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UNITED STATES
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, 2003 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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes |X| No |_|
The number of shares outstanding of registrant's common stock, as of
October 30, 2003 is 29,049,234 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 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 20
Item 4. Controls and Procedures 20
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Item 1.
CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2002 2003 2002 2003
-------- -------- -------- --------
Net sales ........................... $113,332 $120,747 $337,806 $363,321
Cost of sales ....................... 54,429 57,516 160,244 173,303
-------- -------- -------- --------
Gross profit ........................ 58,903 63,231 177,562 190,018
Selling and administrative .......... 34,562 38,596 104,171 115,094
Research and development ............ 4,253 4,487 12,155 12,568
Write-off of purchased in-process
research and development assets ... -- -- -- 7,900
Other expense ....................... 1,475 1,153 1,475 4,883
-------- -------- -------- --------
40,290 44,236 117,801 140,445
-------- -------- -------- --------
Income from operations .............. 18,613 18,995 59,761 49,573
Interest expense .................... 5,765 3,829 18,748 15,228
-------- -------- -------- --------
Income before income taxes .......... 12,848 15,166 41,013 34,345
Provision for income taxes .......... 4,625 5,460 14,764 15,208
-------- -------- -------- --------
Net income .......................... $ 8,223 $ 9,706 $ 26,249 $ 19,137
======== ======== ======== ========
Per share data:
Net income
Basic ........................... $ .29 $ .34 $ .98 $ .66
Diluted ......................... .28 .33 .96 .66
Weighted average common shares
Basic ........................... 28,613 28,941 26,870 28,909
Diluted ......................... 29,043 29,391 27,470 29,190
See notes to consolidated condensed financial statements.
1
CONMED CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands except share amounts)
(unaudited)
December 31, September.30,
2002 2003
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 5,626 $ 11,122
Accounts receivable, net ........................... 58,093 61,206
Inventories ........................................ 120,443 127,583
Deferred income taxes .............................. 6,304 5,829
Prepaid expenses and other current assets .......... 3,200 3,430
--------- ---------
Total current assets ............................. 193,666 209,170
--------- ---------
Property, plant and equipment, net ................... 95,608 96,717
Goodwill ............................................. 262,394 292,152
Other intangible assets, net ......................... 180,271 192,330
Other assets ......................................... 10,201 11,117
--------- ---------
Total assets ..................................... $ 742,140 $ 801,486
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .................. $ 2,631 $ 4,067
Accounts payable ................................... 22,074 20,296
Accrued compensation ............................... 10,463 7,954
Income taxes payable ............................... 5,885 8,142
Accrued interest ................................... 3,794 1,604
Other current liabilities .......................... 13,127 15,051
--------- ---------
Total current liabilities ........................ 57,974 57,114
--------- ---------
Long-term debt ....................................... 254,756 276,883
Deferred income taxes ................................ 28,446 42,212
Other long-term liabilities .......................... 14,025 12,644
--------- ---------
Total liabilities ................................ 355,201 388,853
--------- ---------
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; 28,808,105 and
28,997,488 shares issued and outstanding in
2002 and 2003, respectively .................... 288 291
Paid-in capital .................................... 231,832 235,144
Retained earnings .................................. 162,391 181,528
Accumulated other comprehensive loss ............... (7,153) (3,911)
Less 37,500 shares of common stock in treasury,
at cost .......................................... (419) (419)
--------- ---------
Total shareholders' equity ....................... 386,939 412,633
--------- ---------
Total liabilities and shareholders equity ....... $ 742,140 $ 801,486
========= =========
See notes to consolidated condensed financial statements.
2
CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2002 and 2003
(in thousands)
(unaudited)
2002 2003
--------- ---------
Cash flows from operating activities:
Net income ............................................... $ 26,249 $ 19,137
--------- ---------
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation ....................................... 6,731 7,717
Amortization ....................................... 9,843 10,516
Deferred income taxes .............................. 7,973 8,302
Pension settlement charge .......................... -- 2,839
Write-off of deferred financing fees ............... 1,475 2,181
Write-off of purchased in-process research and
development assets ............................. -- 7,900
Increase (decrease) in cash flows
from changes in assets and liabilities:
Accounts receivable ...................... (2,588) (2,162)
Increase (decrease) in sale of
accounts receivable .................... (2,000) 2,000
Inventories .............................. (14,006) (8,588)
Accounts payable ......................... 4,808 (3,129)
Income taxes payable ..................... 883 2,642
Accrued compensation ..................... (2,081) (2,879)
Accrued interest ......................... (3,796) (2,190)
Other assets/liabilities, net ............ (4,961) (5,625)
--------- ---------
2,281 19,524
--------- ---------
Net cash provided by operating activities .......... 28,530 38,661
--------- ---------
Cash flows from investing activities:
Payments related to business acquisitions,
net of cash acquired ............................... (2,359) (52,307)
Purchases of property, plant, and equipment ............ (10,561) (6,291)
--------- ---------
Net cash used by investing activities .............. (12,920) (58,598)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock ............... 66,123 --
Net proceeds from exercise of stock options .............. 3,669 1,255
Repurchase of warrant on common stock .................... (2,000) --
Payments on debt ......................................... (183,097) (136,437)
Proceeds of debt ......................................... 101,000 160,000
Payments related to issuance of debt ..................... (1,513) (1,300)
--------- ---------
Net cash provided (used) by financing activities ... (15,818) 23,518
--------- ---------
Effect of exchange rate changes
on cash and cash equivalents ........................... 1,319 1,915
--------- ---------
Net increase in cash and cash equivalents .................. 1,111 5,496
Cash and cash equivalents at beginning of period ........... 1,402 5,626
--------- ---------
Cash and cash equivalents at end of period ................. $ 2,513 $ 11,122
========= =========
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 a leading developer, manufacturer and supplier of RF
electrosurgery systems used routinely to cut and cauterize tissue in nearly all
types of surgical procedures worldwide, endoscopy products such as trocars, clip
appliers, scissors and surgical staplers and a full line of ECG electrodes for
heart monitoring and other patient care products. We also offer integrated
operating room systems and intensive care unit service managers. 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.
