robert
D.
Shallish, Jr.
Vice
President-Finance and
Chief
Financial Officer
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareholders of CONMED Corporation
In
our
opinion, the consolidated financial statements listed in the index appearing
under Item 15(a)(1) present fairly, in all material respects, the financial
position of CONMED Corporation and its subsidiaries at December 31,
2007 and December 31, 2006, and the results of their operations and their
cash flows for each of the three years in the period ended December 31,
2007 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item
15(a)(2) presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related
consolidated financial statements. Also in our opinion, the
Company maintained, in all material respects, effective internal control
over
financial reporting as of December 31, 2007, based on criteria established
in
Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Company's management is responsible for these financial
statements and financial statement schedule, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness
of
internal control over financial reporting, included in the accompanying
"Management's Report On Internal Control Over Financial
Reporting". Our responsibility is to express opinions on these
financial statements, on the financial statement schedule, and on the Company's
internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting
was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control
over
financial reporting, assessing the risk that a material weakness exists,
and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for
our
opinions.
As
discussed in Note 7 to the consolidated financial statements, the Company
changed the manner in which it accounts for share-based compensation in
2006. As discussed in Note 9 to the consolidated financial
statements, the Company changed the manner in which it accounts for its defined
benefit pension plan in 2006.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts
and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers
LLP
Buffalo,
New York
February
26, 2008
CONMED
CORPORATION
CONSOLIDATED
BALANCE SHEETS
December
31, 2006 and 2007
(In
thousands except share and per share amounts)
|
2006
|
2007
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 3,831 | $ | 11,695 | ||||
|
Accounts
receivable, less allowance for doubtful accounts of $1,210 in 2006
and
$787 in 2007
|
75,120 | 80,642 | ||||||
|
Inventories
|
151,687 | 164,969 | ||||||
|
Income
taxes receivable
|
747 | 1,425 | ||||||
|
Deferred
income taxes
|
10,008 | 11,697 | ||||||
|
Prepaid
expenses and other current assets
|
8,490 | 8,594 | ||||||
|
Total
current assets
|
249,883 | 279,022 | ||||||
|
Property,
plant and equipment, net
|
116,480 | 123,679 | ||||||
|
Goodwill,
net
|
290,512 | 289,508 | ||||||
|
Other
intangible assets, net
|
191,135 | 191,807 | ||||||
|
Other
assets
|
13,561 | 9,935 | ||||||
|
Total
assets
|
$ | 861,571 | $ | 893,951 | ||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Current
portion of long-term debt
|
$ | 3,148 | $ | 3,349 | ||||
|
Accounts
payable
|
41,823 | 38,987 | ||||||
|
Accrued
compensation and benefits
|
17,712 | 19,724 | ||||||
|
Accrued
interest
|
727 | 695 | ||||||
|
Other
current liabilities
|
11,795 | 14,529 | ||||||
|
Total
current liabilities
|
75,205 | 77,284 | ||||||
|
Long-term
debt
|
264,676 | 219,485 | ||||||
|
Deferred
income taxes
|
51,004 | 71,188 | ||||||
|
Other
long-term liabilities
|
30,332 | 20,992 | ||||||
|
Total
liabilities
|
421,217 | 388,949 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Shareholders'
equity:
|
||||||||
|
Preferred
stock, par value $.01 per share; authorized 500,000 shares, none
outstanding
|
- | - | ||||||
|
Common
stock, par value $.01 per share; 100,000,000 authorized; 31,304,203
and
31,299,203 issued in 2006 and 2007, respectively
|
313 | 313 | ||||||
|
Paid-in
capital
|
284,858 | 287,926 | ||||||
|
Retained
earnings
|
247,425 | 284,850 | ||||||
|
Accumulated
other comprehensive income (loss)
|
(8,612 | ) | (505 | ) | ||||
|
Less: Treasury
stock, at cost; 3,321,545
and
2,684,163 shares in 2006 and 2007, respectively
|
(83,630 | ) | (67,582 | ) | ||||
|
Total
shareholders' equity
|
440,354 | 505,002 | ||||||
|
Total
liabilities and shareholders' equity
|
$ | 861,571 | $ | 893,951 | ||||
See
notes
to consolidated financial statements.
CONMED
CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years
Ended December 31, 2005, 2006 and 2007
(In
thousands except per share amounts)
|
2005
|
2006
|
2007
|
||||||||||
|
Net
sales
|
$ | 617,305 | $ | 646,812 | $ | 694,288 | ||||||
|
Cost
of sales
|
304,284 | 333,966 | 345,163 | |||||||||
|
Gross
profit
|
313,021 | 312,846 | 349,125 | |||||||||
|
Selling
and administrative expense
|
216,685 | 234,832 | 240,541 | |||||||||
|
Research
and development expense
|
25,469 | 30,715 | 30,400 | |||||||||
|
Impairment
of goodwill
|
- | 46,689 | - | |||||||||
|
Other
expense (income)
|
7,119 | 5,213 | (2,807 | ) | ||||||||
| 249,273 | 317,449 | 268,134 | ||||||||||
|
Income
(loss) from operations
|
63,748 | (4,603 | ) | 80,991 | ||||||||
|
Loss
on early extinguishment of debt
|
- | 678 | - | |||||||||
|
Interest
expense
|
15,578 | 19,120 | 16,234 | |||||||||
|
Income
(loss) before income taxes
|
48,170 | (24,401 | ) | 64,757 | ||||||||
|
Provision
(benefit) for income taxes
|
16,176 | (11,894 | ) | 23,301 | ||||||||
|
Net
income (loss)
|
$ | 31,994 | $ | (12,507 | ) | $ | 41,456 | |||||
|
Earnings
(loss) per share:
|
||||||||||||
|
Basic
|
$ | 1.09 | $ | (.45 | ) | $ | 1.46 | |||||
|
Diluted
|
1.08 | (.45 | ) | 1.43 | ||||||||
See
notes
to consolidated financial statements.
CONMED
CORPORATION
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
Years
Ended December 31, 2005, 2006 and 2007
(In
thousands)
|
Accumulated
|
||||||||||||||||||||||||||||
|
Other
|
||||||||||||||||||||||||||||
|
Common
Stock
|
Paid-in
|
Retained
|
Comprehensive
|
Treasury
|
Shareholders’
|
|||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Earnings
|
Income
(Loss)
|
Stock
|
Equity
|
||||||||||||||||||||||
|
Balance
at December 31, 2004
|
30,136 | $ | 301 | $ | 256,551 | $ | 227,938 | $ | (6,399 | ) | $ | (30,408 | ) | $ | 447,983 | |||||||||||||
|
Common
stock issued under employee plans
|
1,001 | 10 | 16,988 | 16,998 | ||||||||||||||||||||||||
|
Tax
benefit arising from common stock issued under employee
plans
|
4,742 | 4,742 | ||||||||||||||||||||||||||
|
Repurchase
of common stock
|
(45,374 | ) | (45,374 | ) | ||||||||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||
|
Foreign
currency translation adjustments
|
(3,657 | ) | ||||||||||||||||||||||||||
|
Minimum
pension liability (net of income tax benefit of $172)
|
320 | |||||||||||||||||||||||||||
|
Net
income
|
31,994 | |||||||||||||||||||||||||||
|
Total
comprehensive income
|
|
|
|
|
|
|
28,657
|
|||||||||||||||||||||
|
Balance
at December 31, 2005
|
31,137 | $ | 311 | $ | 278,281 | $ | 259,932 | $ | (9,736 | ) | $ | (75,782 | ) | $ | 453,006 | |||||||||||||
|
Common
stock issued under employee plans
|
167 | 2 | 2,729 | 2,731 | ||||||||||||||||||||||||
|
Tax
benefit arising from common stock issued under employee
plans
|
139 | 139 | ||||||||||||||||||||||||||
|
Stock
based compensation
|
3,709 | 3,709 | ||||||||||||||||||||||||||
|
Repurchase
of common stock
|
(7,848 | ) | (7,848 | ) | ||||||||||||||||||||||||
See
notes
to consolidated financial statements.
(continued)
CONMED
CORPORATION
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
Years
Ended December 31, 2005, 2006 and 2007
(In
thousands)
|
Accumulated
|
||||||||||||||||||||||||||||
|
Other
|
||||||||||||||||||||||||||||
|
Common
Stock
|
Paid-in
|
Retained
|
Comprehensive
|
Treasury
|
Shareholders’
|
|||||||||||||||||||||||
|
|
Shares
|
|
Amount
|
Capital
|
Earnings
|
Income
(Loss)
|
Stock
|
Equity
|
||||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||
|
Foreign
currency translation adjustments
|
3,375 | |||||||||||||||||||||||||||
|
Minimum
pension liability (net of income tax expense of $1,330)
|
3,092 | |||||||||||||||||||||||||||
|
Net
income
|
(12,507 | ) | ||||||||||||||||||||||||||
|
Total
comprehensive income (loss)
|
(6,040 | ) | ||||||||||||||||||||||||||
|
Adjustment
to initially apply SFAS No. 158 (net of income tax benefit of
$3,132)
|
(5,343
|
) |
(5,343
|
) | ||||||||||||||||||||||||
|
Balance
at December 31, 2006
|
31,304 | $ | 313 | $ | 284,858 | $ | 247,425 | $ | (8,612 | ) | $ | (83,630 | ) | $ | 440,354 | |||||||||||||
|
Common
stock issued under employee plans
|
(5 | ) | (662 | ) | (4,031 | ) | 16,048 | 11,355 | ||||||||||||||||||||
|
Tax
benefit (expense) arising from common stock issued under employee
plans
|
(41 | ) | (41 | ) | ||||||||||||||||||||||||
|
Stock-based
compensation
|
3,771 | 3,771 | ||||||||||||||||||||||||||
|
Comprehensive
income (loss):
|
||||||||||||||||||||||||||||
|
Foreign
currency translation adjustments
|
5,284 | |||||||||||||||||||||||||||
|
Minimum
pension liability (net of income tax expense
of $1,654)
|
2,823 | |||||||||||||||||||||||||||
|
Net
income (loss)
|
41,456 | |||||||||||||||||||||||||||
|
Total
comprehensive income (loss)
|
49,563 | |||||||||||||||||||||||||||
|
Balance
at December 31, 2007
|
31,299 | $ | 313 | $ | 287,926 | $ | 284,850 | $ | (505 | ) | $ | (67,582 | ) | $ | 505,002 | |||||||||||||
See
notes
to consolidated financial statements.
