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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2002
Commission File Number 0-16093
CONMED CORPORATION
(Exact name of the registrant as specified in its charter)
New York 16-0977505
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
525 French Road, Utica, New York 13502
(Address of principal executive offices) (Zip Code)
(315) 797-8375
(Registrant's telephone number, including area code)
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 [X] No [_]
The number of shares outstanding of registrant's common stock, as of
November 7, 2002 is 28,660,380 shares.
CONMED CORPORATION
TABLE OF CONTENTS
FORM 10-Q
PART I FINANCIAL INFORMATION
Item Number Page
Item 1. Financial Statements
- Consolidated Condensed Statements
of Income 1
- Consolidated Condensed Balance Sheets 2
- Consolidated Condensed Statements
of Cash Flows 3
- Notes to Consolidated Condensed
Financial Statements 4
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 17
Item 4. Controls and Procedures 26
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
Certifications 29
Item 1.
CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
September September
--------- ---------
2001 2002 2001 2002
---- ---- ---- ----
Net sales............................................ $105,318 $113,332 $315,398 $337,806
-------- -------- -------- --------
Cost of sales........................................ 51,332 54,429 150,971 160,244
Selling and administrative........................... 35,029 34,562 103,780 104,171
Research and development............................. 3,491 4,253 10,663 12,155
-------- -------- -------- --------
89,852 93,244 265,414 276,570
-------- -------- -------- --------
Income from operations............................... 15,466 20,088 49,984 61,236
Interest expense, net................................ 7,630 5,765 23,809 18,748
-------- -------- -------- --------
Income before income taxes
and extraordinary item............................. 7,836 14,323 26,175 42,488
Provision for income taxes........................... 2,821 5,156 9,423 15,295
-------- -------- -------- --------
Income before extraordinary item..................... 5,015 9,167 16,752 27,193
Extraordinary item, net of
income taxes....................................... - 944 - 944
-------- -------- -------- --------
Net income........................................... $ 5,015 $ 8,223 $16,752 $26,249
======== ======== ======== ========
Per share data:
Income before extraordinary item
Basic............................................ $ .20 $ .32 $ .71 $ 1.01
Diluted.......................................... .20 .32 .70 .99
Extraordinary item
Basic............................................ $ - $ .03 $ - $ .03
Diluted.......................................... - .04 - .03
Net income
Basic............................................ $ .20 $ .29 $ .71 $ .98
Diluted.......................................... .20 .28 .70 .96
Weighted average common shares
Basic............................................ 24,806 28,613 23,657 26,870
Diluted.......................................... 25,381 29,043 23,990 27,470
See notes to consolidated condensed financial statements.
1
CONMED CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands except share amounts)
(unaudited)
December 31, September
2001 2002
---- ----
ASSETS
Current assets:
Cash and cash equivalents ..................... $ 1,402 $ 2,513
Accounts receivable, net ...................... 51,188 55,770
Inventories ................................... 107,390 117,880
Deferred income taxes ......................... 1,105 1,105
Prepaid expenses and other current assets ..... 3,464 3,363
--------- ---------
Total current assets ........................ 164,549 180,631
--------- ---------
Property, plant and equipment, net .............. 91,026 94,856
Goodwill, net ................................... 251,140 253,499
Other intangible assets, net .................... 189,752 185,781
Other assets .................................... 5,141 6,000
--------- ---------
Total assets ................................ $ 701,608 $ 720,767
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ............. $ 73,429 $ 2,272
Accounts payable .............................. 19,877 24,694
Accrued compensation .......................... 11,863 9,782
Income taxes payable .......................... 2,507 3,390
Accrued interest .............................. 4,954 1,158
Other current liabilities ..................... 7,207 6,486
--------- ---------
Total current liabilities ................... 119,837 47,782
--------- ---------
Long-term debt .................................. 262,500 251,560
Deferred income taxes ........................... 18,655 28,875
Other long-term liabilities ..................... 16,982 12,878
--------- ---------
Total liabilities ........................... 417,974 341,095
--------- ---------
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 shares authorized; 25,261,590 and
28,656,671 shares issued and outstanding in
2001 and 2002, respectively ............... 253 287
Paid-in capital ............................... 160,757 228,515
Retained earnings ............................. 128,240 154,489
Accumulated other comprehensive loss .......... (5,197) (3,200)
Less 37,500 shares of common stock in treasury,
at cost ..................................... (419) (419)
--------- ---------
Total shareholders' equity .................. 283,634 379,672
--------- ---------
Total liabilities and shareholders equity . $ 701,608 $ 720,767
========= =========
See notes to consolidated condensed financial statements.
2
CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2001 and 2002
(in thousands)
(unaudited)
2001 2002
---- ----
Cash flows from operating activities:
Net income ............................................ $ 16,752 $ 26,249
--------- ---------
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation .................................... 6,648 6,731
Amortization .................................... 15,639 9,843
Extraordinary item, net of income taxes ......... -- 944
Increase (decrease) in cash flows
from changes in assets and liabilities:
Accounts receivable ................... (7,052) (2,588)
Decrease in sale of accounts receivable -- (2,000)
Inventories ........................... (2,432) (14,006)
Prepaid expenses and
other current assets ................ (283) (3,057)
Accounts payable ...................... (80) 4,808
Income taxes payable .................. (601) 1,414
Accrued compensation .................. (20) (2,081)
Accrued interest ...................... (2,614) (3,796)
Other assets/liabilities, net ......... (2,385) 6,069
--------- ---------
6,820 2,281
--------- ---------
Net cash provided by operating activities ....... 23,572 28,530
--------- ---------
Cash flows from investing activities:
Payments related to business acquisitions ........... -- (2,359)
Purchases of property, plant, and equipment ......... (12,704) (10,561)
--------- ---------
Net cash used by investing activities ........... (12,704) (12,920)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock ............ -- 66,123
Net proceeds from exercise of stock options ........... 1,591 3,669
Repurchase of warrant on common stock ................. -- (2,000)
Payments on debt ...................................... (13,034) (183,097)
Proceeds of debt ...................................... -- 101,000
Payments related to issuance of debt .................. -- (1,513)
--------- ---------
Net cash used by financing activities ........... (11,443) (15,818)
--------- ---------
Effect of exchange rate changes
on cash and cash equivalents ........................ (880) 1,319
--------- ---------
Net increase (decrease) in cash and cash equivalents .... (1,455) 1,111
Cash and cash equivalents at beginning of period ........ 3,470 1,402
--------- ---------
Cash and cash equivalents at end of period .............. $ 2,015 $ 2,513
========= =========
Supplemental non-cash investing and financing activities:
We acquired a business in the third quarter of 2001 through the exchange of
1,950,000 shares of our common stock.
We acquired certain property in the third quarter of 2001 through the assumption
of approximately $22.8 million of debt and accrued interest.
See notes to consolidated condensed financial statements.
3
CONMED CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(in thousands except share amounts)
Note 1 - Organization and operations
- ------------------------------------
The consolidated condensed financial statements include the accounts of CONMED
Corporation and its subsidiaries ("CONMED", the "Company", "we" or "us"). All
intercompany accounts and transactions have been eliminated. CONMED Corporation
is a medical technology company specializing in instruments, implants and video
equipment for arthroscopic sports medicine, and powered surgical instruments,
such as drills and saws, for orthopedic, ENT, neuro-surgery and other surgical
specialties. We are also a leading developer, manufacturer and supplier of
advanced medical devices, including radio frequency, or RF, electrosurgery
systems used routinely to cut and cauterize tissue in nearly all types of
surgical procedures worldwide and endoscopy products such as trocars, clip
appliers, scissors and surgical staplers. We also manufacture and sell a full
line of ECG electrodes for heart monitoring and other patient care products. Our
products are used in a variety of clinical settings, such as operating rooms,
surgery centers, physicians' offices and critical care areas of hospitals. Our
business is organized, managed and internally reported as a single segment,
since our product offerings have similar economic, operating and other related
characteristics.