Stock-based Compensation
We account for our stock-based compensation plans under the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". No compensation expense has been recognized in the accompanying
financial statements relative to our stock option plans. Pro forma information
regarding net income and earnings per share is required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" , as amended, and has been determined as if we had accounted for
our employee stock options under the fair value method described in that
statement.
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
Three months ended Nine months ended
September 30, September 30,
----------------- -------------------
2002 2003 2002 2003
------ ------ ------- -------
Net income - as reported .......... $8,223 $9,706 $26,249 $19,137
------ ------ ------- -------
Pro forma stock-based employee
compensation expense, net of
related income tax effect ....... (559) (586) (1,583) (1,689)
------ ------ ------- -------
Net income - pro forma ............ $7,664 $9,120 $24,666 $17,448
====== ====== ======= =======
EPS - as reported:
Basic ........................... $ .29 $ .34 $ .98 $ .66
Diluted ......................... .28 .33 .96 .66
EPS - pro forma:
Basic ........................... $ .27 $ .32 $ .92 $ .60
Diluted ......................... .26 .31 .90 .60
4
Note 2 - Interim financial information
The statements for the three and nine months ended September 30, 2002 and 2003
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 results of operations for the
three and nine months ended September 30, 2003 are not necessarily indicative of
the results of operations to be expected for any other quarter nor for the year
ending December 31, 2003. 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, 2002 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 30, September 30,
2002 2003 2002 2003
------- ------- ------- -------
Net income ...................... $ 8,223 $ 9,706 $26,249 $19,137
------- ------- ------- -------
Other comprehensive income:
Foreign currency
translation adjustment ...... (139) 208 1,338 2,396
Cash flow hedging
(net of income taxes) ....... 221 191 659 846
------- ------- ------- -------
Comprehensive income .......... $ 8,305 $10,105 $28,246 $22,379
======= ======= ======= =======
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, 2002 ........... $(5,086) $(1,159) $(908) $(7,153)
Foreign currency translation
adjustments .................... -- 2,396 -- 2,396
Cash flow hedging (net of
income taxes) .................. -- -- 846 846
------- ------- ----- -------
Balance, September 30, 2003 .......... $(5,086) $ 1,237 $ (62) $(3,911)
======= ======= ===== =======
Note 4 - Inventories
The components of inventory are as follows:
December 31, September 30,
2002 2003
------------ -------------
Raw materials .................................... $ 44,701 $ 39,905
Work-in-process .................................. 12,869 14,898
Finished goods ................................... 62,873 72,780
-------- --------
Total ...................................... $120,443 $127,583
======== ========
5
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,
------------------ -----------------
2002 2003 2002 2003
------ ------ ------ ------
Shares used in the calculation
of Basic EPS(weighted average
shares outstanding) .................. 28,613 28,941 26,870 28,909
Effect of dilutive potential
securities ........................... 430 450 600 281
------ ------ ------ ------
Shares used in the calculation
of Diluted EPS ....................... 29,043 29,391 27,470 29,190
====== ====== ====== ======
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 approximately 1.2
million for the three months ended September 30, 2002, and .6 million for the
nine months ended September 30, 2002. Such shares aggregated approximately .9
million for the three months ended September 30, 2003 and 1.5 million for the
nine months ended September 30, 2003.
Note 6 - Business acquisitions
As more fully described in our report on Form 10-Q/A for the quarter ended March
31, 2003, we acquired the stock of Bionx Implants, Inc. on March 10, 2003 for
$47.0 million in cash (the "Bionx acquisition"). Bionx develops and manufactures
self-reinforced resorbable polymer implants for use in a variety of orthopedic
applications. In connection with the Bionx acquisition, during the quarter-ended
March 31, 2003, we wrote-off $7.9 million in purchased in-process research and
development assets. No benefit for income taxes was recorded on the write-off of
purchased in-process research and development assets as these costs are not
deductible for income tax purposes.
Pro forma statements of income for the three and nine months ended September 30,
2003, assuming the Bionx acquisition occurred as of January 1, 2002 are
presented below. The proforma net income and earnings per share for each period
presented exclude the $7.9 million write-off of purchased in-process research
and development assets.
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
2002 2003 2002 2003
-------- -------- -------- --------
Net sales ...................... $117,633 $120,747 $351,434 $367,003
Net income ..................... $ 7,558 $ 9,706 $ 24,806 $ 26,473
Basic ........................ $ .26 $ .34 $ .92 $ .92
Diluted ...................... .26 .33 .90 .91
During the three and nine months ended September 30, 2003, we incurred
approximately $.4 million and $3.7 million, respectively, in other acquisition
expenses related primarily
6
to the December 31, 2002 acquisition of CORE Dynamics, Inc. (the "CORE
acquisition") and the Bionx acquisition of which $.4 million and $3.0 million,
respectively, have been recorded in other expense in the three and nine months
ended September 30, 2003, and $.7 million has been recorded to cost of sales in
the nine months ended September 30, 2003. Those expenses recorded to other
expense consist of various acquisition integration costs to wind down CORE
operations in Jacksonville, Florida and Bionx operations in Blue Bell,
Pennsylvania. Those expenses recorded to cost of sales consist of the step-up to
fair value related to the sale of inventory acquired as a result of the CORE and
Bionx acquisitions as well as certain training and transition-related costs
related to the transfer of CORE's manufacturing operations.
