United
States
Securities
and Exchange Commission
Washington,
D.C.
20549
Form
10-K
Annual
Report Pursuant to Section 13 or 15(d) of
The
Securities Exchange Act of 1934
|
For
the fiscal year ended December 31, 2006
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Commission
file number 0-16093
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CONMED
CORPORATION
(Exact
name of registrant as specified in its charter)
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|
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New
York
(State
or other jurisdiction of
incorporation
or organization)
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16-0977505
(I.R.S.
Employer
Identification
No.)
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525
French Road, Utica, New York
(Address
of principal executive offices)
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13502
(Zip
Code)
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(315)
797-8375
Registrant's
telephone number, including area code
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Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $.01 par value per share
(Title
of class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer (as defined
in
Rule 405 of the Securities Act).
Yes
ý
No
¨
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
Yes
¨
No
ý
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
ý No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. ý
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check
one).
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Large
accelerated filer ý
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Accelerated
filer ¨
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Non-accelerated
filer ¨
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
¨
No
ý
As
of
June 30, 2006, the last business day of the registrant’s most recently completed
second fiscal quarter, the aggregate market value of the shares of voting common
stock held by non-affiliates of the registrant was approximately $577,062,449
based upon the closing price of the Company’s common stock on the NASDAQ Stock
Market.
The
number of shares of the registrant's $0.01 par value common stock outstanding
as
of February 20, 2007 was 28,025,644.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions
of the Definitive Proxy Statement or other informational filing for the 2007
Annual Meeting of Shareholders are incorporated by reference into Part III
of
this report.
ANNUAL
REPORT ON FORM 10-K
FOR
YEAR ENDED DECEMBER 31, 2006
TABLE
OF CONTENTS
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Page
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Business
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2
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Risk
Factors
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20
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Properties
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28
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Legal
Proceedings
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29
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Submission
of Matters to a Vote of Security Holders
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30
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Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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31
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Selected
Financial Data
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33
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Management's
Discussion and Analysis of Financial Condition
and Results of Operations
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35
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Quantitative
and Qualitative Disclosures About Market
Risk
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53
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Financial
Statements and Supplementary Data
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53
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Changes
in and Disagreements with Accountants on Accounting
and Financial Disclosure
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53
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Controls
and Procedures
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53
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Other
Information
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54
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Directors,
Executive Officers and Corporate Governance
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55
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Executive
Compensation
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55
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Security
Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
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55
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Certain
Relationships and Related Transactions, and Director
Independence
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55
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Principal
Accounting Fees and Services
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55
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Exhibits,
Financial Statement Schedules
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56
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57
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Business
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Forward
Looking Statements
This
Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2006 (“Form
10-K”) contains certain forward-looking statements (as such term is defined in
the Private Securities Litigation Reform Act of 1995) and information relating
to CONMED Corporation (“CONMED”, the “Company”, “we” or “us” — references to
“CONMED”, the “Company”, “we” or “us” shall be deemed to include our direct and
indirect subsidiaries unless the context otherwise requires) which are based
on
the beliefs of our management, as well as assumptions made by and information
currently available to our management.
When
used in this Form 10-K, the words “estimate,” “project,” “believe,”
“anticipate,” “intend,” “expect” and similar expressions are intended to
identify forward-looking statements. These statements involve known and unknown
risks, uncertainties and other factors, including those identified under
the
caption “Item 1A — Risk Factors” and elsewhere in this Form 10-K which may cause
our actual results, performance or achievements, or industry results, to
be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following:
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·
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general
economic and business conditions;
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·
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cyclical
customer purchasing patterns due to budgetary and other
constraints;
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·
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changes
in customer preferences;
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·
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competition;
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·
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changes
in technology;
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·
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the
introduction and acceptance of new
products;
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·
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the
ability to evaluate, finance and integrate acquired businesses,
products
and companies;
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·
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changes
in business strategy;
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·
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the
availability and cost of
materials;
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·
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the
possibility that United States or foreign regulatory and/or administrative
agencies may initiate enforcement actions against us or our
distributors;
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·
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future
levels of indebtedness and capital
spending;
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·
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changes
in foreign exchange and interest
rates;
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·
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quality
of our management and business abilities and the judgment of our
personnel;
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·
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the
availability, terms and deployment of capital;
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·
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the
risk of litigation, especially patent litigation as well as the
cost
associated with patent and other litigation;
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·
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changes
in regulatory requirements;
and
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·
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various
other factors referenced in this Form 10-K.
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See
“Item
7-Management’s Discussion and Analysis of Financial Condition and Results of
Operations”, “Item 1-Business” and “Item 1A-Risk Factors” for a further
discussion of these factors. You are cautioned not to place undue reliance
on
these forward-looking statements, which speak only as of the date hereof.
We do
not undertake any obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date
of
this Form 10-K or to reflect the occurrence of unanticipated events.
General
CONMED
Corporation was incorporated under the laws of the State of New York in 1970
by
Eugene R. Corasanti, the Company’s founder and Chairman of the Board. CONMED is
a medical technology company with an emphasis on surgical devices and equipment
for minimally invasive procedures and monitoring. The Company’s products serve
the clinical areas of arthroscopy, powered surgical instruments, electrosurgery,
cardiac monitoring disposables, endosurgery and endoscopic technologies. They
are used by surgeons and physicians in a variety of specialties including
orthopedics, general surgery, gynecology, neurosurgery, and gastroenterology.
Headquartered in Utica, New York, the Company’s 3,200 employees distribute its
products worldwide from ten manufacturing locations. See Note 9 to the
Consolidated Financial Statements for further discussion of our principal
operating units.
We
have
historically used strategic business acquisitions and exclusive distribution
relationships to diversify our product offerings, increase our market share
in
certain product lines, realize economies of scale and take advantage of growth
opportunities in the healthcare field. During the last five years, we have
completed a number of acquisitions. These acquisitions, complemented by internal
growth, have resulted in a compound annual growth rate in net sales during
that
period of approximately 7%.
We
are
committed to offering products with the highest standards of quality,
technological excellence and customer service. Substantially all of our
facilities have attained certification under the ISO international quality
standards and other domestic and international quality
accreditations.
Our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on
Form 8-K, and amendments to those reports are accessible free of charge through
the Investor Relations section of our website (http://www.conmed.com)
as soon
as practicable after such material has been electronically filed with, or
furnished to, the United States Securities and Exchange Commission.
Industry
Market
growth for our products is primarily driven by:
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·
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Favorable
Demographics.
The number of surgical procedures performed is increasing and we
believe
the long term demographic trend will be continued growth in surgical
procedures as a result of the aging of the population, and technological
advancements, which result in safer and less invasive (or non-invasive)
surgical procedures. Additionally, as people are living longer, more
active lives, they are engaging in contact sports and activities
such as
running, skiing, rollerblading, golf and tennis which result in injuries
with greater frequency and at an earlier age than ever before. Sales
of
surgical products aggregated approximately 90% of our total net revenues
in 2006. See “Products.”
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·
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Continued
Pressure to Reduce Health Care Costs.
In response to rising health care costs, managed care companies and
other
third-party payers have placed pressures on health care providers
to
reduce costs. As a result, health care providers have focused on
the high
cost areas such as surgery. To reduce costs, health care providers
use
minimally invasive techniques, which generally reduce patient trauma,
recovery time and ultimately the length of hospitalization. Approximately
50% of our
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products
are designed for use in minimally invasive surgical procedures. See “Products.”
Health care providers are also increasingly purchasing single-use, disposable
products, which reduce the costs associated with sterilizing surgical
instruments and products following surgery. The single-use nature of disposable
products lowers the risk of incorrectly sterilized instruments spreading
infection into the patient and increasing the cost of post-operative care.
Approximately 75% of our sales are derived from single-use disposable
products.
In
the
United States, the pressure on health care providers to contain costs has caused
many health care providers to enter into comprehensive purchasing contracts
with
fewer suppliers, which offer a broader array of products at lower prices. In
addition, many health care providers have aligned themselves with Group
Purchasing Organizations (“GPOs”) or Integrated Health Networks (“IHNs”), whose
stated purpose is to aggregate the purchasing volume of their members in order
to negotiate competitive pricing with suppliers, including manufacturers of
surgical products. We believe that these trends will favor entities which offer
a diverse product portfolio. See “—Business Strategy”.
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·
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Increased
Global Medical Spending.
We believe that foreign markets offer significant growth opportunities
for
our products. We currently distribute our products through our own
sales
subsidiaries or through local dealers in over 100 foreign countries.
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Management
believes that we hold a significant market share position in each of our key
product areas including, Arthroscopy, Powered Surgical Instruments,
Electrosurgery, Patient Care, Endosurgery and Endoscopic Technologies. We have
established a leadership position in the marketplace by capitalizing on the
following competitive strengths:
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·
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Brand
Recognition.
Our products are marketed under leading brand names, including
CONMED®,
CONMED Linvatec®
and Hall Surgical®.
These brand names are recognized by physicians and healthcare
professionals for quality and service. It is our belief that brand
recognition facilitates increased demand for our products in the
marketplace, enables us to build upon the brand’s associated reputation
for quality and service, and realize increased market acceptance
of new
branded products.
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·
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Breadth
of Product Offering.
The breadth of our product lines in our key product areas enables
us to
meet a wide range of customer requirements and preferences. This
has
enhanced our ability to market our products to surgeons, hospitals,
surgery centers, GPOs, IHNs and other customers, particularly as
institutions seek to reduce costs and minimize the number of suppliers.
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·
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Successful
Integration of Acquisitions.
We
seek to build growth platforms around our core markets through focused
acquisitions of complementary businesses and product lines. During
the
last five years we have completed a number of acquisitions. These
acquisitions have enabled us to diversify our product portfolio,
expand
our sales and marketing capabilities and strengthen our presence
in key
geographical markets.
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·
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Strategic
Marketing and Distribution Channels.
We
market our products domestically through five focused sales force
groups
consisting of approximately 180 employee sales representatives
and 210
sales professionals employed by independent sales agent groups.
Each of
our dedicated sales professionals are highly knowledgeable in the
applications and procedures for the products they sell. Our sales
representatives foster close professional relationships with physicians,
surgeons, hospitals, outpatient surgery centers and physicians’ offices.
Additionally, we maintain a global presence through sales subsidiaries
and
branches located in key international markets. We directly service
hospital customers located in these markets through an employee-based
international sales force of approximately 170 sales representatives.
We
also maintain distributor relationships domestically and in numerous
countries worldwide. See
“—Marketing.”
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·
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Operational
Improvements and Manufacturing.
We
are focused on continuously improving our supply chain effectiveness,
strengthening our manufacturing processes and optimizing our plant
network
to increase operational efficiencies within the organization.
Substantially all of our products are manufactured and assembled
from
components we produce. Our strategy has historically been to vertically
integrate our manufacturing facilities in order to develop competitive
advantage. This integration provides us with cost efficient and flexible
manufacturing operations which permit us to allocate capital more
efficiently. Additionally, we attempt to exploit commercial synergies
between operations, such as the procurement of common raw materials
and
components used in production.
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·
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Technological
Leadership.
Research and development efforts are closely aligned with our key
business
objectives, namely developing and improving products and processes,
applying innovative technology to the manufacture of products for
new
global markets and reducing the cost of producing core products.
These
efforts are evidenced by recent product introductions, including
the
following: IM 4000 High Definition Camera System; 24K Irrigation
System;
Hip Arthroscopy Kit; and Hi-Fi Suture Cutter.
|
Business
Strategy
Our
principal objectives are to improve the quality of surgical outcomes and patient
care through the development of innovative medical devices, refinement of
existing products and development of new technologies which reduce risk, trauma,
cost and procedure time. We believe that by meeting these objectives we will
enhance our ability to anticipate and adapt to customer needs and market
opportunities, and provide shareholders with superior investment returns. We
intend to achieve future growth and earnings development through the following
initiatives:
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·
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Introduction
of New Products and Product Enhancements.
We
continually pursue organic growth through the development of new
products
and enhancements to existing products. We seek to develop new technologies
which improve the durability, performance and usability of existing
products. In addition to our internal research and development efforts,
we
receive new ideas for products and technologies, particularly in
procedure-specific areas, from surgeons, inventors and other healthcare
professionals.
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·
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Pursue
Strategic Acquisitions.
We pursue strategic acquisitions in existing and new growth markets
to
achieve increased operating efficiencies, geographic diversification
and
market penetration. Targeted companies have historically included
those
with proven technologies and established brand names which provide
potential sales, marketing and manufacturing
synergies.
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·
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Realize
Manufacturing and Operating Efficiencies.
We
continually review our production systems for opportunities to reduce
operating costs, consolidate product lines or identical process flows,
reduce inventory requirements and optimize existing processes. Our
vertically integrated manufacturing facilities allow for further
opportunities to reduce overhead, increase operating efficiencies
and
capacity utilization.
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·
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Geographic
Diversification.
We
believe that significant growth opportunities exist for our surgical
products outside the United States. Principal foreign markets for
our
products include Europe, Latin America and Asia/Pacific Rim. Critical
elements of our future sales growth in these markets include leveraging
our existing relationships with foreign surgeons, hospitals, third-party
payers and foreign distributors, maintaining an appropriate presence
in
emerging market countries and continually evaluating our routes-to-market.
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·
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Active
Participation In The Medical Community.
We
believe that excellent working relationships with physicians and
others in
the medical industry enable us to gain an understanding of new therapeutic
and diagnostic alternatives, trends and emerging opportunities. Active
participation allows us to quickly respond to the changing needs
of
physicians and patients.
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Products
The
following table sets forth the percentage of net sales for each of our product
lines during each of the three years ended December 31:
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Year
Ended December 31,
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||||||||||
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2004
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2005
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2006
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||||||||
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Arthroscopy
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37
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%
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34
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%
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35
|
%
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||||
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Powered
Surgical Instruments
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23
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22
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21
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|||||||
|
Electrosurgery
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15
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14
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15
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|||||||
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Patient
Care
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14
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12
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12
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|||||||
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Endosurgery
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8
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8
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8
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|||||||
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Endoscopic
Technologies
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3
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10
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9
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|||||||
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Total
|
100
|
%
|
100
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%
|
100
|
%
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||||
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Net
Sales (in thousands)
|
$
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558,388
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$
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617,305
|
$
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646,812
|
||||
Arthroscopy
We
offer
a comprehensive range of devices and products for use in arthroscopic surgery.
Arthroscopy refers to diagnostic and therapeutic surgical procedures performed
on joints with the use of minimally invasive arthroscopes and related
instruments. Minimally invasive arthroscopic procedures enable surgical repairs
to be completed with less trauma to the patient, resulting in shorter
recovery
times and cost savings. Arthroscopic procedures are performed on the knee and
shoulder, and smaller joints, such as the wrist and ankle.
Our
arthroscopy products include powered resection instruments, arthroscopes,
reconstructive systems, tissue repair sets, metal and bioabsorbable implants
and
related disposable products and fluid management systems. We also offer a line
of video and imaging products suitable for use in multi-specialty clinical
environments beyond arthroscopy, including laparoscopy, ENT, gynecology and
urology as well as integrated operating room systems and equipment. It is our
standard practice to transfer some of these products, such as shaver consoles
and pumps, to certain customers at no charge. These capital “placements” allow
for and accommodate the use of a variety of disposable products, such as shaver
blades, burs and pump tubing. We have benefited from the introduction of new
arthroscopic products and technologies, such as bioabsorbable screws, ablators,
“push-in” and “screw-in” suture anchors, resection shavers and cartilage repair
implants.
A
significant portion of arthroscopic procedures are performed to repair injuries
which have occurred in the joint areas of the body. Many of these injuries
are
the result of sports related events or similar traumas. For this reason,
arthroscopy is often referred to as “sports medicine.”
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Arthroscopy
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||||
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Product
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Description
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Brand
Name
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Ablators
and Shaver Ablators
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Electrosurgical
ablators and resection ablators to resect and remove soft tissue
and bone;
used in knee, shoulder and small joint surgery.
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Advantage®
UltrAblator®
Lightwave™
Trident®
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Knee
Reconstructive Systems
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Products
used in cruciate reconstructive surgery; includes instrumentation,
screws,
pins and ligament harvesting and preparation devices.
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Paramax®
Pinn-ACL®
Grafix®
Matryx™
Bioscrew®
EndoPearl®
XtraLok®
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Soft
Tissue Repair Systems
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Instrument
systems designed to attach specific torn or damaged soft tissue to
bone or
other soft tissue in the knee, shoulder and wrist; includes
instrumentation, guides, hooks and suture devices.
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Spectrum®
Inteq®
Shuttle
RelayTM
Blitz®
Hi-Fi™
Suture
Saver™
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Fluid
Management Systems
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Disposable
tubing sets, disposable and reusable inflow devices, pumps and
suction/waste management systems for use in arthroscopic and general
surgeries.
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Apex®
Quick-Flow®
Quick-Connect®
87K™
10K®
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Arthroscopy
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||||
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Product
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Description
|
Brand
Name
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Imaging
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Surgical
video systems for endoscopic procedures; includes autoclavable
single and
three-chip camera heads and consoles, endoscopes, light sources,
monitors,
VCRs and printers.
|
Apex®
8180
Series
Envision™
IM3300
Quicklatch®
Shock
Flex™
|
||
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Implants
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Products
including bioabsorbable and metal screws, pins and suture anchors
for
attaching soft tissue to bone in the knee, shoulder and wrist as
well as
miniscal repair.
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BioScrew™
Bio-Anchor®
BioTwist®
UltraFix®
Revo®
Super
Revo®
Bionx™
Meniscus
Arrow™
Smart
Nail®
Smart
Pin®
Smart
Screw®
Smart
Tack®
The
Wedge™
Biostinger®
Hornet®
ThRevo™
Duet™
Impact™
|
||
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Integrated
operating room systems and equipment
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Centralized
operating room management and control systems, service arms and
service
managers.
|
CONMED®
Nurse’s
Assistant®
|
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Arthroscopic
Shaver Systems
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Electrically
powered shaver handpieces that accommodate a large variety of shaver
blade
disposables specific to clinical specialty and technological
precision.
|
Advantage®
Turbo™
Gator®
Great
White®
Mako™
Merlin®
Sterling®
|
||
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Other
Instruments and Accessories
|
Forceps,
graspers, punches, probes, sterilization cases and other general
instruments for arthroscopic procedures.
|
Shutt®
Concept®
TractionTower®
Clearflex™
SE™
|
||
Powered
Surgical Instruments
Electric,
battery or pneumatic powered surgical instruments are used to perform
orthopedic, arthroscopic and other surgical procedures, such as cutting,
drilling or reaming. Each instrument consists of one or more handpieces and
related
accessories as well as disposable and limited reusable items (e.g., burs, saw
blades, drills and reamers). Powered instruments are categorized as either
small
bone, large bone or specialty powered instruments. Specialty powered instruments
are utilized in procedures such as spinal surgery, neurosurgery, ENT,
oral/maxillofacial surgery, and cardiothoracic surgery.
Our
line
of powered instruments is sold principally under the Hall®
Surgical
brand name, for use in large and small bone orthopedic, arthroscopic,
oral/maxillofacial, podiatric, plastic, ENT, neurological, spinal and
cardiothoracic surgeries. Large bone, neurosurgical, spinal and cardiothoracic
powered instruments are sold primarily to hospitals while small bone
arthroscopic, otolaryngological and oral/maxillofacial powered instruments
are
sold to hospitals, outpatient facilities and physicians’ offices. Our CONMED
Linvatec subsidiary has devoted significant resources in the development of
new
technologies for large bone, small bone, arthroscopic, neurosurgical, spine
and
otolaryngological instruments which may be easily adapted and modified for
new
procedures.