CONMED
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended December 31, 2005, 2006 and 2007
(In
thousands)
|
2005
|
2006
|
2007
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income (loss)
|
$ | 31,994 | $ | (12,507 | ) | $ | 41,456 | |||||
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
|
12,466 | 11,738 | 13,101 | |||||||||
|
Amortization
|
18,320 | 18,113 | 18,433 | |||||||||
|
Stock-based
compensation
|
- | 3,709 | 3,771 | |||||||||
|
Goodwill
impairment
|
- | 46,689 | - | |||||||||
|
Deferred
income taxes
|
10,128 | (12,164 | ) | 16,714 | ||||||||
|
Income
tax benefit of stock option exercises
|
4,742 | 139 | - | |||||||||
|
Contributions
to pension plans less than (in excess of) net pension cost
|
2,062 | 1,877 | (5,112 | ) | ||||||||
|
Loss
on extinguishment of debt
|
- | 203 | - | |||||||||
|
Loss
on sale of equity investment
|
794 | - | - | |||||||||
|
Increase
(decrease) in cash flows from changes in assets and liabilities,
net of
effects from acquisitions:
|
||||||||||||
|
Sale
of accounts receivable
|
(9,000 | ) | 4,000 | 1,000 | ||||||||
|
Accounts
receivable
|
266 | (126 | ) | (6,301 | ) | |||||||
|
Inventories
|
(33,620 | ) | (9,380 | ) | (22,621 | ) | ||||||
|
Accounts
payable
|
8,273 | 7,016 | (2,414 | ) | ||||||||
|
Income
taxes receivable
|
675 | (2,069 | ) | 3,118 | ||||||||
|
Accrued
compensation and benefits
|
(194 | ) | 5,251 | 2,012 | ||||||||
|
Accrued
interest
|
347 | (368 | ) | (32 | ) | |||||||
|
Other
assets
|
(4,402 | ) | (1,582 | ) | (83 | ) | ||||||
|
Other
liabilities
|
(417 | ) | 4,172 | 2,852 | ||||||||
| 10,440 | 77,218 | 24,438 | ||||||||||
|
Net
cash provided by operating activities
|
42,434 | 64,711 | 65,894 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Payments
related to business acquisitions, net of cash acquired
|
(372 | ) | (2,466 | ) | (5,933 | ) | ||||||
|
Proceeds
from sale of equity investment
|
- | 1,205 | - | |||||||||
|
Purchases
of property, plant and equipment, net
|
(16,242 | ) | (21,895 | ) | (20,910 | ) | ||||||
|
Net
cash used in investing activities
|
(16,614 | ) | (23,156 | ) | (26,843 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Net
proceeds from common stock issued under employee plans
|
16,998 | 2,731 | 11,355 | |||||||||
|
Repurchase
of common stock
|
(45,374 | ) | (7,848 | ) | - | |||||||
See
notes
to consolidated financial statements.
(continued)
CONMED
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended December 31, 2005, 2006 and 2007
(In
thousands)
|
2005
|
2006
|
2007
|
||||||||||
|
Payments
on senior credit agreement
|
(29,917 | ) | (173,160 | ) | (44,000 | ) | ||||||
|
Proceeds
of senior credit agreement
|
43,000 | 135,000 | - | |||||||||
|
Payments
on mortgage notes
|
(754 | ) | (867 | ) | (990 | ) | ||||||
|
Payments
related to issuance of debt
|
(185 | ) | (1,260 | ) | - | |||||||
|
Net
change in cash overdrafts
|
(6,102 | ) | 1,166 | (1,770 | ) | |||||||
|
Net
cash provided by (used in) financing activities
|
(22,334 | ) | (44,238 | ) | (35,405 | ) | ||||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
(4,221 | ) | 3,060 | 4,218 | ||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(735 | ) | 377 | 7,864 | ||||||||
|
Cash
and cash equivalents at beginning of year
|
4,189 | 3,454 | 3,831 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 3,454 | $ | 3,831 | $ | 11,695 | ||||||
|
Supplemental
disclosures of cash flow information:
|
||||||||||||
|
Cash
paid during the year for:
|
||||||||||||
|
Interest
|
$ | 13,794 | $ | 18,247 | $ | 14,386 | ||||||
|
Income
taxes
|
3,921 | 2,168 | 4,172 | |||||||||
See
notes
to consolidated financial statements.
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 with an emphasis on surgical devices and equipment for minimally
invasive procedures and monitoring. The Company’s products serve the
clinical areas of arthroscopy, powered surgical instruments, electrosurgery,
cardiac monitoring disposables, endosurgery and endoscopic
technologies. They are used by surgeons and physicians in a variety
of specialties including orthopedics, general surgery, gynecology, neurosurgery,
and gastroenterology.
Principles
of consolidation
The
consolidated financial statements include the accounts of CONMED Corporation
and
its controlled subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
Use
of estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and judgments which affect the reported amounts of assets,
liabilities, related disclosure of contingent assets and liabilities at the
date
of the financial statements, and the reported amount of revenues and expenses
during the reporting period. Estimates are used in accounting for, among other
things, allowances for doubtful accounts, rebates and sales allowances,
inventory allowances, purchased in-process research and development, pension
benefits, goodwill and intangible assets, contingencies and other
accruals. We base our estimates on historical experience and on
various other assumptions which are believed to be reasonable under the
circumstances. Due to the inherent uncertainty involved in making
estimates, actual results reported in future periods may differ from those
estimates. Estimates and assumptions are reviewed periodically, and
the effect of revisions are reflected in the consolidated financial statements
in the period they are determined to be necessary.
Cash
and cash equivalents
We
consider all highly liquid investments with an original maturity of three months
or less to be cash equivalents.
Accounts
receivable sale
We
have
an accounts receivable sales agreement pursuant to which we and certain of
our
subsidiaries sell on an ongoing basis certain accounts receivable to CONMED
Receivables Corporation (“CRC”), a wholly-owned, bankruptcy-remote,
special-purpose subsidiary of CONMED Corporation. CRC may in turn
sell up to an aggregate $50.0 million undivided percentage ownership interest
in
such receivables (the “asset interest”) to a bank (“the
“purchaser”). The purchaser’s share of collections on accounts
receivable are calculated as defined in the accounts receivable sales agreement,
as amended. Effectively, collections on the pool of receivables flow
first to the purchaser and then to CRC, but to the extent that the purchaser’s
share of collections may be less than the amount of the purchaser’s asset
interest, there is no recourse to CONMED or CRC for such
shortfall. For receivables which have been sold, CONMED Corporation
and its subsidiaries retain collection and administrative responsibilities
as
agent for the purchaser. As of December 31, 2006 and 2007, the
undivided percentage ownership interest in receivables sold by CRC to the
purchaser aggregated $44.0 million and $45.0 million, respectively, which has
been accounted for as a sale and reflected in the balance sheet as a reduction
in accounts receivable. Expenses associated with the sale of accounts
receivable, including the purchaser’s financing costs to purchase the accounts
receivable, were $1.9 million, $2.3 million and $2.9 million, in 2005, 2006
and
2007, respectively, and are included in interest expense.
There
are
certain statistical ratios, primarily related to sales dilution and losses
on
accounts receivable, which must be calculated and maintained on the pool of
receivables in order to continue selling to the purchaser. The pool
of receivables is in full compliance with these ratios. Management
believes that additional accounts receivable arising in the normal course of
business will be of sufficient quality and quantity to meet the requirements
for
sale under the accounts receivable sales agreement. In the event that
new accounts receivable arising in the normal course of business do not qualify
for sale, then collections on sold receivables will flow to the purchaser rather
than being used to fund new receivable purchases. To the extent that
such collections would not be available to CONMED in the form of new receivables
purchases, we would need to access an alternate source of working capital,
such
as our $100 million revolving credit facility. Our accounts
receivable sales agreement, as amended, also requires us to obtain a commitment
(the “purchaser commitment”) from the purchaser to fund the purchase of our
accounts receivable. The purchaser commitment was amended effective
December 28, 2007 whereby it was extended through October 31, 2009 under
substantially the same terms and conditions.
Inventories
Inventories
are valued at the lower of cost or market. Cost is determined on the
FIFO (first-in, first-out) method of accounting.
Property,
plant and equipment
Property,
plant and equipment are stated at cost and depreciated using the straight-line
method over the following estimated useful lives:
|
Building
and improvements
|
40
years
|
|
Leasehold
improvements
|
Shorter
of life of asset or life of lease
|
|
Machinery
and equipment
|
2
to 15 years
|
Goodwill
and other intangible assets
Goodwill
represents the excess of purchase price over fair value of identifiable net
assets of acquired businesses. Other intangible assets primarily
represent allocations of purchase price to identifiable intangible assets of
acquired businesses. Because of our history of growth through
acquisitions, goodwill and other intangible assets comprise a substantial
portion (53.8% at December 31, 2007) of our total assets.
Goodwill
and intangible assets deemed to have indefinite lives are not amortized. All
other intangible assets are amortized over their estimated useful lives. We
perform impairment tests of goodwill and indefinite-lived intangible assets
and
evaluate the useful lives of acquired intangible assets subject to
amortization. These tests and evaluations are performed in accordance
with Statement of Financial Accounting Standards No. 142 “Goodwill and Other
Intangible Assets” (“SFAS 142”). It is our policy to perform annual
impairment tests in the fourth quarter. These tests resulted in an
impairment charge of $46.7 million in the fourth quarter ending December 31,
2006. See Note 4 for additional discussion.
Other
long-lived assets
We
review
asset carrying amounts for impairment (consisting of intangible assets subject
to amortization and property, plant and equipment) whenever events or
circumstances indicate that such carrying amounts may not be
recoverable. If the sum of the expected future undiscounted cash
flows is less than the carrying amount of the asset, an impairment loss is
recognized by reducing the recorded value to its current fair
value.
Fair
value of financial instruments
The
carrying amounts reported in our balance sheets for cash and cash equivalents,
accounts receivable, accounts payable and long-term debt excluding the 2.50%
convertible senior subordinated notes (the “Notes”) approximate fair
value. The fair value of the Notes approximated $133.7 million and
$134.8 million at December 31, 2006 and 2007, respectively, based on their
quoted market price.
Translation
of foreign currency financial statements
Assets
and liabilities of foreign subsidiaries have been translated into United States
dollars at the applicable rates of exchange in effect at the end of the period
reported. Revenues and expenses have been translated at the
applicable weighted average rates of exchange in effect during the period
reported. Translation adjustments are reflected in accumulated other
comprehensive income (loss). Transaction gains and losses are
included in net income (loss).
Forward
Foreign Exchange Contracts
We
have a
forward contract program to exchange Canadian dollars for United States dollars
in order to hedge our intercompany exposure related to our Canadian subsidiary.
These forward contracts settle each month at month-end, at which time we
enter into new forward contracts. We have not designated these
forward contracts as hedges. We have a forward contract with a notional contract
amount of $14.7 million outstanding at December 31, 2007. Net
realized losses in connection with these forward contracts approximated $1.1
million for the year ended December 31, 2007 and is recorded in selling and
administrative expense in the Consolidated Statements of
Operations. We mark outstanding forward contracts to
market. The market value for forward foreign exchange contracts
outstanding at December 31, 2007 was not material.
