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CNMD > SEC Filings for CNMD > Form 10-Q on 29-Oct-2012All Recent SEC Filings

Show all filings for CONMED CORP

Form 10-Q for CONMED CORP


Quarterly Report


Forward-Looking Statements

In this Report on 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. Such statements may be identified by the use of words such as "anticipates", "expects", "estimates", "intends" and "believes" and variations thereof and other terms of similar meaning.

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, 2011 and the following, among others:

• general economic and business conditions;

• changes in foreign exchange and interest rates;

• cyclical customer purchasing patterns due to budgetary and other constraints;

• changes in customer preferences;

• competition;

• changes in technology;

• the introduction and acceptance of new products;

• the ability to evaluate, finance and integrate acquired businesses, products and companies;

• changes in business strategy;

• the availability and cost of materials;

• the possibility that United States or foreign regulatory and/or administrative agencies may initiate enforcement actions against us or our distributors;

• future levels of indebtedness and capital spending;

• quality of our management and business abilities and the judgment of our personnel;

• the availability, terms and deployment of capital;

• the risk of litigation, especially patent litigation as well as the cost associated with patent and other litigation;

• the risk of a lack of allograft tissue due to reduced donations of such tissues or due to tissues not meeting the appropriate high standards for screening and/or processing of such tissues; and

• changes in regulatory requirements.

See "Management's Discussion and Analysis of Financial Condition and Results of Operations" below and "Risk Factors" and "Business" in our Annual Report on Form 10-K for the year-ended December 31, 2011 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 Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.


CONMED Corporation ("CONMED", the "Company", "we" or "us") is a medical technology company with six principal product lines. These product lines and the percentage of consolidated revenues associated with each, are as follows:

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                                      Three months ended September 30,        Nine months ended September 30,
                                          2011                 2012               2011                2012

Arthroscopy                                  40.2 %                42.1 %           39.9 %               43.1 %
Powered Surgical Instruments                 20.1                  19.8             20.6                 19.7
Electrosurgery                               13.5                  12.4             13.5                 12.3
Endosurgery                                  10.2                   9.8             10.2                  9.6
Patient Care                                  8.9                   8.4              9.0                  8.3
Endoscopic Technologies                       7.1                   7.5              6.8                  7.0
Consolidated net sales                      100.0 %               100.0 %          100.0 %              100.0 %

A significant amount of our products are used in surgical procedures with the majority of our revenues derived from the sale of single-use products. We manufacture substantially all of our products in facilities located in the United States and Mexico. We market our products both domestically and internationally directly to customers and through distributors. International sales represent a significant portion of our business. During the three and nine months ended September 30, 2012, international sales approximated 49.1% and 50.2%, respectively, of total net sales.

Business Environment and Opportunities

The aging of the worldwide population along with lifestyle changes, continued cost containment pressures on healthcare systems and the desire of clinicians and administrators to use less invasive (or noninvasive) procedures are important trends which are driving the long-term growth in our industry. We believe that with our broad product offering of high quality surgical and patient care products, we can capitalize on this growth for the benefit of the Company and our shareholders.

In order to further our growth prospects, we have historically used strategic business acquisitions and exclusive distribution relationships to continue to diversify our product offerings, increase our market share and realize economies of scale.

We have a variety of research and development initiatives focused in each of our principal product lines as continued innovation and commercialization of new proprietary products and processes are essential elements of our long-term growth strategy. Our reputation as an innovator is exemplified by recent new product introductions such as the PressFT™ Suture Anchor, absorbable and non-absorbable implants for use in arthroscopic stabilization procedures of the shoulder and labral repair of the hip; Y-Knot™ All-suture Anchor, a suture anchor implant comprised entirely of high strength suture for instability repair procedures in the shoulder; the Sequent™ Meniscal Repair System, which offers suture-locking implant cleats that will provide a knotless repair and allow the surgeon to complete an entire meniscal repair with one device without leaving the joint; XACTPIN™ Graft Passing Guide Pin is specifically engineered for fast, accurate and minimally invasive referencing of the Aperture to Cortex length; Hip Preservation System™, from access to repair, the system is committed to optimizing patient outcomes by providing a comprehensive solution of joint preserving instrumentation and techniques; Bullseye® Anatomic Cruciate Reconstruction System; the Hall® Lithium Power Battery System offers lithium ion battery technology which will provide greater power and longevity during surgery when compared to present batteries and the Altrus® Thermal Tissue Fusion System which utilizes thermal energy to seal, cut, grasp, and dissect vessels up to 7mm in size utilizing a closed feedback loop between the energy source and the single-use handpiece to precisely control the desired effect on tissue.