On June 30, 2003, we acquired an electrosurgery business for $2.9 million in
cash. Goodwill recognized in the transaction amounted to $2.4 million and is
expected to be fully deductible for income tax purposes.
Note 7 - Other expense
Other expense (income) consists of the following:
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2002 2003 2002 2003
------ ------ ------ -------
Gain on settlement of a contractual
dispute, net of legal costs ...... $ -- $ -- $ -- $(9,000)
Pension settlement costs ............. -- 758 -- 2,839
Acquisition-related costs ............ -- 395 -- 2,966
Loss on early extinguishments
of debt .......................... 1,475 -- 1,475 8,078
------ ------ ------ -------
Other expense ................ $1,475 $1,153 $1,475 $ 4,883
====== ====== ====== =======
On March 10, 2003, we entered into an agreement with Bristol-Myers Squibb
Company ("BMS") and Zimmer, Inc., ("Zimmer") to settle a contractual dispute
related to the 1997 sale by BMS and its then subsidiary, Zimmer, of Linvatec
Corporation to CONMED Corporation. As a result of the agreement, BMS paid us
$9.5 million in cash, which was recorded in the quarter ended March 31, 2003, as
a gain on settlement of a contractual dispute, net of $.5 million in legal
costs.
During the quarter ended June 30, 2003, we announced a plan to restructure our
orthopedic sales force by increasing our domestic sales force from 180 to 230
sales representatives. The increase is part of our integration plan for the
Bionx acquisition discussed in Note 6 to the consolidated condensed financial
statements. As part of the orthopedic sales force restructuring, we converted 90
direct employee sales representatives into nine independent sales agent groups.
As a result of this restructuring, we now have 18 exclusive orthopedic sales
agent groups managing 230 orthopedic sales representatives. As a result of the
termination of the 90 direct employee sales representatives, we incurred costs
of $.8 million and $2.8 million, respectively, in the three and nine months
ended September 30, 2003, related to settlement losses of pension obligations,
pursuant to Statement of Financial Accounting Standards No. 88 , "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits".
During the three and nine months ended September 30, 2003, we incurred $.4
million and $3.7 million, respectively, in costs related primarily to the CORE
acquisition and the Bionx acquisition of which $.4 million and $3.0 million,
respectively, has been recorded in other expense as discussed in Note 6 to the
consolidated condensed financial statements.
7
During the six months ended June 30, 2003 we purchased all $130.0 million of our
9% senior subordinated notes (the "Notes") and recorded expense of $8.1 million
in premium and unamortized deferred financing costs to other expense related to
these purchases. We financed the purchases through amendment of our $200.0
million senior credit agreement which expanded the existing term loan facility
under the senior credit agreement by $160.0 million to $360.0 million (the
"expanded term loan facility"). The proceeds of the expanded term loan facility
were used to reduce borrowings outstanding on the revolving credit facility, to
fund the purchase of the outstanding Notes and related accrued interest, and
fund payment of the 4.5% call premium on the Notes. Proceeds of the expanded
term loan facility were also used to fund payment of bank and legal fees
associated with amending the senior credit agreement. In connection with the
purchase of the Notes, we wrote off $5.8 million in 4.5% call premium and $2.3
million in unamortized deferred financing costs to other expense in the nine
months ended September 30, 2003.
During the quarter ended September 30, 2002, we entered into our $200 million
senior credit agreement. Deferred financing fees of $1.5 million related to the
previously existing credit agreement were written off as an extraordinary charge
in 2002 but have been reclassified to other expense as a result of our adoption
of Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections", in 2003.
Note 8- Goodwill and other intangible assets
The changes in the net carrying amount of goodwill for the nine months ended
September 30, 2003 are as follows:
Balance as of January 1, 2003 ...................................... $262,394
Goodwill acquired .................................................. 29,360
Foreign currency translation ....................................... 398
--------
Balance as of September 30, 2003 ................................... $292,152
========
Other intangible assets consist of the following:
December 31, 2002 September 30, 2003
-------------------------- -------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amortized intangible assets: Amount Amortization Amount Amortization
--------- ------------ --------- ------------
Customer relationships ................. $ 96,712 $ (12,725) $ 105,712 $(14,752)
Patents and other intangible assets .... 23,674 (13,534) 30,098 (15,672)
Unamortized intangible assets:
Trademarks and tradenames .............. 86,144 -- 86,944 --
--------- --------- --------- --------
$ 206,530 $ (26,259) $ 222,754 $(30,424)
========= ========= ========= ========
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 22 years.
Customer relationships are being amortized over 38 years. Patents and other
intangible assets are being amortized over a weighted average life of 9 years.
The trademarks and tradenames intangible asset has been determined to have an
indefinite life and therefore is not amortized.
8
Amortization expense related to intangible assets which are subject to
amortization totaled $1,561 and $4,165 in the three and nine months ended
September 30, 2003, respectively, and $1,397 and $4,171 in the three and nine
months ended September 30, 2002, respectively, and is included in selling and
administrative expense on the consolidated condensed statement of income.