Income
taxes
We
provide for income taxes in accordance with the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (“SFAS
109”). Under the liability method specified by SFAS 109, deferred tax
assets and liabilities are based on the difference between the financial
statement and tax basis of assets and liabilities and operating
loss and tax
credit carryforwards as measured by the enacted tax rates that are
anticipated to be in effect in the respective jurisdictions when these
differences reverse. The deferred tax provision generally represents
the net change in the assets and liabilities for deferred tax. A valuation
allowance is established when it is necessary to reduce deferred tax assets
to
amounts for which realization is not likely.
Deferred
taxes are not provided on the unremitted earnings of subsidiaries outside
of the United States when it is expected that these earnings
are permanently reinvested. Such earnings may become taxable upon the
sale or liquidation of these subsidiaries or upon the remittance of
dividends. Deferred taxes are provided when the Company no longer considers
subsidiary earnings to be permanently invested, such as in situations where
the Company’s subsidiaries plan to make future dividend
distributions.
On
January 1, 2007 we adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, (“FIN 48”). FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. The impact of this pronouncement was not
material to the Company’s consolidated financial statements. See Note
6 to the Consolidated Financial Statements for further discussion.
Revenue
Recognition
Revenue
is recognized when title has been transferred to the customer which is at the
time of shipment. The following policies apply to our major
categories of revenue transactions:
|
|
·
|
Sales
to customers are evidenced by firm purchase orders. Title and the
risks
and rewards of ownership are transferred to the customer when product
is
shipped under our stated shipping terms. Payment by the
customer is due under fixed payment
terms.
|
|
|
·
|
We
place certain of our capital equipment with customers in return for
commitments to purchase disposable products over time periods generally
ranging from one to three years. In these circumstances, no
revenue is recognized upon capital equipment shipment and we recognize
revenue upon the disposable product shipment. The cost of the
equipment is amortized over the term of individual commitment
agreements.
|
|
|
·
|
Product
returns are only accepted at the discretion of the Company and in
accordance with our “Returned Goods Policy”. Historically the
level of product returns has not been significant. We accrue
for sales returns, rebates and allowances based upon an analysis
of
historical customer returns and credits, rebates, discounts and current
market conditions.
|
|
|
·
|
Our
terms of sale to customers generally do not include any obligations
to
perform future services. Limited warranties are provided for
capital equipment sales and provisions for warranty are provided
at the
time of product sale based upon an analysis of historical
data.
|
|
|
·
|
Amounts
billed to customers related to shipping and handling have been included
in
net sales. Shipping and handling costs included in selling and
administrative expense were $11.2 million, $14.3 million and $14.1
million
for 2005, 2006 and 2007,
respectively.
|
|
|
·
|
We
sell to a diversified base of customers around the world and, therefore,
believe there is no material concentration of credit
risk.
|
|
|
·
|
We
assess the risk of loss on accounts receivable and adjust the allowance
for doubtful accounts based on this risk
assessment. Historically, losses on accounts receivable have
not been material. Management believes that the allowance for
doubtful accounts of $0.8 million at December 31, 2007 is adequate
to
provide for probable losses resulting from accounts
receivable.
|
Earnings
(loss) per share
Basic
earnings per share (“basic EPS”) is computed by dividing net income (loss) by
the weighted average number of shares outstanding for the reporting
period. Diluted earnings per share (“diluted EPS”) gives effect to
all dilutive potential shares outstanding resulting from employee stock options,
restricted stock units and stock appreciation rights during the
period. In the 2006 period, incremental shares are not included in
computing diluted EPS because to do so would have reduced the net loss per
share. The following table sets forth the calculation of basic and
diluted earnings per share at December 31, 2005, 2006 and 2007,
respectively:
|
2005
|
2006
|
2007
|
||||||||||
|
Net
income (loss)
|
$ | 31,994 | $ | (12,507 | ) | $ | 41,456 | |||||
|
Basic-weighted
average shares outstanding
|
29,300 | 27,966 | 28,416 | |||||||||
|
Effect
of dilutive potential securities
|
436 | - | 549 | |||||||||
|
Diluted-weighted
average shares outstanding
|
29,736 | 27,966 | 28,965 | |||||||||
|
Basic
EPS
|
$ | 1.09 | $ | (.45 | ) | $ | 1.46 | |||||
|
Diluted
EPS
|
$ | 1.08 | $ | (.45 | ) | $ | 1.43 | |||||
The
shares used in the calculation of diluted EPS exclude options to purchase shares
where the exercise price was greater than the average market price of common
shares for the year. Such shares aggregated approximately 0.6 million at
December 31, 2005 and 2007, respectively. Upon conversion
of our 2.50% convertible senior subordinated notes (the “Notes”), the holder of
each Note will receive the conversion value of the Note payable in
cash up to the principal amount of the Note and CONMED common stock
for the Note's conversion value in excess of such
principal amount. As of December 31, 2007, our share price
has not exceeded the conversion price of the Notes, therefore the conversion
value was less than the principal amount of the Notes. Under the net
share settlement method and in accordance with Emerging Issues Task Force
(“EITF”) Issue 04-8, “The Effect of Contingently Convertible Debt on Diluted
Earnings per Share”, there were no potential shares issuable under the Notes to
be used in the calculation of diluted EPS.
The maximum number of shares we may issue with respect to the Notes is
5,750,000. See Note 5 for further discussion of the
Notes.
Stock
Based Compensation
We
adopted Statement of Financial Accounting Standards No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123R”) effective January 1, 2006. SFAS
123R requires that all share-based payments to employees, including grants
of
employee stock options, restricted stock units, and stock appreciation rights
be
recognized in the financial statements based on their fair
values. Prior to January 1, 2006, we accounted for stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25
“Accounting for Stock Issued to Employees” (“APB 25”). No
compensation expense was recognized for stock options under the provisions
of
APB 25 since all options granted had an exercise price equal to the market
value
of the underlying stock on the grant date.
SFAS
123R
was adopted using the modified prospective transition method. Under this method,
the provisions of SFAS No. 123R apply to all awards granted or modified
after the date of adoption. In addition, compensation expense must be recognized
for any nonvested stock option awards outstanding as of the date of
adoption. We recognize such expense using a straight-line method over
the vesting period. Prior periods have not been
restated.
We
elected to adopt the alternative transition method, as permitted by FASB Staff
Position No. FAS 123R-3 “Transition Election Related to Accounting for Tax
Effects of Share-Based Payment Awards,” to calculate the tax effects of
stock-based compensation pursuant to SFAS 123R for those employee awards that
were outstanding upon adoption of SFAS 123R. The alternative
transition method allows the use of a simplified method to calculate the
beginning pool of excess tax benefits available to absorb tax deficiencies
recognized subsequent to the adoption of SFAS 123R. The Company’s
policy for intra-period tax allocation is the with and without approach for
utilization of tax attributes.
During
2007, we began issuing shares under our stock based compensation plans out
of
treasury stock whereby treasury stock is reduced by the weighted average cost
of
such treasury stock. To the extent there is a difference between the
cost of the treasury stock and the exercise price of shares issued under stock
based compensation plans, we record gains to paid in capital; losses
are recorded to paid in capital to the extent any gain was previously recorded,
otherwise the loss is recorded to retained earnings.
Accumulated
other comprehensive income (loss)
Accumulated
other comprehensive income (loss) consists of the following:
|
Accumulated
|
||||||||||||
|
Cumulative
|
Other
|
|||||||||||
|
Pension
|
Translation
|
Comprehensive
|
||||||||||
|
Liability
|
Adjustments
|
Income
(loss)
|
||||||||||
|
Balance,
December 31, 2006
|
$ | (12,386 | ) | $ | 3,774 | $ | (8,612 | ) | ||||
|
Foreign
currency translation adjustments
|
- | 5,284 | 5,284 | |||||||||
|
Minimum
pension liability (net of income taxes)
|
2,823 | - | 2,823 | |||||||||
|
Balance,
December 31, 2007
|
$ | (9,563 | ) | $ | 9,058 | $ | (505 | ) | ||||
Note
2 — Inventories
Inventories
consist of the following at December 31,:
|
2006
|
2007
|
|||||||
|
Raw
materials
|
$ | 50,225 | $ | 60,081 | ||||
|
Work
in process
|
17,815 | 18,669 | ||||||
|
Finished
goods
|
83,647 | 86,219 | ||||||
| $ | 151,687 | $ | 164,969 | |||||
Note
3 — Property, Plant and Equipment
Property,
plant and equipment consist of the following at December 31,:
|
2006
|
2007
|
|
||||||
|
Land
|
$ | 4,200 | $ | 4,200 | ||||
|
Building
and improvements
|
84,944 | 88,564 | ||||||
|
Machinery
and equipment
|
101,218 | 109,368 | ||||||
|
Construction
in progress
|
11,281 | 14,103 | ||||||
|
|
201,643 | 216,235 | ||||||
|
Less: Accumulated
depreciation
|
(85,163 | ) | (92,556 | ) | ||||
| $ | 116,480 | $ | 123,679 | |||||
We
lease
various manufacturing facilities, office facilities and equipment under
operating leases. Rental expense on these operating leases was
approximately $2,727, $3,269 and $3,724 for the years ended December 31, 2005,
2006 and 2007, respectively. The aggregate future minimum lease commitments
for
operating leases at December 31, 2007 are as follows:
|
2008
|
$ | 3,984 | ||
|
2009
|
3,012 | |||
|
2010
|
2,248 | |||
|
2011
|
2,094 | |||
|
2012
|
1,730 | |||
|
Thereafter
|
3,490 |
Note
4 – Goodwill and Other Intangible Assets
The
changes in the net carrying amount of goodwill for the years ended December
31,
are as follows:
|
2006
|
2007
|
|||||||
|
Balance
as of January 1,
|
$ | 335,651 | $ | 290,512 | ||||
|
Goodwill
impairment
|
(46,689 | ) | - | |||||
|
Adjustments
to goodwill resulting from tax benefits recognized
|
- | (2,192 | ) | |||||
|
Adjustments
to goodwill resulting from business acquisitions
finalized
|
1,705 | 671 | ||||||
|
Foreign
currency translation
|
(155 | ) | 517 | |||||
|
Balance
as of December 31,
|
$ | 290,512 | $ | 289,508 | ||||
In
September 2004, we acquired the business operations of the Endoscopic
Technologies Division of C.R. Bard, Inc. (the “Endoscopic Technologies
acquisition”) for aggregate consideration of $81.3 million in
cash. The Endoscopic Technologies acquisition involved the transfer
of substantially all of the Endoscopic Technologies production lines from
C.R. Bard facilities to CONMED facilities. This transfer proved
to be more time-consuming, costly and complex than was originally
anticipated. In addition, production and operational issues at an
assembly operation in Mexico under contract to CONMED resulted in product
shortages and backorders. These operational issues, in combination
with increased competition and pricing pressures in the marketplace resulted
in
decreased sales and gross margins and operating losses. As a result
of these factors, during our fourth quarter 2006 goodwill impairment testing,
we
determined that the goodwill of our Endoscopic Technologies operating unit
was
impaired and consequently we recorded a goodwill impairment charge of $46.7
million to reduce the carrying amount of the unit to its fair
value. We estimated the fair value of the Endoscopic Technologies
operating unit using a discounted cash flow valuation methodology and measured
the goodwill impairment in accordance with SFAS 142.