Business Challenges
Significant volatility in the financial markets and foreign currency exchange rates and depressed economic conditions in both domestic and international markets, have presented significant business challenges since the second half of 2008. While we returned to revenue growth in 2010, 2011 and the first nine months of 2012 and are cautiously optimistic that the domestic economic environment is improving, conditions in Europe and elsewhere may present significant business challenges for the Company, and there can be no assurance that improvement in the overall economic environment will be sustained. We will continue to monitor and manage the impact of the overall economic environment on the Company.
Over the past few years we successfully completed certain of our operational restructuring plans whereby we consolidated manufacturing and distribution centers as well as restructured certain of our administrative functions. We continue to restructure both operations and administrative functions as necessary throughout the organization. However, we cannot be certain such activities will be completed in the estimated time period or that planned cost savings will be achieved.

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Our facilities are subject to periodic inspection by the United States Food and Drug Administration ("FDA") and foreign regulatory agencies or notified bodies for, among other things, conformance to Quality System Regulation and Current Good Manufacturing Practice ("CGMP") requirements and foreign or international standards. We are committed to the principles and strategies of systems-based quality management for improved CGMP compliance, operational performance and efficiencies through our Company-wide quality systems initiatives. However, there can be no assurance that our actions will ensure that we will not receive a warning letter or be the subject of other regulatory action, which may include consent decrees or fines, that we will not conduct product recalls or that we will not experience temporary or extended periods during which we may not be able to sell products in foreign countries.

Critical Accounting Policies

Preparation of our financial statements requires us to make estimates and assumptions which affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the consolidated financial statements in our Annual Report on Form 10-K for the year-ended December 31, 2011 describes 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. There have been no significant changes in our critical accounting estimates during the nine months ended September 30, 2012.

Revenue Recognition

Revenue is recognized when title has been transferred to the customer which is
at the time of shipment. Service fees earned for our marketing efforts related
to sports medicine allograft tissue are recorded in accordance with the
contractual terms of the agreement with Musculoskeletal Tissue Foundation
("MTF"). The following policies apply to our major categories of revenue

•         Sales to customers are evidenced by firm purchase orders. Title and the
          risks and rewards of ownership are transferred to the customer when
          product is shipped under our stated shipping terms. Payment by the
          customer is due under fixed payment terms.

•         We place certain of our capital equipment with customers on a loaned
          basis in return for commitments to purchase related single-use products
          over time periods generally ranging from one to three years. In these
          circumstances, no revenue is recognized upon capital equipment shipment
          as the equipment is loaned and subject to return if certain minimum
          single-use purchases are not met. Revenue is recognized upon the sale
          and shipment of the related single-use products. The cost of the
          equipment is amortized over its estimated useful life.

•         Product returns are only accepted at the discretion of the Company and
          in accordance with our "Returned Goods Policy". Historically the level
          of product returns has not been significant. We accrue for sales
          returns, rebates and allowances based upon an analysis of historical
          customer returns and credits, rebates, discounts and current market

•         Our terms of sale to customers generally do not include any obligations
          to perform future services. Limited warranties are provided for capital
          equipment sales and provisions for warranty are provided at the time of
          product sale based upon an analysis of historical data.

•         Amounts billed to customers related to shipping and handling have been
          included in net sales. Shipping and handling costs are included in
          selling and administrative expense.

• We sell to a diversified base of customers around the world and, therefore, believe there is no material concentration of credit risk.

•         We assess the risk of loss on accounts receivable and adjust the
          allowance for doubtful accounts based on this risk
          assessment. Historically, losses on accounts receivable have not been
          material. Management believes that the allowance for doubtful accounts
          of $1.2 million at September 30, 2012 is adequate to provide for
          probable losses resulting from accounts receivable.

Inventory Valuation

We write-off excess and obsolete inventory resulting from the inability to sell our products at prices in excess of current carrying costs. The markets in which we operate are highly competitive, with new products and surgical procedures introduced

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on an on-going basis. Such marketplace changes may result in our products becoming obsolete. We make estimates regarding the future recoverability of the costs of our products and record a provision for excess and obsolete inventories based on historical experience, expiration of sterilization dates and expected future trends. If actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, additional inventory write-downs may be required.

Goodwill and Intangible Assets

We have a history of growth through acquisitions. Assets and liabilities of acquired businesses are recorded at their estimated fair values as of the date of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Other intangible assets primarily represent allocations of purchase price to identifiable intangible assets of acquired businesses. We have accumulated goodwill of $256.8 million and other intangible assets of $192.7 million as of September 30, 2012.