The estimated amortization expense for the year ending December 31, 2003 and for
each of the five succeeding years is as follows:
2003 $5,744
2004 5,953
2005 5,058
2006 4,484
2007 4,184
2008 3,888
In accordance with Statement of Financial Accounting Standards ("SFAS") 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
annual impairment testing. The identification and measurement of goodwill
impairment involves the estimation of the fair value of our business. The
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 can 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 on an annual basis to determine
whether events and circumstances warrant a revision to the remaining period of
amortization. An intangible asset is determined to be impaired when estimate
future cash flows indicate the carrying amount of the asset may not be
recoverable. We intend to perform impairment testing of our goodwill and
intangible assets during the fourth quarter of 2003. Although no goodwill or
other intangible asset impairment has been recorded to date, there can be no
assurances that future impairment will not occur.
Note 9 -- Guarantees
We provide service and warranty policies on certain of our products at the time
of sale. 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.
The changes in the carrying amount of service and product warranties for the
nine months ended September 30, 2003 are as follows:
Balance as of January 1, 2003 ...................................... $ 3,213
Provision for warranties ........................................... 3,272
Claims made ........................................................ (3,005)
-------
Balance as of September 30, 2003 ................................... $ 3,480
=======
Note 10 - New Accounting Pronouncements
In January 2003, FIN No. 46, "Consolidation of Variable Interest Entities" was
issued. The interpretation provides guidance on consolidating variable interest
entities and applies immediately to variable interests created after January 31,
2003. The guidelines of the interpretation are applicable for us in the fourth
quarter 2003 financial statements for variable interest entities created before
February 1, 2003. The interpretation requires variable interest entities to be
consolidated if the equity investment at risk is not sufficient to permit an
entity to finance its activities without support from other parties or the
equity investors lack certain specified
9
characteristics. Adoption of this pronouncement has not had and is not expected
to have any material impact on our financial condition or results of operations
during 2003.
In April 2003, SFAS No. 149 "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" was issued. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments embedded
in other contracts and for hedging activities under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities". SFAS No. 149 became
applicable for us in our third quarter 2003. Adoption of this pronouncement has
not had any material impact on our financial condition or results of operations
during 2003.
In May 2003, SFAS No. 150 "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" was issued. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability, many of which were previously classified as equity. SFAS No. 150
became applicable for us in our third quarter 2003. Adoption of this
pronouncement has not had any material impact on our financial condition or
results of operations during 2003.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,"
which updates, clarifies, and simplifies certain existing accounting
pronouncements beginning at various dates in 2002 and 2003. This Statement
rescinds SFAS 4 and SFAS 64, which required net gains or losses from the
extinguishment of debt to be classified as an extraordinary item in the income
statement. These gains and losses will now be classified as extraordinary only
if they meet the criteria for such classification as outlined in Accounting
Principles Board ("APB") Opinion 30, which allows for extraordinary treatment if
the item is material and both unusual and infrequent in nature. We adopted this
pronouncement during 2003. As a result we have reclassified the extraordinary
loss recognized in the third quarter of 2002 related to the refinancing of debt
to ordinary income in this Form 10-Q.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses financial accounting and
reporting for costs associated with exit or disposal activities. This Statement
supersedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit and Activity
(including Certain Costs Incurred in a Restructuring)." The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. This pronouncement has not
had an impact on our financial condition or results of operations during 2003.
In November 2002, FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" was issued. The interpretation provides guidance on the
guarantor's accounting and disclosure requirements for guarantees, including
indirect guarantees of indebtedness of others. We have adopted the disclosure
requirements of the interpretation as of December 31, 2002. The accounting
guidelines are applicable to guarantees issued after December 31, 2002 and
require that we record a liability for the fair value of such guarantees in the
balance sheet. FIN 45 has not had any material accounting impact on our
financial condition or results of operations.
10
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, 2002
and the following, among others:
o general economic and business conditions;
o cyclical customer purchasing patterns due to budgetary and other
constraints;
o changes in customer preferences;
o competition;
o changes in technology;
o our ability to manufacture product consistently and in a timely manner,
especially those products involving delicate or complex manufacturing
processes;
o the introduction and acceptance of new products, including our
PowerPro(R) battery-powered instrument product line;
o the success of our distribution arrangement with DePuy Orthopaedics;
o the integration of any acquisition, including the Bionx acquisition;
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 our indebtedness;
o quality of our management and business abilities and the judgment of our
personnel;
o the risk of litigation, especially patent litigation as well as the cost
associated with patent and other litigation;
o changes in regulatory requirements; 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, 2002 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.
11
Critical Accounting Estimates
Preparation of our financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Note 1 to the consolidated financial statements in our Annual
Report on Form 10K for the year-ended December 31, 2002 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
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. The cost of the
equipment is amortized over the terms of the commitment agreements.
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. We accrue for sales returns,
rebates and allowances based upon analysis of historical data.
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 $1.6
million at September 30, 2003 is adequate to provide for any
probable losses from accounts receivable.
12
Business Acquisitions
We completed acquisitions in 2003 with purchase prices totaling approximately
$50.0 million and have a history of growth through acquisitions. The assets and
liabilities of acquired businesses are recorded under the purchase method at
their estimated fair values at the dates 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 $292.2 million and other intangible assets of $192.3
million at September 30, 2003.
In accordance with Statement of Financial Accounting Standards ("SFAS") 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
annual impairment testing. The identification and measurement of goodwill
impairment involves the estimation of the fair value of our business. The
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 can 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 on an annual basis 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
future cash flows indicate the carrying amount of the asset may not be
recoverable. Although no goodwill or other intangible asset impairment has been
recorded to date, there can be no assurances that future impairment will not
occur.