Our
powered instruments product line also includes the PowerPro®
Battery
System. This full function orthopedic power system is specifically designed
to
meet the requirements of most orthopedic applications. The PowerPro®
Battery
System has a SureCharge™ option which allows the user to sterilize the battery
before charging. This ensures that the battery will be fully charged when
delivered to the operating room, unlike competitive battery systems currently
available on the market. The PowerPro®
uses
a
proprietary process for maintaining sterility during charging, thus avoiding
the
loss of battery charge during sterilization, which frequently occurs in
competing battery systems.
|
Powered
Surgical Instruments
|
||||
|
Product
|
Description
|
Brand
Name
|
||
|
Large
Bone
|
Powered
saws, drills and related disposable accessories for use primarily
in total
knee and hip joint replacements and trauma surgical
procedures.
|
Hall®
Surgical
MaxiDriver™
PowerPro®
PowerProMax™
Advantage®
SureCharge®
MPower™
|
||
|
Small
Bone
|
Powered
saws, drills and related disposable accessories for small bone and
joint
related surgical procedures.
|
Hall®
Surgical
MicroPower™
Advantage®
Smart
Guard®
PowerProMax™
|
||
|
Otolaryngology
Neurosurgery
Spine
|
Specialty
powered saws, drills and related disposable accessories for use in
neurosurgery, spine, and otolaryngologic procedures.
|
Hall®
Surgical
E9000®
UltraPower®
Hall
Osteon®
Hall
Ototome®
Coolflex®
|
||
|
Powered
Surgical Instruments
|
||||
|
Product
|
Description
|
Brand
Name
|
||
|
Cardiothoracic
Oral/maxillofacial
|
Powered
sternum saws, drills, and related disposable accessories for
use by
cardiothoracic and oral/maxillofacial surgeons.
|
Hall®
Surgical
E9000®
UltraPower®
Micro
100TM
VersiPower®
Plus
|
||
Electrosurgery
Electrosurgery
is a technique of using high-frequency electrical energy which, when applied
to
tissues through special instruments, may be used to cut or coagulate tissues.
Radio frequency (“RF”) is the form of high-frequency electrical energy used in
electrosurgery. An electrosurgical system consists of a generator,an active
electrode in the form of an electrosurgical pencil used to apply concentrated
energy from the generator to the target tissues and a ground pad which returns
the energy safely to the generator. Electrosurgery is routinely used in most
forms of surgery, including general, dermatologic, thoracic, orthopedic,
urologic, neurosurgical, gynecological, laparoscopic, arthroscopic and
endoscopic procedures.
Our
electrosurgical products include electrosurgical pencils and active electrodes,
ground pads, generators, the Argon-Beam Coagulation system (ABC®),
and related disposable products. ABC® technology is a special method
of electrosurgery, which produces a faster and more superficial coagulation
of
tissues as compared to conventional electrosurgery. Unlike conventional
electrosurgery, the electrical energy travels through an ionized column of
argon
gas, allowing the energy to be applied to the bleeding tissues in a completely
non-contact mode. Clinicians have reported notable benefits of ABC®
over traditional electrosurgical coagulation in certain clinical situations,
including open-heart, liver, oncology and trauma surgery.
|
Electrosurgery
|
||||
|
Product
|
Description
|
Brand
Name
|
||
|
Pencils
|
Disposable
and reusable surgical instruments designed to deliver high-frequency
electrical energy to cut and/or coagulate tissue.
|
Hand-Trol®
GoldLine™
ClearVac®
|
||
|
Ground
Pads
|
Disposable
ground pads which disperse electrosurgical energy and safely return
it to
the generator; available in adult, pediatric and infant
sizes.
|
MacroLyte®
ThermoGard®
SureFit™
DiaTemp™
|
||
|
Active
Electrodes
|
Surgical
accessory electrodes with and without the proprietary
UltraClean™ coating
which provides an easy to clean electrode surface during
surgery.
|
UltraClean®
|
||
|
Electrosurgery
|
||||
|
Product
|
Description
|
Brand
Name
|
||
|
Generators
|
Monopolar
and bipolar clinical energy sources for surgical procedures performed
in a
hospital, physicians’ office or clinical setting.
|
System
5000™
System
2450™
Hyfrecator®
2000
|
||
|
Argon
Beam
Coagulation
Systems
|
Specialized
electrosurgical generators, disposable hand pieces and ground pads
for
Argon Enhanced non-contact coagulation of tissues.
|
ABC®
Beamer
Plus®
System
7550®
ABC
Flex®
Bend-A-Beam®
|
||
Patient
Care
Our
patient care product line offering includes a line of vital signs and cardiac
monitoring products including pulse oximetry equipment & sensors, ECG
electrodes and cables, cardiac defibrillation & pacing pads and blood
pressure cuffs. We also offer a complete line of reusable surgical patient
positioners and suction instruments & tubing for use in the operating room,
as well as a line of IV products and hydrogel-based wound care dressings.
|
Patient
Care
|
||||
|
Product
|
Description
|
Brand
Name
|
||
|
ECG
Monitoring
|
Line
of disposable electrodes, monitoring cables, lead wire products and
accessories designed to transmit ECG signals from the heart to an
ECG
monitor or recorder.
|
CONMED®
Ultratrace®
Cleartrace®
|
||
|
Wound
Care
|
Disposable
transparent wound dressings comprising proprietary hydrogel; able
to
absorb 2½ times its weight in wound exudate.
|
ClearSite®
Hydrogauze™
|
||
|
Patient
Positioners
|
Products
which properly and safely position patients while in
surgery.
|
Airsoft®
|
||
|
Surgical
Suction Instruments and Tubing
|
Disposable
surgical suction instruments and connecting tubing, including Yankauer,
Poole, Frazier and Sigmoidoscopic instrumentation, for use by physicians
in the majority of open surgical procedures.
|
CONMED®
|
||
|
Intravenous
Therapy
|
Disposable
IV drip rate gravity controller and disposable catheter stabilization
dressing designed to hold and secure an IV needle or catheter for
use in
IV therapy.
|
VENI-GARD®
MasterFlow®
Stat
2®
|
||
|
Patient
Care
|
||||
|
Product
|
Description
|
Brand
Name
|
||
|
Defibrillator
Pads and Accessories
|
Stimulation
electrodes for use in emergency cardiac response and conduction
studies of
the heart.
|
PadPro®
|
||
|
Pulse
Oximetry
|
Used
in critical care to continuously monitor a patient’s arterial blood oxygen
saturation and pulse rate.
|
Dolphin®
(a
registered trademark of Dolphin Medical, Inc.)
Pro2®
|
||
|
Non-invasive
blood pressure cuff
|
Used
in critical care to measure blood pressure.
|
SoftCheck®
UltraCheck®
(registered
trademarks of CAS Medical Systems, Inc.)
|
||
Endosurgery
Endosurgery
(also referred to as minimally invasive surgery or laparoscopic surgery) is
surgery performed without a major incision. This surgical specialty results
in
less trauma for the patient and produces important cost savings as a result
of
shorter recovery times and reduced hospitalization. Endoscopic surgery is
performed on organs in the abdominal cavity such as the gallbladder, appendix
and female reproductive organs. During such procedures, devices called “trocars”
are used to puncture the abdominal wall and are then removed, leaving in place
a
trocar cannula. The trocar cannula provides access into the abdomen for camera
systems and surgical instruments. Some of our endosurgical instruments are
“reposable”, meaning that the instrument has a disposable and a reusable
component.
Our
Endosurgical products include the Reflex®
and
PermaClip™ clip appliers for vessel and duct ligation, Universal S/I™
(suction/irrigation) and Universal Plus™ laparoscopic instruments, specialized
suction/irrigation electrosurgical instrument systems for use in laparoscopic
surgery and the TroGard Finesse®
which
incorporates a blunt-tipped version of a trocar. The TroGard Finesse®
dilates
access through the body wall rather than cutting with the sharp, pointed tips
of
conventional trocars thus resulting in smaller wounds, and less bleeding. We
also offer cutting trocars, suction/irrigation accessories, laparoscopic
scissors, active electrodes, insufflation needles and linear cutters and
staplers for use in laparoscopic surgery. Our disposable skin staplers are
used
to close large skin incisions with surgical staples, thus eliminating the time
consuming suturing process.
|
Endosurgery
|
||||
|
Product
|
Description
|
Brand
Name
|
||
|
Trocars
|
Disposable
and reposable devices used to puncture the abdominal wall providing
access
to the abdominal cavity for camera systems and
instruments.
|
TroGard
Finesse®
Reflex®
Detach
a Port®
OnePort®
CORE
Dynamics®
|
||
|
Multi-functional
Electrosurgery and Suction/Irrigation instruments
|
Instruments
for cutting and coagulating tissue by delivering high-frequency
current.
Instruments which deliver irrigating fluid to the tissue and remove
blood
and fluids from the internal operating field.
|
Universal™
Universal
Plus™
FloVac®
|
||
|
Clip
Appliers
|
Disposable
and reposable devices for ligating blood vessels and ducts by placing
a
titanium clip on the vessel.
|
Reflex®
PermaClip™
|
||
|
Laparoscopic
Instruments
|
Scissors,
graspers
|
DetachaTip®
|
||
|
Skin
Staplers
|
Disposable
devices which place surgical staples for closing a surgical
incision.
|
Reflex®
|
||
|
Microlaparoscopy
scopes and instruments
|
Small
laparoscopes and instruments for performing surgery through very
small
incisions.
|
MicroLap®
|
||
|
Specialty
Laparoscopic Devices
|
Specialized
elevator, retractor for laparoscopic hysterectomy
|
VCARE®
|
||
Endoscopic
Technologies
Gastrointestinal
(GI) endoscopy is the examination of the digestive tract with a flexible,
lighted instrument referred to as an "endoscope". This instrument enables the
physician to directly visualize the esophagus, stomach, portions of the small
intestine, and colon. This technology allows the physician to more accurately
diagnose and treat diseases of the digestive system. Through these scopes a
physician may take biopsies, dilate narrowed areas referred to as strictures,
and remove polyps which are growths in the digestive tract. Some of the more
common conditions which may be diagnosed and treated using this procedure
include ulcers, Crohn's disease, ulcerative colitis and gallbladder
disease.
We
offer
a comprehensive line of minimally invasive diagnostic and therapeutic products
used in conjunction with procedures which require flexible endoscopy. Our
principal customers include GI endoscopists, pulmonologists,
and
nurses which perform both diagnostic and therapeutic endoscopic procedures
in
hospitals and outpatient clinics.
Our
primary focus is to identify, develop, acquire, manufacture
and market differentiated medical devices, which improve outcomes in the
diagnosis and treatment of gastrointestinal and pulmonary disorders. Our
diagnostic and therapeutic product offerings for GI and pulmonology include
forceps, accessories, bronchoscopy devices, dilatation, hemostasis, biliary
devices, and polypectomy.
|
Endoscopic
Technologies
|
||||
|
Product
|
Description
|
Brand
Name
|
||
|
Pulmonary
|
Transbronchial
Cytology and Histology Aspiration Needles, Disposable Biopsy Forceps,
Cytology Brushes and Bronchoscope Cleaning Brushes
|
Wang®
Blue
Bullet®
Precisor
BRONCHO®
GARG™
|
||
|
Biopsy
|
Disposable
biopsy forceps, Percutaneous Liver Biopsy instrument, Disposable
Cytology
Brushes
|
Precisor®
Hepacor®
OptiBite®
|
||
|
Polypectomy
|
Disposable
Polypectomy Snares, Retrieval Nets, Polyp Traps
|
Singular®
Optimizer®
Nakao
Spidernet™
|
||
|
Biliary
|
Triple
Lumen Stone Removal Balloons, Advanced Cannulation Triple Lumen
Papillotomes, High Performance Biliary Guidewires, Cannulas, Biliary
Balloon Dilators, Plastic and Metal Endoscopic Biliary
Stents
|
Apollo®
Apollo3®
Apollo3AC®
FXWire™
XWire™
DirecXion®
Director™
Duraglide™
Duraglide
3™
Flexxus™
ProForma®
HYDRODUCT®
|
||
|
Dilation
|
Multi-Stage
Balloon Dilators, American Dilation System
|
Eliminator®
|
||
|
Hemostasis
|
Endoscopic
Injection Needles, Endoscope Ligator, Multiple Band Ligator, Sclerotherapy
Needle, Bipolar Hemostasis Probes
|
SureShot®
Stiegmann-Goff™
Bandito™
RapidFire®
Flexitip™
BICAP®
BICAP
SUPERCONDUCTOR™
|
||
|
Endoscopic
Technologies
|
||||
|
Product
|
Description
|
Brand
Name
|
||
|
Endoscopic
Ultrasound
|
Fine
Needle Aspiration
|
Vizeon™
|
||
|
Enteral
Feeding
|
Initial
Percutaneous Endoscopic Gastrostomy (PEG) systems, Replacement
Tri-Funnel
G-Tube
|
Entake™
|
||
|
Accessories
|
Disposable
Bite Blocks, Cleaning Brushes
|
Scope
Saver™
Channel
Master™
Blue
Bullet®
|
||
Marketing
A
significant portion of our products are distributed domestically directly
to
more than 6,000 hospitals and other healthcare institutions as well as through
medical specialty distributors and surgeons. We are not dependent on any
single
customer and no single customer accounted for more than 10% of our net sales
in
2004, 2005 and 2006.
A
significant portion of our U.S. sales are to customers affiliated with GPOs,
IHNs and other large national or regional accounts, as well as to the Veterans
Administration and other hospitals operated by the Federal government. For
hospital inventory management purposes, some of our customers prefer to purchase
our products through independent third-party medical product distributors.
In
order to provide a high level of expertise to the medical
specialties we serve, our domestic sales force consists of the following:
|
·
|
210 sales
representatives selling arthroscopy and powered surgical instrument
products employed by independent sales agent
groups;
|
|
·
|
60 employee
sales representatives selling electrosurgery
products;
|
|
·
|
30 employee
sales representatives selling endosurgery
products;
|
|
·
|
40 employee
sales representatives selling patient care
products;
|
|
·
|
50
employee sales representatives selling endoscopic technologies
products.
|
Each
employee sales representative is assigned a defined geographic area and
compensated on a commission basis or through a combination of salary and
commission. The sales force is supervised and supported by either area directors
or district managers. Sales agent groups are used in the United States to sell
our arthroscopy, multi-specialty medical video systems and powered surgical
instrument products. These sales agent groups are paid a commission for sales
made to customers while home office sales and marketing management provide
the
overall direction for sales of our products.
Our
Corporate sales organization is responsible for interacting with large regional
and national accounts (eg. GPOs, IHNs, etc.). We have contracts with many such
organizations and believe that, with certain exceptions, the loss of any
individual group purchasing contract will not adversely impact our business.
In
addition,
all of our sales professionals are required to work closely with distributors
where applicable and maintain close relationships with end-users.
The
sale
of our products is accompanied by initial and ongoing in-service end-user
training. Each of our dedicated sales professionals are highly knowledgeable
in
the applications and procedures for the products they sell. Our sales
professionals, in turn, provide surgeons and medical personnel with information
relating to the technical features and benefits of our products.
Maintaining
and expanding our international presence is an important component of our
long-term growth plan. Our products are sold in over 100 foreign countries.
International sales efforts are coordinated through local country dealers or
through direct in country sales. We distribute our products through sales
subsidiaries and branches with offices located in Australia, Austria, Belgium,
Canada, France, Germany, Korea, the Netherlands, Spain, Poland and the United
Kingdom. In these countries, our sales are denominated in the local currency.
In
the remaining countries where our products are sold through independent
distributors, sales are denominated in United States dollars.
We
sell
to a diversified base of customers around the world and, therefore, believe
there is no material concentration of credit risk.
Manufacturing
We
manufacture substantially all of our products and assemble them from components
we produce. Our strategy has historically been to vertically integrate our
manufacturing facilities in order to develop competitive advantage. This
integration provides us with cost efficient and flexible manufacturing
operations which permit us to allocate capital more efficiently. Additionally,
we attempt to exploit commercial synergies between operations, such as the
procurement of common raw materials and components used in
production.
Raw
material costs constitute a substantial portion of our cost of production.
We
use numerous raw materials and components in the design, development and
manufacturing of our products. Substantially all of our raw materials and select
components used in the manufacturing process are procured from external
suppliers. We work closely with multiple suppliers to ensure continuity of
supply while maintaining high quality and reliability. None of our critical
raw
materials and components are procured from single sources for reasons of quality
assurance, sole source availability, cost effectiveness or constraints resulting
from regulatory requirements. The loss of any existing supplier or supplier
contract would not have a material adverse effect on our financial and
operational performance. To date, we have not experienced any protracted
interruption in the availability of raw materials and components necessary
to
fulfill production schedules.
All
of
our products are classified as medical devices subject to regulation by numerous
agencies and legislative bodies, including the United States Food and Drug
Administration (“FDA”) and comparable foreign counter parts. The FDA’s Quality
System Regulations set forth standards for our product design and manufacturing
processes, require the maintenance of certain records and provide for on-site
inspections of our facilities by the FDA. In many of the foreign countries
in
which we manufacture and distribute our products we are subject to regulatory
requirements affecting, among other things, product performance standards,
packaging requirements, labeling requirements and import laws. Regulatory
requirements affecting the Company vary from country to country. The timeframes
and
costs
for regulatory submission and approval from foreign agencies or legislative
bodies may vary from those required by the FDA. Certain requirements for
approval from foreign agencies or legislative bodies may also differ from those
of the FDA.
We
believe that our production and inventory management practices are
characteristic of those in the medical device industry. Substantially all
of our
products are stocked in inventory and are not manufactured to order or to
individual customer specifications. We schedule production and maintain adequate
levels of safety stock based on a number of factors including, experience,
knowledge of customer ordering patterns, demand, manufacturing lead times
and
optimal quantities required to maintain the highest possible service levels.
Customer orders are generally processed for immediate shipment and backlog
of
firm orders is therefore not considered material to an understanding of our
business.
Research
and Development
New
and
improved products play a critical role in our continued sales growth. Internal
research and development efforts focus on the development of new products
and
product technological and design improvements aimed at complementing and
expanding existing product lines. We continually seek to leverage new
technologies which improve the durability, performance and usability of existing
products. In addition, we maintain close working relationships with surgeons,
inventors and operating room personnel who often make new product and technology
disclosures, principally in procedure-specific areas. For clinical and
commercially promising disclosures, we seek to obtain rights to these ideas
through negotiated agreements. Such agreements typically compensate the
originator through royalty payments based upon a percentage of licensed product
net sales. Royalty expense approximated $3.8 million, $4.6 million and $4.4
million in 2004, 2005 and 2006, respectively.
Amounts
expended for Company sponsored research and development was approximately $20.2
million, $25.5 million and $30.7 million during 2004, 2005, and 2006,
respectively.
We
have
rights to significant intellectual property, including United States patents
and
foreign equivalent patents which cover a wide range of our products. We own
a
majority of these patents and have exclusive and non-exclusive licensing rights
to the remainder. In addition, certain of these patents have currently been
licensed to third parties on a non-exclusive basis. We believe that the
development of new products and technological and design improvements to
existing products will continue to be of primary importance in maintaining
our
competitive position.
Competition
The
market for our products is highly competitive and our customers generally have
numerous alternatives of supply. Many of our competitors offer a range of
products in areas other than those in which we compete, which may make such
competitors more attractive to surgeons, hospitals, group purchasing
organizations and others. In addition, several of our competitors are large,
technically-competent firms with substantial assets.
The
following chart identifies our principal competitors in each of our key business
areas:
|
Business
Area
|
Competitor
|
||
|
Arthroscopy
|
Smith
& Nephew, plc
Arthrex,
Inc.
Stryker
Corporation
ArthroCare
Corporation
Johnson
& Johnson; Mitek Worldwide
|
||
|
Powered
Surgical Instruments
|
Stryker
Corporation
Medtronic,
Inc. Midas Rex and Xomed divisions
The
Anspach Effort, Inc.