Note 2 - Interim financial information
- --------------------------------------
The statements for the three and nine months ended September 30, 2001 and 2002
are unaudited; in our opinion such unaudited statements include all adjustments
(which comprise only normal recurring accruals) necessary for a fair
presentation of the results for such periods. The consolidated condensed
financial statements for the year ending December 31, 2002 are subject to
adjustment at the end of the year when they will be audited by independent
accountants. The results of operations for the three and nine months ended
September 30, 2002 are not necessarily indicative of the results of operations
to be expected for any other quarter nor for the year ending December 31, 2002.
The consolidated condensed financial statements and notes thereto should be read
in conjunction with the financial statements and notes for the year ended
December 31, 2001 included in our Annual Report to the Securities and Exchange
Commission on Form 10-K.
Note 3 - Other comprehensive income (loss)
- ------------------------------------------
Comprehensive income (loss) consists of the following:
Three months ended Nine months ended
September September
2001 2002 2001 2002
---- ---- ---- ----
Net income .................... $ 5,015 $ 8,223 $ 16,752 $ 26,249
-------- -------- -------- --------
Other comprehensive income:....
Foreign currency
translation adjustment .... 35 (139) (857) 1,338
Cash flow hedging
(net of income taxes) ..... (707) 221 (2,143) 659
-------- -------- -------- --------
Comprehensive income ........ $ 4,343 $ 8,305 $ 13,752 $ 28,246
======== ======== ======== ========
4
Accumulated other comprehensive income (loss) consists of the following:
Accumulated
Minimum Cumulative Cash Other
Pension Translation Flow Comprehensive
Liability Adjustments Hedges Income (loss)
--------- ----------- ------ -------------
Balance, December 31, 2001 ............ $(1,062) $(2,169) $(1,966) $(5,197)
Foreign currency translation.......
adjustments ..................... -- 1,338 -- 1,338
Cash flow hedging (net of
income taxes) ................... -- -- 659 659
------- ------- ------- -------
Balance, September 30, 2002 ........... $(1,062) $ (831) $(1,307) $(3,200)
======= ======= ======= =======
Note 4 - Inventories
- --------------------
The components of inventory are as follows:
December 31, September 30,
2001 2002
---- ----
Raw materials................................ $38,101 $40,512
Work-in-process.............................. 11,921 13,339
Finished goods............................... 57,368 64,029
-------- --------
Total ........................... $107,390 $117,880
======== ========
Note 5 - Earnings per share
- ---------------------------
Basic earnings per share (EPS) is computed based on the weighted average number
of common shares outstanding for the period. Diluted EPS gives effect to all
dilutive potential shares outstanding (i.e., options and warrants) during the
period. The following is a reconciliation of the weighted average shares used in
the calculation of basic and diluted EPS (in thousands):
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2001 2002 2001 2002
---- ---- ---- ----
Shares used in the calculation
of Basic EPS(weighted average
shares outstanding) ................ 24,806 28,613 23,657 26,870
Effect of dilutive potential
securities ......................... 575 430 333 600
------ ------ ------ ------
Shares used in the calculation
of Diluted EPS...................... 25,381 29,043 23,990 27,470
====== ====== ====== ======
The shares used in the calculation of diluted EPS exclude warrants and options
to purchase shares where the exercise price was greater than the average market
price of common shares for the period. Such shares aggregated 1,988,000 and
1,194,000 for the three months ended September 30, 2001 and 2002, respectively,
and 3,027,000 and 599,000 for the nine months ended September 30, 2001 and 2002
respectively.
5
Note 6 - New senior credit agreement
- ------------------------------------
During the quarter ended September 30, 2002, we entered into a new $200 million
senior credit agreement (the "new senior credit agreement"). The new senior
credit agreement consists of a $100 million revolving credit facility and a $100
million term loan. The proceeds of the term loan portion of the new senior
credit agreement were used to eliminate the term loans and borrowings on the
revolving credit facility under the previously existing senior credit agreement
(the "old senior credit agreement"). The new senior credit agreement calls for
both components to extend for approximately five years, with the revolving
credit facility terminating on August 28, 2007 and the term loan expiring on
December 15, 2007. The term loan portion of the facility could be extended an
additional two years, provided our currently outstanding $130 million in 9%
Senior Subordinated Notes are refinanced or repaid by December 15, 2007. The
scheduled principal payments on the term loan portion of the new senior credit
agreement are $1.0 million annually with the remaining balance outstanding due
and payable on December 15, 2007. We may also be required, under certain
circumstances, to make additional principal payments based on excess cash flow
as defined in the new senior credit agreement. Approximately $99.0 million of
the revolving credit facility under the new senior credit agreement was
available at September 30, 2002. Interest rates on the term loan and revolving
credit facility components of the new senior credit agreement are LIBOR plus 275
basis points and LIBOR plus 250 basis points, respectively.
The new 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 new senior credit agreement contains covenants and restrictions
which, among other things, require maintenance of certain working capital levels
and financial ratios, prohibit dividend payments and restrict the incurrence of
certain indebtedness and other activities, including acquisitions and
dispositions. We are also required, under certain circumstances, to make
mandatory prepayments from net cash proceeds from any issue of equity and asset
sales.
Note 7 - Extraordinary charge
- -----------------------------
Deferred financing fees related to the approximately three years remaining on
the old senior credit agreement have been written off as an extraordinary charge
of $.9 million, net of income taxes, or $.04 per diluted share, on the early
extinguishment of debt.
Note 8 - New accounting pronouncements
- --------------------------------------
In June 2001, the Financial Accounting Standards Board approved Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets",
("SFAS 142"). We adopted SFAS 142 effective January 1, 2002. Under this
standard, amortization of goodwill and certain intangible assets, including
certain intangibles recorded as a result of past business combinations, is to be
discontinued upon adoption of SFAS 142.
During 2002, we performed tests of goodwill and indefinite-lived intangible
assets as of January 1, 2002. We tested for impairment using the two-step
process prescribed in SFAS 142. The first step is identification for potential
impairment. The second step, which has been determined not to be necessary,
measures the amount of any impairment. No impairment losses have been recognized
as a result of these tests. The changes in the net carrying amount of goodwill
for the nine months ended September 30, 2002 are as follows:
Balance as of January 1, 2002................................ $ 251,140
Goodwill acquired ........................................... 2,359
---------
Balance as of September 30, 2002............................. $ 253,499
=========
6
Other intangible assets consist of the following:
December 31, 2001 September 30, 2002
----------------- ------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amortized intangible assets: Amount Amortization Amount Amortization
-------- -------- -------- --------
Customer relationships............................... $ 96,712 $(10,180) $ 96,712 $(12,089)
Patents and other intangible assets.................. 35,465 (18,389) 38,126 (23,112)
Unamortized intangible assets:
Trademarks and tradenames............................ 95,715 (9,571) 95,715 (9,571)
-------- -------- -------- --------
$227,892 $(38,140) $230,553 $(44,772)
======== ======== ======== ========
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 19 years.
Customer relationships are being amortized over 38 years. Patents and other
intangible assets are being amortized over a weighted average life of 8 years.