Goodwill
associated with each of our principal operating units at December 31, is as
follows:
|
2006
|
2007
|
|||||||
|
CONMED
Electrosurgery
|
$ | 16,645 | $ | 16,645 | ||||
|
CONMED
Endosurgery
|
42,419 | 42,439 | ||||||
|
CONMED
Linvatec
|
173,007 | 171,332 | ||||||
|
CONMED
Patient Care
|
58,441 | 59,092 | ||||||
|
Balance
as of December 31,
|
$ | 290,512 | $ | 289,508 | ||||
Other
intangible assets consist of the following:
|
December
31, 2006
|
December
31, 2007
|
|||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||
|
Carrying
|
Accumulated
|
Carrying
|
Acumulated
|
|||||||||||||
|
Amortized
intangible assets:
|
Amount
|
Amortization
|
Amount
|
Amortization
|
||||||||||||
|
Customer
relationships
|
$ | 113,376 | $ | (24,498 | ) | $ | 118,124 | $ | (28,000 | ) | ||||||
|
Patents
and other intangible assets
|
39,609 | (24,696 | ) | 39,812 | (26,473 | ) | ||||||||||
|
Unamortized
intangible
assets:
|
||||||||||||||||
|
Trademarks
and tradenames
|
87,344 | - | 88,344 | - | ||||||||||||
| $ | 240,329 | $ | (49,194 | ) | $ | 246,280 | $ | (54,473 | ) | |||||||
Other
intangible assets primarily represent allocations of purchase price to
identifiable intangible assets of acquired businesses. The weighted
average amortization period for intangible assets which are amortized is 25
years. Customer relationships are being amortized over a weighted
average life of 36 years. Patents and other intangible assets are
being amortized over a weighted average life of 11 years.
Customer
relationship assets were acquired primarily in connection with the 1997
acquisition of Linvatec Corporation, the 2003 acquisition of Bionx Implants,
Inc. and the 2004 Endoscopic Technologies acquisition. These assets
represent the value associated with business expected to be generated from
acquired customers as of the acquisition date. Asset values were
determined by measuring the present value of the projected future earnings
attributable to these assets. Additionally, while the useful lives of
these assets are not limited by contract or any other economic, regulatory
or
other known factors, the weighted average useful life of 36 years was determined
as of acquisition date by historical customer attrition. In
accordance with SFAS 142 and as clarified by EITF Issue 02-17, “Recognition of
Customer Relationship Intangible Assets Acquired in a Business Combination”,
customer relationships evidenced by customer purchase orders are contractual
in
nature and therefore continue to be recognized separate from goodwill and are
amortized over their weighted average 36 year life.
Trademarks
and tradenames were recognized primarily in connection with the 1997 acquisition
of Linvatec Corporation, the 2003 acquisition of Bionx Implants, Inc. and the
2004 Endoscopic Technologies acquisition. We continue to market
products, release new product and product extensions and maintain and promote
these trademarks and tradenames in the marketplace through legal registration
and such methods as advertising, medical education and trade
shows. It is our belief that these trademarks and tradenames will
generate cash flow for an indefinite period of time. Therefore, in
accordance with SFAS 142, our trademarks and tradenames intangible assets are
not amortized.
Amortization
expense related to intangible assets for the year ending December 31, 2007
and
estimated amortization expense for each of the five succeeding years is as
follows:
|
2007
|
$ | 5,647 | ||
|
2008
|
5,893 | |||
|
2009
|
5,893 | |||
|
2010
|
5,547 | |||
|
2011
|
5,094 | |||
|
2012
|
5,037 |
Note
5 — Long Term Debt
Long-term
debt consists of the following at December 31,:
|
2006
|
2007
|
|||||||
|
Revolving
line of credit
|
$ | - | $ | - | ||||
|
Term
loan borrowings on senior credit facility
|
102,988 | 58,988 | ||||||
|
2.50%
Convertible senior subordinated notes
|
150,000 | 150,000 | ||||||
|
Mortgage
notes
|
14,836 | 13,846 | ||||||
|
Total
long-term debt
|
267,824 | 222,834 | ||||||
|
Less: Current
portion
|
3,148 | 3,349 | ||||||
| $ | 264,676 | $ | 219,485 | |||||
During
2006, we entered into an amended and restated $235.0 million senior credit
agreement (the "amended and restated senior credit agreement"). The amended
and
restated senior credit agreement consists of a $100.0 million revolving credit
facility and a $135.0 million term loan. There were no borrowings outstanding
on
the revolving credit facility as of December 31, 2007. Our available
borrowings on the revolving credit facility at December 31, 2007 were $95.0
million with approximately $5.0 million of the facility set aside for
outstanding letters of credit. There were $59.0 million in borrowings
outstanding on the term loan at December 31, 2007. The proceeds of
the term loan portion of the amended and restated senior credit agreement were
used to repay borrowings outstanding on the term loan and revolving credit
facility of $142.5 million under the previously existing senior credit
agreement. In connection with the refinancing, we recorded a $0.7 million loss
on early extinguishment of debt of which $0.2 million related to the write-off
of unamortized deferred financing costs under the previously existing senior
credit agreement and $0.5 million related to financing costs associated with
the
amended and restated senior credit agreement.
The
scheduled principal payments on the term loan portion of the senior credit
agreement are $1.4 million annually through December 2011, increasing to $53.6
million in 2012 with the remaining balance outstanding due and payable on April
12, 2013. We may also be required, under certain circumstances, to
make additional principal payments based on excess cash flow as defined in
the
senior credit agreement. Interest rates on the term loan portion of
the senior credit agreement are at LIBOR plus 1.50% (6.34% at December 31,
2007)
or an alternative base rate; interest rates on the revolving credit facility
portion of the senior credit agreement are at LIBOR plus 1.375% or an
alternative base rate. For those borrowings where the Company elects
to use the alternative base rate, the base rate will be the greater of the
Prime
Rate or the Federal Funds Rate in effect on such date plus 0.50%, plus a margin
of 0.50% for term loan borrowings or 0.375% for borrowings under the revolving
credit facility.
The
senior credit agreement is collateralized by substantially all of our personal
property and assets, except for our accounts receivable and related rights
which
are pledged in connection with our accounts receivable sales
agreement. The senior credit agreement contains covenants and
restrictions which, among other things, require the maintenance of certain
financial ratios, and restrict dividend payments and the incurrence of certain
indebtedness and other activities, including acquisitions and
dispositions. We were in full compliance with these covenants and
restrictions as of December 31, 2007. We are also required, under
certain circumstances, to make mandatory prepayments from net cash proceeds
from
any issue of equity and asset sales.
Mortgage
notes outstanding in connection with the property and facilities utilized by
our
CONMED Linvatec subsidiary consist of a note bearing interest at 7.50% per
annum
with semiannual payments of principal and interest through June 2009 (the "Class
A note"); and a note bearing interest at 8.25% per annum compounded semiannually
through June 2009, after which semiannual payments of principal and interest
will commence, continuing through June 2019 (the "Class C note"). The
principal balances outstanding on the Class A note and Class C note aggregated
$3.4 million and $10.4 million, respectively, at December 31,
2007. These mortgage notes are secured by the CONMED Linvatec
property and facilities.
We
have
outstanding $150.0 million in 2.50% convertible senior subordinated notes (the
“Notes”) due 2024. The Notes represent subordinated unsecured
obligations and are convertible under certain circumstances, as defined in
the
bond indenture, into a combination of cash and CONMED common
stock. Upon conversion, the holder of each Note will receive the
conversion value of the Note payable in cash up to the principal amount of
the
Note and CONMED common stock for the Note’s conversion value in excess of such
principal amount. Amounts in excess of the principal amount are at an
initial conversion rate, subject to adjustment, of 26.1849 shares per $1,000
principal amount of the Note (which represents an initial conversion price
of
$38.19 per share). As of December 31, 2007, there was no value
assigned to the conversion feature because the Company’s share price was below
the conversion price. The Notes mature on November 15, 2024 and are
not redeemable by us prior to November 15, 2011. Holders of the Notes
will be able to require that we repurchase some or all of the Notes on November
15, 2011, 2014 and 2019.
The
Notes
contain two embedded derivatives. The embedded derivatives are
recorded at fair value in other long-term liabilities and changes in their
value
are recorded through the consolidated statements of operations. The
embedded derivatives have a nominal value, and it is our belief that any change
in their fair value would not have a material adverse effect on our business,
financial condition, results of operations, or cash flows.
The scheduled maturities of long-term debt
outstanding at December 31, 2007 are as follows:
|
2008
|
$ | 3,349 | ||
|
2009
|
3,185 | |||
|
2010
|
2,174 | |||
|
2011
|
2,244 | |||
|
2012
|
54,557 | |||
|
Thereafter
|
157,325 |
Note
6 — Income Taxes
The
provision for income taxes for the years ended December 31, 2005, 2006 and
2007
consists of the following:
|
2005
|
2006
|
2007
|
||||||||||
|
Current
tax expense:
|
||||||||||||
|
Federal
|
$ | 3,083 | $ | (2,582 | ) | $ | 2,634 | |||||
|
State
|
795 | 1,006 | 1,102 | |||||||||
|
Foreign
|
2,170 | 1,846 | 2,851 | |||||||||
| 6,048 | 270 | 6,587 | ||||||||||
|
Deferred
income tax expense
|
10,128 | (12,164 | ) | 16,714 | ||||||||
|
Provision
for income taxes
|
$ | 16,176 | $ | (11,894 | ) | $ | 23,301 | |||||
A
reconciliation between income taxes computed at the statutory federal rate
and
the provision for income taxes for the years ended December 31, 2005, 2006
and
2007 follows:
|
2005
|
2006
|
2007
|
||||||||||
|
Tax
provision at statutory rate based on income (loss) before income
taxes
|
35.00 | % | (35.00 | )% | 35.00 | % | ||||||
|
Extraterritorial
income exclusion
|
(2.78 | ) | (5.39 | ) | - | |||||||
|
State
income taxes
|
0.66 | (3.24 | ) | 1.78 | ||||||||
|
Stock-based
compensation
|
- | 3.49 | 0.56 | |||||||||
|
Research
& development credit
|
(.53 | ) | (3.87 | ) | (1.23 | ) | ||||||
|
Settlement
of taxing authority examinations
|
- | (6.08 | ) | (0.97 | ) | |||||||
|
Other
nondeductible permanent differences
|
0.85 | 1.81 | 0.63 | |||||||||
|
Other,
net
|
0.38 | (0.46 | ) | 0.21 | ||||||||
| 33.58 | % | (48.74 | )% | 35.98 | % | |||||||
The
tax
effects of the significant temporary differences which comprise the deferred
tax
assets and liabilities at December 31, 2006 and 2007 are as
follows:
|
2006
|
2007
|
|||||||
|
Assets:
|
||||||||
|
Inventory
|
$ | 5,695 | $ | 4,817 | ||||
|
Net
operating losses
|
13,707 | 6,903 | ||||||
|
Deferred
compensation
|
2,680 | 3,162 | ||||||
|
Accounts
receivable
|
3,134 | 2,960 | ||||||
|
Accrued
pension
|
7,259 | 5,604 | ||||||
|
Research
and development credit
|
1,980 | 2,200 | ||||||
|
State
taxes
|
156 | - | ||||||
|
Other
|
2,043 | 3,495 | ||||||
|
Valuation
allowance
|
(6,892 | ) | (4,209 | ) | ||||
| 29,762 | 24,932 | |||||||
Liabilities:
|
Goodwill
and intangible assets
|
59,969 | 70,653 | ||||||
|
Depreciation
|
5,329 | 4,949 | ||||||
|
Employee
benefits
|
103 | 287 | ||||||
|
State
taxes
|
- | 360 | ||||||
|
Contingent
interest
|
5,357
|
8,174
|
||||||
| 70,758 | 84,423 | |||||||
|
Net
liability
|
$ | (40,996 | ) | $ | (59,491 | ) | ||
Earnings
before income (loss) taxes consists of the following U.S. and foreign income
(loss):
|
2005
|
2006
|
2007
|
||||||||||
|
U.S.