MicroAire
Surgical Instruments, LLC
|
||
|
Electrosurgery
|
Tyco
International Ltd.; Valleylab
3M
Company
ERBE
Elektromedizin GmbH
|
||
|
Patient
Care
|
Tyco
International Ltd.; Kendall
3M
Company
|
||
|
Endosurgery
|
Johnson
& Johnson; Ethicon Endo-Surgery, Inc.
Tyco
International Ltd.; U.S.Surgical
|
|
Endoscopic
Technologies
|
Boston
Scientific Corporation - Endoscopy
Wilson-Cook
Medical, Inc.
Olympus
America, Inc.
U.S.
Endoscopy
|
Factors
which affect our competitive posture include product design, customer
acceptance, service and delivery capabilities, pricing and product
development/improvement. In the future, other alternatives such as new medical
procedures or pharmaceuticals may become interchangeable alternatives to our
products.
Government
Regulation and Quality Systems
Substantially
all of our products are classified as medical devices subject to regulation
by
numerous agencies and legislative bodies, including the FDA and comparable
foreign counterparts. Authorization to commercially distribute our products
in
the U.S. is granted by the FDA under a procedure referred to as 510(k) premarket
notification. This process requires us to demonstrate that our new product,
line
extension or modified product is substantially equivalent to a legally marketed
device which was on the market prior to May 28, 1976 or is currently on the
U.S.
market and does not require premarket approval. Substantially all of our
products have been classified as either Class I or Class II devices with the
FDA, indicating that they are subject to the 510(k) premarketing notification
clearance as discussed above and must continually meet certain FDA standards
(Our products are classified as Class I, IIa and IIb in the European Union
(EU)
and subject to regulation by our European Notified Body). Our FDA clearance
is
subject to continual review and future discovery of previously unknown events
could result in restrictions being placed on a product’s marketing or
notification from the FDA to halt the distribution of certain medical devices.
Medical
device regulations continue to evolve world-wide. Products marketed in the
EU
and other countries require preparation of technical files and dossiers which
demonstrate compliance with applicable local regulations. Products marketed
in
Australia are subject to a new classification system and must be re-registered
under the updated Therapuetics Goods Act’s by October 2007 in order to continue
distribution. Products marketed in Japan must be re-registered under the
Ministry of Health’s, recently updated Pharmacuetical Affairs Law (PAL). As
government regulations continue to change, there is a risk that the distribution
of some of our products may be interrupted or discontinued if they do not
meet
the new requirements.
Our
operations are supported by quality assurance/regulatory compliance personnel
tasked with monitoring compliance to design controls, process controls and
the
other relevant government regulations for all of our design, manufacturing,
distribution and servicing activities. We and substantially all of our products
are subject to the provisions of the Federal Food, Drug and Cosmetic Act
of
1938, as amended by the Medical Device Amendments of 1976, Safe Medical Device
Act of 1990, Medical Device Modernization Act of 1997, Medical User Fee and
Modernization Act of 2002 and similar international regulations, such as
the
European Union Medical Device Directives.
As
a
manufacturer of medical devices, the FDA’s Quality System Regulations as
specified in Title 21, Code of Federal Regulation (CFR) part 820, set forth
standards for our product design and manufacturing processes, require the
maintenance of certain records, provide for on-site inspection of our facilities
and continuing review by the FDA. Many of our products are also subject to
industry-defined standards. Such industry-defined product standards are
generally formulated by committees of the Association for the Advancement
of
Medical Instrumentation (AAMI), International Electrotechnical Commission
(IEC)
and the International Organization for Standardization (ISO). We believe
that
our products and processes presently meet applicable standards in all material
respects.
As
noted
above, our facilities are subject to periodic inspection by the FDA for,
among
other things, conformance to Quality System Regulation and Current Good
Manufacturing Practice (“CGMP”) requirements. Following an inspection, the FDA
typically provides its observations, if any, in the form of a Form 483 (Notice
of Inspectional Observations) with specific observations concerning potential
violation of regulations. In December 2004, the FDA initiated an inspection
of
our Largo, Florida manufacturing facility. Following the inspection, the
FDA
issued to us a Form 483 which included observations related to our corrective
and preventive action procedures for nonconforming products and other quality
problems. Although we responded to the Form 483 to address and correct the
deficiencies, the FDA further issued a warning letter in June 2005 relating
to
these observations. We subsequently responded to the FDA with a plan of the
corrective actions that we had taken or proposed to take. In that response,
we
committed to further developing and implementing, in a timely manner, the
principles and strategies of systems-based quality management for improved
CGMP
compliance, operational performance and efficiencies. We consider the receipt
of
a warning letter to be an important regulatory event. Accordingly, we have
undertaken corrective actions that have involved significant additional costs
to
the Company. In May 2006, the FDA initiated a re-inspection of our Largo,
Florida manufacturing facility to verify issues related to the June 2005
warning
letter and December 2004 Form 483 observations had been corrected. No further
Form 483 observations were issued by FDA during the May 2006 inspection.
We will
continue implementing and monitoring continuous improvement activities through
our Company-wide quality systems
initiative.
However, there can be no assurance that the actions undertaken by the Company
will ensure that we will not receive an additional Form 483 or warning letter,
or other regulatory actions which may include consent decrees or fines.
We
market
our products in several foreign countries and therefore are subject to
regulations affecting, among other things, product standards, packaging
requirements, labeling requirements and import laws. Many of the regulations
applicable to our devices and products in these countries are similar to
those
of the FDA. The member countries of the European Union have adopted the European
Medical Device Directives, which create a single set of medical device
regulations for all member countries. These regulations require companies
that
wish to manufacture and distribute medical devices in the European Union
maintain quality system certification through European Union recognized Notified
Bodies. These Notified Bodies authorize the use of the CE Mark allowing free
movement of our products throughout the member countries. Requirements
pertaining to our products vary widely from country to country, ranging from
simple product registrations to detailed submissions such as those required
by
the FDA. We believe that our products currently meet applicable standards
for
the countries in which they are marketed.
Our
products may become subject to recall or market withdrawal regulations and
we
have made product recalls in the past. No product recall has had a material
effect on our financial condition or results of operations, however there
can be
no assurance that regulatory issues will not have a material adverse effect
in
the future.
Any
change in existing federal, state, foreign laws or regulations, or in the
interpretation or enforcement thereof, or the promulgation or any additional
laws or regulations may result in a material adverse effect on our financial
condition or results of operations.
Employees
As
of
December 31, 2006, we had approximately 3,200 full-time employees,
including more than 2,000 in operations, 161 in research and development,
and
the remaining in sales, marketing and related administrative support. We
believe
that we have good relations with our employees and have never experienced
a
strike or similar work stoppage. None of our employees are represented by
a
labor union.
Item
1A. Risk Factors
An
investment in our securities, including our common stock, involves a high
degree
of risk. Investors should carefully consider the specific factors set forth
below as well as the other information included or incorporated by reference
in
this Form 10-K. See “Forward Looking Statements”.
Our
financial performance is subject to the risks inherent in our acquisition
strategy, including the effects of increased borrowing and integration of
newly
acquired businesses or product lines.
A
key
element of our business strategy has been to expand through acquisitions
and we
may seek to pursue additional acquisitions in the future. Our success is
dependent in part upon our ability to integrate acquired companies or product
lines into our existing operations. We may not have sufficient management
and
other resources to accomplish the integration of
our
past
and future acquisitions and implementing our acquisition strategy may strain
our
relationship with customers, suppliers, distributors, manufacturing personnel
or
others. There can be no assurance that we will be able to identify and make
acquisitions on acceptable terms or that we will be able to obtain financing
for
such acquisitions on acceptable terms. In addition, while we are generally
entitled to customary indemnification from sellers of businesses for any
difficulties that may have arisen prior to our acquisition of each business,
acquisitions may involve exposure to unknown liabilities and the amount and
time
for claiming under these indemnification provisions is often limited. As
a
result, our financial performance is now and will continue to be subject
to
various risks associated with the acquisition of businesses, including the
financial effects associated with any increased borrowing required to fund
such
acquisitions or with the integration of such businesses.
Failure
to comply with regulatory requirements may result in recalls, fines or
materially adverse implications.
All
of
our products are classified as medical devices subject to regulation by the
FDA.
As a manufacturer of medical devices, our manufacturing processes and facilities
are subject to on-site inspection and continuing review by the FDA for
compliance with the Quality System Regulations. Manufacturing and sales of
our
products outside the United States are also subject to foreign regulatory
requirements which vary from country to country. Moreover, we are generally
required to obtain regulatory clearance or approval prior to marketing a
new
product. The time required to obtain approvals from foreign countries may
be
longer or shorter than that required for FDA approval, and requirements for
foreign approvals may differ from FDA requirements. Failure to comply with
applicable domestic and/or foreign regulatory requirements may result in:
|
·
|
fines
or other enforcement actions;
|
|
·
|
recall
or seizure of products;
|
|
·
|
total
or partial suspension of
production;
|
|
·
|
withdrawal
of existing product approvals or
clearances;
|
|
·
|
refusal
to approve or clear new applications or notices;
|
|
·
|
increased
quality control costs; or
|
|
·
|
criminal
prosecution.
|
Failure
to comply with Quality System Regulations and applicable foreign regulations
could result in a material adverse effect on our business, financial condition
or results of operations.
If
we are
not able to manufacture products in compliance with regulatory standards,
we may
decide to cease manufacturing of those products and may be subject to product
recall.
In
addition to the Quality System Regulations, many of our products are also
subject to industry-defined standards. We may not be able to comply with
these
regulations and standards due to deficiencies in component parts or our
manufacturing processes. If we are not able to comply with the Quality System
Regulations or industry-defined standards, we may not be able to fill customer
orders and we may decide to cease production of non-compliant products. Failure
to produce products could affect our profit margins and could lead to loss
of
customers.
Our
products are subject to product recall and we have made product recalls in
the
past. Although no recall has had a material adverse effect on our business,
financial condition or results of operations, we cannot assure you that
regulatory issues will not have a material adverse effect in the future or
that
product recalls will not harm our reputation and our customer relationships.
The
highly competitive market for our products may create adverse pricing
pressures.
The
market for our products is highly competitive and our customers have numerous
alternatives of supply. Many of our competitors offer a range of products
in
areas other than those in which we compete, which may make such competitors
more
attractive to surgeons, hospitals, group purchasing organizations and others.
In
addition, several of our competitors are large, technically-competent firms
with
substantial assets. Competitive pricing pressures or the introduction of
new
products by our competitors could have an adverse effect on our revenues.
See
“Competition” for a further discussion of these competitive forces.
Factors
which may influence our customers’ choice of competitor products
include:
|
·
|
changes
in surgeon preferences;
|
|
·
|
increases
or decreases in health care spending related to medical
devices;
|
|
·
|
our
inability to supply products to them, as a result of product recall,
market withdrawal or back-order;
|
|
·
|
the
introduction by competitors of new products or new features to
existing
products;
|
|
·
|
the
introduction by competitors of alternative surgical technology;
and
|
|
·
|
advances
in surgical procedures, discoveries or developments in the health
care
industry.
|
We
use a variety of raw materials in our businesses, and significant shortages
or
price increases could increase our operating costs and adversely impact the
competitive positions of our products.
Our
reliance on certain suppliers and commodity markets to secure raw materials
used
in our products exposes us to volatility in the prices and availability of
raw
materials. In some instances, we participate in commodity markets that may
be
subject to allocations by suppliers. A disruption in deliveries from our
suppliers, price increases, or decreased availability of raw materials or
commodities, could have an adverse effect on our ability to meet our commitments
to customers or increase our operating costs. We believe that our supply
management practices are based on an appropriate balancing of the foreseeable
risks and the costs of alternative practices. Nonetheless, price increases
or
the unavailability of some raw materials may have an adverse effect on our
results of operations or financial condition.
Cost
reduction efforts in the health care industry could put pressures on our
prices
and margins.
In
recent
years, the health care industry has undergone significant change driven by
various efforts to reduce costs. Such efforts include national health care
reform, trends towards managed care, cuts in Medicare,
consolidation
of health care distribution companies and collective purchasing arrangements
by
GPOs and IHNs. Demand and prices for our products may be adversely affected
by
such trends.
We
may not be able to keep pace with technological change or to successfully
develop new products with wide market acceptance, which could cause us to
lose
business to competitors.
The
market for our products is characterized by rapidly changing technology.
Our
future financial performance will depend in part on our ability to develop
and
manufacture new products on a cost-effective basis, to introduce them to
the
market on a timely basis, and to have them accepted by surgeons.
We
may
not be able to keep pace with technology or to develop viable new products.
Factors which may result in delays of new product introductions or cancellation
of our plans to manufacture and market new products include:
|
·
|
capital
constraints;
|
|
·
|
research
and development delays;
|
|
·
|
delays
in securing regulatory approvals;
or
|
|
·
|
changes
in the competitive landscape, including the emergence of alternative
products or solutions which reduce or eliminate the markets for
pending
products.
|
Our
new products may fail to achieve expected levels of market acceptance.
New
product introductions may fail to achieve market acceptance. The degree of
market acceptance for any of our products will depend upon a number of factors,
including:
|
·
|
our
ability to develop and introduce new products and product enhancements
in
the time frames we currently
estimate;
|
|
·
|
our
ability to successfully implement new
technologies;
|
|
·
|
the
market’s readiness to accept new
products;
|
|
·
|
having
adequate financial and technological resources for future product
development and promotion;
|
|
·
|
the
efficacy of our products; and
|
|
·
|
the
prices of our products compared to the prices of our competitors’
products.
|
If
our
new products do not achieve market acceptance, we may be unable to recover
our
investments and may lose business to competitors.
In
addition, some of the companies with which we now compete or may compete
in the
future have or may have more extensive research, marketing and manufacturing
capabilities and significantly greater technical and personnel resources
than we
do, and may be better positioned to continue to improve their technology
in
order to compete in an evolving industry. See “Competition” for a further
discussion of these competitive forces.
Our
senior credit agreement contains covenants which may limit our flexibility
or
prevent us from taking actions.
Our
senior credit agreement contains, and future credit facilities are expected
to
contain, certain restrictive covenants which will affect, and in
many
respects significantly limit or prohibit, among other things, our ability
to:
|
·
|
incur
indebtedness;
|
|
·
|
make
investments;
|
|
·
|
engage
in transactions with affiliates;
|
|
·
|
pay
dividends or make other distributions on, or redeem or repurchase,
capital
stock;
|
|
·
|
sell
assets; and
|
|
·
|
pursue
acquisitions.
|
These
covenants, unless waived, may prevent us from pursuing acquisitions,
significantly limit our operating and financial flexibility and limit our
ability to respond to changes in our business or competitive activities.
Our
ability to comply with such provisions may be affected by events beyond our
control. In the event of any default under our credit agreement, the credit
agreement lenders may elect to declare all amounts borrowed under our credit
agreement, together with accrued interest, to be due and payable. If we were
unable to repay such borrowings, the credit agreement lenders could proceed
against collateral securing the credit agreement, which consists of
substantially all of our property and assets, except for our accounts receivable
and related rights which are sold in connection with the accounts receivable
sales agreement. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Liquidity and Capital Resources” for a
discussion of the accounts receivable sales agreement. Our credit agreement
also
contains a material adverse effect clause which may limit our ability to
access
additional funding under our credit agreement should a material adverse change
in our business occur.
Our
substantial leverage and debt service requirements may require us to adopt
alternative business strategies.
We
have
indebtedness that is substantial in relation to our shareholders’ equity, as
well as interest and debt service requirements that are significant compared
to
our cash flow from operations. As of December 31, 2006, we had $267.8 million
of
debt outstanding, representing 38% of total capitalization and which does
not
include the $44 million of accounts receivable sold under the accounts
receivable sales agreement. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Liquidity and Capital
Resources”.
The
degree to which we are leveraged could have important consequences to investors,
including but not limited to the following:
|
·
|
a
substantial portion of our cash flow from operations must be dedicated
to
debt service and will not be available for operations, capital
expenditures, acquisitions, dividends and other
purposes;
|
|
·
|
our
ability to obtain additional financing in the future for working
capital,
capital expenditures, acquisitions or general corporate purposes
may be
limited or impaired, or may be at higher interest
rates;
|
|
·
|
we
may be at a competitive disadvantage when compared to competitors
that are
less leveraged;
|
|
·
|
we
may be hindered in our ability to adjust rapidly to market conditions;
|
|
·
|
our
degree of leverage could make us more vulnerable in the event of
a
downturn in general economic conditions or other adverse circumstances
applicable to us; and
|
|
·
|
our
interest expense could increase if interest rates in general increase
because a portion of our borrowings, including our borrowings under
our
credit agreement, are and will continue to be at variable rates
of
interest.
|
We
may not be able to generate sufficient cash to service our indebtedness,
which
could require us to reduce our expenditures, sell assets, restructure our
indebtedness or seek additional equity capital.
Our
ability to satisfy our obligations will depend upon our future operating
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, many of which are beyond our control.
We
may not have sufficient cash flow available to enable us to meet our
obligations. If we are unable to service our indebtedness, we will be forced
to
adopt an alternative strategy that may include actions such as foregoing
acquisitions, reducing or delaying capital expenditures, selling assets,
restructuring or refinancing our indebtedness or seeking additional equity
capital. We cannot assure you that any of these strategies could be implemented
on terms acceptable to us, if at all. See “Management’s Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources” for a discussion of our indebtedness and its implications.
We
may be unable to continue to sell our accounts receivable, which could require
us to seek alternative sources of financing.
Under
our
accounts receivable sales agreement, there are certain statistical ratios
which
must be maintained relating to the pool of receivables in order for us to
continue selling to the purchaser. These ratios relate to sales dilution
and
losses on accounts receivable. If new accounts receivable arising in the
normal
course of business do not qualify for sale or the purchaser otherwise ceases
to
purchase our receivables, we may require access to alternate sources of working
capital, which may be more expensive or difficult to obtain. Our accounts
receivable sales agreement, as amended, also requires us to obtain a commitment
(the “purchaser commitment”) from the purchaser to fund the purchase of our
accounts receivable. The purchaser commitment was amended effective October
23,
2006 whereby it was extended through October 31, 2008 under substantially
the
same terms and conditions. In the event we are unable to renew our purchaser
commitment in the future, we would need to access alternate sources of working
capital which may be more expensive or difficult to obtain.
If
we infringe third parties’ patents, or if we lose our patents or they are held
to be invalid, we could become subject to liability and our competitive position
could be harmed.
Much
of
the technology used in the markets in which we compete is covered by patents.
We
have numerous U.S. patents and corresponding foreign patents on products
expiring at various dates from 2007 through 2030 and have additional patent
applications pending. See “Research and Development” for a further description
of our patents. The loss of our patents could reduce the value of the related
products and any related competitive advantage. Competitors
may
also
be able to design around our patents and to compete effectively with our
products. In addition, the cost of enforcing our patents against third parties
and defending our products against patent infringement actions by others
could
be substantial. We cannot assure you that:
|
·
|
pending
patent applications will result in issued patents,
|
|
·
|
patents
issued to or licensed by us will not be challenged by competitors,
|
|
·
|
our
patents will be found to be valid or sufficiently broad to protect
our
technology or provide us with a competitive advantage, or
|
|
·
|
we
will be successful in defending against pending or future patent
infringement claims asserted against our
products.
|
Ordering
patterns of our customers may change resulting in reductions in
sales.
Our
hospital and surgery center customers purchase our products in quantities
sufficient to meet their anticipated demand. Likewise, our health care
distributor customers purchase our products for ultimate resale to health
care
providers in quantities sufficient to meet the anticipated requirements of
the
distributors’ customers. Should inventories of our products owned by our
hospital, surgery center and distributor customers grow to levels higher
than
their requirements, our customers may reduce the ordering of products from
us.
This could result in reduced sales during a financial accounting
period.