Our customer relationship intangible asset was acquired in connection with the
1997 acquisition of Linvatec Corporation. Our accounting for this asset upon
implementation of SFAS 142 was to recognize this asset separately from goodwill
and continue to amortize this asset over the 38 year life supported by a
valuation prepared in connection with the Linvatec acquisition.
The trademarks and tradenames intangible asset was recognized in conjunction
with the 1997 acquisition of Linvatec Corporation. As of the date of this
acquisition, Linvatec was a leader in the orthopedic medical device marketplace
with a focus in arthroscopic surgery and powered surgical instruments. We
continue to market products under the acquired trademarks and tradenames of
"Linvatec", "Hall", "Shutt" and "Envision" which we believe are respected names
in the orthopedic marketplace. From the date of the Linvatec acquisition, we
have continued to release new product and product extensions under the above
trademarks and tradenames and continue to maintain and promote these trademarks
and tradenames in the market through continued legal registration and such
methods as advertising, medical education and trade shows. Linvatec continues to
be a leader in the orthopedic medical device marketplace. Based on the
orthopedic marketplace, it is our belief that the trademarks and tradenames
intangible asset will generate cash flow for an indefinite period of time.
Accordingly, upon adoption of SFAS 142, effective January 1, 2002, amortization
of the trademarks and tradenames intangible asset was discontinued.
Amortization expense related to intangible assets which are subject to
amortization totaled $5,442 in the nine months ended September 30, 2002 and
$5,259 in the nine months ended September 30, 2001.
The estimated amortization expense for the year ending December 31, 2002 and for
each of the five succeeding years is as follows:
2002 $ 7,256
2003 6,857
2004 6,487
2005 4,664
2006 3,424
2007 3,424
The following is a reconciliation assuming goodwill and other intangible assets
had been accounted for in accordance with SFAS 142 in the three and nine months
ended September 30, 2001:
7
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2002 2001 2002
---- ---- ---- ----
Reported net income $5,015 $ 8,223 $16,752 $26,249
------ ------- ------- -------
Adjustments (net of income taxes)
Add back: Goodwill amortization 1,030 -- 3,090 --
Add back: Trademarks and trade
names amortization 383 -- 1,149 --
------ ------- ------- -------
Adjusted net income $6,428 $ 8,223 $20,991 $26,249
====== ======= ======= =======
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2002 2001 2002
---- ---- ---- ----
Basic earnings per share
Reported net income $ .20 $ .29 $ .71 $ .98
------ ------- ------- -------
Adjustments (net of income taxes)
Add back: Goodwill amortization .04 -- .13 --
Add back: Trademarks and trade
names amortization .02 -- .05 --
------ ------- ------- -------
Adjusted net income $ .26 $ .29 $ .89 $ .98
====== ======= ======= =======
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2002 2001 2002
---- ---- ---- ----
Diluted earnings per share
Reported net income $ .20 $ .28 $ .70 $ .96
------ ------- ------- -------
Adjustments (net of income taxes)
Add back: Goodwill amortization .04 -- .13 --
Add back: Trademarks and trade
names amortization .01 -- .04 --
------ ------- ------- -------
Adjusted net income $ .25 $ .28 $ .87 $ .96
====== ======= ======= =======
Note 9 - Guarantor financial statements
- ---------------------------------------
Our new senior credit agreement and Senior Subordinated Notes (the "Notes") are
guaranteed (the "Subsidiary Guarantees") by each of our subsidiaries (the
"Subsidiary Guarantors") except CONMED Receivables Corporation (the
"Non-Guarantor Subsidiary"). The Subsidiary Guarantees provide that each
Subsidiary Guarantor will fully and unconditionally guarantee our obligations
under the new senior credit agreement and the Notes on a joint and several
basis. Each Subsidiary Guarantor and Non-Guarantor Subsidiary is wholly-owned by
CONMED Corporation. The following supplemental financial information sets forth
on a condensed consolidating basis, condensed consolidating balance sheets,
statements of income and statements of cash flows for the Parent Company only,
Subsidiary Guarantors and Non-Guarantor Subsidiary and for the Company as of
December 31, 2001 and September 30, 2002 and for the three and nine months ended
September 30, 2001 and 2002.
8
CONMED CORPORATION
CONSOLIDATING CONDENSED BALANCE SHEET
December 31,2001
(in thousands)
Parent Non-
Company Subsidiary Guarantor Company
Only Guarantors Subsidiary Eliminations Total
---- ---------- ---------- ------------ -----
ASSETS
Current assets:
Cash and cash equivalents ....... $ -- $ 1,181 $ 221 $ -- $ 1,402
Accounts receivable, net ........ -- 7,198 43,990 -- 51,188
Inventories ..................... 23,045 84,345 -- -- 107,390
Deferred income taxes ........... 1,105 -- -- -- 1,105
Prepaid expenses and other
current assets .............. 831 2,633 -- -- 3,464
--------- --------- --------- --------- ----------
Total current assets ...... 24,981 95,357 44,211 -- 164,549
--------- --------- --------- --------- ----------
Property, plant and equipment, net .. 45,856 45,170 -- -- 91,026
Goodwill, net ....................... 86,412 164,728 -- -- 251,140
Other intangible assets, net ........ 8,177 181,575 -- -- 189,752
Other assets ........................ 477,798 2,376 -- (475,033) 5,141
--------- --------- --------- --------- ----------
Total assets .................... $ 643,224 $ 489,206 $ 44,211 $(475,033) $ 701,608
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 72,241 $ 1,188 $ -- $ -- $ 73,429
Accounts payable ................ 5,078 14,799 -- -- 19,877
Accrued compensation ............ 3,979 7,884 -- -- 11,863
Income taxes payable ............ 2,372 135 -- -- 2,507
Accrued interest ................ 4,760 37 157 -- 4,954
Other current liabilities ....... 4,634 2,573 -- -- 7,207
--------- --------- --------- --------- ----------
Total current liabilities ... 93,064 26,616 157 -- 119,837
--------- --------- --------- --------- ----------
Long-term debt ...................... 241,404 21,096 -- -- 262,500
Deferred income taxes ............... 18,655 -- -- -- 18,655
Other long-term liabilities ......... 6,467 285,329 41,947 (316,761) 16,982
--------- --------- --------- --------- ----------
Total liabilities ............... 359,590 333,041 42,104 (316,761) 417,974
--------- --------- --------- --------- ----------
Shareholders' equity:
Preferred stock ................. -- -- -- -- --
Common stock .................... 253 1 -- (1) 253
Paid-in capital ................. 160,757 -- 2,000 (2,000) 160,757
Retained earnings ............... 128,240 158,333 107 (158,440) 128,240
Accumulated other comprehensive
loss ........................ (5,197) (2,169) -- 2,169 (5,197)
Less common stock in
treasury, at cost .............. (419) -- -- -- (419)
--------- --------- --------- --------- ----------
Total shareholders' equity .. 283,634 156,165 2,107 (158,272) 283,634
--------- --------- --------- --------- ----------
Total liabilities and
shareholders' equity ...... $ 643,224 $ 489,206 $ 44,211 $(475,033) $ 701,608
========= ========= ========= ========= =========
9
CONMED CORPORATION
CONSOLIDATING CONDENSED BALANCE SHEET
September 30, 2002
(in thousands)(unaudited)
Parent Non-
Company Subsidiary Guarantor Company
Only Guarantors Subsidiary Eliminations Total
---- ---------- ---------- ------------ -----
ASSETS
Current assets:
Cash and cash equivalents ......... $ -- $ 1,698 $ 815 $ -- $ 2,513
Accounts receivable, net .......... -- 11,417 44,353 -- 55,770
Inventories ....................... 23,829 94,051 -- -- 117,880
Deferred income taxes ............. 880 -- 225 -- 1,105
Prepaid expenses and other
current assets ................ 1,168 2,195 -- -- 3,363
--------- --------- --------- --------- ---------
Total current assets ........ 25,877 109,361 45,393 -- 180,631
--------- --------- --------- --------- ---------
Property, plant and equipment, net .... 47,099 47,757 -- -- 94,856
Goodwill, net ......................... 88,768 164,731 -- -- 253,499