income (loss)
|
$ | 42,653 | $ | (29,659 | ) | $ | 57,664 | |||||
|
Foreign
income
|
5,517 | 5,258 | 7,093 | |||||||||
|
Total
income (loss)
|
$ | 48,170 | $ | (24,401 | ) | $ | 64,757 | |||||
The
net
operating loss carryforwards of acquired subsidiaries begin to expire in
2008. These net operating loss carryforwards are subject to
pre-existing ownership change limitations under IRC section 382 as a result
of
the purchase of stock of these acquired subsidiaries. We have
established a valuation allowance to reflect the uncertainty of realizing the
benefits of certain net operating loss carryforwards recognized in connection
with an acquisition. Any subsequently recognized tax benefits
associated with the valuation allowance would be allocated to reduce
goodwill. However, upon adoption of Statement of Financial Accounting
Standards No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”) on
January 1, 2009, changes in deferred tax valuation allowances and income tax
uncertainties after the acquisition date, including those associated with
acquisitions that closed prior to the effective date of SFAS 141(R), generally
will affect income tax expense.
During
2007, we reduced our valuation
allowance for the portion of the net operating loss carryforward for which
we
determined utilization is more likely than not. This amount totaled
$2.2 million. See Note 4 for additional discussion.
The
gross
amount of Federal net operating loss carryforwards available is $17.7
million. This includes $6.7 million of net operating loss
carryforwards from acquired subsidiaries as discussed above. The
remaining $11.0 million begins to expire in 2026. Approximately $5.7
million of the gross Federal net operating loss is attributable to stock-based
compensation windfall tax deductions. In accordance with SFAS 123(R),
the $2.0 million windfall tax benefit on the $5.7 million net operating loss
carryforward has not been recorded as a deferred tax asset. The $2.0
million tax benefit will be recorded in additional paid-in capital when
realized.
We
operate in multiple taxing jurisdictions, both within and outside the United
States. We face audits from these various tax authorities regarding
the amount of taxes due. Such audits can involve complex issues and
may require an extended period of time to resolve. Our Federal income
tax returns have been examined by the Internal Revenue Service (“IRS”) for
calendar years ending through 2006. During 2007, Internal Revenue
Service examinations were settled for tax years 2005 and 2006. The net effect
of
the settlement of these examinations, was a $0.6 million reduction in income
tax
expense in 2007.
We
have
not provided for federal income taxes on undistributed earnings of our foreign
subsidiaries as it remains our intention to permanently reinvest such earnings
(approximately $24.9 million at December 31, 2007.) It is not
practicable given the complexities of the foreign tax credit calculation to
estimate the tax due upon any possible repatriation.
On
January 1, 2007 we adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, (“FIN 48”). FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. The impact of this pronouncement was not
material to the Company’s consolidated financial
statements.
The
following table summarizes the activity related to our unrecognized tax
benefits:
|
2007
|
||||
|
Balance
as of January 1,
|
$ | 1,359 | ||
|
Decrease
for positions taken in prior periods
|
(164 | ) | ||
|
Increases
for positions taken in current periods
|
1,410 | |||
|
Decreases
in unrecorded tax positions related to settlement with the taxing
authorities
|
(739 | ) | ||
|
Balance
as of December 31,
|
$ | 1,866 | ||
Included
in the unrecognized tax benefits of $1.9 million at December 31, 2007
was $0.5 million of tax benefits that, if recognized, would reduce our
annual effective tax rate. The amount of interest accrued in 2007
related to these unrecognized tax benefits was not material and is included
in
the provision for income taxes in the Consolidated Statements of
Operations. It is reasonably possible that the amount of unrecognized
tax benefits could change in the next 12 months as a result of the anticipated
completion of the 2007 IRS examination and expiration of statutes of limitations
on prior tax returns. A reasonable estimate of the range of change in
unrecognized tax benefits cannot be made at this time.
Note
7 – Shareholders’ Equity
Our
shareholders have authorized 500,000 shares of preferred stock, par value $.01
per share, which may be issued in one or more series by the Board of Directors
without further action by the shareholders. As of December 31, 2006 and 2007,
no
preferred stock had been issued.
On
February 15, 2005, our Board of Directors authorized a share repurchase program
under which we may repurchase up to $50.0 million of our common stock, although
no more than $25.0 million could be purchased in any calendar
year. The Board subsequently amended this program on December 2, 2005
to authorize repurchases up to $100.0 million of our common stock, although
no
more than $50.0 million may be purchased in any calendar year. The
repurchase program calls for shares to be purchased in the open market or in
private transactions from time to time. We may suspend or discontinue
the share repurchase program at any time. Through December 31, 2006,
we have repurchased a total of 2.2 million shares of common stock. No
stock repurchases were made in 2007 under this authorization.
We
have
reserved 4.7 million shares of common stock for issuance to employees and
directors under three shareholder-approved share-based compensation plans (the
"Plans") of which approximately 639,000 shares remain available for grant at
December 31, 2007. The exercise price on all outstanding options and
SARs is equal to the quoted fair market value of the stock at the date of
grant. RSUs are valued at the market value of the underlying stock on
the date of grant. Stock options, SARs and RSUs are non-transferable
other than on death and generally become exercisable over a five year period
from date of grant. Stock options and SARs expire ten years from date
of grant. SARs are only settled in shares of the Company’s
stock. The issuance of shares pursuant to the exercise of stock
options and SARs and vesting of RSUs are from the Company’s treasury
stock.
Total
pre-tax stock-based compensation expense recognized in the Consolidated
Statements of Operations was $3.7 million and $3.8 million for the year ended
December 31, 2006 and 2007, respectively. This amount is included in selling
and
administrative expenses on the Consolidated Statements of
Operations. Tax related benefits of $0.4 million and $0.8
million were also recognized for the years ended December 31, 2006 and
2007. Cash received from the exercise of stock options and SARs was
$15.9 million, $1.7 million and $11.3 million for the years ended December
31,
2005, 2006 and 2007, respectively and is reflected in cash flows from financing
activities in the Consolidated Statements of Cash Flows.
The
weighted average fair value of awards of options and SARs granted in the years
ended December 31, 2005, 2006 and 2007 was $16.51, $8.92 and $11.88,
respectively. The fair value of these options and SARs was estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for options and SARs granted in the
years
ended December 31, 2005, 2006 and 2007, respectively: risk-free
interest rate of 4.16%, 5.13% and 4.56%; volatility factor of the expected
market price of the Company's common stock of 53.26%, 37.79% and 32.61%; a
weighted-average expected life of the option and SAR of 5.7 years for all three
years; and that no dividends would be paid on common stock. The risk
free interest rate is based on the option and SAR grant date for a traded
zero-coupon U.S. Treasury bond with a maturity date equal to the expected
life. Expected volatilities are based upon historical volatility of
the Company’s stock over a period equal to the expected life of each option and
SAR grant. The expected life selected for options and SARs granted
during the year ended December 31, 2007 represents the period of time that
the
options and SARs are expected to be outstanding based on a study of historical
data of option holder exercise and termination behavior.
The
following table illustrates the stock option and SAR activity for the year
ended
December 31, 2007. There were no SARs granted prior to
2006.:
|
Number
|
Weighted-
|
|||||||
|
of
|
Average
|
|||||||
|
Shares
|
Exercise
|
|||||||
|
(in
000’s)
|
Price
|
|||||||
|
Outstanding
at December 31, 2006
|
3,166 | $ | 22.23 | |||||
|
Granted
|
194 | 29.96 | ||||||
|
Forfeited
|
(71 | ) | 26.56 | |||||
|
Exercised
|
(600 | ) | 18.60 | |||||
|
Outstanding
at December 31, 2007
|
2,689 | $ | 23.46 | |||||
|
Exercisable
at December 31, 2007
|
1,949 | $ | 22.66 | |||||
The
weighted average remaining contractual term for stock options and SARs
outstanding and exercisable at December 31, 2007 was 5.8 years and 5.0 years,
respectively. The aggregate intrinsic value of stock options and SARs
outstanding and exercisable at December 31, 2007 was $5.8 million and $4.8
million, respectively. The aggregate intrinsic value of stock options
and SARs exercised during the year ended December 31, 2005, 2006 and 2007 was
$12.9 million, $0.7 million and $6.7 million, respectively.
The
following table illustrates the RSU activity for the year ended December 31,
2007. There were no RSU’s granted prior to 2006.
|
Number
|
Weighted-
|
|||||||
|
of
|
Average
|
|||||||
|
Shares
|
Grant-Date
|
|||||||
|
(in
000’s)
|
Fair
Value
|
|||||||
|
Outstanding
at December 31, 2006
|
144 | $ | 20.22 | |||||
|
Granted
|
155 | 29.13 | ||||||
|
Vested
|
(28 | ) | 20.19 | |||||
|
Forfeited
|
(6 | ) | 23.10 | |||||
|
Outstanding
at December 31, 2007
|
265 | $ | 25.20 | |||||
The
total
fair value of shares vested was $0 and $0.6 million for the years ended December
31, 2006 and 2007, respectively.
As
of
December 31, 2007, there was $12.0 million of total unrecognized compensation
cost related to nonvested stock options, SARs and RSUs granted under the Plan
which is expected to be recognized over 5.0 years (weighted average period
of
1.9 years).