Our
significant international operations subject us to risks associated with
operating in foreign countries.
A
significant portion of our revenues are derived from foreign sales. As a
result,
our international presence exposes us to certain inherent risks,
including:
|
·
|
devaluations
and fluctuations in currency exchange
rates;
|
|
·
|
imposition
of limitations on conversions of foreign currencies into dollars
or
remittance of dividends and other payments by international
subsidiaries;
|
|
·
|
imposition
or increase of withholding and other taxes on remittances and other
payments by international
subsidiaries;
|
|
·
|
trade
barriers;
|
|
·
|
political
risks, including political
instability;
|
|
·
|
reliance
on third parties to distribute our
products;
|
|
·
|
hyperinflation
in certain foreign countries; and
|
|
·
|
imposition
or increase of investment and other restrictions by foreign
governments.
|
We
cannot
assure you that such risks will not have a material adverse effect on our
business and results of operations.
We
can be sued for producing defective products and our insurance coverage may
be
insufficient to cover the nature and amount of any product liability
claims.
The
nature of our products as medical devices and today’s litigious environment
should be regarded as potential risks which could significantly and adversely
affect our financial condition and results of operations. The insurance we
maintain to protect against claims associated with the use of our products
have
deductibles and may not adequately cover the amount or nature of any claim
asserted against us. We are also exposed to the risk that our insurers may
become insolvent or that premiums may increase substantially. See “Legal
Proceedings” for a further discussion of the risk of product liability actions
and our insurance coverage.
Damage
to our physical properties as a result of windstorm, earthquake, fire or
other
natural or man-made disaster may cause a financial loss and a loss of
customers.
Although
we maintain insurance coverage for physical damage to our property and
the
resultant losses that could occur during a business interruption, we are
required to pay deductibles and our insurance coverage is limited to certain
caps. For example, our deductible for windstorm damage to our Florida property
amounts to 2% of any loss and coverage for earthquake damage to our California
properties is limited to $10 million. Further, while insurance reimburses
us for
our lost gross earnings during a business interruption, if we are unable
to
supply our customers with our products for an extended period of time,
there can
be no assurance that we will regain the customers’ business once the product
supply is returned to normal.
Item
2. Properties
Facilities
The
following table sets forth certain information with respect to our principal
operating facilities. We believe that our facilities are generally well
maintained, are suitable to support our business and adequate for present and
anticipated needs.
|
Location
|
Square
Feet
|
Own
or Lease
|
Lease
Expiration
|
|||||
|
Utica,
NY (two facilities)
|
650,000
|
Own
|
-
|
|||||
|
Largo,
FL
|
278,000
|
Own
|
-
|
|||||
|
Rome,
NY
|
120,000
|
Own
|
-
|
|||||
|
Centennial,
CO
|
87,500
|
Own
|
-
|
|||||
|
Tampere,
Finland
|
5,662
|
Own
|
-
|
|||||
|
El
Paso, TX
|
96,000
|
Lease
|
March
2010
|
|||||
|
Billerica,
MA
|
60,000
|
Lease
|
September
2007
|
|||||
|
Juarez,
Mexico
|
44,000
|
Lease
|
December
2009
|
|||||
|
Montreal,
Canada (two facilities)
|
20,940
|
Lease
|
April
2007 & March
2009
|
|||||
|
Santa
Barbara, CA
|
18,600
|
Lease
|
December
2008 & September 2013
|
|||||
|
Frenchs
Forest, Australia
|
16,903
|
Lease
|
July
2008
|
|||||
|
Tampere,
Finland
|
15,457
|
Lease
|
Open
Ended
|
|||||
|
Brussels,
Belgium
|
39,073
|
Lease
|
June
2015
|
|||||
|
Anaheim,
CA
|
14,037
|
Lease
|
October
2012
|
|||||
|
Mississauga,
Canada
|
13,500
|
Lease
|
May
2008
|
|||||
|
Swindon,
Wiltshire, UK
|
10,000
|
Lease
|
December
2015
|
|||||
|
Portland,
OR
|
9,107
|
Lease
|
September
2008
|
|||||
|
Seoul,
Korea
|
7,513
|
Lease
|
August
2007
|
|||||
|
Frankfurt,
Germany
|
6,900
|
Lease
|
December
2012
|
|||||
|
Shepshed,
Leicestershire,UK
|
5,000
|
Lease
|
October
2015
|
|||||
|
Barcelona,
Spain
|
2,691
|
|
|
Lease
|
May
2009
|
|||
|
Rungis
Cedex, France
|
2,637
|
Lease
|
November
2011
|
|||||
|
Lodz,
Poland
|
2,367
|
Lease
|
May
2010
|
|||||
|
Graz,
Austria
|
2,174
|
Lease
|
October
2008
|
|||||
|
San
Juan Capistrano, CA
|
2,000
|
Lease
|
January
2008
|
|||||
Item
3. Legal Proceedings
From
time
to time, we are a defendant in certain lawsuits alleging product liability,
patent infringement, or other claims incurred in the ordinary course of
business. Likewise, from time to time, the Company may receive a subpoena from
a
government agency such as the Equal Employment Opportunity Commission,
Occupational Safety and Health Administration, the Department of Labor, the
Treasury Department, and other federal and state agencies or foreign governments
or government agencies. These subpoenae may or may not be routine inquiries,
or
may begin as routine inquiries and over time develop into enforcement actions
of
various types. The product liability claims are generally covered by various
insurance policies, subject to certain deductible amounts and maximum policy
limits. When there is no insurance coverage, as would typically be the case
primarily in lawsuits alleging patent infringement or in connection with certain
government investigations, we establish sufficient reserves to cover probable
losses associated with such claims. We do not expect that the resolution of
any
pending claims or investigations will have a material adverse effect on our
financial condition or results of operations. There can be no assurance,
however, that future claims or investigations, or the costs associated with
claims or investigations, especially claims and investigations not covered
by
insurance, will not have a material adverse effect on our future performance.
Manufacturers
of medical products may face exposure to significant product liability claims.
To date, we have not experienced any product liability claims that are material
to our financial statements or condition, but any such claims arising in the
future could have a material adverse effect on our business or results of
operations. We currently maintain commercial product liability insurance of
$25
million per incident and $25 million in the aggregate annually, which we believe
is adequate. This coverage is on a claims-made basis. There can be no assurance
that claims will not exceed insurance coverage or that such insurance will
be
available in the future at a reasonable cost to us.
Our
operations are subject, and in the past have been subject, to a number of
environmental laws and regulations governing, among other things, air emissions,
wastewater discharges, the use, handling and disposal of hazardous substances
and wastes, soil and groundwater remediation and employee health and safety.
In
some jurisdictions environmental requirements may be expected to become more
stringent in the future. In the United States certain environmental laws can
impose liability for the entire cost of site restoration upon each of the
parties that may have contributed to conditions at the site regardless of fault
or the lawfulness of the party’s activities. While we do not believe that the
present costs of environmental compliance and remediation are material, there
can be no assurance that future compliance or remedial obligations could not
have a material adverse effect on our financial condition or results of
operations.
In
November 2003, we commenced litigation against Johnson & Johnson and several
of its subsidiaries, including Ethicon, Inc. for violation of federal and state
antitrust laws. The lawsuit claims that Johnson & Johnson engaged in illegal
and anticompetitive conduct with respect to sales of product used in endoscopic
surgery, resulting in higher prices to consumers and the exclusion of
competition. We have sought relief which includes an injunction restraining
Johnson & Johnson from continuing its anticompetitive practice as well as
receiving the maximum amount of damages allowed by law. The discovery phase
is
now essentially complete
and
Johnson & Johnson filed a motion for summary judgment which was denied by
the Court by Order dated May 2, 2006. This Order does not represent a
determination on the merits with respect to the Company’s claims against Johnson
& Johnson, but rather represents a determination that the Company has
produced sufficient evidence to warrant submitting the case to a jury. The
Company expects to submit briefs on certain evidentiary matters in the next
few
weeks, with the case currently scheduled for a jury trial to commence on April
23, 2007. There can be no assurance that the case will in fact proceed to trial
on that date. The Company believes that its claims are well-grounded in fact
and
law, but there can be no assurance that it will be successful in its claims
in a
trial before a jury.
On
April
7, 2006, CONMED received a copy of a complaint filed in the United States
District for the Northern District of New York on behalf of a purported class
of
former CONMED Linvatec sales representatives. The complaint alleges that the
former sales representatives were entitled to, but did not receive, severance
in
2003 when CONMED Linvatec restructured its distribution channels. We believe
that the maximum exposure related to this complaint is $2.5 to $3.0 million,
not
including any interest, fees or costs that might be awarded if the five named
plaintiffs were to prevail on their own behalf as well as on behalf of all
members of the purported class. CONMED Linvatec did not generally pay severance
during the 2003 restructuring because the former sales representatives were
offered sales positions with CONMED Linvatec’s new manufacturer’s
representatives. Other than three of the five named plaintiffs in the class
action, nearly all of CONMED Linvatec’s former sales representatives accepted
such positions.
The
Company has filed motions which, if granted, would result in the dismissal
of
the case, subject to any appeals the plaintiffs could pursue. The Court held
a
hearing on the Company’s motions on January 5, 2007, and took the matter under
advisement. There is no fixed time frame within the Court must rule on the
motions. The Company believes there is no merit to the claims asserted in the
Complaint, although there can be no assurance that the Company will prevail
in
the litigation.
Item
4. Submission of Matters to a Vote of Security
Holders
Not
Applicable.
Item
5. Market for the Registrant’s Common Equity, Related
Stockholder Matters
and Issuer Purchases of Equity Securities
Our
common stock, par value $.01 per share, is traded on the Nasdaq Stock Market
under the symbol “CNMD”. At January 31, 2007, there were 1,076 registered
holders of our common stock and approximately 8,683 accounts held in “street
name”.
The
following table sets forth quarterly high and low sales prices for the years
ended December 31, 2005 and 2006, as reported by the Nasdaq Stock Market.
|
2005
|
||||||||
|
Period
|
High
|
Low
|
||||||
|
First
Quarter
|
$
|
30.16
|
$
|
26.69
|
||||
|
Second
Quarter
|
32.58
|
29.27
|
||||||
|
Third
Quarter
|
31.81
|
27.44
|
||||||
|
Fourth
Quarter
|
27.85
|
22.55
|
||||||
|
2006
|
||||||||
|
Period
|
High
|
Low
|
||||||
|
First
Quarter
|
$
|
24.00
|
$
|
18.09
|
||||
|
Second
Quarter
|
22.05
|
18.75
|
||||||
|
Third
Quarter
|
21.29
|
19.19
|
||||||
|
Fourth
Quarter
|
23.32
|
21.10
|
||||||
We
did
not pay cash dividends on our common stock during 2005 or 2006 and do not
currently intend to pay dividends for the foreseeable future. Future decisions
as to the payment of dividends will be at the discretion of the Board of
Directors, subject to conditions then existing, including our financial
requirements and condition and the limitation and payment of cash dividends
contained in debt agreements.
Our
Board
of Directors has authorized a share repurchase program; see Note 8 to the
Consolidated Financial Statements.
Information
relating to compensation plans under which equity securities of CONMED
Corporation are authorized for issuance is set forth in the section captioned
“Equity Compensation Plans” in CONMED Corporation’s definitive Proxy Statement
or other informational filing for our 2007 Annual Meeting of Stockholders and
all such information is incorporated herein by reference.
Performance
Graph
The
performance graph below compares the yearly percentage change in the Company’s
Common Stock with the cumulative total return of the NASDAQ Composite Index
and
the cumulative total return of the Standard & Poor’s Health Care Equipment
Index. In each case, the cumulative total return assumes reinvestment of
dividends into the same class of equity securities at the frequency with which
dividends are paid on such securities during the applicable fiscal
year.
Item
6. Selected Financial Data
The
following table sets forth selected historical financial data for the years
ended December 31, 2002, 2003, 2004, 2005 and 2006. The financial data set
forth
below should be read in conjunction with the information under “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
included in Item 7 of this Form 10-K and the Financial Statements of the Company
and the notes thereto.
FIVE
YEAR SUMMARY OF SELECTED FINANCIAL DATA
|
Years
Ended December 31,
|
||||||||||||||||
|
2002
|
2003
|
2004
|
2005
|
2006
|
||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||
| Statements of Operations Data (1): | ||||||||||||||||
|
Net
sales
|
$
|
453,062
|
$
|
497,130
|
$
|
558,388
|
$
|
617,305
|
$
|
646,812
|
||||||
|
Cost
of sales (2)
|
215,891
|
237,433
|
271,496
|
304,284
|
333,966
|
|||||||||||
|
Gross
profit
|
237,171
|
259,697
|
286,892
|
313,021
|
312,846
|
|||||||||||
|
Selling
and administrative
|
139,735
|
157,453
|
183,183
|
216,685
|
234,832
|
|||||||||||
|
Research
and development
|
16,087
|
17,306
|
20,205
|
25,469
|
30,715
|
|||||||||||
|
Impairment
of goodwill (3)
|
-
|
-
|
-
|
-
|
46,689
|
|||||||||||
|
Write-off
of in-process research
and development (4)
|
-
|
7,900
|
16,400
|
-
|
-
|
|||||||||||
|
Other
expense (income)(5)
|
2,000
|
(2,917
|
)
|
3,943
|
7,119
|
5,213
|
||||||||||
|
Income
(loss) from operations
|
79,349
|
79,955
|
63,161
|
63,748
|
(4,603
|
)
|
||||||||||
|
Loss
on early extinguishment of
debt (6)
|
1,475
|
8,078
|
825
|
-
|
678
|
|||||||||||
|
Interest
expense
|
24,513
|
18,868
|
12,774
|
15,578
|
19,120
|
|||||||||||
|
Income
(loss) before income taxes
|
53,361
|
53,009
|
49,562
|
48,170
|
(24,401
|
)
|
||||||||||
|
Provision
(benefit) for income taxes
|
19,210
|
20,927
|
16,097
|
16,176
|
(11,894
|
)
|
||||||||||
|
Net
income (loss)
|
$
|
34,151
|
$
|
32,082
|
$
|
33,465
|
31,994
|
(12,507
|
)
|
|||||||
|
Earnings
(loss) Per Share
|
||||||||||||||||
|
Basic
|
$
|
1.25
|
$
|
1.11
|
$
|
1.13
|
$
|
1.09
|
$
|
(.45
|
)
|
|||||
|
Diluted
|
$
|
1.23
|
$
|
1.10
|
$
|
1.11
|
$
|
1.08
|
$
|
(.45
|
)
|
|||||
|
Weighted
Average Number of Common Shares In Calculating:
|
||||||||||||||||
|
Basic
earnings (loss) per share
|
27,337
|
28,930
|
29,523
|
29,300
|
27,966
|
|||||||||||
|
Diluted
earnings (loss) per share
|
27,827
|
29,256
|
30,105
|
29,736
|
27,966
|
|||||||||||
|
Other
Financial Data:
|
||||||||||||||||
|
Depreciation
and amortization
|
$
|
22,370
|
$
|
24,854
|
$
|
26,868
|
$
|
30,786
|
$
|
29,851
|
||||||
|
Capital
expenditures
|
13,384
|
9,309
|
12,419
|
16,242
|
21,895
|
|||||||||||
|
Balance
Sheet Data (at period end):
|
||||||||||||||||
|
Cash
and cash equivalents
|
$
|
5,626
|
$
|
5,986
|
$
|
4,189
|
$
|
3,454
|
$
|
3,831
|
||||||
|
Total
assets
|
742,140
|
805,058
|
872,825
|
903,783
|
861,571
|
|||||||||||
|
Long-term
debt (including current
portion)
|
257,387
|
264,591
|
294,522
|
306,851
|
267,824
|
|||||||||||
|
Total
shareholders’ equity
|
386,939
|
433,490
|
447,983
|
453,006
|
440,354
|
|||||||||||
|
(1)
|
Results
of operations of acquired businesses have been recorded in the financial
statements since the date of acquisition. See additional discussion
in
Note 2 to the Consolidated Financial
Statements.
|
|
(2)
|
Includes
acquisition and acquisition-transition related charges of $1.3 million
in
2003, $4.4 million in 2004, $7.8 million in 2005, and $10.0 million
in
2006. Also included in 2006 are $1.3 million in charges
related to the closing of a manufacturing plant. See additional discussion
in Notes 2 and 12 to the Consolidated Financial
Statements.
|
|
(3)
|
During
2006, we recorded a $46.7 million charge for the impairment of goodwill
related to the Endoscopic Technologies business unit. See additional
discussion in Note 5 to the Consolidated Financial
Statements.
|
|
(4)
|
During
2003, we recorded a $7.9 million charge to write-off in-process research
and development assets acquired as a result of our purchase of Bionx
Implants, Inc. No benefit for income taxes was recorded as these
costs are
not deductible for income tax purposes. During 2004, we recorded
a $16.4
million charge to write-off the tax-deductible in-process research
and
development assets acquired as a result of our purchase of the business
operations of the Endoscopic Technologies Division of C.R. Bard,
Inc. See
additional discussion in Note 2 to the Consolidated Financial
Statements.
|
|
(5)
|
Other
expense (income) includes the following:
|
|
2002
|
2003
|
2004
|
2005
|
2006
|
|||||||||||||
|
Loss
on settlement
|
|||||||||||||||||
|
of
a patent
|
|||||||||||||||||
|
dispute
|
2,000
|
-
|
-
|
-
|
595
|
||||||||||||
|
Gain
on settlement
|
|||||||||||||||||
|
of
a contractual
|
|||||||||||||||||
|
dispute
|
-
|
(9,000
|
)
|
-
|
-
|
-
|
|||||||||||
|
Pension
settlement
|
-
|
2,839
|
-
|
-
|
-
|
||||||||||||
|
Acquisition-
|
|||||||||||||||||
|
transition
related
|
|||||||||||||||||
|
costs
|
-
|
3,244
|
1,547
|
4,108
|
2,592
|
||||||||||||
|
Termination
of
|
|||||||||||||||||
|
product
offering
|
-
|
-
|
2,396
|
1,519
|
1,448
|
||||||||||||
|
Environmental
|
|||||||||||||||||
|
settlement
|
-
|
-
|
-
|
698
|
-
|
||||||||||||
|
Loss
on equity
|
|||||||||||||||||
|
investment
|
-
|
-
|
-
|
794
|
-
|
||||||||||||
|
Closure
of
|
|||||||||||||||||
|
manufacturing
|
|||||||||||||||||
|
facility
|
-
|
-
|
-
|
-
|
578
|
||||||||||||
|
Other
expense
|
|||||||||||||||||
|
(income)
|
$
|
2,000
|
$
|
(2,917
|
)
|
$
|
3,943
|
$
|
7,119
|
$
|
5,213
|
||||||
|
See
additional discussion in Note 12 to the Consolidated Financial
Statements.
|
|
(6)
|
Includes
in 2002, 2003, 2004 and 2006, charges of $1.5 million, $8.1 million,
$0.8
million, and $0.7 million, respectively, related to losses on early
extinguishment of debt. See additional discussion in Note 6 to the
Consolidated Financial Statements.
|
Item
7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
The
following discussion should be read in conjunction with Selected Financial
Data
(Item 6), and our Consolidated Financial Statements and related notes contained
elsewhere in this report.