Other intangible assets, net .......... 7,873 177,908 -- -- 185,781
Other assets .......................... 492,033 2,173 -- (488,206) 6,000
--------- --------- --------- --------- ---------
Total assets ...................... $ 661,650 $ 501,930 $ 45,393 $(488,206) $ 720,767
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt . $ 1,000 $ 1,272 $ -- $ -- $ 2,272
Accounts payable .................. 4,392 20,302 -- -- 24,694
Accrued compensation .............. 2,856 6,926 -- -- 9,782
Income taxes payable .............. 3,390 -- -- -- 3,390
Accrued interest .................. 863 246 49 -- 1,158
Other current liabilities ......... 4,181 2,305 -- -- 6,486
--------- --------- --------- --------- ---------
Total current liabilities ..... 16,682 31,051 49 -- 47,782
--------- --------- --------- --------- ---------
Long-term debt ........................ 230,761 20,799 -- -- 251,560
Deferred income taxes ................. 28,875 -- -- -- 28,875
Other long-term liabilities ........... 5,660 273,829 43,051 (309,662) 12,878
--------- --------- --------- --------- ---------
Total liabilities ................. 281,978 325,679 43,100 (309,662) 341,095
--------- --------- --------- --------- ---------
Shareholders' equity:
Preferred stock ................... -- -- -- -- --
Common stock ...................... 287 1 -- (1) 287
Paid-in capital ................... 228,515 -- 2,000 (2,000) 228,515
Retained earnings ................. 154,489 177,081 293 (177,374) 154,489
Accumulated other comprehensive
loss .......................... (3,200) (831) -- 831 (3,200)
Less common stock in
treasury, at cost ................ (419) -- -- -- (419)
--------- --------- --------- --------- ---------
Total shareholders' equity .... 379,672 176,251 2,293 (178,544) 379,672
--------- --------- --------- --------- ---------
Total liabilities and
shareholders' equity ........ $ 661,650 $ 501,930 $ 45,393 $(488,206) $ 720,767
========= ========= ========= ========= =========
10
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Three Months Ended September 30, 2001
(in thousands)
(unaudited)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
---- ---------- ------------ -----
Net sales ............................... $ 24,715 $ 80,603 $ -- $105,318
-------- -------- -------- --------
Cost of sales ........................... 14,342 36,990 -- 51,332
Selling and administrative expense....... 7,970 27,059 -- 35,029
Research and development expense ........ 332 3,159 -- 3,491
-------- -------- -------- --------
22,644 67,208 -- 89,852
-------- -------- -------- --------
Income from operations .................. 2,071 13,395 -- 15,466
Interest expense, net ................... -- 7,630 -- 7,630
-------- -------- -------- --------
Income before income taxes .............. 2,071 5,765 -- 7,836
Provision for income taxes .............. 746 2,075 -- 2,821
-------- -------- -------- --------
Income before equity in earnings
of unconsolidated subsidiaries ........ 1,325 3,690 -- 5,015
Equity in earnings of unconsolidated
subsidiaries .......................... 3,690 -- (3,690) --
-------- -------- -------- --------
Net income .............................. $ 5,015 $ 3,690 $ (3,690) $ 5,015
======== ======== ======== ========
11
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Three Months Ended September 30, 2002
(in thousands)
(unaudited)
Parent
Company Subsidiary Non-Guarantor Company
Only Guarantors Subsidiary Eliminations Total
---- ---------- ---------- ------------ -----
Net sales ................................... $ 26,632 $ 86,700 $ -- $ -- $ 113,332
-------- -------- -------- -------- ---------
Cost of sales ............................... 14,225 40,204 -- -- 54,429
Selling and administrative
expense ................................. 7,510 27,470 (418) -- 34,562
Research and development
expense ................................. 484 3,769 -- -- 4,253
-------- -------- -------- -------- ---------
22,219 71,443 (418) -- 93,244
-------- -------- -------- -------- ---------
Income from operations ...................... 4,413 15,257 418 -- 20,088
Interest expense, net ....................... -- 5,491 274 -- 5,765
-------- -------- -------- -------- ---------
Income before income taxes .................. 4,413 9,766 144 -- 14,323
Provision for income taxes .................. 1,589 3,515 52 -- 5,156
-------- -------- -------- -------- ---------
Income before equity in
earnings of unconsolidated
subsidiaries ............................ 2,824 6,251 92 -- 9,167
Equity in earnings of
unconsolidated subsidiaries ............. 6,343 -- -- (6,343) --
-------- -------- -------- -------- ---------
Income before extraordinary
item ..................................... 9,167 6,251 92 (6,343) 9,167
Extraordinary item, net
of income taxes ........................... 944 -- -- -- 944
-------- -------- -------- -------- ---------
Net income .................................. $ 8,223 $ 6,251 $ 92 $ (6,343) $ 8,223
======== ======== ======== ======== =========
12
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Nine Months Ended September 30, 2001
(in thousands)
(unaudited)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
---- ---------- ------------ -----
Net sales .............................. $ 65,688 $ 249,710 $ -- $ 315,398
--------- --------- --------- ---------
Cost of sales .......................... 38,641 112,330 -- 150,971
Selling and administrative expense ..... 20,135 83,645 -- 103,780
Research and development expense ....... 1,064 9,599 -- 10,663
--------- --------- --------- ---------
59,840 205,574 -- 265,414
--------- --------- --------- ---------
Income from operations ................. 5,848 44,136 -- 49,984
Interest expense, net .................. -- 23,809 -- 23,809
--------- --------- --------- ---------
Income before income taxes ............. 5,848 20,327 -- 26,175
Provision for income taxes ............. 2,106 7,317 -- 9,423
--------- --------- --------- ---------
Income before equity in earnings
of unconsolidated subsidiaries ....... 3,742 13,010 -- 16,752
Equity in earnings of unconsolidated
subsidiaries ......................... 13,010 -- (13,010) --
--------- --------- --------- ---------
Net income ............................. $ 16,752 $ 13,010 $ (13,010) $ 16,752
========= ========= ========= =========
13
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Nine Months Ended September 30, 2002
(in thousands)
(unaudited)
Parent
Company Subsidiary Non-Guarantor Company
Only Guarantors Subsidiary Eliminations Total
---- ---------- ---------- ------------ -----
Net sales ..................... $ 78,930 $ 258,876 $ -- $ -- $ 337,806
--------- --------- --------- --------- ---------
Cost of sales ................. 41,828 118,416 -- -- 160,244
Selling and administrative
expense ................... 22,886 82,447 (1,162) -- 104,171
Research and development
expense ................... 1,311 10,844 -- -- 12,155
--------- --------- --------- --------- ---------
66,025 211,707 (1,162) -- 276,570
--------- --------- --------- --------- ---------
Income from operations ........ 12,905 47,169 1,162 -- 61,236
Interest expense, net ......... -- 17,877 871 -- 18,748
--------- --------- --------- --------- ---------
Income before income taxes .... 12,905 29,292 291 -- 42,488
Provision for income taxes .... 4,646 10,544 105 -- 15,295
--------- --------- --------- --------- ---------
Income before equity in
earnings of unconsolidated
subsidiaries .............. 8,259 18,748 186 -- 27,193
Equity in earnings of
unconsolidated subsidiaries 18,934 -- -- (18,934) --
--------- --------- --------- --------- ---------
Income before extraordinary
item ........................ 27,193 18,748 186 (18,934) 27,193
Extraordinary item, net of
income taxes ................ 944 -- -- -- 944
--------- --------- --------- --------- ---------
Net income .................... $ 26,249 $ 18,748 $ 186 $ (18,934) $ 26,249
========= ========= ========= ========= =========
14
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 2001
(in thousands)
(unaudited)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
---- ---------- ------------ -----
Net cash provided by operating
activities ................................ $ 5,092 $ 18,480 $ -- $ 23,572