The
following table illustrates the
effect on net earnings and earnings per share as if we had applied the fair
value recognition provisions of SFAS 123R to stock-based employee compensation
for the year ended December 31, 2005. The pro forma disclosures
are based on the fair value of awards at the grant date, amortized to expense
over the service period.
|
2005
|
||||
|
Net
income — as reported
|
$ | 31,994 | ||
|
Pro
forma stock-based employee compensation expense, net of related income
tax
effect
|
(4,075 | ) | ||
|
Net
income — pro forma
|
$ | 27,919 | ||
|
Earnings
per share - as reported:
|
||||
|
Basic
|
$ | 1.09 | ||
|
Diluted
|
$ | 1.08 | ||
|
Earnings
per share - pro forma:
|
||||
|
Basic
|
$ | 0.95 | ||
|
Diluted
|
$ | 0.94 | ||
We
offer
to our employees a shareholder-approved Employee Stock Purchase Plan (the
“Employee Plan”), under which we have reserved 1.0 million shares of common
stock for issuance to our employees. The Employee Plan provides
employees with the opportunity to invest from 1% to 10% of their annual salary
to purchase shares of CONMED common stock through the exercise of stock options
granted by the Company at a purchase price equal to 95% of the fair market
value
of the common stock on the exercise date. During 2007, we issued
approximately 19,000 shares of common stock under the Employee
Plan. No stock-based compensation expense has been recognized in the
accompanying consolidated financial statements as a result of common stock
issuances under the Employee Plan.
Note
8 — Business Segments and Geographic Areas
CONMED
conducts its business through five principal operating segments, CONMED
Endoscopic Technologies, CONMED Endosurgery, CONMED Electrosurgery, CONMED
Linvatec and CONMED Patient Care. We believe each of our segments are
similar in the nature of products, production processes, customer base,
distribution methods and regulatory environment. In accordance with
Statement of Financial Accounting Standards No. 131 “Disclosures About Segments
of an Enterprise and Related Information” (“SFAS 131”), our CONMED Endosurgery,
CONMED Electrosurgery and CONMED Linvatec operating segments also have similar
economic characteristics and therefore qualify for aggregation under SFAS
131. Our CONMED Patient Care and CONMED Endoscopic Technologies
operating units do not qualify for aggregation under SFAS 131 since their
economic characteristics do not meet the criteria for aggregation as a result
of
the lower overall operating income (loss) in these segments.
CONMED
Endosurgery, CONMED Electrosurgery and CONMED Linvatec consist of a single
aggregated segment comprising a complete line of endo-mechanical instrumentation
for minimally invasive laparoscopic procedures, electrosurgical generators
and
related surgical instruments, arthroscopic instrumentation for use in orthopedic
surgery and small bone, large bone and specialty powered surgical
instruments. CONMED Patient Care product offerings include a line of
vital signs and cardiac monitoring products as well as suction instruments
&
tubing for use in the operating room. CONMED Endoscopic Technologies
product offerings include a comprehensive line of minimally invasive endoscopic
diagnostic and therapeutic instruments used in procedures which require
examination of the digestive tract.
The
following is net sales information by product line and reportable
segment:
|
2005
|
2006
|
2007
|
||||||||||
|
Arthroscopy
|
$ | 211,397 | $ | 228,195 | $ | 264,637 | ||||||
|
Powered
Surgical Instruments
|
132,045 | 137,150 | 149,261 | |||||||||
|
CONMED
Linvatec
|
343,442 | 365,345 | 413,898 | |||||||||
|
CONMED
Electrosurgery
|
88,455 | 97,809 | 92,107 | |||||||||
|
CONMED
Endosurgery
|
50,694 | 52,783 | 58,829 | |||||||||
|
CONMED
Linvatec, Electrosurgery and Endosurgery
|
482,591 | 515,937 | 564,834 | |||||||||
|
CONMED
Patient Care
|
75,879 | 75,883 | 76,711 | |||||||||
|
CONMED
Endoscopic Technologies
|
58,835 | 54,992 | 52,743 | |||||||||
|
Total
|
$ | 617,305 | $ | 646,812 | $ | 694,288 | ||||||
Total
assets, capital expenditures, depreciation and amortization information are
not
available by reportable segment.
The
following is a reconciliation between segment operating income (loss) and income
(loss) before income taxes. The Corporate line includes corporate
related items not allocated to operating units:
|
2005
|
2006
|
2007
|
||||||||||
|
CONMED
Linvatec, Electrosurgery and Endosurgery
|
$ | 69,295 | $ | 70,193 | $ | 87,569 | ||||||
|
CONMED
Patient Care
|
5,734 | (759 | ) | 2,003 | ||||||||
|
CONMED
Endoscopic Technologies
|
(5,513 | ) | (63,399 | ) | (6,250 | ) | ||||||
|
Corporate
|
(5,768 | ) | (10,638 | ) | (2,331 | ) | ||||||
|
Income
(loss) from operations
|
63,748 | (4,603 | ) | 80,991 | ||||||||
|
Loss
on early extinguishment of debt
|
- | 678 | - | |||||||||
|
Interest
expense
|
15,578 | 19,120 | 16,234 | |||||||||
|
Income
(loss) before income taxes
|
$ | 48,170 | $ | (24,401 | ) | $ | 64,757 | |||||
Net
sales
information for geographic areas consists of the following:
|
2005
|
2006
|
2007
|
||||||||||
|
United
States
|
$ | 390,050 | $ | 396,953 | $ | 404,434 | ||||||
|
Canada
|
36,111 | 43,104 | 55,313 | |||||||||
|
United
Kingdom
|
30,117 | 32,542 | 45,335 | |||||||||
|
Japan
|
22,073 | 25,451 | 26,274 | |||||||||
|
Australia
|
23,237 | 27,249 | 30,199 | |||||||||
|
All
other countries
|
115,717 | 121,513 | 132,733 | |||||||||
|
Total
|
$ | 617,305 | $ | 646,812 | $ | 694,288 | ||||||
Sales
are
attributed to countries based on the location of the customer. There were no
significant investments in long-lived assets located outside the United States
at December 31, 2006 and 2007. No single customer represented over
10% of our consolidated net sales for the years ended December 31, 2005, 2006
and 2007.
Note
9 — Employee Benefit Plans
We
sponsor an employee savings plan (“401(k) plan”) and a defined benefit pension
plan (the “pension plan”) covering substantially all our employees.
Total
employer contributions to the 401(k) plan were $2.2 million, $2.3 million and
$2.5 million during the years ended December 31, 2005, 2006 and 2007,
respectively.
We
use a
December 31, measurement date for our pension plan. Gains and losses
are amortized on a straight-line basis over the average remaining service period
of active participants. The following table provides a reconciliation
of the projected benefit obligation, plan assets and funded status of the
pension plan at December 31,:
|
2006
|
2007
|
|||||||
|
Accumulated
Benefit Obligation
|
$ | 46,066 | $ | 47,991 | ||||
|
Change
in benefit obligation
|
||||||||
|
Projected
benefit obligation at beginning of year
|
$ | 51,420 | $ | 54,541 | ||||
|
Service
cost
|
5,444 | 5,863 | ||||||
|
Interest
cost
|
2,905 | 3,216 | ||||||
|
Actuarial
gain
|
(1,176 | ) | (3,834 | ) | ||||
|
Benefits
paid
|
(4,052 | ) | (3,194 | ) | ||||
|
Projected
benefit obligation at end of year
|
$ | 54,541 | $ | 56,592 | ||||
|
Change
in plan assets
|
||||||||
|
Fair
value of plan assets at beginning of year
|
$ | 33,252 | $ | 36,894 | ||||
|
Actual
gain on plan assets
|
2,694 | 2,832 | ||||||
|
Employer
contribution
|
5,000 | 12,000 | ||||||
|
Benefits
paid
|
(4,052 | ) | (3,194 | ) | ||||
|
Fair
value of plan assets at end of year
|
$ | 36,894 | $ | 48,532 | ||||
|
Funded
status
|
$ | 17,647 | $ | 8,059 | ||||
Amounts
recognized in the consolidated balance sheets consist of the following at
December 31,:
|
2006
|
2007
|
|||||||
|
Accrued
long-term pension liability
|
$ | 17,647 | $ | 8,059 | ||||
|
Accumulated
other comprehensive income (loss)
|
(19,644 | ) | (15,167 | ) | ||||
The
following actuarial assumptions were used to determine our accumulated and
projected benefit obligations as of December 31,:
|
2006
|
2007
|
|||||||
|
Discount
rate
|
5.90 | % | 6.48 | % | ||||
|
Expected
return on plan assets
|
8.00 | % | 8.00 | % | ||||
|
Rate
of compensation increase
|
3.00 | % | 3.00 | % | ||||
The
following table illustrates the effects of adopting Statement of Financial
Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88,
106, and 132(R)” (“SFAS 158”) on each of the balance sheet line items in
2006:
|
Before
|
After
|
|||||||||||
|
Application of
|
Application of
|
|||||||||||
|
SFAS
158
|
Adjustment
|
SFAS 158
|
||||||||||
|
Accrued
pension liability
|
$ | 9,172 | $ | 8,475 | $ | 17,647 | ||||||
|
Deferred
income taxes
|
54,136 | (3,132 | ) | 51,004 | ||||||||
|
Total
liabilities
|
415,874 | 5,343 | 421,217 | |||||||||
|
Accumulated
other comprehensive income (loss)
|
(3,269 | ) | (5,343 | ) | (8,612 | ) | ||||||
|
Shareholders’
equity
|
445,697 | (5,343 | ) | 440,354 | ||||||||
Accumulated
other comprehensive income (loss) for the years ended December 31, 2006 and
2007
consists of the following items not yet recognized in net periodic pension
cost
(before income taxes):
|
2006
|
2007
|
|||||||
|
Net
actuarial loss
|
$ | (24,792 | ) | $ | (19,969 | ) | ||
|
Transition
liability
|
(36 | ) | (32 | ) | ||||
|
Prior
service cost
|
5,184 | 4,834 | ||||||
|
Accumulated
other comprehensive income (loss)
|
$ | (19,644 | ) | $ | (15,167 | ) | ||
The
total
amounts reclassified from accumulated other comprehensive income (loss) and
recognized in 2007 as a component of net periodic pension cost
included net actuarial losses of $1,382, transition obligation of $4
and prior service cost (credit) of $(351).
Net
periodic pension cost for the years ended December 31, consists of the
following:
|
2005
|
2006
|
2007
|
||||||||||
|
Service
cost — benefits earned during the
period
|
$ | 4,503 | $ | 5,444 | $ | 5,863 | ||||||
|
Interest
cost on projected benefit obligation
|
2,651 | 2,905 | 3,216 | |||||||||
|
Return
on plan assets
|
(2,548 | ) | (2,694 | ) | (3,226 | ) | ||||||
|
Transition
amount
|
4 | 4 | 4 | |||||||||
|
Prior
service cost
|
(351 | ) | (351 | ) | (351 | ) | ||||||
|
Amortization
of loss
|
1,303 | 1,569 | 1,382 | |||||||||
|
Net
periodic pension cost
|
$ | 5,562 | $ | 6,877 | $ | 6,888 | ||||||
The
following actuarial assumptions were used to determine our net periodic pension
benefit cost for the years ended December 31,:
|
2005
|
2006
|
2007
|
||||||||||
|
Discount
rate
|
5.75 | % | 5.55 | % | 5.90 | % | ||||||
|
Expected
return on plan assets
|
8.00 | % | 8.00 | % | 8.00 | % | ||||||
|
Rate
of compensation increase
|
3.00 | % | 3.00 | % | 3.00 | % | ||||||
In
determining the expected return on pension plan assets, we consider the relative
weighting of plan assets, the historical performance of total plan assets
and individual asset classes and economic and other indicators of future
performance. In addition, we consult with financial and investment
management professionals in developing appropriate targeted rates of
return.