Overview
of CONMED Corporation
CONMED
Corporation (“CONMED”, the “Company”, “we” or “us”) is a medical technology
company with an emphasis on surgical devices and equipment for minimally
invasive procedures and monitoring. The Company’s products serve the clinical
areas of arthroscopy, powered surgical instruments, electrosurgery, cardiac
monitoring disposables, endosurgery and endoscopic technologies. They are used
by surgeons and physicians in a variety of specialties including orthopedics,
general surgery, gynecology, neurosurgery, and gastroenterology. These product
lines and the percentage of consolidated revenues associated with each, are
as
follows:
|
2004
|
2005
|
2006
|
||||||||
|
Arthroscopy
|
37
|
%
|
34
|
%
|
35
|
%
|
||||
|
Powered
Surgical Instruments
|
23
|
22
|
21
|
|||||||
|
Electrosurgery
|
15
|
14
|
15
|
|||||||
|
Patient
Care
|
14
|
12
|
12
|
|||||||
|
Endosurgery
|
8
|
8
|
8
|
|||||||
|
Endoscopic
Technologies
|
3
|
10
|
9
|
|||||||
|
Consolidated
Net Sales
|
100
|
%
|
100
|
%
|
100
|
%
|
||||
A
significant amount of our products are used in surgical procedures with
approximately 75% of our revenues derived from the sale of disposable products.
Our capital equipment offerings also facilitate the ongoing sale of related
disposable products and accessories, thus providing us with a recurring revenue
stream. We manufacture substantially all of our products in facilities located
in the United States, Mexico and Finland. We market our products both
domestically and internationally directly to customers and through distributors.
International sales approximated 35%, 37% and 39% in 2004, 2005 and 2006,
respectively.
Business
Environment and Opportunities
The
aging
of the worldwide population along with lifestyle changes, continued cost
containment pressures on healthcare systems and the desire of clinicians and
administrators to use less invasive (or noninvasive) procedures are important
trends which are driving the growth in our industry. We believe that with our
broad product offering of high quality surgical and patient care products,
we
can capitalize on this growth for the benefit of the Company and our
shareholders.
In
order
to further our growth prospects, we have historically used strategic business
acquisitions and exclusive distribution relationships to continue to diversify
our product offerings, increase our market share and realize economies of scale.
We
have a
variety of research and development initiatives focused in each of our principal
product lines. Among the most significant of these efforts is the Endotracheal
Cardiac Output Monitor (“ECOM”). Our ECOM product offering is expected to
provide an innovative alternative to catheter monitoring of cardiac output
with
a specially designed endotracheal tube which utilizes proprietary bio-impedance
technology. Also of significance are our research and development efforts in
the
area of tissue-sealing for electrosurgery.
Continued
innovation and commercialization of new proprietary products and processes
are
essential elements of our long-term growth strategy. In February 2007, we
unveiled several new products at the American Academy of Orthopaedic Surgeons
Annual Meeting which we believe will further enhance our arthroscopy product
offerings. Our reputation as an innovator is exemplified by these recent product
introductions, which include the following: the IM4000 High Definition Camera
System,
our
first high definition camera system utilized in arthroscopic and multi-specialty
endoscopy; the 24K Irrigation System, a high end irrigation system that provides
fluid to the joint space for irrigation, distention, and hemostasis during
an
Arthroscopic procedure; the Hip Arthroscopy Kit used for diagnosis and treatment
of hip pain; and the Hi-Fi Suture Cutter, specifically designed to cut high
strength sutures utilized with or without attached anchors for soft tissue
repair.
Business
Challenges
In
September 2004, we acquired the business operations of the Endoscopic
Technologies Division of C.R. Bard, Inc. (the “Endoscopic Technologies
acquisition”) for aggregate consideration of $81.3 million in cash. The acquired
business has enhanced our product offerings by adding a comprehensive line
of
single-use medical devices employed by gastro-intestinal and pulmonary
physicians to diagnose and treat diseases of the digestive tract and lungs
using
minimally invasive endoscopic techniques. The transfer of the Endoscopic
Technologies production lines from C.R. Bard facilities to CONMED facilities
has
proven to be more time-consuming, costly and complex than was originally
anticipated. Operational issues associated with the transfer of production
lines
have resulted in backorders, which combined with increased competition and
pricing pressures in the marketplace have resulted in decreased sales, lower
than anticipated gross margins and operating losses. As a result of these
factors, during
our
fourth quarter 2006 goodwill impairment testing, we determined that the goodwill
of our Endoscopic Technologies business was impaired and consequently we
recorded an impairment charge of $46.7 million to reduce the carrying amount
of
this business to its fair value. We have taken corrective action to resolve
the
operational issues associated with product shortages and are continuing our
efforts to ensure a return to sales growth and profitability.
Our
facilities are subject to periodic inspection by the United States Food and
Drug
Administration (“FDA”) for, among other things, conformance to Quality System
Regulation and Current Good Manufacturing Practice (“CGMP”) requirements.
Following an inspection, the FDA typically provides its observations, if any,
in
the form of a Form 483 (Notice of Inspectional Observations) with specific
observations concerning potential violation of regulations. In December 2004,
the FDA initiated an inspection of our Largo, Florida manufacturing facility.
Following
the inspection, the FDA issued to us a Form 483 which included observations
related to our corrective and preventive action procedures for nonconforming
products and other quality problems. Although we responded to the Form 483
to
address and correct the deficiencies, the FDA further issued a warning letter
in
June 2005 relating to these observations. We subsequently responded to the
FDA
with a plan of the corrective actions that we had taken or proposed to take.
In
that response, we committed to further developing and implementing, in a timely
manner, the principles and strategies of systems-based quality management for
improved CGMP compliance, operational performance and efficiencies. We consider
the receipt of a warning letter to be an important regulatory event.
Accordingly, we have undertaken corrective actions that have involved
significant additional costs to the Company. In May 2006, the FDA initiated
a
re-inspection of our Largo, Florida manufacturing facility to verify issues
related to the June 2005 warning letter and December 2004 Form 483 observations
had been corrected. No further Form 483 observations were issued by FDA during
the May 2006 inspection. We will continue implementing and monitoring continuous
improvement activities through our Company-wide quality systems initiative.
However, there can be no assurance that the actions undertaken by the Company
will ensure that we will not receive an additional Form 483 or warning letter,
or other regulatory actions which may include consent decrees or fines.
We
remain
in litigation against Johnson & Johnson and several of its subsidiaries,
including Ethicon, Inc. for violation of federal and state antitrust laws.
The
lawsuit claims that Johnson & Johnson engaged in illegal and anticompetitive
conduct with respect to sales of product used in endoscopic surgery, resulting
in higher prices to consumers and the exclusion of competition. We have sought
relief which includes an injunction restraining Johnson & Johnson from
continuing its anticompetitive practice as well as receiving the maximum amount
of damages allowed by law. While we believe that our claims are well-grounded
in
fact and law, there can be no assurance that we will be successful in our claim.
In addition, the costs associated with pursuing this claim have been
substantial. See Note 11 to the Consolidated Financial Statements.
Critical
Accounting Policies
Preparation
of our financial statements requires us to make estimates and assumptions which
affect the reported amounts of assets, liabilities, revenues and expenses.
Note
1 to the Consolidated Financial Statements describes the significant accounting
policies used in preparation of the Consolidated Financial Statements. The
most
significant areas involving management judgments and estimates are described
below and are considered by management to be critical to understanding the
financial condition and results of operations of CONMED
Corporation.
Revenue
Recognition
Revenue
is recognized when title has been transferred to the customer which is at the
time of shipment. The following policies apply to our major categories of
revenue transactions:
|
·
|
Sales
to customers are evidenced by firm purchase orders. Title and the
risks
and rewards of ownership are transferred to the customer when product
is
shipped under our stated shipping terms. Payment by the customer
is due
under fixed payment terms.
|
| · |
We
place certain of our capital equipment with customers in return for
commitments to purchase disposable products over time periods generally
ranging from one to three years. In these circumstances, no revenue
is
recognized upon capital equipment shipment and we recognize revenue
upon
the disposable product shipment. The cost of the equipment is amortized
over the term of individual commitment
agreements.
|
|
·
|
Product
returns are only accepted at the discretion of the Company and in
accordance with our “Returned Goods Policy”. Historically the level of
product returns has not been significant. We accrue for sales returns,
rebates and allowances based upon an analysis of historical customer
returns and credits, rebates, discounts and current market
conditions.
|
|
·
|
Our
terms of sale to customers generally do not include any obligations
to
perform future services. Limited warranties are provided for capital
equipment sales and provisions for warranty are provided at the time
of
product sale based upon an analysis of historical
data.
|
|
·
|
Amounts
billed to customers related to shipping and handling have been included
in
net sales. Shipping and handling costs included in selling and
administrative expense were $9.3 million, $11.2 million and $14.3
million
for 2004, 2005 and 2006,
respectively.
|
|
·
|
We
sell to a diversified base of customers around the world and, therefore,
believe there is no material concentration of credit
risk.
|
|
·
|
We
assess the risk of loss on accounts receivable and adjust the allowance
for doubtful accounts based on this risk assessment. Historically,
losses
on accounts receivable have not been material. Management believes
that
the allowance for doubtful accounts of $1.2 million at December 31,
2006
is adequate to provide for probable losses resulting from accounts
receivable.
|
Inventory
Reserves
We
maintain reserves for excess and obsolete inventory resulting from the inability
to sell our products at prices in excess of current carrying costs. The markets
in which we operate are highly competitive, with new products and surgical
procedures introduced on an on-going basis. Such marketplace changes may result
in our products becoming obsolete. We make estimates regarding the future
recoverability of the costs of our products and record a provision for excess
and obsolete inventories based on historical experience, expiration of
sterilization dates and expected future trends. If actual product life cycles,
product demand or acceptance of new product introductions are less favorable
than projected by management, additional inventory write-downs may be required.
We believe that our current inventory reserves are adequate.
Business
Acquisitions
We
have a
history of growth through acquisitions. Assets and liabilities of acquired
businesses are recorded under the purchase method of accounting at their
estimated fair values as of the date of acquisition. Goodwill represents costs
in excess of fair values assigned to the underlying net assets of acquired
businesses.
Other
intangible assets primarily represent allocations of purchase price to
identifiable intangible assets of acquired businesses. We have accumulated
goodwill of $290.5 million and other intangible assets of $191.1 million at
December 31, 2006.
In
accordance with Statement of Financial Accounting Standards No. 142, “Goodwill
and Other Intangible Assets,” (“SFAS 142”), goodwill and intangible assets
deemed to have indefinite lives are not amortized, but are subject to at least
annual impairment testing. The identification and measurement of goodwill
impairment involves the estimation of the fair value of our businesses.
Estimates of fair value are based on the best information available as of the
date of the assessment, which primarily incorporate management assumptions
about
expected future cash flows and contemplate other valuation techniques. Future
cash flows may be affected by changes in industry or market conditions or the
rate and extent to which anticipated synergies or cost savings are realized
with
newly acquired entities.
Intangible
assets with a finite life are amortized over the estimated useful life of the
asset. Intangible assets which continue to be subject to amortization are also
evaluated to determine whether events and circumstances warrant a revision
to
the remaining period of amortization. An intangible asset is determined to
be
impaired when estimated undiscounted future cash flows indicate that the
carrying amount of the asset may not be recoverable. An impairment loss is
recognized by reducing the recorded value to its current fair value. It is
our
policy to perform annual impairment tests in the fourth quarter.
During
the fourth quarter of 2006, after completing our annual goodwill impairment
analysis, we determined that the goodwill of our CONMED Endoscopic Technologies
business was impaired and consequently we recorded a goodwill impairment charge
of $46.7 million.
See
Note
2 to the Consolidated Financial Statements for further discussion of business
acquisitions; see Note 5 to the Consolidated Financial Statements for further
discussion of goodwill and other intangible assets.
Pension
Plan
We
sponsor a defined benefit pension plan covering substantially all our employees.
Major assumptions used in accounting for the plan include the discount rate,
expected return on plan assets, rate of increase in employee compensation levels
and expected mortality. Assumptions are determined based on Company data and
appropriate market indicators, and are evaluated annually as of the plan’s
measurement date. A change in any of these assumptions would have an effect
on
net periodic pension costs reported in the consolidated financial
statements.
Higher
market interest rates have resulted in us increasing the discount rate used
in
determining pension expense from 5.55% in 2006 to 5.90% in 2007. This change
in
assumption will result in lower pension expense during 2007. This rate was
determined by using the Citigroup Pension Liability Index rate which, we
believe, is a reasonable indicator of our plan’s future payment
stream.
We
have
used an expected rate of return on pension plan assets of 8.0% for purposes
of
determining the net periodic pension benefit cost. In determining the expected
return on pension plan assets, we consider the relative weighting of
plan
assets,
the historical performance of total plan assets and individual asset classes
and
economic and other indicators of future performance. In addition,
we
consult
with financial and investment management professionals in developing appropriate
targeted rates of return.
We
have
estimated our rate of increase in employee compensation levels at 3.0%
consistent with our internal budgeting.
As
of
December 31, 2004, we changed from the 1984 Unisex Pension mortality table
to
the 1994 Group Annuity Reserving mortality table for purposes of determining
expected mortality. This change in assumption resulted in higher pension expense
in 2005.
Based
on
these and other factors, 2007 pension expense is estimated at approximately
$6.2
million compared to $6.9 million in 2006. Actual expense may vary significantly
from this estimate.
We
expect
to contribute approximately $12.0 million to our pension plan in
2007.
During
the year-ended December 31, 2006, we adopted Statement of Financial Accounting
Standards No. 158, ““Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and
132(R)” (“SFAS 158”) which requires balance sheet recognition of the overfunded
or underfunded status of pension and postretirement benefit plans. The effects
of adopting SFAS 158 was an increase in total liabilities of approximately
$8.5
million and a reduction to total shareholders’ equity of approximately $5.3
million.
See
Note
10 to the Consolidated Financial Statements for further discussion.
Stock
Based Compensation
We
adopted Statement of Financial Accounting Standards No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123R”) effective January 1, 2006. SFAS 123R
requires that all share-based payments to employees, including grants of
employee stock options, restricted stock units, and stock appreciation rights
be
recognized in the financial statements based on their fair values. Prior to
January 1, 2006, we accounted for stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25 “Accounting for Stock
Issued to Employees” (“APB 25”). No compensation expense was recognized for
stock options under the provisions of APB 25 since all options granted had
an
exercise price equal to the market value of the underlying stock on the grant
date.
SFAS
123R
was adopted using the modified prospective transition method. Under this method,
the provisions of SFAS 123R apply to all awards granted or modified after the
date of adoption. In addition, compensation expense must be recognized for
any
nonvested stock option awards outstanding as of the date of adoption. We
recognize such expense using a straight-line method over the vesting period.
Prior periods have not been restated.
We
elected to adopt the alternative transition method, as permitted by FASB Staff
Position No. FAS 123R-3 “Transition Election Related to Accounting for Tax
Effects of Share-Based Payment Awards,” to calculate the tax effects of
stock-based compensation pursuant to SFAS 123R for those employee awards that
were outstanding upon adoption of SFAS 123R. The alternative transition method
allows the use of a simplified method to calculate the beginning pool of excess
tax benefits available to absorb tax deficiencies recognized subsequent to
the
adoption of SFAS 123R.
See
Note
8 to the Consolidated Financial Statements for further discussion.
Income
Taxes
The
recorded future tax benefit arising from net deductible temporary differences
and tax carryforwards is approximately $35.0 million at December 31, 2006.
Management believes that our earnings during the periods when the temporary
differences become deductible will be sufficient to realize the related future
income tax benefits.
We
operate in multiple taxing jurisdictions, both within and outside the United
States. We face audits from these various tax authorities regarding the amount
of taxes due. Such audits can involve complex issues and may require an extended
period of time to resolve. Our United States federal income tax returns
examination by the Internal Revenue Service (“IRS”) for calendar years 2001
through 2004 was settled during 2006. As a result of the settlement of the
income tax examinations, we adjusted our reserves to consider positions taken
in
our income tax return for periods subsequent to 2004. The net effect of these
adjustments and the settlement was a $1.5 million reduction in income tax
expense in 2006.
During
the third quarter of 2006, we filed our United States federal income tax return
for 2005. As a result of the filing, we identified a greater benefit than was
originally anticipated associated with the extraterritorial income exclusion
rules and research and development tax credit. The net effect of these
adjustments was a $0.7 million reduction in income tax expense in
2006.
We
have
established a valuation allowance to reflect the uncertainty of realizing the
benefits of certain net operating loss carryforwards recognized in connection
with an acquisition. Any subsequently recognized tax benefits associated with
the valuation allowance would be allocated to reduce goodwill. In
assessing the need for a valuation allowance, we estimate future taxable income,
considering the feasibility of ongoing tax planning strategies and the
realizability of tax loss carryforwards. Valuation allowances related to
deferred tax assets may be impacted by changes to tax laws, changes to statutory
tax rates and future taxable income levels.
See
Note
7 to the Consolidated Financial Statements for further discussion.
Consolidated
Results of Operations
The
following table presents, as a percentage of net sales, certain categories
included in our consolidated statements of income (loss) for the periods
indicated:
|
Year
Ended December 31,
|
||||||||||
|
2004
|
2005
|
2006
|
||||||||
|
Net
sales
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||
|
Cost
of sales
|
48.6
|
49.3
|
%
|
51.6
|
%
|
|||||
|
Gross
margin
|
51.4
|
50.7
|
48.4
|
|||||||
|
Selling
and administrative expense
|
32.8
|
35.1
|
36.3
|
|||||||
|
Research
and development expense
|
3.6
|
4.1
|
4.7
|
|||||||
|
Goodwill
impairment
|
-
|
-
|
7.2
|
|||||||
|
Write-off
of purchased in-process
|
2.9
|
-
|
-
|
|||||||
|
research
and development assets
|
0.8
|
1.0
|
0.8
|
|||||||
|
Other
expense (income), net
|
||||||||||
|
Income
(loss) from operations
|
11.3
|
10.5
|
(0.6
|
)
|
||||||
|
Loss
on early extinguishment of debt
|
0.1
|
-
|
0.1
|
|||||||
|
Interest
expense
|
2.3
|
2.6
|
3.0
|
|||||||
|
Income
(loss) before income taxes
|
8.9
|
7.9
|
(3.7
|
)
|
||||||
|
Provision
(benefit) for income taxes
|
2.9
|
2.7
|
(1.8
|
)
|
||||||
|
Net
income (loss)
|
6.0
|
%
|
5.2
|
%
|
(1.9
|
)%
|
2006
Compared to 2005
Sales
for
2006 were $646.8 million, an increase of $29.5 million (4.8%) compared to
sales of $617.3 million in 2005 with the increase occurring in all product
lines except Endoscopic Technologies. Favorable foreign currency exchange rates
in 2006 compared to 2005 accounted for $4.5 million of the
increase.
Cost
of
sales increased to $334.0 million in 2006 compared to $304.3 million in 2005,
primarily as a result of the increased sales volumes discussed above. Gross
profit margins decreased 2.3 percentage points from 50.7% in 2005 to 48.4%
in
2006. The total decrease of 2.3 percentage points is comprised of 1.2 percentage
points attributable to decreased gross margins in our Endoscopic Technologies
business, 0.7 percentage points attributable to decreased gross margins in
our
Patient Care business with the remaining 0.4 percentage point decrease
attributable to decreased gross margins in our Endosurgery business. The
Endoscopic Technologies business was acquired as a result of the Endoscopic
Technologies acquisition and involved the transfer of substantially all of
the
Endoscopic Technologies production lines from C.R. Bard facilities to CONMED
facilities. This transfer has proven to be more time-consuming, costly and
complex than was originally anticipated. In addition, production and operational
issues at an assembly operation in Mexico under contract to CONMED have resulted
in product shortages and backorders. These operational issues, in combination
with increased competition and pricing pressures in the marketplace have
resulted in decreased sales and gross margins. The decreases in gross margin
percentage attributable to Patient Care and Endosurgery are primarily a result
of significant cost increases experienced in the second half of 2005 and in
2006
with respect to certain commodity and petroleum-based raw materials such as
plastic resins and polymers used in the production of many of our products
as
well as higher spending related to quality assurance.