--------- -------- -------- --------
Cash flows from investing activities:
Net distributions from subsidiaries....... 15,990 -- (15,990) --
Purchases of property, plant and
equipment .......................... (9,639) (3,065) -- (12,704)
--------- -------- -------- --------
Net cash provided (used)
by investing activities ....... 6,351 (3,065) (15,990) (12,704)
--------- -------- -------- --------
Cash flows from financing:
Net distributions to parent ............ -- (15,990) 15,990 --
Net proceeds from exercise of
stock options ...................... 1,591 -- -- 1,591
Payments on debt ....................... (13,034) -- -- (13,034)
--------- -------- -------- --------
Net cash provided (used) by
financing activities ............ (11,443) (15,990) 15,990 (11,443)
--------- -------- -------- --------
Effect of exchange rate changes on cash
and cash equivalents ..................... -- (880) -- (880)
--------- -------- -------- --------
Net increase (decrease) in cash and
cash equivalents .......................... -- (1,455) -- (1,455)
Cash and cash equivalents at
beginning of period ....................... -- 3,470 -- 3,470
--------- -------- -------- --------
Cash and cash equivalents at
end of period ............................. $ -- $ 2,015 $ -- $ 2,015
========= ======== ======== ========
15
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 2002
(in thousands)
(unaudited)
Parent Non-
Company Subsidiary Guarantor Company
Only Guarantors Subsidiary Eliminations Total
---- ---------- ---------- ------------ -----
Net cash provided by operating activities .. $ 9,972 $ 18,946 $(388) $ -- $ 28,530
--------- -------- ----- -------- ---------
Cash flows from investing activities:
Net distributions from subsidiaries .... 11,820 -- -- (11,820) --
Payments related to business
acquisitions ......................... (2,359) -- -- -- (2,359)
Purchases of property, plant and
equipment .......................... (3,615) (6,946) -- -- (10,561)
--------- -------- ----- -------- ---------
Net cash provided (used)
by investing activities ........ 5,846 (6,946) -- (11,820) (12,920)
--------- -------- ----- -------- ---------
Cash flows from financing:
Net distributions to parent ............ -- (12,802) -- 12,802 --
Borrowings on note payable to parent ... -- -- 982 (982) --
Net proceeds from issuance of
common stock ......................... 66,123 -- -- -- 66,123
Net proceeds from exercise
of stock options ...................... 3,669 -- -- -- 3,669
Repurchase of warrant on common stock .. (2,000) -- -- -- (2,000)
Payments on debt ....................... (183,097) -- -- -- (183,097)
Proceeds of debt ....................... 101,000 -- -- -- 101,000
Payments related to issuance
of debt .............................. (1,513) -- -- -- (1,513)
--------- -------- ----- -------- ---------
Net cash provided (used) by
financing activities .......... (15,818) (12,802) 982 11,820 (15,818)
--------- -------- ----- -------- ---------
Effect of exchange rate changes on cash.....
and cash equivalents ................... -- 1,319 -- -- 1,319
--------- -------- ----- -------- ---------
Net increase (decrease) in cash
and cash equivalents ..................... -- 517 594 -- 1,111
Cash and cash equivalents
at beginning of period ................... -- 1,181 221 -- 1,402
--------- -------- ----- -------- ---------
Cash and cash equivalents
at end of period ......................... $ -- $ 1,698 $ 815 $ -- $ 2,513
========= ======== ===== ======== =========
16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements Made in this Form 10-Q
In this Form 10-Q, we make forward-looking statements about our financial
condition, results of operations and business. Forward-looking statements are
statements made by us concerning events that may or may not occur in the future.
These statements may be made directly in this document or may be "incorporated
by reference" from other documents. You can find many of these statements by
looking for words like "believes," "expects," "anticipates," "estimates" or
similar expressions.
Forward-Looking Statements are not Guarantees of Future Performance
Forward-looking statements involve known and unknown risks, uncertainties and
other factors, including those that 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 those identified under "Risk
Factors" in our Annual Report on Form 10-K for the year-ended December 31, 2001
and the following, among others:
o general economic and business conditions;
o changes in customer preferences;
o changes in technology;
o the introduction of new products;
o changes in business strategy;
o the possibility that United States or foreign regulatory and/or
administrative agencies might initiate enforcement actions against us or
our distributors;
o quality of our management and business abilities and the judgment of our
personnel; and
o the availability, terms and deployment of capital.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" below and "Business" in our Annual Report on Form 10-K for the
year-ended December 31, 2001 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-Q or to reflect the occurrence of
unanticipated events.
Critical Accounting Policies
The accounting policies discussed below are considered by management to be
critical to understanding our financial condition and results of operations.
Accounts receivable sale
On November 1, 2001, we entered into a five-year 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 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
17
interest") to a commercial paper conduit (the "conduit purchaser"). The conduit
purchaser's share of collections on accounts receivable are calculated as
defined in the accounts receivable sales agreement. Effectively, collections on
the pool of receivables flow first to the conduit purchaser and then to CRC, but
to the extent that the conduit purchaser's share of collections were less than
the amount of the conduit purchaser's asset interest, there is no recourse to
CONMED or CRC for such shortfall. For receivables that have been sold, CONMED
Corporation and its subsidiaries retain collection and administrative
responsibilities as agent for the conduit purchaser. As of December 31, 2001 and
September 30, 2002, the undivided percentage ownership interest in receivables
sold by CRC to the conduit purchaser aggregated $40.0 million and $38.0 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 conduit purchaser's financing
cost of issuing commercial paper, were $.3 million and $.9 million, in the three
and nine months ended September 30, 2002 and 2001, respectively.
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 conduit 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 qualify 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 conduit 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.
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. Goodwill and other intangible assets have been amortized over
periods ranging from 5 to 40 years through December 31, 2001. Because of our
history of growth through acquisitions, goodwill and other intangible assets
comprise a substantial portion (61.0% at September 30, 2002) of our total
assets.
In June 2001, the Financial Accounting Standards Board approved Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets",
("SFAS 142"). We adopted SFAS 142 effective January 1, 2002. Under this
standard, amortization of goodwill and certain intangible assets, including
certain intangibles recorded as a result of past business combinations, is to be
discontinued upon adoption of SFAS 142.
During 2002, we performed tests of goodwill and indefinite-lived intangible
assets as of January 1, 2002. We tested for impairment using the two-step
process prescribed in SFAS 142. The first step is identification for potential
impairment. The second step, which has been determined not to be necessary,
measures the amount of any impairment. No impairment losses have been recognized
as a result of these tests. During the three and nine months ended September 30,
2002, net income increased by approximately $1.4 million and $4.2 million
respectively, as a result of the adoption of SFAS 142.