In accordance with FASB guidance, goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to at least annual impairment testing. It is our policy to perform our annual impairment testing in the fourth quarter. The identification and measurement of goodwill impairment involves the estimation of the fair value of our reporting units. 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 other valuation techniques. Future cash flows may be affected by changes in industry or market conditions or the rate and extent to which anticipated synergies or cost savings are realized with newly acquired entities. The Company evaluates EBITDA multiples to value its reporting units relative to the Company's market capitalization plus a market-based control premium. The market-based control premium is defined as the premiums paid by acquirers of comparable businesses. The sum of the individual reporting units' estimated market values are compared to the Company's market value, with the sum of the individual values typically being larger than the market value of the Company. The Company considers premiums paid by acquirers of comparable businesses to determine the reasonableness of the implied control premium.

During the fourth quarter of 2011, we completed our goodwill impairment testing with data as of October 1, 2011. For our CONMED Electrosurgery, CONMED Endosurgery and CONMED Linvatec operating units, our impairment testing utilized CONMED Corporation's EBITDA multiple adjusted for a market-based control premium with the resultant fair values exceeding carrying values by 42% to 107%.

We estimated the fair value of the CONMED Patient Care operating unit utilizing both a market-based approach and an income approach. Under the income approach, we utilized a discounted cash flow valuation methodology and measured the goodwill impairment in accordance with ASC 350. The first step of the impairment test determined the carrying value exceeded fair value and therefore we proceeded to Step 2. Under Step 2, we calculated the amount of impairment loss by measuring the amount the carrying value of goodwill exceeded the implied fair value of the goodwill. We determined the goodwill of our CONMED Patient Care operating unit was impaired as a result of lower future earnings due to pricing pressures in a number of our product lines and consequently we recorded a goodwill impairment charge of $60.3 million in the fourth quarter of 2011 to reduce the carrying amount of the unit's goodwill to its implied fair value.

Intangible assets with a finite life are amortized over the estimated useful life of the asset and are evaluated each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. Intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The carrying amount of an intangible asset subject to amortization is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset. An impairment loss is recognized by reducing the carrying amount of the intangible asset to its current fair value.

Customer relationship assets arose principally as a result of the 1997 acquisition of Linvatec Corporation. These assets represent the acquisition date fair value of existing customer relationships based on the after-tax income expected to be derived during their estimated remaining useful life. The useful lives of these customer relationships were not and are not limited by contract or any economic, regulatory or other known factors. The estimated useful life of the Linvatec customer relationship assets was determined as of the date of acquisition as a result of a study of the observed pattern of historical revenue attrition during the 5 years immediately preceding the acquisition of Linvatec Corporation. This observed attrition pattern was then applied to the existing customer relationships to derive the future expected retirement of the customer relationships. This analysis indicated an annual attrition rate of 2.6%. Assuming an exponential attrition pattern, this equated to an average remaining useful life of approximately 38 years for the Linvatec customer relationship assets. Customer relationship intangible assets arising as a result of other business acquisitions are being amortized over a weighted average life of 15 years. The weighted average life for customer relationship assets in aggregate is 33 years.

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We evaluate the remaining useful life of our customer relationship intangible assets each reporting period in order to determine whether events and circumstances warrant a revision to the remaining period of amortization. In order to further evaluate the remaining useful life of our customer relationship intangible assets, we perform an analysis and assessment of actual customer attrition and activity as events and circumstances warrant. This assessment includes a comparison of customer activity since the acquisition date and review of customer attrition rates. In the event that our analysis of actual customer attrition rates indicates a level of attrition that is in excess of that which was originally contemplated, we would change the estimated useful life of the related customer relationship asset with the remaining carrying amount amortized prospectively over the revised remaining useful life.

We test our customer relationship assets for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Factors specific to our customer relationship assets which might lead to an impairment charge include a significant increase in the annual customer attrition rate or otherwise significant loss of customers, significant decreases in sales or current-period operating or cash flow losses or a projection or forecast of losses. We do not believe that there have been events or changes in circumstances which would indicate the carrying amount of our customer relationship assets might not be recoverable.

Pension Plan

We sponsor a defined benefit pension plan ("the plan") covering substantially all our United States-based employees. The plan was frozen effective May 14, 2009. Major assumptions used in accounting for the plan include the discount rate, expected return on plan assets and expected mortality. Assumptions are determined based on Company data and appropriate market indicators, and are evaluated annually as of the plan's measurement date. A change in any of these assumptions would have an effect on net periodic pension costs reported in the consolidated financial statements.