Selling
and administrative expense increased to $234.8 million in 2006 compared to
$216.7 million in 2005. Selling and administrative expense as a percentage
of
net sales increased to 36.3% in 2006 from 35.1% in 2005. This increase of 1.2
percentage points is primarily attributable to expensing stock options and
other
share-based payments in 2006 (0.6 percentage points) due to the adoption of
SFAS
123R (see Note 8 to the Consolidated Financial Statements); increased
administrative expenses associated with higher distribution costs (0.2
percentage points) due in part to higher petroleum prices; higher pension costs
(0.2 percentage points) due primarily as a result of a decrease in the pension
discount rate (see “Pension Plan” section of “Critical Accounting Estimates”
above); increased spending on corporate quality systems and management (0.1
percentage points) to continue to maintain appropriate regulatory compliance;
and other increases in selling and administrative costs (0.1 percentage
points).
Research
and development expense was $30.7 million in 2006 compared to $25.5 million
in
2005. As a percentage of net sales, research and development expense increased
to 4.7% in 2006 from 4.1% in 2005. The increase of 0.6 percentage points
reflects an increased emphasis on new product development across all of our
product
lines
with the most significant increases occurring in the areas of arthroscopy and
powered instruments (0.3 percentage points).
As
discussed above, the transfer of the Endoscopic Technologies production lines
from C.R. Bard facilities to CONMED facilities has proven to be more
time-consuming, costly and complex than was originally anticipated. In addition,
production and operational issues at an assembly operation in Mexico under
contract to CONMED have resulted in product shortages and backorders. These
operational issues, in combination with increased competition and pricing
pressures in the marketplace have resulted in decreased sales and gross margins
and operating losses. As a result of these factors, during our fourth quarter
2006 goodwill impairment testing, we determined that the goodwill of our
Endoscopic Technologies business was impaired and consequently we recorded
an
impairment charge of $46.7 million to reduce the carrying amount of this
business to its fair value. We estimated the fair value of the Endoscopic
Technologies business using a discounted cash flow valuation methodology and
measured the goodwill impairment in accordance with SFAS 142.
As
discussed in Note 12 to the Consolidated Financial Statements, other expense
in
2006 consisted of the following: $0.6 million in costs related to the closing
of
a manufacturing plant; $0.6 million in costs related to the write-off of
inventory in settlement of a patent dispute; a $1.4 million charge related
to
the termination of our surgical lights product offering; and $2.6 million in
Endoscopic Technologies acquisition and transition-integration related charges.
Other expense in 2005 consisted of $1.5 million of expenses associated with
the
termination of our surgical lights product offering; $4.1 million in Endoscopic
Technologies acquisition and transition-integration related charges; $0.7
million in environmental settlement costs; and $0.8 million of expense related
to the loss on an equity investment.
During
2006, we recorded $0.7 million in losses on the early extinguishment of debt
in
connection with the refinancing of our senior credit agreement. See additional
discussion under Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Liquidity and Capital Resources and Note 6
to the Consolidated Financial Statements.
Interest
expense in 2006 was $19.1 million compared to $15.6 million in 2005. The
increase in interest expense is primarily a result of higher weighted average
borrowings outstanding in 2006 as compared to 2005 and higher weighted average
interest rates on our borrowings (5.53% in 2006 as compared to 4.69% in 2005)
inclusive of the finance charge on our accounts receivable sale facility. The
increase in weighted average interest rates on our borrowings is primarily
a
result of market increases in interest rates on our variable rate
debt.
A
provision for income taxes was recorded at an effective rate of (48.7)% in
2006
and 33.6% in 2005. The effective rate for 2006 was lower than 2005. As a result
of the settlement of our 2001 through 2004 income taxes as a result of IRS
examinations, we adjusted our reserves to consider positions taken in our income
tax returns for periods subsequent to 2004. The settlement and adjustment to
our
reserves resulted in a $1.5 million reduction in income tax expense in 2006.
During the third quarter of 2006, we filed our United States federal income
tax
return for 2005. As a result of the filing, we identified a greater benefit
than
was originally anticipated associated with the extraterritorial income exclusion
rules and research and development tax credit resulting in a $0.7 million
reduction in income tax expense. The net effect of these adjustments was a
$2.2
million reduction in income tax expense in 2006 as compared to the same period
a
year ago.
A
reconciliation of the United States statutory income tax rate to our effective
tax rate is included in Note 7 to the Consolidated Financial Statements.
2005
Compared to 2004
Sales
for
2005 were $617.3 million, an increase of $58.9 million (10.5%) compared to
sales of $558.4 million in 2004 with the increase occurring in all product
lines except Patient Care. The Endoscopic Technologies acquisition accounted
for
$43.2 million of the increase and favorable foreign currency exchange rates
in
2005 compared to 2004 accounted for $3.6 million. The Endoscopic Technologies
acquisition is described more fully in Note 2 to the Consolidated Financial
Statements.
Cost
of
sales increased to $304.3 million in 2005 compared to $271.5 million in 2004,
primarily as a result of the increased sales volumes discussed above. Gross
profit margins decreased 0.7 percentage points from 51.4% in 2004 to 50.7%
in
2005 primarily as a result of significant cost increases with respect to certain
commodity and petroleum-based raw materials such as plastic resins and polymers
used in the production of many of our products and higher spending related
to
quality assurance. These higher costs (approximately 1.2 percentage points)
more
than offset the improvement in margins we experienced as a result of the
addition of the higher margin products acquired in the Endoscopic Technologies
acquisition (0.5 percentage points).
Selling
and administrative expense increased to $216.7 million in 2005 as compared
to
$183.2 million in 2004. Selling and administrative expense as a percentage
of
net sales increased to 35.1% in 2005 from 32.8% in 2004. This increase of 2.3
percentage points is primarily attributable to increased administrative expenses
associated with higher distribution costs (0.4 percentage points) due in part
to
higher petroleum prices; higher pension costs (0.2 percentage points) due
primarily as a result of changes in actuarial assumptions (see “Pension Plan”
section of “Critical Accounting Estimates” above); increased spending on
corporate quality systems and management (0.2 percentage points) to ensure
we
continue to maintain appropriate regulatory compliance; increased selling and
marketing costs associated with the Endoscopic Technologies business (0.3
percentage points); other increases in selling and administrative costs (1.2
percentage points) including the Johnson & Johnson litigation (see Note 11
to the Consolidated Financial Statements).
Research
and development expense was $25.5 million in 2005 compared to $20.2 million
in
2004. As a percentage of net sales, research and development expense increased
to 4.1% in 2005 from 3.6% in 2004. The increase of 0.5 percentage points in
research and development expense as a percentage of sales is principally a
result of increased spending on the development of our Pro2®
reflectance pulse oximetry system and ECOM endotracheal cardiac output monitor
for our Patient Care business (0.2 percentage points) and the addition of the
Endoscopic Technologies business in September 2004 (0.3 percentage points).
As
discussed in Note 2 to the Consolidated Financial Statements, we wrote-off
$16.4
million of purchased in-process research and development assets associated
with
the Endoscopic Technologies acquisition in 2004.
As
discussed in Note 12 to the Consolidated Financial Statements, other expense
in
2005 consisted of the following: $1.5 million of expenses associated with the
termination of our surgical lights product offering; $4.1 million of
Endoscopic
Technologies acquisition and transition-integration related charges; $0.7
million in environmental settlement costs; and $0.8 million of expense related
to the loss on an equity investment. Other expense in 2004 consisted primarily
of $2.4 million of expenses associated with the termination of our surgical
lights product offering and $1.5 million of Endoscopic Technologies acquisition
and transition-integration related charges.
During
2004, we recorded $0.8 million in losses on the early extinguishment of debt
related to the refinancing of a portion of the term loans under our senior
credit agreement through the issuance of 2.50% convertible senior subordinated
notes. See additional discussion under Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources and Note 6 to the Consolidated Financial Statements.
Interest
expense in 2005 was $15.6 million compared to $12.8 million in 2004. The
increase in interest expense is primarily a result of higher weighted average
borrowings outstanding in 2005 as compared to 2004 and higher weighted average
interest rates on our borrowings (4.69% in 2005 as compared to 4.17% in 2004)
inclusive of the finance charge on our accounts receivable sale facility. The
increase in weighted average interest rates on our borrowing is primarily a
result of our increased borrowings against our revolving credit facility coupled
with market increases in interest rates on our variable rate debt.
A
provision for income taxes was recorded at an effective rate of 33.6% in 2005
and 32.5% in 2004. The effective rate for 2005 was higher than 2004 because
the
2004 effective tax rate reflected an adjustment to the estimated benefit to
be
realized from the extraterritorial income exclusion tax rules on foreign sales.
A reconciliation of the United States statutory income tax rate to our effective
tax rate is included in Note 7 to the Consolidated Financial
Statements.
Operating
Segment Results:
Segment
information is prepared on the same basis that we review financial information
for operational decision-making purposes. We conduct our business through five
principal operating units: CONMED Endoscopic Technologies, CONMED Endosurgery,
CONMED Electrosurgery, CONMED Linvatec and CONMED Patient Care. Based upon
the
aggregation criteria for segment reporting under Statement of Financial
Accounting Standards No. 131 “Disclosures about Segments of an Enterprise and
Related Information” (“SFAS 131”), we have grouped our CONMED Endosurgery,
CONMED Electrosurgery and CONMED Linvatec operating units into a single segment.
The economic characteristics of CONMED Patient Care and CONMED Endoscopic
Technologies do not meet the criteria for aggregation due to the lower overall
operating income (loss) of these segments.
The
following tables summarize the Company’s results of operations by segment for
2004, 2005 and 2006:
CONMED
Endosurgery, CONMED Electrosurgery and CONMED Linvatec
|
2004
|
2005
|
2006
|
||||||||
|
|
||||||||||
|
Net
sales
|
$
|
466,771
|
$
|
482,591
|
$
|
515,937
|
||||
|
Income
from operations
|
77,538
|
69,295
|
70,193
|
|||||||
|
Operating
margin
|
16.6
|
%
|
14.4
|
%
|
13.6
|
%
|
||||
Product
offerings include a complete line of endo-mechanical instrumentation for
minimally invasive laparoscopic procedures, electrosurgical generators and
related surgical instruments, arthroscopic instrumentation for use in orthopedic
surgery and small bone, large bone and specialty powered surgical
instruments.
|
·
|
Arthroscopy
sales increased $16.8 million (7.9%) in 2006 to $228.2 million from
$211.4 million in 2005, on increased sales of our resection and video
imaging products for arthroscopy and general surgery, and our integrated
operating room systems and equipment; Arthroscopy sales increased
$6.5
million (3.2%) in 2005 to $211.4 million from $204.9 million in
2004, on increased sales of our procedure specific, resection and
video
imaging products for arthroscopy and general surgery, and our integrated
operating room systems and
equipment.
|
|
·
|
Powered
Surgical Instrument sales increased $5.1 million (3.9%) in 2006 to
$137.2
million from $132.0 million in 2005, on increased sales of small
bone and
large bone powered instrument products offset by slight decreases
in our
specialty powered instrument products; Powered Surgical Instrument
sales
increased $3.4 million (2.7%) in 2005 to $132.0 million from $128.6
million in 2004, on increased sales of our PowerPro®
line of large bone powered instrument products and our PowerPro
Max®
line of small bone powered instrument
products.
|
|
·
|
Electrosurgery
sales increased $9.3 million (10.6%) in 2006 to $97.8 million from
$88.5
million in 2005, on increased sales of our System 5000™ electrosurgical
generator, ABC® and UltraClean™ disposable surgical products;
Electrosurgery sales increased $2.6 million (3.0%) in 2005 to $88.5
million from $85.9 million in 2004, on increased sales of the System
5000™
and Ultraclean™.
|
|
·
|
Endosurgery
sales increased $2.1 million (4.1%) in 2006 to $52.8 million from
$50.7
million in 2005, as a result of increased sales of our hand held
instruments, skin staplers, suction/irrigation products and various
laparoscopic instrument products and systems; Endosurgery sales increased
$3.2 million (6.9%) in 2005 to $50.7 million from $47.4 million in
2004,
on increased sales of our skin staplers, suction/irrigation products
and
various laparoscopic instrument products and
systems.
|
|
·
|
Operating
margins as a percentage of net sales decreased 0.8 percentage points
to
13.6% in 2006 compared to 14.4% in 2005 largely as a result of increased
research and development spending (0.6 percentage points) in the
CONMED
Linvatec product lines. The remaining 0.2 percentage point decline
in
operating margin is due to decreased gross margins in the CONMED
Endosurgery product lines as a result of significant cost increases
experienced in the second half of 2005 and in 2006 with respect to
certain
commodity and petroleum-based raw materials such as plastic resins
and
polymers used in the production of the Endosurgery product lines
as well
as higher spending related to quality assurance.
|
|
·
|
Operating
margins decreased 2.2 percentage points to 14.4% in 2005 compared
to 16.6%
in 2004 due to increased selling and administrative expense comprised
of
higher distribution costs (0.4 percentage points), higher pension
expense
(0.2 percentage points) and other increases (0.6 percentage points);
and
decreased gross margin percentage (1.0 percentage points)in
the
|
CONMED
Linvatec product lines as a result of higher than planned production variances.
CONMED
Patient Care
|
2004
|
2005
|
2006
|
|||||||||
|
Net
sales
|
$
|
75,879
|
$
|
75,879
|
$
|
75,883
|
|||||
|
Income
(loss) from operations
|
7,314
|
5,734
|
(759
|
)
|
|||||||
|
Operating
margin
|
9.6
|
%
|
7.6
|
%
|
(1.0
|
%)
|
|||||
Product
offerings include a line of vital signs and cardiac monitoring products
including pulse oximetry equipment & sensors, ECG electrodes and cables,
cardiac defibrillation & pacing pads and blood pressure cuffs. We also offer
a complete line of reusable surgical patient positioners and suction instruments
& tubing for use in the operating room, as well as a line of IV products and
hydrogel-based wound care dressings.
|
·
|
Patient
Care net sales and the net sales of its principal ECG and suction
instruments product lines remained flat in 2006 when compared to
2005 and
2004 while increased sales of defibrillator pads and blood pressure
cuffs
have offset decreases in other patient care products during the same
periods.
|
|
·
|
Operating
margins as a percentage of net sales decreased 8.6 percentage points
to
(1.0%) in 2006 compared to 7.6% in 2005 primarily as a result of
decreased
gross margins. Gross margins declined 6.1 percentage points in 2006
as
compared to 2005 as a result of significant cost increases experienced
in
the second half of 2005 and in 2006 with respect to certain commodity
and
petroleum-based raw materials such as plastic resins and polymers
as well
as higher spending related to quality assurance. In addition, as
a
percentage of net sales, research and development expense increased
0.9
percentage points in 2006 compared to 2005 as a result of increased
spending on the development of our Pro2®
reflectance pulse oximetry system and ECOM endotracheal cardiac output
monitor. Selling and administrative expenses increased 1.6 percentage
points in 2006 compared to 2005 as a result of higher distribution
costs
(0.5 percentage points), a charge to write-off inventory in settlement
of
a patent dispute (0.8 percentage points) and other increases (0.3
percentage points).
|
|
·
|
Operating
margins decreased 2.0 percentage points to 7.6% in 2005 compared
to 2004
primarily as a result of decreased gross margins (1.7 percentage
points)
as discussed above. The remaining decrease in operating margin in
2005
compared to 2004 (0.3 percentage points) is a result of increased
spending
on the Pro2®
and ECOM projects.
|
CONMED
Endoscopic Technologies
|
2004
|
2005
|
2006
|
|||||||||
|
Net
sales
|
$
|
15,738
|
$
|
58,835
|
$
|
54,992
|
|||||
|
Income
(loss) from operations
|
(19,177
|
)
|
(5,513
|
)
|
(63,399
|
)
|
|||||
|
Operating
Margin
|
(121.9
|
%)
|
(9.4
|
%)
|
(115.3
|
%)
|
|||||
Product
offerings include a comprehensive line of minimally invasive endoscopic
diagnostic and therapeutic instruments used in procedures which require
examination of the digestive tract.
|
·
|
Endoscopic
Technologies net sales declined $3.8 million (6.5%) in 2006 to $54.9
million from $58.8 million in 2005, principally due to lower sales
in our
forceps products as a result of increased competition and pricing
pressures as well as production and operational issues which have
resulted
in product shortages and backorders. In addition, we experienced
lower
sales as a result of the discontinuation of our agreement with Xillix
Technologies Corporation to distribute the ONCO-Life™ product. The
increase in sales in 2005 compared to 2004 of $43.2 million is a
result of
the inclusion of a full year of Endoscopic Technologies sales in
2005
following the Endoscopic Technologies acquisition in 2004.
|
|
·
|
Operating
margins as a percentage of net sales declined from (9.4%) in 2005
to
(115.3%) in 2006. Selling and administrative and research and development
expenses increased 5.0 and 1.4 percentage points, respectively, as
expenses increased while net sales declined. Additionally, as discussed
above, production and operational issues associated with the transfer
of
production lines from C.R. Bard to CONMED have resulted in product
shortages and backorders, reduced sales and a decrease in gross margin
of
14.5 percentage points. As a result of these factors and the resulting
operating losses, we determined during our testing of goodwill in
the
fourth quarter of 2006, that the goodwill of our Endoscopic Technologies
business was impaired, resulting in an impairment charge of $46.7
million
(85.0 percentage points). Operating margins increased to (9.4%) in
2005
from (121.9%) in 2004 principally due to the inclusion in 2004 of
an
in-process research and development charge of $16.4
million.
|
Liquidity
and Capital Resources
Our
liquidity needs arise primarily from capital investments, working capital
requirements and payments on indebtedness under our senior credit agreement.
We
have historically met these liquidity requirements with funds generated from
operations, including sales of accounts receivable and borrowings under our
revolving credit facility. In addition, we use term borrowings, including
borrowings under our senior credit agreement and borrowings under separate
loan
facilities, in the case of real property purchases, to finance our acquisitions.
We also have the ability to raise funds through the sale of stock or we may
issue debt through a private placement or public offering. We generally attempt
to minimize our cash balances on-hand and use available cash to pay down debt
or
repurchase our common stock.
Operating
cash flows
Our
net
working capital position was $174.7 million at December 31, 2006. Net cash
provided by operating activities was $74.8 million, $42.4 million and $64.6
million for 2004, 2005 and 2006, respectively.
Net
cash
provided by operating activities increased $22.1 million in 2006 as compared
to
2005 on a $44.5 million decline in net income due to the non-cash nature of
the
goodwill impairment charge recognized in 2006 coupled with a lower rate of
growth in inventory levels during 2006 as compared to 2005. The decline in
inventory growth is due to the planned build-up of inventories during 2005
associated with the transition in manufacturing of the product lines acquired
as
a result of the Endoscopic Technologies acquisition; this transition was
completed during 2006.
Investing
cash flows
Capital
expenditures were $12.4 million, $16.2 million and $21.9 million for 2004,
2005
and 2006, respectively. The continued increase in capital expenditures in 2006
as compared to 2005 and 2004 is primarily due to ongoing
expansion of our manufacturing and distribution capacity as a result of the
Endoscopic Technologies acquisition and other infrastructure and technology
upgrades including the ongoing implementation of an enterprise business software
application.
Capital
expenditures are expected to approximate $15.0 million in 2007.
The
sale
of an equity investment resulted in proceeds of $1.2 million in 2006. The
purchase of a distributor’s business resulted in a $2.5 million payment in
2006.
Payments related to business acquisitions in 2005 totaled $0.4 million and
are
additional cash consideration paid for a business acquisition as a result of
a
purchase price adjustment. Investing cash flows in 2004 consisted primarily
of
$81.3 million in payments related to the Endoscopic Technologies
acquisition.