In connection with the Bionx acquisition, significant estimates were made in the
valuation of the purchased in-process research and development assets. With the
assistance of a third-party valuation, $7.9 million of the purchase price was
determined to represent the estimated fair value of projects that, as of the
acquisition date had not reached technological feasibility and had no
alternative future use. Accordingly, this amount of purchased in-process
research and development assets was written-off in accordance with FASB
Interpretation No. 4, "Applicability of FASB Statement No. 2 to Business
Combinations Accounted for by the Purchase Method". The purchased in-process
research and development value relates to next generation sports medicine and
orthopedic products, which have been or are expected to be released between the
second quarter of 2003 and fourth quarter of 2004. The acquired projects include
enhancements and upgrades to existing device technology, introduction of new
device functionality and the development of new materials technology for sports
medicine and orthopedic applications.
The value of the in-process research and development was calculated using a
discounted cash flow analysis of the anticipated net cash flow stream associated
with the in-process technology of the related product sales. The estimated net
cash flows were discounted using a discount rate of 22%, which was based on the
weighted-average cost of capital for publicly-traded companies within the
medical device industry and adjusted for the stage of completion of each of the
in-process research and development projects. The risk and return considerations
surrounding the stage of completion were based on costs, man-hours and
complexity of the work completed versus to be completed and other risks
associated with achieving technological feasibility. In total, these projects
were approximately 40% complete as of the acquisition date. The total budgeted
costs for the projects were approximately $5.5 million and the remaining costs
to complete these projects were approximately $3.3 million as of the acquisition
date.
The major risks and uncertainties associated with the timely and successful
completion of these projects consist of the ability to confirm the safety and
efficacy of the technologies and products based on the data from clinical trials
and obtaining the necessary regulatory approvals. In addition, no assurance can
be given that the underlying assumptions used to forecast the cash flows or the
timely and successful
13
completion of such projects will materialize, as estimated. For these reasons,
among others, actual results may vary significantly from the estimated results.
Pension Plans
We sponsor defined benefit pension plans for the Company and its subsidiaries.
Major assumptions used in the accounting for these plans include the discount
rate, expected return on plan assets and rate of increase in employee
compensation levels. Assumptions are determined based on Company data and
appropriate market indicators, and are evaluated each year as of the plans'
measurement date. A change in any of these assumptions would have an effect on
net periodic pension costs reported in the consolidated financial statements.
Lower market interest rates and plan asset returns have resulted in declines in
pension plan asset performance and funded status and higher pension expense. The
discount rate used in determining pension expense in 2003 is 6.75%.
Income Taxes
The recorded future tax benefit arising from net deductible temporary
differences and tax carryforwards is approximately $11.0 million at September
30, 2003. 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.
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 can be impacted by changes to tax laws, changes to statutory
tax rates and future taxable income levels. In the event we were to determine
that we would not be able to realize all or a portion of our deferred tax assets
in the future, we would reduce such amounts through a charge to income in the
period that such determination was made.
Results of Operations
Three months ended September 30, 2003 compared to three months ended September
30, 2002
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 30,
2002 2003
------ ------
(unaudited)
Net sales .............................................. 100.0% 100.0%
Cost of sales .......................................... 48.0 47.6
------ ------
Gross profit ...................................... 52.0 52.4
Selling and administrative ............................. 30.5 32.0
Research and development ............................... 3.8 3.7
Other expense .......................................... 1.3 1.0
------ ------
Income from operations ............................ 16.4 15.7
Interest expense ....................................... 5.0 3.2
------ ------
Income before income taxes ........................ 11.4 12.5
Provision for income taxes ............................. 4.1 4.5
------ ------
Net income ........................................ 7.3% 8.0%
====== ======
14
Sales for the quarter ended September 30, 2003 were $120.7 million, an increase
of 6.5% compared to sales of $113.3 million in the same quarter a year ago.
Favorable changes in foreign currency exchange rates accounted for 1.8% of our
sales growth.
o Sales in our orthopedic businesses increased 3.5% to $71.5 million
from $69.1 million in the same quarter last year.
o Arthroscopy sales, which represented 59.0% of total third quarter
2003 orthopedic revenues, grew 9.3% to $42.2 million from $38.6
million in the same quarter last year, as a result of the Bionx
acquisition (Note 6 to the consolidated condensed financial
statements).
o Powered surgical instrument sales, which represented 41.0% of total
third quarter orthopedic revenues, decreased 3.9% to $29.3 million
from $30.5 million in the same quarter last year. Sales in the same
quarter a year ago included a $3.0 million initial stocking order to
DePuy Orthopaedics in conjunction with a co-marketing agreement for
the PowerPro(R) battery powered instrument product line.
o Patient care sales for the three months ended September 30, 2003
were $17.1 million, a decrease of 5.5% when compared to $18.1
million in the same quarter last year on lower sales of ECG products
to distributors.
o Electrosurgery sales for the three months ended September 30, 2003
were $20.6 million, an increase of 21.2% when compared to $17.0
million in the same quarter last year, as we gained sales as a
result of our newly-introduced System 5000(R) electrosurgical
generator.
o Sales of endoscopy products increased 20.9% to $11.0 million in the
three months ended September 30, 2003 from $9.1 million in the same
quarter last year, as a result of the CORE acquisition (See Note 6
to the consolidated condensed financial statements).
o Sales of integrated operating room systems were $.5 million in the
third quarter of 2003. This business is the result of our fourth
quarter 2002 acquisitions of ValMed Corporation and Nortrex Medical
Corporation.