The weighted-average discount rate used to measure pension liabilities and costs is set by reference to the Citigroup Pension Liability Index. However, this index gives only an indication of the appropriate discount rate because the cash flows of the bonds comprising the index do not precisely match the projected benefit payment stream of the plan. For this reason, we also consider the individual characteristics of the plan, such as projected cash flow patterns and payment durations, when setting the discount rate. The rates used in determining 2011 and 2012 pension expense are 5.41% and 4.30%, respectively.

We have used an expected rate of return on pension plan assets of 8.0% for purposes of determining the net periodic pension benefit cost. In determining the expected return on pension plan assets, we consider the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance. In addition, we consult with financial and investment management professionals in developing appropriate targeted rates of return.

For the three and nine months ending September 30, 2012 we recorded pension expense of $0.5 million and $1.6 million, respectively. Pension expense in 2012 is expected to be $2.1 million compared to expense of $1.0 million in 2011. We are required and expect to make $2.7 million in contributions to our pension plan for the 2012 plan year. We contributed $1.3 million during the second and third quarters of 2012 and expect to contribute the remaining $1.4 million during the remainder of 2012 and the first quarter of 2013.

See Note 9 to the Consolidated Condensed Financial Statements for further discussion.

Stock Based Compensation

All share-based payments to employees, including grants of employee stock options, restricted stock units, performance share units and stock appreciation rights are recognized in the financial statements based at their fair values. Compensation expense is generally recognized using a straight-line method over the vesting period. Compensation expense for performance share units is recognized using the graded vesting method.

Income Taxes

The recorded future tax benefit arising from deductible temporary differences and tax carryforwards is approximately $34.3 million at September 30, 2012. Management believes that earnings during the periods when the temporary differences become deductible will be sufficient to realize the related future income tax benefits.

The Company is subject to taxation in the United States and various states and foreign jurisdictions. Taxing authority examinations can involve complex issues and may require an extended period of time to resolve. Our Federal income tax returns

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have been examined by the Internal Revenue Service ("IRS") for calendar years ending through 2010. Tax years subsequent to 2010 are subject to future examination.

Results of Operations

The following table presents, as a percentage of net sales, certain categories
included in our consolidated statements of income for the periods indicated:

                                      Three months ended September 30,        Nine months ended September 30,
                                          2011                 2012               2011                2012

Net sales                                   100.0 %               100.0 %          100.0 %              100.0 %
Cost of sales                                47.2                  46.2             48.4                 47.2
Gross profit                                 52.8                  53.8             51.6                 52.8
Selling and administrative expense           39.5                  40.7             38.2                 39.3
Research and development expense              4.1                   3.9              4.0                  3.8
Other expense                                   -                   1.5              0.1                  1.1
    Income from operations                    9.2                   7.7              9.3                  8.6
Amortization of bond discount                 0.6                     -              0.6                    -
Interest expense                              1.0                   0.7              1.0                  0.8
Income before income taxes                    7.6                   7.0              7.7                  7.8
Provision for income taxes                    2.9                   1.9              2.9                  2.5
Net income                                    4.7 %                 5.1 %            4.8 %                5.3 %

Three months ended September 30, 2012 compared to three months ended September 30, 2011

Sales for the quarterly period ended September 30, 2012 were $181.9 million , an increase of $9.1 million (5.3%) compared to sales of $172.8 million in the same period a year ago with increases in our Arthroscopy, Powered Instruments, Endosurgery and Endoscopic Technologies product lines. The distribution agreement with Musculoskeletal Tissue Foundation ("MTF") accounted for a 3.7% quarterly sales increase. In local currency, excluding the effects of the hedging program, sales increased 6.0%. Sales of capital equipment decreased $0.4 million (-1.1%) to $36.9 million in the quarterly period ended September 30, 2012 from $37.3 million in the same period a year ago; sales of single-use products increased $9.5 million (7.0%) to $145.0 million in the quarterly period ended September 30, 2012 from $135.5 million in the same period a year ago. On a local currency basis, excluding the effects of our hedging program, sales of capital equipment increased 0.3% and single-use products increased 7.6%.

Cost of sales increased to $84.0 million in the quarterly period ended September 30, 2012 as compared to $81.5 million in the same period a year ago on overall increases in sales volumes as described above. Gross profit margins increased 1.0 percentage points to 53.8% in the quarterly period ended . . .

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