Financing
cash flows
Net
cash
provided by (used in) financing activities during 2006 consisted of the
following: $2.7 million in proceeds from the issuance of common stock under
our
stock option plans and employee stock purchase plan (See Note 8 to the
Consolidated Financial Statements); $7.8 million used to repurchase our common
stock under our Board of Directors approved stock repurchase program described
below; $130.2 million in repayments of term borrowings under our senior credit
agreement; $43.0 million in repayments under the revolving credit facility
of
our senior credit agreement and $1.3 million in payments related to the issuance
of long-term debt. These payments were offset by a $1.2 million net change
in
cash overdrafts and proceeds of $135.0 million from the term loan portion of
our
amended and restated senior credit agreement as described below.
During
2006, we entered into an amended and restated $235.0 million senior credit
agreement (the "amended and restated senior credit agreement"). The amended
and
restated senior credit agreement consists of a $100.0 million revolving credit
facility and a $135.0 million term loan. There were no borrowings outstanding
on
the revolving credit facility as of December 31, 2006. Our available borrowings
on the revolving credit facility at December 31, 2006 were $93.0 million with
approximately $7.0 million of the facility set aside for outstanding letters
of
credit. There were $103.0 million in borrowings outstanding on the term loan
at
December 31, 2006. The proceeds of the term loan portion of the amended and
restated senior credit agreement were used to repay borrowings outstanding
on
the term loan and revolving credit facility of $142.5 million under the
previously existing senior credit agreement. In
connection with the refinancing, we recorded a $0.7 million loss on early
extinguishment of debt of which $0.2 million related to the write-off of
unamortized deferred financing costs under the previously existing senior credit
agreement and $0.5 million related to financing costs associated with the
amended and restated senior credit agreement.
The
scheduled principal payments on the term loan portion of the amended and
restated senior credit agreement are $1.4 million annually through December
2011, increasing to $95.5 million in 2012 with the remaining balance outstanding
due and payable on April 12, 2013. We may also be required, under certain
circumstances, to make additional principal payments based on excess cash flow
as defined in the senior credit agreement. Interest rates on the term loan
portion of the senior credit agreement are at LIBOR plus 2.00% (7.35% at
December 31, 2006) or an
alternative
base rate; interest rates on the revolving credit facility portion of the senior
credit agreement are at LIBOR plus 2.00% or an alternative base rate. For those
borrowings where the Company elects to use the alternative base rate, the base
rate will be the greater of the Prime Rate or the Federal Funds Rate in effect
on such date plus 0.50%, plus a margin of 0.75% for term loan borrowings or
0.50% for borrowings under the revolving credit facility.
The
amended and restated senior credit agreement is collateralized by substantially
all of our personal property and assets, except for our accounts receivable
and
related rights which are pledged in connection with our accounts receivable
sales agreement. The senior credit agreement contains covenants and restrictions
which, among other things, require the maintenance of certain financial ratios,
and restrict dividend payments and the incurrence of certain indebtedness and
other activities, including acquisitions and dispositions. We were in full
compliance with these covenants and restrictions as of December 31, 2006. We
are
also required, under certain circumstances, to make mandatory prepayments from
net cash proceeds from any issue of equity and asset sales .
Mortgage
notes outstanding in connection with the property and facilities utilized by
our
CONMED Linvatec subsidiary consist of a note bearing interest at 7.50% per
annum
with semiannual payments of principal and interest through June 2009 (the "Class
A note"); and a note bearing interest at 8.25% per annum compounded semiannually
through June 2009, after which semiannual payments of principal and interest
will commence, continuing through June 2019 (the "Class C note"). The principal
balances outstanding on the Class A note and Class C note aggregated $5.2
million and $9.6 million, respectively, at December 31, 2006. These mortgage
notes are secured by the CONMED Linvatec property and facilities.
During
2004, we completed an offering of $150.0 million in 2.50% convertible senior
subordinated notes (the “Notes”) due 2024. The Notes represent subordinated
unsecured obligations and are convertible under certain circumstances, as
defined in the bond indenture, into a combination of cash and CONMED common
stock. Upon conversion, the holder of each Note will receive the conversion
value of the Note payable in cash up to the principal amount of the Note and
CONMED common stock for the Note’s conversion value in excess of such principal
amount. Amounts in excess of the principal amount are at an initial conversion
rate, subject to adjustment, of 26.1849 shares per $1,000 principal amount
of
the Note (which represents an initial conversion price of $38.19 per share).
The
Notes mature on November 15, 2024 and are not redeemable by us prior to November
15, 2011. Holders of the Notes will be able to require that we repurchase some
or all of the Notes on November 15, 2011, 2014 and 2019.
The
Notes
contain two embedded derivatives. The embedded derivatives are recorded at
fair
value in other long-term liabilities and changes in their value are recorded
through the consolidated statements of operations. The embedded derivatives
have
a nominal value, and it is our belief that any change in their fair value would
not have a material adverse effect on our business, financial condition or
results of operations.
Proceeds
from the offering and cash on hand were used to repay $82.2 million on the
term
loan and a further $45.0 million in borrowings then outstanding on the revolving
credit facility under our senior credit agreement. Additionally, in conjunction
with the Notes offering, we repurchased $30.0 million of our common stock in
privately negotiated transactions. As a result of the $82.2 million prepayment
on the term loan, we recorded $0.8 million in losses on the early
extinguishment
of debt related to the write-off of unamortized deferred financing fees.
Our
Board
of Directors has authorized a share repurchase program under which we may
repurchase up to $100.0 million of our common stock, although no more than
$50.0
million may be purchased in any calendar year. The repurchase program calls
for
shares to be purchased in the open market or in private transactions from time
to time. We may suspend or discontinue the share repurchase program at any
time.
During 2006, we repurchased $7.8 million in common stock in order to offset
the
dilutive effect of the issuance of shares under our employee stock option and
employee stock purchase plans. We have financed the repurchases and may finance
additional repurchases through the proceeds from the issuance of common stock
under our stock option plans, from operating cash flow and from available
borrowings under our revolving credit facility.
Management
believes that cash flow from operations, including accounts receivable sales,
cash and cash equivalents on hand and available borrowing capacity under our
senior credit agreement will be adequate to meet our anticipated operating
working capital requirements, debt service, funding of capital expenditures
and
common stock repurchases in the foreseeable future. See “Item 1. Business -
Forward Looking Statements.”
Off-Balance
Sheet Arrangements
We
have
entered into an accounts receivable sales agreement pursuant to which we and
certain of our subsidiaries sell on an ongoing basis certain accounts receivable
to CONMED Receivables Corporation (“CRC”), a wholly-owned, bankruptcy-remote,
special-purpose subsidiary of CONMED Corporation. CRC may in turn sell up to
an
aggregate $50.0 million undivided percentage ownership interest in such
receivables (the “asset interest”) to a bank (the “purchaser”). The purchaser’s
share of collections on accounts receivable are calculated as defined in the
accounts receivable sales agreement, as amended. Effectively, collections on
the
pool of receivables flow first to the purchaser and then to CRC, but to the
extent that the purchaser’s share of collections may be less than the amount of
the purchaser’s asset interest, there is no recourse to CONMED or CRC for such
shortfall. For receivables which have been sold, CONMED Corporation and its
subsidiaries retain collection and administrative responsibilities as agent
for
the purchaser. As of December 31, 2005 and 2006, the undivided percentage
ownership interest in receivables sold by CRC to the purchaser aggregated $40.0
million and $44.0 million, respectively, which has been accounted for as a
sale
and reflected in the balance sheet as a reduction in accounts receivable.
Expenses associated with the sale of accounts receivable, including the
purchaser’s financing costs to purchase the accounts receivable, were $1.0
million, $1.9 million and $2.3 million, in 2004, 2005 and 2006, respectively,
and are included in interest expense.
There
are
certain statistical ratios, primarily related to sales dilution and losses
on
accounts receivable, which must be calculated and maintained on the pool of
receivables in order to continue selling to the purchaser. The pool of
receivables is in full compliance with these ratios. Management believes that
additional accounts receivable arising in the normal course of business will
be
of sufficient quality and quantity to meet the requirements for sale under
the
accounts receivables sales agreement. In the event that new accounts receivable
arising in the normal course of business do not qualify for sale, then
collections on sold receivables will flow to the purchaser rather than being
used to fund new receivable purchases. To the extent that such collections
would
not be available to CONMED in the form of new receivables purchases, we would
need to access an
alternate
source of working capital, such as our $100 million revolving credit facility.
Our
accounts receivable sales agreement, as amended, also requires us to obtain
a
commitment (the “purchaser commitment”) from the purchaser to fund the purchase
of our accounts receivable. The purchaser commitment was amended effective
October 23, 2006 whereby it was extended through October 31, 2008 under
substantially the same terms and conditions.
Contractual
Obligations
The
following table summarizes our contractual obligations for the next five years
and thereafter (amounts in thousands). Purchase obligations represent purchase
orders for goods and services placed in the ordinary course of business. There
were no capital lease obligations as of December 31, 2006.
|
Payments
Due by Period
|
||||||||||||||||
|
Less
than
|
1-3
|
3-5
|
More
than
|
|||||||||||||
|
Total
|
1
Year
|
Years
|
Years
|
5
Years
|
||||||||||||
|
Long-term
debt
|
$
|
267,824
|
$
|
3,148
|
$
|
6,534
|
$
|
4,418
|
$
|
253,724
|
||||||
|
Purchase
obligations
|
56,185
|
56,051
|
134
|
-
|
-
|
|||||||||||
|
Operating
lease
|
||||||||||||||||
|
obligations
|
13,304
|
3,265
|
4,874
|
2,886
|
2,279
|
|||||||||||
|
Total
contractual
|
||||||||||||||||
|
obligations
|
$
|
337,313
|
$
|
62,464
|
$
|
11,542
|
$
|
7,304
|
$
|
256,003
|
||||||
In
addition to the above contractual obligations, we are required to make periodic
interest payments on our long-term debt obligations; (See additional discussion
under Item 7A. “Quantitative and Qualitative Disclosures About Market
Risk—Interest Rate Risk”) and Note 6 to the Consolidated Financial Statements.
We expect there to be approximately $4.5 million in required contributions
to
our pension plan in 2007. (See Note 10 to the Consolidated Financial
Statements).
Stock-based
Compensation
We
have
reserved shares of common stock for issuance to employees and directors under
three shareholder-approved share-based compensation plans (the "Plans"). The
Plans provide for grants of options, stock appreciation rights (“SARs”),
dividend equivalent rights, restricted stock, restricted stock units (“RSUs”),
and other equity-based and equity-related awards. The exercise price on all
outstanding options and SARs is equal to the quoted fair market value of the
stock at the date of grant. RSUs are valued at the market value of the
underlying stock on the date of grant. Stock options, SARs and RSUs are
non-transferable other than on death and generally become exercisable over
a
five year period from date of grant. Stock options and SARs expire ten years
from date of grant. SARs are only settled in shares of the Company’s stock. (See
Note 8 to the Consolidated Financial Statements).
New
Accounting Pronouncements
See
Note
14 to the Consolidated Financial Statements for a discussion of new accounting
pronouncements.
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
Market
risk is the potential loss arising from adverse changes in market rates and
prices such as commodity prices, foreign currency exchange rates and interest
rates. In the normal course of business, we are exposed to various market risks,
including changes in foreign currency exchange rates and interest rates. We
manage our exposure to these and other market risks through regular operating
and financing activities and as necessary through the use of derivative
financial instruments.
Foreign
currency risk
A
significant portion of our operations consist of sales activities in foreign
jurisdictions. As a result, our financial results may be affected by factors
such as changes in foreign currency exchange rates or weak economic conditions
in the markets in which we distribute products. As of December 31, 2006, we
have
not entered into any foreign exchange forward or option contracts designed
to
hedge the effect of foreign currency transactions. We have mitigated the effect
of foreign currency exchange rate risk by transacting a significant portion
of
our foreign sales in United States dollars. During 2006, changes in foreign
currency exchange rates increased sales by approximately $4.5 million and income
(loss) before income taxes by approximately $2.5 million. In the future, we
will
continue to evaluate our foreign currency exposure and assess the need to enter
into derivative contracts which hedge foreign currency
transactions.
Interest
rate risk
At
December 31, 2006, we had approximately $103.0 million of variable rate
long-term debt under our senior credit agreement; we are not a party to any
interest rate swap agreements as of December 31, 2006. Assuming no repayments
other than our 2007 scheduled term loan payments, if market interest rates
for
similar borrowings average 1.0% more in 2007 than they did in 2006, interest
expense would increase, and income (loss) before income taxes would decrease
by
$1.5 million. Comparatively, if market interest rates for similar borrowings
average 1.0% less in 2007 than they did in 2006, our interest expense would
decrease, and income (loss) before income taxes would increase by $1.5 million.
Item
8. Financial Statements and Supplementary
Data
Our
2006
Financial Statements, as well as the report thereon of PricewaterhouseCoopers
LLP dated February 27, 2007, are included elsewhere herein.
Item
9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosures
There
were no changes in or disagreement with accountants on accounting and financial
disclosure during the last two fiscal years.
Item
9A. Controls and Procedures
As
of the
end of the period covered by this report, an evaluation was carried out by
CONMED Corporation’s management, with the participation of our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934). Based upon that evaluation, our Chief
Executive
Officer
and Chief Financial Officer concluded that these disclosure controls and
procedures were effective as of the end of the period covered by this report.
In
addition, no change in our internal control over financial reporting (as defined
in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during
the
fourth quarter of the year ended December 31, 2006 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
Management’s
Report on Internal Control over Financial Reporting and the Report of
Independent Registered Public Accounting Firm thereon are set forth in Part
II,
Item 8 of the Annual Report on Form 10-K.
Item
9B. Other
Information
Not
applicable.
Item
10. Directors, Executive Officers and Corporate Governance
The
information required by this item is incorporated herein by reference to the
sections captioned “Proposal One: Election of Directors” and “Directors,
Executive Officers, Senior Officers, and Nominees for the Board of Directors” in
CONMED Corporation’s definitive Proxy Statement or other informational filing to
be filed with the Securities and Exchange Commission on or about April 13,
2007.
Item
11. Executive Compensation
The
information required by this item is incorporated herein by reference to the
sections captioned “Compensation Discussion and Analysis”, “Summary Compensation
Table”, “Grants of Plan-Based Awards in 2006”, “Outstanding Equity Awards at
2006 Fiscal Year-End”, “Option Exercises and Stock Vested in 2006”, “Pension
Benefits for the 2006 Fiscal Year”, “Nonqualified Deferred Compensation”,
“Potential Payments upon Termination or Change in Control”, “Director
Compensation” and “Board of Directors Interlocks and Insider Participation;
Certain Relationships and Related Transactions” in CONMED Corporation’s
definitive Proxy Statement or other informational filing to be filed with the
Securities and Exchange Commission on or about April 13, 2007.
Item
12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
The
information required by this item is incorporated herein by reference to the
section captioned “Security Ownership of Certain Beneficial Owners and
Management” in CONMED Corporation’s definitive Proxy Statement or other
informational filing to be filed with the Securities and Exchange Commission
on
or about April 13, 2007.
Item
13. Certain
Relationships and Related Transactions, and Director
Independence
The
information required by this item is incorporated herein
by
reference to the section captioned “Board of Directors Interlocks and Insider
Participation; Certain Relationships and Related Transactions” in CONMED
Corporation’s definitive Proxy Statement or other informational filing to be
filed with the Securities and Exchange Commission on or about April 13,
2007.
Item
14. Principal Accounting Fees and
Services
The
information required by this item is incorporated herein
by
reference to the section captioned “Audit Fees”, “Audit Related Fees”, “Tax
Fees” and “All Other Fees” in CONMED Corporation’s definitive Proxy Statement or
other informational filing to be filed with the Securities and Exchange
Commission on or about April 13, 2007.
Item
15. Exhibits, Financial Statement
Schedules
|
Index
to Financial Statements
|
|||
|
(a)(1)
|
List
of Financial Statements
|
Page
in Form
10-K
|
|
|
Management’s
Report on Internal Control Over Financial Reporting
|
62
|
||
|
Report
of Independent Registered Public Accounting Firm
|
63
|
||
|
Consolidated
Balance Sheets at December 31, 2005 and 2006
|
65
|
||
|
Consolidated
Statements of Operations for the Years Ended December 31, 2004, 2005
and
2006
|
66
|
||
|
Consolidated
Statements of Shareholders’ Equity for the Years Ended December 31, 2004,
2005 and 2006
|
67
|
||
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2004, 2005
and
2006
|
69
|
||
|
Notes
to Consolidated Financial Statements
|
71
|
||
|
(2)
|
List
of Financial Statement Schedules
|
||
|
Valuation
and Qualifying Accounts (Schedule II)
|
99
|
||
|
All
other schedules have been omitted because they are not applicable,
or the
required information is shown in the financial statements or notes
thereto.
|
|||
|
(3)
|
List
of Exhibits
|
||
|
The
exhibits listed on the accompanying Exhibit Index on page 58 below
are
filed as part of this Form 10-K.
|
|||
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized on the date indicated
below.
|
CONMED
CORPORATION
|
|
|
February
27, 2007
|
|
|
By:
/s/
Joseph J. Corasanti
|
|
|
Joseph
J. Corasanti
|
|
|
(President
and Chief Executive Officer)
|
Pursuant
to the requirements of the Securities Act of 1934, this report has been signed
below by the following persons on behalf of the registrants and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
|
|
/s/
EUGENE R. CORASANTI
|
Chairman
of the Board
|
||
|
Eugene
R. Corasanti
|
of
Directors
|
February
27, 2007
|
|
|
/s/
JOSEPH J. CORASANTI
|
President,
Chief Executive
|
||
|
Joseph
J. Corasanti
|
Officer
and Director
|
February
27, 2007
|
|
|
Vice
President-Finance
|
|||
|
/s/
ROBERT D. SHALLISH JR.
|
and
Chief Financial Officer
|
||
|
Robert
D. Shallish, Jr.
|
(Principal
Financial Officer)
|
February
27, 2007
|
|
|
Vice
President - Corporate
|
|||
|
/s/
LUKE A. POMILIO
|
Controller
(Principal
|
||
|
Luke
A. Pomilio
|
Accounting
Officer)
|
February
27, 2007
|
|
|
/s/
BRUCE F. DANIELS
|
|||
|
Bruce
F. Daniels
|
Director
|
February
27, 2007
|
|
|
/s/
JO ANN GOLDEN
|
|||
|
Jo
Ann Golden
|
Director
|
February
27, 2007
|
|
|
/s/
STEPHEN M. MANDIA
|
|||
|
Stephen
M. Mandia
|
Director
|
February
27, 2007
|
|
|
/s/
WILLIAM D. MATTHEWS
|
|||
|
William
D. Matthews
|
Director
|
February
27, 2007
|
|
|
/s/
STUART J. SCHWARTZ
|
|||
|
Stuart
J. Schwartz
|
Director
|
February
27, 2007
|
Exhibit
Index
|
Exhibit
No.
|
Description
|
||
|
|
|||
|
2.1
|
- |
Asset
Purchase Agreement, dated August 18, 2004 by and between CONMED
Corporation and C.R. Bard, Inc. et al (Incorporated by reference
to
Exhibit 2.1 of the Company’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004).
|
|
|
2.2
|
- |
First
Amendment to Asset Purchase Agreement, dated September 29, 2004 by
and
between CONMED Corporation and C.R. Bard, Inc. et al (Incorporated
by
reference to Exhibit 2.2 of the Company’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2004).
|
|
|
3.1
|
- |
Amended
and Restated By-Laws, as adopted by the Board of Directors on December
26,
1990 (Incorporated by reference to the Company’s Current Report on Form
8-K filed with the Securities and Exchange Commission on March 7,
1991).
|
|
|
3.2
|
- |
1999
Amendment to Certificate of Incorporation and Restated Certificate
of
Incorporation of CONMED Corporation (Incorporated by reference to
Exhibit
3.2 of the Company’s Annual Report on Form 10-K for the year ended
December 31, 1999).
|
|
|
4.1
|
- |
See
Exhibit 3.1.