18
Derivative financial instruments
We use an interest rate swap, a form of derivative financial instrument, to
manage interest rate risk. We have designated as a cash-flow hedge, an interest
rate swap which effectively converts $50.0 million of LIBOR-based floating rate
debt under our new senior credit agreement into fixed rate debt with a base
interest rate of 7.01%. The interest rate swap expires in June 2003 and is
included in liabilities on the balance sheet with a fair value approximating
$2.0 million. During the nine months ended September 30, 2002, gross holding
losses on the interest rate swap were $.9 million, before income taxes, and
holding losses of $1.9 million, before income taxes, were reclassified and
included in net income. There were no material changes in our market risk during
the three and nine months ended September 30, 2002. For a detailed discussion of
market risk, see our Annual Report on Form 10-K for the year ended December 31,
2001, Part II, Item 7A, Quantitative and Qualitative Disclosures About Market
Risk.
Revenue recognition
We recognize revenue upon shipment of product and passage of title to our
customers. Factors considered in our revenue recognition policy are as follows:
o 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.
o Payment by the customer is due under fixed payment terms. Even when the
sale is to a distributor, payment to us is not contractually or implicitly
delayed until the product is resold by the distributor.
o 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 shipment and we recognize revenue upon the
disposable product shipment.
o Product returns are only accepted at the discretion of the Company and in
keeping with our "Returned Goods Policy". Product returns have not been
significant historically.
o The terms of the Company's sales to customers do not involve any
obligations for the Company to perform future services. Limited warranties
are generally provided for capital equipment sales and provisions for
warranty are provided at the time of product shipment.
o Amounts billed to customers related to shipping and handling are included
in net sales. Shipping and handling costs are included in selling and
administrative expense.
o We sell to a diversified base of customers around the world and, therefore,
believe there is no material concentration of credit risk.
o 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 the
allowance for doubtful accounts of $1.2 million at September 30, 2002 is
adequate to provide for any probable losses from accounts receivable.
19
Results of Operations
Three months ended September 30, 2002 compared to three months ended September
30, 2001
The following table presents, as a percentage of net sales, certain categories
included in our unaudited consolidated statements of income for the periods
indicated:
Three Months Ended
September
2001 2002
-------- --------
(unaudited)
Net sales.................................. 100.0% 100.0%
Cost of sales.............................. 48.7 48.0
-------- --------
Gross margin.......................... 51.3 52.0
Selling and administrative expense......... 33.3 30.5
Research and development expense........... 3.3 3.8
-------- --------
Income from operations................ 14.7 17.7
Interest expense, net...................... 7.2 5.0
-------- --------
Income before income taxes
and extraordinary item............. 7.5 12.7
Provision for income taxes................. 2.7 4.6
-------- --------
Income before extraordinary item...... 4.8% 8.1%
======== ========
Sales for the quarter ended September 30, 2002 were $113.3 million, an increase
of 7.6% compared to sales of $105.3 million in the same quarter a year ago.
Adjusted for constant foreign currency exchange rates, sales growth in the third
quarter of 2002 would have been approximately 6.9% as compared to the same
period a year ago.
o Sales in our orthopedic businesses increased 8.3% to $69.1 million from
$63.8 million in the comparable quarter last year.
o Arthroscopy sales, which represented approximately 55.9% of total third
quarter 2002 orthopedic revenues, grew 4.0% to $38.6 million from $37.1
million in the same period a year ago on strength in sales of shoulder
repair products, scopes and video equipment.
o Powered surgical instrument sales, which represented approximately 44.1% of
orthopedic revenues, increased 14.2% to $30.5 million from $26.7 million in
the same quarter last year. We introduced our PowerPro(R) Battery Powered
Instrument line in February 2002, with first shipments to customers in
March 2002. During the third quarter 2002, sales of the PowerPro(R) battery
systems amounted to approximately $5 million. A portion of the third
quarter's sales of Powered Instruments were made to DePuy Orthopaedics,
("DePuy"), a Johnson and Johnson Company, pursuant to a distribution
agreement, which calls for providing sample units of the PowerPro(R)
product to the DePuy sales force.
o Patient care sales for the three months ended September 30, 2002 were $18.1
million, a 7.7% increase from $16.8 million in the same period a year ago,
driven primarily by increases in sales of our ECG electrode and automatic
defibrillator pad products.
o Electrosurgery sales for the three months ended September 30, 2002 were
$17.0 million, an increase of 1.2% from $16.8 million in the third quarter
of last year, as sales of electrosurgical generators and disposables were
flat compared with the same period a year ago.
20
o Sales of endoscopy products increased 15.2% to $9.1 million in the three
months ended September 30, 2002 from $7.9 million in the same period a year
ago.
Cost of sales increased to $54.4 million in the third quarter 2002 as compared
to $51.3 million in the same quarter a year ago, primarily as a result of the
increased sales volumes described above while gross margin percentage increased
to 52.0% in the third quarter of 2002 compared to 51.3% in the third quarter of
2001. During the quarter ended September 30, 2001, we incurred various
nonrecurring charges in connection with the July 2001 Imagyn acquisition. These
costs were primarily related to the transition in manufacturing of the Imagyn
product lines from Imagyn's Richland, Michigan facility to our manufacturing
plants in Utica, New York. Such costs totaled $.9 million in the third quarter
of 2001 and are included in cost of sales. Excluding the impact of these
non-recurring adjustments, cost of sales was $50.4 million. Gross margin
percentage for the third quarter 2001, excluding the Imagyn-related charges, was
52.1%. The decrease in gross margin percentage in the third quarter 2002 is
primarily a result of the sales of sample PowerPro(R) product to the DePuy sales
force as discussed above. These sample sales were at gross margins lower than
the margins realized for units sold to end-user customers and resulted in an
overall lower gross margin.
Selling and administrative expense decreased to $34.6 million in the third
quarter of 2002 as compared to $35.0 million in the third quarter of 2001. As a
percentage of sales, selling and administrative expense totaled 30.5% in the
third quarter of 2002 compared to 33.3% in the third quarter of 2001. During the
quarter ended September 30, 2002, selling and administrative expense decreased
by approximately $2.2 million, before income taxes, as a result of the adoption
of SFAS 142. Excluding the impact of the adoption of SFAS 142, selling and
administrative expense in the third quarter of 2002 would have been
approximately $36.8 million or 32.4% as a percentage of sales, decreasing by
approximately .9% when compared with the same period a year ago, but remaining
within the range of our historical percentages.
Research and development expense increased to $4.3 million in the third quarter
of 2002 as compared to $3.5 million in the third quarter of 2001. This increase
represents continued research and development efforts primarily focused on new
product development in the orthopedic product lines. As a percentage of sales,
research and development expense increased to 3.8% in the current quarter
compared to 3.3% in the same quarter a year ago but remains within the range of
our historical percentages.
Interest expense in the third quarter of 2002 was $5.8 million compared to $7.6
million in the third quarter of 2001. The decrease in interest expense is
primarily a result of lower total borrowings outstanding during the current
quarter as compared to the same period a year ago, as borrowings have declined
to $253.8 million at September 30, 2002 as compared to $388.4 million at
September 30, 2001. Additionally, the weighted average interest rates on our
borrowings has declined to 6.53% at September 30, 2002 as compared to 6.88% at
September 30, 2001.
During the quarter ended September 30, 2002, we terminated our old senior credit
agreement and entered into a new senior credit agreement. Accordingly, we
recorded an extraordinary charge on the early extinguishment of debt, of
approximately $.9 million, net of income taxes, to write-off the remaining
unamortized deferred financing costs associated with the approximately three
years remaining on the old senior credit agreement.