Cost of sales increased to $57.5 million in the third quarter 2003 as compared
to $54.4 million in the same quarter last year, primarily as a result of the
increased sales volumes described above while gross margin percentage improved
to 52.4% in the third quarter of 2003, as compared to 52.0% in the third quarter
of 2002.
Selling and administrative expense increased to $38.6 million in the third
quarter of 2003 as compared to $34.6 million in the third quarter of 2002. As a
percentage of sales, selling and administrative expense totaled 32.0% in the
third quarter of 2003, compared to 30.5% in the third quarter of 2002. During
the second quarter we announced a plan to restructure our orthopedic sales force
by increasing our domestic sales force from 180 to 230 sales representatives.
The increase is part of our integration plan for the Bionx acquisition. As part
of the orthopedic sales force restructuring, we converted 90 direct employee
sales representatives into nine independent sales agent groups. As a result of
this restructuring, we will have 18 exclusive orthopedic sales agent groups
managing 230 orthopedic sales representatives. The increase in selling and
administrative expense as a percentage of sales is a result of higher costs
associated with this sales force expansion which is intended to result in
improved sales growth in our orthopedic product lines.
Research and development expense increased to $4.5 million in the third quarter
of 2003 as compared to $4.3 million in the third quarter of 2002. As a
percentage of sales, research and development expense was 3.7% in the current
quarter, consistent with the 3.8% experienced in the same quarter a year ago.
15
As discussed in Note 7 to the consolidated condensed financial statements, other
expense in the third quarter 2003 is comprised of pension settlement costs of
$.8 million and acquisition-related costs of $.4 million. In the third quarter
2002, we entered into our present senior credit agreement. As a result, $1.5
million in unamortized deferred financing fees related to the previously
existing credit agreement were written-off and are included in other expense.
Interest expense in the third quarter of 2003 was $3.8 million compared to $5.8
million in the third quarter of 2002. The decrease in interest expense is
primarily a result of lower weighted average interest rates on our borrowings,
which have declined to 4.15% at September 30, 2003 as compared to 6.53% at
September 30, 2002, offsetting an increase in borrowings at September 30, 2003
compared to September 30, 2002 of approximately $27.2 million, related to the
Bionx acquisition. The decrease in weighted average interest rates on our
borrowings is primarily due to our redemption in the second quarter 2003 of our
$130 million in 9% senior subordinated notes through borrowings under our senior
credit agreement at LIBOR plus 2.75% or 3.89% at September 30, 2003 as discussed
in Note 7 to the consolidated condensed financial statements.
Provision for income taxes has been recorded at an effective rate of 36% for the
third quarter 2003 and 2002. A reconciliation of the United States statutory
income tax rate to our effective tax rate is included in Note 7 to the Company's
financial statements for the year ended December 31, 2002 included in our Annual
Report to the Securities and Exchange Commission on Form 10-K.
Results of Operations
Nine months ended September 30, 2003 compared to nine months ended September 30,
2002
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 30,
2002 2003
------ ------
(unaudited)
Net sales .............................................. 100.0% 100.0%
Cost of sales .......................................... 47.4 47.7
------ ------
Gross profit ...................................... 52.6 52.3
Selling and administrative ............................. 30.8 31.7
Research and development ............................... 3.6 3.5
In-process R & D write-off ............................. -- 2.2
Other expense .......................................... .4 1.3
------ ------
Income from operations ............................ 17.8 13.6
Interest expense ....................................... 5.5 4.2
------ ------
Income before income taxes ........................ 12.3 9.4
Provision for income taxes ............................. 4.5 4.1
------ ------
Net income ........................................ 7.8% 5.3%
====== ======
Sales for the nine months ended September 30, 2003 were $363.3 million, an
increase of 7.5% compared to sales of $337.8 million in the same period a year
ago. Favorable changes in foreign currency exchange rates accounted for 2.2% of
our sales growth.
o Sales in our orthopedic businesses increased 5.5% to $218.3 million
from $207.0 million in the same period last year.
o Arthroscopy sales, which represented 59.0% of first nine months of
2003 orthopedic revenues, grew 5.9% to $128.3 million from $121.1
million in the same period last
16
year, as a result of the Bionx acquisition (Note 6 to the
consolidated condensed financial statements).
o Powered surgical instrument sales, which represented 41.0% of first
nine months of 2003 orthopedic revenues, increased 4.8% to $90.0
million from $85.9 million in the same period last year on higher
sales of our newly-introduced PowerPro(R) battery powered instrument
product line.
o Patient care sales for the nine months ended September 30, 2003 were
$52.1 million, compared to $52.5 million in the same period last
year as decreases in sales of our ECG and suction instrument product
lines offset increases in sales of automatic defibrillator pads and
other patient care products.
o Electrosurgery sales for the nine months ended September 30, 2003
were $56.3 million, compared to $50.8 million in the same period
last year as we gained sales as a result of our newly-introduced
System 5000(R) electrosurgical generator compared with the same
period last year.
o Sales of endoscopy products increased 22.2% to $33.6 million in the
nine months ended September 30, 2003 from $27.5 million in the same
period last year, as a result of the CORE acquisition (Note 6 to the
consolidated condensed financial statements).
o Sales of integrated operating room systems were $2.9 million in the
nine months ended September 30, 2003. This business is the result of
our fourth quarter 2002 acquisitions of ValMed Corporation and
Nortrex Medical Corporation.