Asset
management objectives include maintaining an adequate level of diversification
to reduce interest rate and market risk and providing adequate liquidity to
meet
immediate and future benefit payment requirements.
The
allocation of pension plan assets by category is as follows at December
31,:
|
Percentage
of
Pension
|
Target
|
|||||||||||
|
Plan
Assets
|
Allocation
|
|||||||||||
|
2006
|
2007
|
2008
|
||||||||||
|
Equity
securities
|
71 | % | 64 | % | 75 | % | ||||||
|
Debt
securities
|
29 | 36 | 25 | |||||||||
|
Total
|
100 | % | 100 | % | 100 | % | ||||||
As
of
December 31, 2007, the Plan held 27,562 shares of our common stock, which had
a
fair value of $0.6 million. We believe that our long-term asset allocation
on average will approximate the targeted allocation. We regularly review our
actual asset allocation and periodically rebalance the pension plan’s
investments to our targeted allocation when deemed appropriate.
We
expect
to contribute approximately $12.0 million to our pension plan in
2008.
The
estimated portion of net actuarial
loss, net prior service cost, and transition obligation in accumulated other
comprehensive income (loss) that is expected to be recognized as a component
of
net periodic pension cost in 2008 is $917, ($351) and $4,
respectively.
The
following table summarizes the
benefits expected to be paid by our pension plan in each of the next five years
and in aggregate for the following five years. The expected benefit
payments are estimated based on the same assumptions used to measure the
Company’s projected benefit obligation at December 31, 2007 and reflect the
impact of expected future employee service.
|
2008
|
$ | 2,225 | ||
|
2009
|
2,216 | |||
|
2010
|
2,972 | |||
|
2011
|
2,586 | |||
|
2012
|
3,985 | |||
|
2013-2017
|
16,431 |
Note
10 — Legal Matters
From
time
to time, we are a defendant in certain lawsuits alleging product liability,
patent infringement, or other claims incurred in the ordinary course of
business. Likewise, from time to time, the Company may receive a subpoena from
a
government agency such as the Equal Employment Opportunity Commission,
Occupational Safety and Health Administration, the Department of Labor, the
Treasury Department, and other federal and state agencies or foreign governments
or government agencies. These subpoenae may or may not be routine
inquiries, or may begin as routine inquiries and over time develop into
enforcement actions of various types. The product liability claims
are generally covered by various insurance policies, subject to certain
deductible amounts and maximum policy limits. When there is no
insurance coverage, as would typically be the case primarily in lawsuits
alleging patent infringement or in connection with certain government
investigations, we establish reserves sufficient to cover probable losses
associated with such claims. We do not expect that the resolution of
any pending claims or investigations will have a material adverse effect on
our
financial condition, results of operations or cash flows. There can
be no assurance, however, that future claims or investigations, or the costs
associated with responding to such claims or investigations, especially claims
and investigations not covered by insurance, will not have a material adverse
effect on our future performance.
Manufacturers
of medical products may face exposure to significant product liability claims.
To date, we have not experienced any product liability claims that are material
to our financial statements or condition, but any such claims arising in the
future could have a material adverse effect on our business or results of
operations. We currently maintain commercial product liability insurance of
$25
million per incident and $25 million in the aggregate annually, which we believe
is adequate. This coverage is on a claims-made basis. There can be no
assurance that claims will not exceed insurance coverage or that such insurance
will be available in the future at a reasonable cost to us.
Our
operations are subject, and in the past have been subject, to a number of
environmental laws and regulations governing, among other things, air emissions,
wastewater discharges, the use, handling and disposal of hazardous substances
and wastes, soil and groundwater remediation and employee health and safety.
In
some jurisdictions environmental requirements may be expected to become more
stringent in the future. In the United States certain environmental laws can
impose liability for the entire cost of site restoration upon each of the
parties that may have contributed to conditions at the site regardless of fault
or the lawfulness of the party’s activities. While we do not believe
that the present costs of environmental compliance and remediation are material,
there can be no assurance that future compliance or remedial obligations could
not have a material adverse effect on our financial condition, results of
operations or cash flows.
On
April
7, 2006, CONMED received a copy of a complaint filed in the United States
District for the Northern District of New York on behalf of a purported class
of
former CONMED Linvatec sales representatives. The complaint alleges
that the former sales representatives were entitled to, but did not receive,
severance in 2003 when CONMED Linvatec restructured its distribution
channels. Although we do not believe it is probable a loss has been
incurred, it is reasonably possible. The range of loss associated
with this complaint ranges from $0 to $3.0 million, not including any interest,
fees or costs that might be awarded if the five named plaintiffs were to prevail
on their own behalf as well as on behalf of the approximately 70 (or 90 as
alleged by the plaintiffs) other members of the purported
class. CONMED Linvatec did not generally pay severance during
the 2003 restructuring because the former sales representatives were offered
sales positions with CONMED Linvatec’s new manufacturer’s
representatives. Other than three of the five named plaintiffs in the
class action, nearly all of CONMED Linvatec’s former sales representatives
accepted such positions.
The
Company’s motions to dismiss and for summary judgment, which were heard at a
hearing held on January 5, 2007, were denied by a Memorandum Decision and Order
dated May 22, 2007. The District Court also granted the plaintiffs’
motion to certify a class of former CONMED Linvatec sales representatives whose
employment with CONMED Linvatec was involuntarily terminated in 2003 and who
did
not receive severance benefits. Although the Court’s ruling on
the motions to dismiss, for summary judgment and the motion to certify the
class
do not represent final rulings on the merits, the Company had filed a motion
seeking reconsideration of the motions to dismiss, and sought to appeal to
the
United State Court of Appeals for the Second Circuit from the class
certification ruling. The Second Circuit declined to consider the
appeal by Order dated August 28, 2007. In an order dated February 25,
2008, the United States District for the Northern District of New York granted
the Company's motion to reconsider the Company's motions to dismiss portions
of
the complaint and, upon reconsideration, reaffirmed its previous ruling denying
the aforementioned motions. The Company believes there is no merit to the
claims asserted in the Complaint, and plans to vigorously defend the
case. There can be no assurance, however, that the Company will
prevail in the litigation.
The
Company had been defending a product liability claim asserted against it and
several of the Company’s subsidiaries in a case captioned Wehner v. Linvatec
Corp., et al (the “Wehner Case”). Two of the Company’s subsidiaries
settled the case and accrued the expenses, including both the settlement and
certain defense costs, in the fourth quarter of 2007 in the amount of $1.3
million. As a result of the settlement, all of the claims against all
of the Company’s entities will be dismissed with prejudice.
As
the
occurrence giving rise to the Wehner Case occurred in 2002 prior to the
Company’s 2003 acquisition of Bionx Implants, Inc., the Wehner Case is not
covered by the Company’s current product liability insurance
policy. The former product liability insurance carrier has denied
coverage, and the Company and its subsidiaries commenced suit in the United
States District Court for the Eastern District of Pennsylvania seeking a
declaration that the underlying claim is covered by the policy. The
Company and its subsidiaries plan to vigorously pursue the claims for insurance
coverage (i.e., for reimbursement of the costs of defending and settling the
Wehner Case), although there can be no assurance that the Company and its
subsidiaries will prevail.
Note
11 — Other expense (income)
Other
expense (income) for the year ended December 31, consists of the
following:
|
2005
|
2006
|
2007
|
||||||||||
|
Acquisition-transition
related costs
|
4,108 | 2,592 | - | |||||||||
|
Termination
of product offering
|
1,519 | 1,448 | 148 | |||||||||
|
Environmental
settlement costs
|
698 | - | - | |||||||||
|
Loss
on equity investment
|
794 | - | - | |||||||||
|
Write-off
of inventory in settlement of a patent dispute
|
- | 595 | - | |||||||||
|
Facility
closure costs
|
- | 578 | 1,822 | |||||||||
|
Gain
on litigation settlement
|
- | - | (6,072 | ) | ||||||||
|
Product
liability settlement
|
- | - | 1,295 | |||||||||
|
Other
expense (income)
|
$ | 7,119 | $ | 5,213 | $ | (2,807 | ) | |||||
On
September 30, 2004, we completed the Endoscopic Technologies
acquisition. As part of the acquisition, manufacturing of the
acquired products was conducted in various C.R. Bard facilities under a
transition agreement. The transition of the manufacturing of these
products from C.R. Bard facilities to CONMED facilities was completed during
2006. During the years ended December 31, 2005 and 2006, we incurred
$4.1 million and $2.6 million, respectively, of acquisition and
transition-integration related charges associated with the Endoscopic
Technologies acquisition which have been recorded in other expense
(income). These expenses consist of severance, acquisition,
transition and integration related charges.
During
2004, we elected to terminate our surgical lights product line. We
instituted a customer replacement program whereby all currently installed
surgical lights were replaced by CONMED. We recorded charges totaling
$5.5 million related to the surgical lights customer replacement program
(including $1.5 million, $1.4 million and $0.1 million in the years ended
December 31, 2005, 2006 and 2007, respectively) in other expense
(income). The surgical lights customer replacement program was
completed during the second quarter of 2007.
During
the quarter ended June 30, 2005, we entered into a settlement of certain
environmental claims related to the operations of one of our subsidiaries during
the 1980s, before it was acquired by CONMED, at a site other than the one it
currently occupies. The current owner alleged that the acquired
subsidiary caused environmental contamination of the property. In
order to avoid litigation, we agreed to reimburse the owner for a certain
percentage of past remediation costs, and to participate in the funding of
the
remediation activities. The total sum of past costs, including
attorney’s fees, together with an estimate of future costs, amounted to
approximately $0.7 million and was recorded in other expense (income) for the
year ended December 31, 2005. We believe any future costs incurred in
excess of amounts already expensed would be covered by insurance.
During
the quarter ended December 31, 2005, we incurred a $0.8 million loss on the
sale
of an equity investment. This investment had a carrying value of $2.0
million and was sold in January 2006 for $1.2 million resulting in a $0.8
million loss.
During
the quarter ended June 30, 2006, we were notified by Dolphin Medical, Inc.
(“Dolphin”), that it would discontinue its Dolphin ONE® product line as a result
of an agreement between Dolphin and Masimo Corporation in which Masimo agreed
to
release Dolphin and its affiliates from certain patent infringement
claims. We had sold the Dolphin ONE® and certain other pulse oximetry
products manufactured by Dolphin under a distribution agreement. As a
result of the product line discontinuation, we recorded a $0.6 million charge
to
other expense (income) to write-off on-hand inventory of the discontinued
product line.