21
Nine months ended September 30, 2002 compared to nine months ended September 30,
2001
The following table presents, as a percentage of net sales, certain categories
included in our unaudited consolidated statements of income for the periods
indicated:
Nine Months Ended
September
2001 2002
-------- --------
(unaudited)
Net sales.................................... 100.0% 100.0%
Cost of sales................................ 47.9 47.4
-------- --------
Gross margin............................ 52.1 52.6
Selling and administrative expense........... 32.9 30.8
Research and development expense............. 3.4 3.6
-------- --------
Income from operations.................. 15.8 18.2
Interest expense, net........................ 7.5 5.6
-------- --------
Income before income taxes
And extraordinary item................. 8.3 12.6
Provision for income taxes................... 3.0 4.5
-------- --------
Income before extraordinary item........ 5.3% 8.1%
======== ========
Sales for the nine months ended September 30, 2002 were $337.8 million, an
increase of 7.1% compared to sales of $315.4 million in the same period a year
ago. Fluctuations in foreign currency exchange rates in the nine months ended
September 30, 2002 as compared to the same period a year ago did not have a
significant effect on sales.
o Sales in our orthopedic businesses increased 3.0% to $207.0 million from
$201.0 million in the comparable period last year.
o Arthroscopy sales, which represented approximately 58.6% of the third
quarter 2002 orthopedic revenues, grew 5.0% to $121.1 million from $115.3
million in the same period a year ago on strength in sales of disposable
products and video equipment.
o Powered surgical instrument sales, which represented approximately 41.5% of
orthopedic revenues, increased 0.2% to $85.9 million from $85.7 million in
the same quarter last year. We introduced our PowerPro(R) Battery Powered
Instrument line in February 2002, with first shipments to customers in
March 2002. During the third quarter 2002, sales of the PowerPro(R) battery
systems amounted to approximately $5 million. A portion of the third
quarter's sales of Powered Instruments were made to DePuy Orthopaedics,
("DePuy"), a Johnson and Johnson Company, pursuant to a distribution
agreement, which calls for providing sample units of the PowerPro(R)
product to the DePuy sales force.
o Patient care sales for the nine months ended September 30, 2002 were $52.5
million, a 1.0% increase from $52.0 million in the same period a year ago.
Sales of ECG and other patient care products were largely stable in the
first nine months of 2002 as compared with the same period a year ago.
o Electrosurgery sales for the nine months ended September 30, 2002 were
$50.8 million, an increase of 3.9% from $48.9 million in the same period a
year ago, driven by increases in electrosurgical disposables sales.
o Sales of endoscopy products increased to $27.5 million in the nine months
ended September 30, 2002 from $13.5 million in the same period a year ago,
primarily as a result of the July 2001 Imagyn acquisition.
22
Cost of sales increased to $160.2 million in the nine months ended September 30,
2002 compared to $151.0 million in the same period a year ago, primarily as a
result of the increased sales volumes described above, while gross margin
percentage increased to 52.6% in the nine months ended September 30, 2002
compared to 52.1% in the same period a year ago. During the quarter ended
September 30, 2001, we incurred various nonrecurring charges in connection with
the July 2001 Imagyn acquisition. These costs were related primarily to the
transition in manufacturing of the Imagyn product lines from Imagyn's Richland,
Michigan facility to our manufacturing plants in Utica, New York. Such costs
totaled $.9 million in the nine months ended September 30, 2001 and are included
in cost of sales. Excluding the impact of these non-recurring adjustments, cost
of sales for the nine months ended September 2001 was $150.1 million. Gross
margin percentage for the nine months ended September 30, 2001 excluding the
Imagyn-related charges, was 52.4%, consistent with the 52.6% experienced in the
nine months ended September 30, 2002.
Selling and administrative expense increased to $104.2 million in the nine
months ended September 30, 2002 as compared to $103.8 million in the same period
a year ago. As a percentage of sales, selling and administrative expense totaled
30.8% in the nine months ended September 30, 2002 compared to 32.9% in the same
period a year ago. During the nine months ended September 30, 2002, selling and
administrative expense decreased by approximately $6.6 million, before income
taxes, as a result of the adoption of SFAS 142. Excluding the impact of the
adoption of SFAS 142, selling and administrative expense in the third quarter of
2002 would have been approximately $110.8 million or 32.8% as a percentage of
sales, decreasing slightly when compared with the same period a year ago but
remaining within the range of our historical percentages.
Research and development expense increased to $12.2 million in the nine months
ended September 30, 2002 as compared to $10.7 million in the same period a year
ago. This increase represents continued research and development efforts
primarily focused on new product development in the orthopedic product lines. As
a percentage of sales, research and development expense was 3.6% in the nine
months ended September 30, 2002 compared to 3.4% in the same period a year ago.
Interest expense in the first nine months of 2002 was $18.7 million compared to
$23.8 million in the first nine months of 2001. The decrease in interest expense
is primarily a result of lower total borrowings outstanding during the current
period as compared to the same period a year ago, as borrowings have declined to
$253.8 million at September 30, 2002 as compared to $388.4 million at September
30, 2001. Additionally, the weighted average interest rates on our borrowings
has declined to 6.53% at September 30, 2002 as compared to 6.88% at September
30, 2001.
During the quarter ended September 30, 2002, we terminated our old senior credit
agreement and entered into a new senior credit agreement. Accordingly, we
recorded an extraordinary charge on the early extinguishment of debt of
approximately $.9 million, net of income taxes, to write-off the remaining
unamortized deferred financing costs associated with the approximately three
years remaining on the old senior credit agreement.
Liquidity and Capital Resources
Cash generated from our operations and borrowings under our revolving credit
facility have traditionally provided the working capital for our operations,
debt service under our credit facility and the funding of our capital
expenditures. In addition, we have used term borrowings, including:
o borrowings under our senior credit agreement;
o Senior Subordinated Notes issued to refinance borrowings under our
senior credit agreement, in the case of the acquisition of Linvatec
Corporation in 1997;
23
o borrowings under separate loan facilities, in the case of real
property acquisitions, to finance our acquisitions.
On May 29, 2002, we completed a public offering of 3.0 million shares of our
common stock. Net proceeds to the Company related to the sale of the shares
approximated $66.1 million and was used to reduce indebtedness under our old
senior credit agreement. We expect to continue to use cash flow from our
operations and borrowings under our revolving credit facility to finance our
operations, our debt service under our new senior credit facility and term
borrowings and the funding of our capital expenditures.
During the quarter ended September 30, 2002, we entered into a new $200 million
senior credit agreement (the "new senior credit agreement"). The new senior
credit agreement consists of a $100 million revolving credit facility and a $100
million term loan. The proceeds of the term loan portion of the new senior
credit agreement were used to eliminate the term loans and borrowings on the
revolving credit facility under the previously existing senior credit agreement
(the "old senior credit agreement"). The new senior credit agreement calls for
both components to extend for approximately five years, with the revolving
credit facility terminating on August 28, 2007 and the term loan expiring on
December 15, 2007. The term loan portion of the facility could be extended an
additional two years, provided our currently outstanding $130 million in 9%
Senior Subordinated Notes are refinanced or repaid by December 15, 2007. The
scheduled principal payments on the term loan portion of the new senior credit
agreement are $1.0 million annually with the remaining balance outstanding due
and payable on December 15, 2007. We may also be required, under certain
circumstances, to make additional principal payments based on excess cash flow
as defined in the new senior credit agreement. Approximately $99.0 million of
the revolving credit facility under the new senior credit agreement was
available at September 30, 2002. Interest rates on the term loan and revolving
credit facility components of the new senior credit agreement are LIBOR plus 275
basis points and LIBOR plus 250 basis points, respectively.