Cost of sales increased to $173.3 million in the first nine months of 2003 as
compared to $160.2 million in the same period a year ago, primarily as a result
of the increased sales volumes described above while gross margin percentage was
52.3% in the nine months of 2003, compared with the 52.6% experienced in the
nine months of 2002. Included in cost of sales during the nine months ended
September 30, 2003 were approximately $.7 million in acquisition-related costs.
Selling and administrative expense increased to $115.1 million in the first nine
months of 2003 as compared to $104.2 million in the same period a year ago. As a
percentage of sales, selling and administrative expense totaled 31.7% in the
first nine months of 2003 compared to 30.8% in the first nine months of 2002.
The increase in selling and administrative expense as a percentage of sales is
due to increased marketing costs associated with recently launched product lines
including the integrated operating room systems product lines, PowerPro(R), and
new electrosurgical generators, as well as higher costs associated with the
orthopedic sales force expansion discussed above which is expected to result in
improved sales growth in our orthopedic product lines.
Research and development expense amounted to $12.6 million in the first nine
months of 2003 as compared to $12.2 million in the first nine months of 2002. As
a percentage of sales, research and development expense was 3.5% in the first
nine months of 2003, consistent with the 3.6% in the same period a year ago.
As discussed in Note 6 to the consolidated condensed financial statements, we
wrote off purchased in-process research and development assets in connection
with the Bionx acquisition of $7.9 million in the first quarter of 2003.
As discussed in Note 7 to the consolidated condensed financial statements, other
expense is comprised of a net gain on settlement of a contractual dispute of
$9.0 million, pension settlement costs of $2.8 million, acquisition related
costs of $3.0 million and the loss of $8.1 million on the early extinguishment
of subordinated debt. In the third quarter 2002, we entered into our present
senior credit agreement. As a result, $1.5 million in unamortized deferred
financing fees related to the previously existing credit
17
agreement were written-off and are included in other expense in the nine months
ended September 30, 2002.
Interest expense in the first nine months of 2003 was $15.2 million compared to
$18.7 million in the first nine months of 2002. The decrease in interest expense
is primarily a result of lower weighted average interest rates on our
borrowings, which have declined to 4.19% at September 30, 2003 as compared to
6.53% at September 30, 2002, offsetting an increase in borrowings at September
30, 2003 compared to September 30, 2002 of approximately $27.2 million, related
to the Bionx acquisition. The decrease in weighted average interest rates on our
borrowings is primarily due to our redemption in the second quarter 2003 of our
$130 million in 9% senior subordinated notes through borrowings under our senior
credit agreement at LIBOR plus 2.75% or 3.89% at September 30, 2003 as discussed
in Note 7 to the consolidated condensed financial statements.
Provision for income taxes has been recorded at an effective rate of 44% for the
first nine months of 2003 and 36% for the nine months of 2002. The effective
rate of 44% for the nine months of 2003 is substantially higher than the 36%
which we have experienced historically as a result of the non-deductibility for
income tax purposes of the $7.9 million in-process research and development
write-off recorded in the third quarter 2003 in conjunction with the Bionx
acquisition. A reconciliation of the United States statutory income tax rate of
35% to our historical effective tax rate of 36% (excluding the effect of the
in-process research and development write-off) is included in Note 7 to the
Company's financial statements for the year ended December 31, 2002 included in
our Annual Report to the Securities and Exchange Commission on Form 10-K.
Liquidity and Capital Resources
Cash generated from our operations, including sales of accounts receivable and
borrowings under our revolving credit facility, provide the working capital for
our operations, debt service under our senior credit agreement 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;
o borrowings under separate loan facilities, in the case of real
property acquisitions, to finance our acquisitions.
Our senior credit agreement consists of a $260 million term loan and a $100
million revolving credit facility of which $258.9 million was outstanding on the
term loan facility at September 30, 2003. There were no borrowings outstanding
at September 30, 2003 on the revolving credit facility. The $260 million term
loan facility extends for approximately 6 years, with scheduled principal
payments of $2.6 million annually through December 2007 increasing to $70.8
million in 2008 and the remaining balance outstanding due in December 2009. We
may be required, under certain circumstances, to make additional principal
payments based on excess cash flow as defined in the senior credit agreement.
Borrowings, if any, on the revolving credit facility are due and payable on
August 28, 2007, the revolving credit facility termination date. Interest rates
on the new term facility are LIBOR plus 2.75% or 3.89% at September 30, 2003.
Interest rates on the revolving credit facility are LIBOR plus 2.50%.
Our senior credit agreement is collateralized by substantially all of our
personal property and assets, except for our accounts receivable and related
rights which have been sold in connection with our accounts receivable sales
agreement. The 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. The senior credit agreement contains a material adverse effect
clause that could limit our ability to access additional funding
18
under our senior credit agreement should a material adverse change in our
business occur. We are also required, under certain circumstances, to make
mandatory prepayments from net cash proceeds from any issue of equity and asset
sales.
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%, a Class C note bearing interest at 8.25% and a seller-financed note
bearing interest at 6.50%. The principal balances outstanding on the Class A
note, Class C note and seller-financed note aggregate $10.2 million, $7.4
million and $3.8 million, respectively, at September 30, 2003. These loans are
secured by our Largo, Florida property.
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, 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 to a commercial
paper conduit (the "conduit purchaser"). As of December 31, 2002 and September
30, 2003, the undivided percentage ownership interest in receivables sold by CRC
to the conduit purchaser aggregated $37.0 million and $39.0 million,
respectively, which has been accounted for as a sale and reflected in the
balance sheet as a reduction in accounts receivable. We entered into an amended
and restated accounts receivable sales agreement as of October 23, 2003, under
substantially the same terms and conditions as the previous agreement except
that the conduit purchaser has been replaced by a bank.