During
2006, we elected to close our facility in Montreal, Canada which manufactured
products for our CONMED Linvatec line of integrated operating room systems
and
equipment. The products which had been manufactured in the Montreal
facility are now purchased from third party vendors. The closing of
this facility was completed in the first quarter of 2007. We incurred
a total of $2.2 million in costs associated with this closure, of which $1.3
million related to the write-off of inventory and was included in cost of goods
sold during 2006. The remaining $0.9 million (including $0.3 million
in 2007) primarily relates to severance expense and the disposal of fixed assets
and has been recorded in other expense (income).
During
2007, we elected to close our CONMED Endoscopic Technologies sales office in
France. During 2007, we incurred $1.5 million in costs associated
with this closure primarily related to severance expense. We have
recorded such costs in other expense (income); no further expenses are expected
to be incurred.
In
November 2003, we commenced litigation against Johnson & Johnson and several
of its subsidiaries, including Ethicon, Inc. for violations of federal and
state
antitrust laws. In the lawsuit we claimed that Johnson & Johnson engaged in
illegal and anticompetitive conduct with respect to sales of product used in
endoscopic surgery, resulting in higher prices to consumers and the exclusion
of
competition. We sought relief including an injunction restraining
Johnson & Johnson from continuing its anticompetitive practices as well as
receiving the maximum amount of damages allowed by law. During the
litigation, Johnson & Johnson represented that the marketing practices which
gave rise to the litigation had been altered with respect to
CONMED. On March 31, 2007, CONMED and Johnson & Johnson settled
the litigation. Under the terms of the final settlement agreement,
CONMED received a payment of $11.0 million from Johnson & Johnson in return
for which we terminated the lawsuit. After deducting legal and other
related costs, we recorded a pre-tax gain of $6.1 million related to the
settlement which we have recorded in other expense (income).
Two
of
the Company’s subsidiaries settled a product liability claim asserted against it
and several of the Company’s subsidiaries in a case captioned Wehner v. Linvatec
Corp., et al. Total settlement and defense related costs
amounted to $1.3 million which we have recorded in other expense (income) during
the quarter ended December 31, 2007.
Note
12 — Guarantees
We
provide warranties on certain of our
products at the time of sale. The standard warranty period for our
capital and reusable equipment is generally one year. Liability under
service and warranty policies is based upon a review of historical warranty
and
service claim experience. Adjustments are made to accruals as claim
data and historical experience warrant.
Changes
in the carrying amount of
service and product warranties for the year ended December 31, are as
follows:
|
2005
|
2006
|
2007
|
||||||||||
|
Balance
as of January 1,
|
$ | 3,524 | $ | 3,416 | $ | 3,617 | ||||||
|
Provision
for warranties
|
4,035 | 5,774 | 3,078 | |||||||||
|
Claims
made
|
(4,143 | ) | (5,573 | ) | (3,389 | ) | ||||||
|
Balance
as of December 31,
|
$ | 3,416 | $ | 3,617 | $ | 3,306 | ||||||
Note
13 - New Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard No. 157, “Fair Value Measurements”
(“SFAS 157”), which is effective for fiscal years beginning after
November 15, 2007 and for interim periods within those years. This
statement defines fair value, establishes a framework for measuring fair value
and expands the related disclosure requirements. The Company is currently
assessing the impact of SFAS 157 on its consolidated financial
statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standard No.
159, "The Fair Value Option for Financial Assets and Financial
Liabilities-Including an amendment of FASB Statement No. 115" ("SFAS 159").
SFAS
159 expands the use of fair value accounting but does not affect existing
standards which require assets and liabilities to be carried at fair value.
Under SFAS 159, a company may elect to use fair value to measure accounts and
loans receivable, available-for-sale and held-to-maturity securities, equity
method investments, accounts payable, guarantees, issued debt and other eligible
financial instruments. SFAS 159 is effective for fiscal years beginning after
November 15, 2007. The Company is currently assessing the impact of
SFAS 159 on its consolidated financial statements.
In
December 2007, the FASB issued Statement of Financial Accounting Standard
No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”).
SFAS 141R requires the use of "full fair value" to record all the
identifiable assets, liabilities, noncontrolling interests and goodwill acquired
in a business combination. SFAS 141R is effective for fiscal years
beginning on or after December 15, 2008. The Company is
currently assessing the impact of SFAS 141R on its consolidated financial
statements.
In
December 2007, the FASB issued Statement of Financial Accounting Standard
No. 160, “Noncontrolling Interests in Consolidated Financial
Statements” (“SFAS 160”).
SFAS 160 requires the noncontrolling interests (minority interests) to be
recorded at fair value and reported as a component of equity. SFAS 160 is
effective for fiscal years beginning on or after December 15,
2008. The Company is currently assessing the impact of SFAS 160 on its
consolidated financial statements.
Note
14 — Selected Quarterly Financial Data (Unaudited)
Selected
quarterly financial data for
2006 and 2007 are as follows:
|
Three
Months Ended
|
||||||||||||||||
|
March
|
June
|
September
|
December
|
|||||||||||||
|
2006
|
||||||||||||||||
|
Net
sales
|
$ | 158,466 | $ | 163,473 | $ | 154,981 | $ | 169,892 | ||||||||
|
Gross
profit
|
77,900 | 77,774 | 74,731 | 82,441 | ||||||||||||
|
Net
income (loss)
|
4,340 | 3,414 | 3,332 | (23,593 | ) | |||||||||||
|
EPS:
|
||||||||||||||||
|
Basic
|
$ | .15 | $ | .12 | $ | .12 | $ | (.84 | ) | |||||||
|
Diluted
|
.15 | .12 | .12 | (.84 | ) | |||||||||||
|
Three
Months Ended
|
||||||||||||||||
|
March
|
June
|
September
|
December
|
|||||||||||||
|
2007
|
||||||||||||||||
|
Net
sales
|
$ | 171,014 | $ | 169,258 | $ | 164,448 | $ | 189,568 | ||||||||
|
Gross
profit
|
85,225 | 85,860 | 82,358 | 95,682 | ||||||||||||
|
Net
income
|
11,922 | 9,345 | 8,355 | 11,834 | ||||||||||||
|
EPS:
|
||||||||||||||||
|
Basic
|
$ | .43 | $ | .33 | $ | .29 | $ | .41 | ||||||||
|
Diluted
|
.42 | .32 | .29 | .41 | ||||||||||||
Unusual
Items Included In Selected Quarterly Financial Data:
2006
First
quarter
During
the first quarter of 2006, we recorded a charge of $0.1 million related to
our
termination of our surgical lights product line and $0.5 million of acquisition
and transition-integration related costs associated with the Endoscopic
Technologies acquisition to other expense – see Note 11.
Second
Quarter
During
the second quarter of 2006, we recorded a charge of $0.6 million related to
the
write-off of inventory in settlement of a patent dispute and $1.0 million of
acquisition and transition-integration related costs associated with the
Endoscopic Technologies acquisition to other expense – see Note 11.
During
the second quarter of 2006, we recorded a loss on the early extinguishment
of
debt of $0.7 million – see Note 5.
Third
Quarter
During
the third quarter of 2006, we recorded a charge of $0.4 million related
to
severance payments due to the closing of a manufacturing plant, $1.0 million
in
charges related to the termination of our surgical lights product line, and
$0.6
million of acquisition and transition-integration related costs associated
with
the Endoscopic Technologies acquisition to other expense – see Note
11.
Fourth
Quarter
During
the fourth quarter of 2006, we recorded a charge of $1.3 million to cost
of
sales to write-off inventory related to the closing of a manufacturing
plant. In addition, we recorded $0.1 million in severance costs due
to the closing of a manufacturing plant, $0.4 million in charges related to
the
termination of our surgical lights product line, and $0.5 million of acquisition
and transition-integration related costs associated with the Endoscopic
Technologies acquisition to other expense – see Note 11.
During
the fourth quarter of 2006, after completing our annual goodwill impairment
testing, we determined that the goodwill of our Endoscopic Technologies
operating unit was impaired and consequently we recorded a goodwill impairment
charge of $46.7 million – see Note 4.
2007
First
quarter
During
the first quarter of 2007, we recorded a charge of $0.1 million related to
our
termination of our surgical lights product line, $0.3 million related to the
closure of a manufacturing plant, and $0.3 million related to the closure of
a
sales office – see Note 11.
During
the first quarter of 2007, we recorded a pre-tax gain of $6.1 million related
to
the settlement of a legal dispute between CONMED and Johnson & Johnson. –
see Note 11.
Second
Quarter
During
the second quarter of 2007, we recorded a charge of $1.3 million related to
severance payments due to the closing of a sales office – see Note
11.
Third
Quarter
There
were no unusual items in the third quarter of 2007.
Fourth
Quarter
During
the fourth quarter of 2007, we recorded a charge of $1.3 million related to
the
settlement of a product liability case. Such charges included
the settlement and defense related costs – see Note 11.
Note
15 – Subsequent Event
On
January 9, 2008, CONMED Corporation entered into an agreement to purchase a
distributor’s business for approximately $14.4 million. This purchase
consists mainly of customer lists.
SCHEDULE
II—Valuation and Qualifying Accounts
(in
thousands)
|
Column
C
|
||||||||||||||||||||
|
Additions
|
||||||||||||||||||||
|
Column
B
|
||||||||||||||||||||
|
Balance
at
|
Charged
to
|
Charged
to
|
Column
E
|
|||||||||||||||||
|
Column
A
|
Beginning
of
|
Costs
and
|
Other
|
Column
D
|
Balance
at End
|
|||||||||||||||
|
Description
|
Period
|
Expenses
|
Accounts
|
Deductions
|
of
Period
|
|||||||||||||||
|
2007
|
||||||||||||||||||||
|
Allowance
for bad debts
|
$ | 1,210 | $ | 346 | $ | - | $ | (769 | ) | $ | 787 | |||||||||
|
Sales
returns andallowance
|
2,964 | 446 | - | (380 | ) | 3,030 | ||||||||||||||
|
Deferred
tax asset valuation
allowance
|
6,892 | 805 | - | $ | (3,488 | ) | 4,209 | |||||||||||||
|
2006
|
||||||||||||||||||||
|
Allowance
for bad debts
|
$ | 1,522 | $ | 640 | $ | (350 | ) | $ | (602 | ) | $ | 1,210 | ||||||||
|
Sales
returns and allowance
|
1,339 | 852 | 773 | - | 2,964 | |||||||||||||||
|
Deferred
tax asset valuation
allowance
|
6,160 | 772 | - | $ | (40 | ) | 6,892 | |||||||||||||
|
2005
|
||||||||||||||||||||
|
Allowance
for bad debts
|
$ | 1,235 | $ | 951 | $ | - | $ | (664 | ) | $ | 1,522 | |||||||||
|
Sales
returns and allowance
|
1,417 | - | - | (78 | ) | 1,339 | ||||||||||||||
|
Deferred
tax asset valuation
allowance
|
5,887 | 829 | - | $ | (556 | ) | 6,160 | |||||||||||||
-
97 -