The new 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 new senior credit agreement contains covenants and restrictions
which, among other things, require maintenance of certain working capital levels
and financial ratios, prohibit dividend payments and restrict the incurrence of
certain indebtedness and other activities, including acquisitions and
dispositions. We are also required, under certain circumstances, to make
mandatory prepayments from net cash proceeds from any issue of equity and asset
sales.
The Senior Subordinated Notes are in aggregate principal amount of $130.0
million, have a maturity date of March 15, 2008 and bear interest at 9.0% per
annum which is payable semi-annually.
We used term loans to purchase the property in Largo, Florida utilized by our
Linvatec subsidiary. The term loans consist of a Class A note bearing interest
at 7.50% per annum with semiannual payments of principal and interest through
September 2009, a Class C 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 and a seller-financed note
bearing interest at 6.50% per annum with monthly payments of principal and
interest through July 2013. The principal balances outstanding on the Class A
note, Class C note and seller-financed note aggregate $11.2 million, $6.8
million and $4.0 million, respectively, at September 30, 2002.
Our net working capital position was $132.8 million at September 30, 2002 as
compared to $44.7 million at December 31, 2001. Included in net working capital
at December 31, 2001 was $56.0 million owed on our revolving credit facility
which was due to expire on December 31, 2002. As discussed above, during the
quarter ended September 30, 2002, we entered into a new $200 million senior
credit agreement. The proceeds of the new senior credit agreement were used to
eliminate the existing term loans and borrowings on the
24
revolving credit facility under the old senior credit agreement. Accordingly,
balances formerly outstanding on the old revolving credit facility have been
reclassified from current to long-term obligations.
We have a five-year 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, a wholly-owned 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 commercial paper conduit (the "conduit purchaser"). The conduit
purchaser's share of collections on accounts receivable are calculated as
defined in the accounts receivable sales agreement. Effectively, collections on
the pool of receivables flow first to the conduit purchaser and then to CRC. To
the extent that the conduit purchaser's share of collections were less than the
amount of the conduit purchaser's asset interest, there is no recourse to CONMED
or CRC for such shortfall. For receivables that have been sold, CONMED
Corporation and its subsidiaries retain collection and administrative
responsibilities as agent for the conduit purchaser. As of December 31, 2001 and
September 30, 2002, the undivided percentage ownership interest in receivables
sold by CRC to the conduit purchaser aggregated $40.0 million and $38.0 million,
respectively, which has been accounted for as a sale and reflected in the
balance sheet as a reduction in accounts receivable.
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 conduit 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 qualify 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 conduit purchaser rather than
being used to fund new receivable purchases. If this were to occur, we would
need to access an alternate source of working capital, such as our $100 million
revolving credit facility.
Net cash provided by operations, which we also refer to as "operating cash
flow," increased to $28.5 million in the nine months ended September 30, 2002
compared to $23.6 million for the same period a year ago. During the nine months
ended September 30, 2002, operating cash flow decreased by $2.0 million due to a
decrease in the sale of accounts receivable under the accounts receivable sales
agreement. Excluding the decrease in accounts receivable sales, operating cash
flow increased to $30.5 million.
In reconciling net income to operating cash flow, operating cash flow in the
third quarter of 2002 was positively impacted by depreciation, amortization and
increases in accounts payable and deferred income taxes and negatively impacted
primarily by increases in accounts receivable and inventory and decreases in
accrued compensation and accrued interest. The increases in accounts receivable
and inventory are primarily related to an increase in sales. The increases in
accounts payable and deferred income taxes and decreases in accrued compensation
and interest are primarily related to the timing of the payment of these
liabilities.
Capital expenditures in the nine months ended September 30, 2002 were $10.6
million compared to $12.7 million in the same period a year ago. These capital
expenditures represent the ongoing capital investment requirements of our
business and are expected to continue at the rate of approximately $12.0 to
$14.0 million annually. Net cash used
25
by investing activities in the nine months ended September 30, 2002 also
included $2.4 million related to the purchase of several product lines.
Financing activities in the nine months ended September 30, 2002 consist
primarily of the completion of a public offering of 3.0 million shares of our
common stock in the second quarter 2002 and the completion of a new $200 million
senior credit facility in the third quarter 2002. The $66.1 million in proceeds
from the stock offering were used to repay term loans under our old senior
credit agreement. Net repayments on our debt as a result of the stock offering
and cash generated from operations in the nine months ended September 30, 2002
totaled $82.1 million. Concurrent with the stock offering, we repurchased for
$2.0 million from Bristol-Myers Squibb Company a warrant exercisable for 1.5
million shares of our common stock. Proceeds from the exercise of stock options
in the nine months ended September 30, 2002 totaled $3.7 million.
Management believes that cash generated from operations, our current cash
resources and funds available under our new senior credit agreement will provide
sufficient liquidity to ensure continued working capital for operations, debt
service and funding of capital expenditures in the foreseeable future.
Contractual Obligations
There were no capital lease obligations or unconditional purchase obligations as
of September 30, 2002. The following table summarizes our contractual
obligations related to operating leases and long-term debt as of September 30,
2002:
(Amounts in thousands)
2002 2003 2004 2005 2006 Thereafter
---- ---- ---- ---- ----
Long-term debt ........... $ 833 $ 2,381 $ 2,554 $ 2,741 $ 2,943 $242,380
Operating lease
obligations............. 433 1,255 1,036 962 933 1,950
-------- -------- -------- -------- -------- --------
Total contractual
cash obligations ....... $ 1,266 $ 3,636 $ 3,590 $ 3,703 $ 3,876 $244,330
======== ======== ======== ======== ======== ========
Item 4. Controls and Procedures
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of these disclosure
controls and procedures were effective. No significant changes were made in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
26
Item 6. Exhibits and Reports on Form 8-K
List of Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
10.1 Credit Agreement, dated August 28, 2002, among CONMED
Corporation and the several banks and other financial
institutions or entities from time to time parties thereto.
10.2 Guarantee and Collateral Agreement, dated August 28, 2002,
made by CONMED Corporation and certain of its subsidiaries
in favor of JPMorgan Chase Bank.
Reports on Form 8-K
None
27
SIGNATURES
Pursuant to the requirements 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.
CONMED CORPORATION
(Registrant)
Date: October 31, 2002
/s/ Robert D. Shallish, Jr.
-------------------------------
Robert D. Shallish, Jr.
Vice President - Finance
(Principal Financial Officer)
28
CERTIFICATION
I, Eugene R. Corasanti, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CONMED Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
October 31, 2002
/s/ Eugene R. Corasanti
-------------------------
Eugene R. Corasanti
Chairman of the Board and
Chief Executive Officer
29
CERTIFICATION
I, Robert D. Shallish, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CONMED Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
October 31, 2002
/s/ Robert D. Shallish Jr.
--------------------------
Robert D. Shallish, Jr.
Vice President - Finance and
Chief Financial Officer
31
Exhibit Index
Sequential Page
Exhibit Number
10.1 Credit Agreement dated August 28, 2002
among CONMED Corporation and the several
banks and other financial institutions or (included in EDGAR
entities from time to time parties thereto. filing only)
10.2 Guarantee and Collateral Agreement, dated
August 28, 2002, made by CONMED Corporation
and certain of its subsidiaries in favor of (included in EDGAR
JPMorgan Chase Bank. filing only)
32