Our net working capital position was $152.1 million at September 30, 2003. Net
cash provided by operations increased to $38.7 million in the nine months ended
September 30, 2003 compared to $28.5 million for the same period a year ago.
Net cash provided by operations in the nine months of 2003 was positively
impacted by depreciation, amortization, deferred income taxes, non-cash pension
settlement charges, the non-cash write-off of the remaining unamortized deferred
financing fees related to the extinguishment of our 9% senior subordinated
notes, the non-cash write-off of purchased in-process research and development
assets, increased sales of accounts receivable and an increase in income taxes
payable.
Net cash provided by operations in the nine months of 2003 was negatively
impacted by the increase in working capital as a result of the Bionx acquisition
(discussed in Note 6 to the consolidated condensed financial statements),
increases in accounts receivable and inventory as a result of growth in our
business, and decreases in accounts payable, accrued compensation and interest
and changes in other assets/liabilities, primarily related to the timing of the
payment of liabilities.
Capital expenditures in the nine months ended September 30, 2003 were $6.3
million compared to $10.6 million in the same period a year ago. The decrease in
capital expenditures compared to the same period a year ago is a result of the
completion of several large capital projects. Capital expenditures representing
the ongoing capital investment requirements of our business are expected to
continue at the rate of approximately $9.0 to $12.0 million annually. Net cash
used by investing activities in the nine months ended September 30, 2003 also
included $52.3 million in payments related to business acquisitions, net of cash
acquired, of which $47.3 million related to the Bionx acquisition and the
remainder related to the CORE acquisition and the acquisition of an
electrosurgery business as discussed in Note 6 to the consolidated condensed
financial statements.
Financing activities in the nine months ended September 30, 2003 consist
primarily of $160.0 million in borrowings under the senior credit agreement and
the retirement of $130.0 million in 9.0% senior subordinated notes (discussed in
Note 7 to the consolidated condensed financial statements). The remaining
borrowings under the expanded term loan facility were used to reduce borrowings
outstanding on the revolving credit facility as a result of the Bionx
acquisition (discussed in Note 6 to the consolidated condensed financial
statements) and to fund payment of bank and legal fees associated with amending
the senior credit agreement. Based on the interest rates in
19
effect at September 30, 2003, annual savings in interest costs as a result of
this debt restructuring are estimated at approximately $6.0 million.
Management believes that cash generated from operations, including accounts
receivable sales, our current cash resources and funds available under our
amended 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, 2003. The following table summarizes our contractual
obligations related to operating leases and long-term debt as of September 30,
2003:
(Amounts in thousands)
2003 2004 2005 2006 2007 Thereafter
------ ------ ------ ------ ------ ----------
Long-term debt ........ $1,306 $4,149 $4,336 $4,538 $4,759 $261,862
Operating lease
obligations ......... 446 1,589 1,310 1,238 1,259 3,173
------ ------ ------ ------ ------ --------
Total contractual
cash obligations .... $1,752 $5,738 $5,646 $5,776 $6,018 $265,035
====== ====== ====== ====== ====== ========
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no significant change in our exposures to market risk during the
three and nine months ended September 30, 2003. For a detailed discussion of
market risk, see our Annual Report on Form 10K for the year-ended December 31,
2002, Part II, Item 7A, Quantitative and Qualitative Disclosures About Market
Risk.
Item 4. Controls and Procedures
An evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures was carried out under the supervision and
with the participation of the Company's management, including the Chairman and
Chief Executive Officer and the Vice President - Finance and Chief Financial
Officer ("the Certifying Officers") as of September 30, 2003. Based on that
evaluation, the Certifying Officers concluded that the Company's disclosure
controls and procedures are effective to bring to the attention of the Company's
management the relevant information necessary to permit an assessment of the
need to disclose material developments and risks pertaining to the Company's
business in its periodic filings with the Securities and Exchange Commission.
There was no change to the Company's internal control over financial reporting
during the quarter ended September 30, 2003 that materially affected, or is
reasonable likely to materially affect, the Company's internal control over
financial reporting.
20
Item 6. Exhibits and Reports on Form 8-K
List of Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
10.1 Amended and Restated Receivables Purchase Agreement, dated
October 23, 2003, among CONMED Receivables Corporation, CONMED
Corporation and Fleet National Bank.
10.2 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.
31.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Reports on Form 8-K
On October 29, 2003, the Company filed a Report on Form 8-K furnishing as
Exhibit 99.1 under Item 12, an October 24, 2003 press release announcing third
quarter and first nine months of 2003 results.
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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: November 10, 2003
/s/ Robert D. Shallish, Jr.
------------------------------------
Robert D. Shallish, Jr.
Vice President - Finance
(Principal Financial Officer)
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Exhibit Index
Sequential Page
Exhibit Number
- ------- ---------------
10.1 Amended and Restated Receivables Purchase Agreement,
dated October 23, 2003, among CONMED Receivables
Corporation, CONMED Corporation, and Fleet (included in EDGAR
National Bank. filing only)
10.2 Amendment No. 1 dated October 23, 2003 to the
Purchase and Sale Agreement dated November 1, 2001 (included in EDGAR
among CONMED Corporation, et al and CONMED filing only)
Receivables Corporation
31.1 Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the E-1
Sarbanes-Oxley Act of 2002.
31.2 Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the E-2
Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the E-3
Sarbanes-Oxley Act of 2002.
23