|
|
|
4.2
|
- |
See
Exhibit 3.2.
|
|
|
4.3
|
- |
Guarantee
and Collateral Agreement, dated August 28, 2002, made by CONMED
Corporation and certain of its subsidiaries in favor of JP Morgan
Chase
Bank (Incorporated by reference to Exhibit 10.2 of the Company’s
Quarterly
Report on Form 10-Q for the quarter ended September 30,
2002).
|
|
|
4.4
|
- |
First
Amendment to Guarantee and Collateral Agreement, dated June 30, 2003,
made
by CONMED Corporation and certain of its subsidiaries in favor of
JP
Morgan Chase Bank and the several banks and other financial institutions
or entities from time to time parties thereto (Incorporated by reference
to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003).
|
|
| 4.5
|
- |
Second
Amendment to Guarantee and Collateral Agreement, dated April 13,
2006,
made by CONMED Corporation and certain of its subsidiaries in favor
of JP
Morgan Chase Bank and the several banks and other financial institutions
or entities from time to time parties thereto (Incorporated by reference
to the Company’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on April 19, 2006).
|
|
|
|
|
||
|
Exhibit
No.
|
Description
|
||
|
4.6
|
- |
Indenture
dated November 10, 2004 between CONMED Corporation and The Bank of
New
York, as Trustee (Incorporated by reference to the Company’s Current
Report on Form 8-K filed with the Securities and Exchange Commission
on
November 16, 2004).
|
|
|
10.1+
|
- |
Employment
Agreement between the Company and Eugene R. Corasanti, dated October
31, 2006 (Incorporated by reference to Exhibit 10.2 of the Company’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 2, 2006).
|
|
|
10.2+
|
- |
Amended
and restated Employment Agreement, dated November 12, 2004, by and
between
CONMED Corporation and Joseph J. Corasanti, Esq. (Incorporated by
reference to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 16, 2004).
|
|
|
10.3+
|
- |
Amendment
No. 1 to the November 12, 2004 Employment Agreement between the Company
and Joseph J. Corasanti, Esq., dated October 31, 2006 (Incorporated
by
reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on November 2,
2006).
|
|
|
10.4
|
- |
1992
Stock Option Plan (including form of Stock Option Agreement) (Incorporated
by reference to the Company’s Annual Report on Form 10-K for the year
ended December 25, 1992).
|
|
|
10.5
|
- |
Amended
and Restated Employee Stock Option Plan (including form of Stock
Option
Agreement) (Incorporated by reference to Exhibit 10.6 of the Company’s
Annual Report on Form 10-K for the year ended December 31,
1996).
|
|
|
10.6
|
- |
Stock
Option Plan for Non-Employee Directors of CONMED Corporation (Incorporated
by reference to Exhibit 10.5 of the Company’s Annual Report on Form 10-K
for the year ended December 31, 1996).
|
|
|
10.7
|
- |
Amendment
to Stock Option Plan for Non-employee Directors of CONMED Corporation
(Incorporated by reference to the Company’s Definitive Proxy Statement for
the 2002 Annual Meeting filed with the Securities and Exchange Commission
on April 17, 2002).
|
|
| 10.8 | - | 1999 Long-term Incentive Plan (Incorporated by reference to the Company’s Definitive Proxy Statement for the 1999 Annual Meeting filed with the Securities and Exchange Commission on April 16, 1999). | |
| 10.9 | - |
Amendment
to 1999 Long-term Incentive Plan (Incorporated by reference to the
Company’s Definitive Proxy Statement for the 2002 Annual Meeting filed
with the Securities and Exchange Commission on April 17,
2002).
|
|
| Exhibit
No.
|
Description
|
||
|
10.10
|
- |
2002
Employee Stock Purchase Plan (Incorporated by reference to the Company’s
Definitive Proxy Statement for the 2002 Annual Meeting filed with
the
Securities and Exchange Commission on April 17, 2002).
|
|
|
|
|||
|
10.11
|
- |
Amendment
to CONMED Corporation 2002 Employee Stock Purchase Plan (Incorporated
by
reference to Exhibit 10.11 of the Company’s Annual Report on Form 10-K for
the year ended December 31, 2005).
|
|
|
10.12
|
- |
2006
Stock Incentive Plan (Incorporated by reference to Exhibit 4.3 of
the
Company’s Registration Statement on Form S-8 on August 8,
2006)
|
|
|
10.13
|
- |
Amended
and Restated Credit Agreement, dated April 13, 2006, among CONMED
Corporation, JP Morgan Chase Bank and the several banks and other
financial institutions or entities from time to time parties thereto
(Incorporated by reference to the Company’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on April 19,
2006).
|
|
|
10.14
|
- |
Registration
Rights Agreement, dated November 10, 2004, among CONMED Corporation
and
UBS Securities LLC on behalf of Several Initial Purchasers (Incorporated
by reference to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 16, 2004).
|
|
|
10.15
|
- |
Purchase
and Sale Agreement dated November 1, 2001 among CONMED Corporation,
et al
and CONMED Receivables Corporation (Incorporated by reference to
Exhibit
10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001).
|
|
|
10.16
|
- |
Amendment
No. 1 dated October 23, 2003 to the Purchase and Sale Agreement dated
November 1, 2001 among CONMED Corporation, et al and CONMED Receivables
Corporation (Incorporated by reference to Exhibit 10.2 of the Company’s
Quarterly Report on Form 10-Q for the quarter ended September 30,
2003).
|
|
| 10.17 | - |
Amended
and Restated Receivables Purchase Agreement, dated October 23, 2003,
among
CONMED Receivables Corporation, CONMED Corporation, and Fleet National
Bank (Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly
Report on Form 10-Q for the quarter ended September 30,
2003).
|
|
| 10.18 | - |
Amendment
No. 1, dated October 20, 2004 to the Amended and Restated Receivables
Purchase Agreement, dated October 23, 2003, among CONMED Receivables
Corporation, CONMED Corporation and Fleet Bank (Incorporated by reference
to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004).
|
|
| Exhibit
No.
|
Description
|
||
|
10.19
|
- |
Amendment
No. 2, dated October 21, 2005 to the Amended and Restated Receivables
Purchase Agreement, dated October 23, 2003, among CONMED Receivables
Corporation, CONMED Corporation and Fleet Bank (Incorporated by reference
to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2005).
|
|
|
10.20
|
- |
Amendment
No. 3, dated October 24, 2006 to the Amended and Restated Receivables
Purchase Agreement, dated October 23, 2003, among CONMED Receivables
Corporation, CONMED Corporation and Fleet Bank (Incorporated by reference
to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated October
30, 2006).
|
|
|
|
|||
|
14
|
- |
Code
of Ethics. The CONMED code of ethics may be accessed via the Company’s
website at http://www.conmed.com/ investor-ethics.htm
|
|
| - |
Subsidiaries
of the Registrant.
|
||
| - |
Consent,
dated February 27, 2007, of PricewaterhouseCoopers LLP, independent
registered public accounting firm.
|
||
| - |
Certification
of Joseph J. Corasanti pursuant to Rule 13a-15(f) and Rule 15d-15(f)
of
the Securities Exchange Act, as adopted pursuant to Section 302 of
the
Sarbanes-Oxley Act of 2002.
|
||
| - |
Certification
of Robert D. Shallish, Jr. pursuant to Rule 13a-15(f) and Rule 15d-15(f)
of the Securities Exchange Act, as adopted pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002.
|
||
| - |
Certifications
of Joseph J. Corasanti and Robert D. Shallish, Jr. pursuant to 18
U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002.
|
||
| * Filed herewith | |||
| + Management contract or compensatory plan or arrangement. | |||
MANAGEMENT’S
REPORT ON INTERNAL CONTROL
OVER
FINANCIAL REPORTING
The
management of CONMED Corporation is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external reporting purposes in accordance with
generally accepted accounting principles. Our internal control over financial
reporting includes policies and procedures that pertain to the maintenance
of
records that, in reasonable detail, accurately and fairly reflect transactions
and dispositions of assets; provide reasonable assurances that transactions
are
recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States
of
America, and that receipts and expenditures are being made only in accordance
with authorizations of management and the directors of the Company; and provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material
effect
on our financial statements. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements.
Management assessed the effectiveness of CONMED’s internal control over
financial reporting as of December 31, 2006. In making its assessment,
management utilized the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in “Internal
Control-Integrated Framework”. Management has concluded that based on its
assessment, CONMED’s internal control over financial reporting was effective as
of December 31, 2006. Management’s assessment of the effectiveness of CONMED’s
internal control over financial reporting as of December 31, 2006 has been
audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears on page
63.
/s/
Joseph J. Corasanti
Joseph
J.
Corasanti
President
and
Chief
Executive Officer
/s/
Robert D. Shallish, Jr.
Robert
D.
Shallish, Jr.
Vice
President-Finance and
Chief
Financial Officer
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareholders of CONMED Corporation:
We
have
completed integrated audits of CONMED Corporation's consolidated financial
statements and of its internal control over financial reporting as of December
31, 2006, in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our audits, are
presented below.
Consolidated
financial statements and financial statement schedule
In
our
opinion, the consolidated financial statements listed in the index appearing
under Item 15(a)(1) present fairly, in all material respects, the financial
position of CONMED Corporation and its subsidiaries at December 31, 2006 and
2005, and the results of their operations and their cash flows for each of
the
three years in the period ended December 31, 2006 in conformity with accounting
principles generally accepted in the United States of America. In addition,
in
our opinion, the financial statement schedule listed in the index appearing
under Item 15(a) (2) presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit
to
obtain reasonable assurance about whether the financial statements are free
of
material misstatement. An audit of financial statements includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
As
discussed in Note 8 to the consolidated financial statements, the Company
changed the manner in which it accounts for share-based compensation in 2006.
As
discussed in Note 10 to the consolidated financial statements, the Company
changed the manner in which it accounts for its defined benefit pension plan
in
2006.
Internal
control over financial reporting
Also,
in
our opinion, management’s assessment, included in “Management’s
Report on Internal Control Over Financial Reporting” appearing on page 62, that
the Company maintained effective internal control over financial reporting
as of
December 31, 2006 based on criteria established in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006
based on criteria established in Internal Control - Integrated Framework
issued by the COSO. The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment
of
the effectiveness of internal control over financial reporting. Our
responsibility is to express
opinions
on management’s assessment and on the effectiveness of the Company’s internal
control over financial reporting based on our audit. We conducted our audit
of
internal control over financial reporting in accordance with the standards
of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained
in
all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
PricewaterhouseCoopers
LLP
Syracuse,
New York
February
27, 2007
CONMED
CORPORATION
CONSOLIDATED
BALANCE SHEETS
December
31, 2005 and 2006
(In
thousands except share and per share amounts)
|
|
2005
|
2006
|
|||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
3,454
|
$
|
3,831
|
|||
|
Accounts
receivable, less allowance for doubtful
|
|||||||
|
accounts
of $1,522 in 2005 and $1,210 in 2006
|
83,327
|
75,120
|
|||||
|
Inventories
|
152,428
|
151,687
|
|||||
|
Income
taxes receivable
|
-
|
747
|
|||||
|
Deferred
income taxes
|
12,887
|
15,212
|
|||||
|
Prepaid
expenses and other current assets
|
3,419
|
3,286
|
|||||
|
Total
current assets
|
255,515
|
249,883
|
|||||
|
Property,
plant and equipment, net
|
104,224
|
116,480
|
|||||
|
Goodwill,
net
|
335,651
|
290,512
|
|||||
|
Other
intangible assets, net
|
191,402
|
191,135
|
|||||
|
Other
assets
|
16,991
|
13,561
|
|||||
|
Total
assets
|
$
|
903,783
|
$
|
861,571
|
|||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Current
portion of long-term debt
|
$
|
4,208
|
$
|
3,148
|
|||
|
Accounts
payable
|
31,084
|
41,823
|
|||||
|
Accrued
compensation and benefits
|
12,461
|
17,712
|
|||||
|
Income
taxes payable
|
4,706
|
-
|
|||||
|
Accrued
interest
|
1,095
|
727
|
|||||
|
Other
current liabilities
|
8,578
|
11,795
|
|||||
|
Total
current liabilities
|
62,132
|
75,205
|
|||||
|
|
|||||||
|
Long-term
debt
|
302,643
|
264,676
|
|||||
|
Deferred
income taxes
|
62,554
|
51,004
|
|||||
|
Other
long-term liabilities
|
23,448
|
30,332
|
|||||
|
Total
liabilities
|
450,777
|
421,217
|
|||||
|
Commitments
and contingencies
|
|||||||
|
Shareholders'
equity:
|
|||||||
|
Preferred
stock, par value $.01 per share; authorized
|
|||||||
|
500,000
shares, none outstanding
|
-
|
-
|
|||||
|
Common
stock, par value $.01 per share; 100,000,000
|
|||||||
|
authorized;
31,137,119 and 31,304,203, issued
|
|||||||
|
in
2005 and 2006, respectively
|
311
|
313
|
|||||
|
Paid-in
capital
|
278,281
|
284,858
|
|||||
|
Retained
earnings
|
259,932
|
247,425
|
|||||
|
Accumulated
other comprehensive income (loss)
|
(9,736
|
)
|
(8,612
|
)
|
|||
|
Less:
Treasury stock, at cost;
|
|||||||
|
2,944,905
and 3,321,545 shares in
|
|||||||
|
2005
and 2006, respectively
|
(75,782
|
)
|
(83,630
|
)
|
|||
|
Total
shareholders' equity
|
453,006
|
440,354
|
|||||
|
Total
liabilities and shareholders' equity
|
$
|
903,783
|
$
|
861,571
|
|||
See
notes
to consolidated financial statements.
CONMED
CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years
Ended December 31, 2004, 2005 and 2006
(In
thousands except per share amounts)
|
2004
|
2005
|
2006
|
||||||||
|
Net
sales
|
$
|
558,388
|
$
|
617,305
|
$
|
646,812
|
||||
|
Cost
of sales
|
271,496
|
304,284
|
333,966
|
|||||||
|
Gross
profit
|
286,892
|
313,021
|
312,846
|
|||||||
|
Selling
and administrative expense
|
183,183
|
216,685
|
234,832
|
|||||||
|
Research
and development expense
|
20,205
|
25,469
|
30,715
|
|||||||
|
Impairment
of goodwill
|
-
|
-
|
46,689
|
|||||||
|
Write-off
of purchased in-process
|
||||||||||
|
research
and development assets
|
16,400
|
-
|
-
|
|||||||
|
Other
expense
|
3,943
|
7,119
|
5,213
|
|||||||
|
|
223,731
|
249,273
|
317,449
|
|||||||
|
Income
(loss) from operations
|
63,161
|
63,748
|
(4,603
|
)
|
||||||
|
Loss
on early extinguishment of debt
|
825
|
-
|
678
|
|||||||
|
Interest
expense
|
12,774
|
15,578
|
19,120
|
|||||||
|
Income
(loss) before income taxes
|
49,562
|
48,170
|
(24,401
|
)
|
||||||
|
Provision
(benefit) for income taxes
|
16,097
|
16,176
|
(11,894
|
)
|
||||||
|
Net
income (loss)
|
$
|
33,465
|
$
|
31,994
|
$
|
(12,507
|
)
|
|||
|
|
||||||||||
|
Earnings
(loss) per share:
|
||||||||||
|
|
||||||||||
|
Basic
|
$
|
1.13
|
$
|
1.09
|
$
|
(.45
|
)
|
|||
|
Diluted
|
1.11
|
1.08
|
(.45
|
)
|
||||||
See
notes
to consolidated financial statements.
CONMED
CORPORATION
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
Years
Ended December 31, 2004, 2005 and 2006
(In
thousands)
|
|
Accumulated
|
|||||||||||||||||||||
|
|
Other
|
|||||||||||||||||||||
|
|
Common
Stock
|
Paid-in
|
Retained
|
Comprehensive
|
Treasury
|
Shareholders’
|
||||||||||||||||
|
|
Shares
|
Amount
|
Capital
|
Earnings
|
Income
(Loss)
|
Stock
|
Equity
|
|||||||||||||||
|
Balance
at December 31, 2003
|
29,141
|
$
|
291
|
$
|
237,076
|
$
|
194,473
|
$
|
2,069
|
$
|
(419
|
)
|
$
|
433,490
|
||||||||
|
Common
stock issued
|
||||||||||||||||||||||
|
under
employee plans
|
995
|
10
|
15,578
|
15,588
|
||||||||||||||||||
|
|
||||||||||||||||||||||
|
Tax
benefit arising from
|
||||||||||||||||||||||
|
common
stock issued
|
||||||||||||||||||||||
|
under
employee plans
|
3,897
|
3,897
|
||||||||||||||||||||
|
|
||||||||||||||||||||||
|
Repurchase
of common stock
|
(29,989
|
)
|
(29,989
|
)
|
||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||
|
|
||||||||||||||||||||||
|
Foreign
currency
|
||||||||||||||||||||||
|
translation
adjustments
|
2,133
|
|||||||||||||||||||||
|
|
||||||||||||||||||||||
|
Cash
flow hedging
|
||||||||||||||||||||||
|
(net
of income tax
|
||||||||||||||||||||||
|
benefit
of $82)
|
(146
|
)
|
||||||||||||||||||||
|
Minimum
pension liability
|
||||||||||||||||||||||
|
(net
of income tax
|
||||||||||||||||||||||
|
benefit
of $5,630)
|
(10,455
|
)
|
||||||||||||||||||||
|
Net
income
|
33,465
|
|||||||||||||||||||||
|
Total
comprehensive income
|
|
|
|
|
|
|
24,997
|
|||||||||||||||
|
Balance
at December 31, 2004
|
30,136
|
$
|
301
|
$
|
256,551
|
$
|
227,938
|
$
|
(6,399
|
)
|
$
|
(30,408
|
)
|
$
|
447,983
|
|||||||
|
|
||||||||||||||||||||||
|
Common
stock issued
|
||||||||||||||||||||||
|
under
employee plans
|
1,001
|
10
|
16,988
|
16,998
|
||||||||||||||||||
|
|
||||||||||||||||||||||
|
Tax
benefit arising from
|
||||||||||||||||||||||
|
common
stock issued
|
||||||||||||||||||||||
|
under
employee plans
|
4,742
|
4,742
|
||||||||||||||||||||
|
|
||||||||||||||||||||||
|
Repurchase
of common stock
|
(45,374
|
)
|
(45,374
|
)
|
||||||||||||||||||
|
|
||||||||||||||||||||||
See
notes
to consolidated financial statements.
(continued)
CONMED
CORPORATION
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
Years
Ended December 31, 2004, 2005 and 2006
(In
thousands)
|
Accumulated
|
||||||||||||||||||||||
|
|
Other
|
|||||||||||||||||||||
|
|
Common
Stock
|
Paid-in
|
Retained
|
Comprehensive
|
Treasury
|
Shareholders’
|
||||||||||||||||
|
|
Shares
|
Amount
|
Capital
|
Earnings
|
Income
(Loss)
|
Stock
|
Equity
|
|||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||
|
|
||||||||||||||||||||||
|
Foreign
currency
|
||||||||||||||||||||||
|
translation
adjustments
|
(3,657
|
)
|
||||||||||||||||||||
|
Minimum
pension liability
|
||||||||||||||||||||||
|
(net
of income tax
|
||||||||||||||||||||||
|
expense
of $172)
|
320
|
|||||||||||||||||||||
|
Net
income
|
31,994
|
|||||||||||||||||||||
|
Total
comprehensive income
|
28,657
|
|||||||||||||||||||||
|
Balance
at December 31, 2005
|
31,137
|
$
|
311
|
$
|
278,281
|
$
|
259,932
|
$
|
(9,736
|
)
|
$
|
(75,782
|
)
|
$
|
453,006
|
|||||||
|
Common
stock issued
|
||||||||||||||||||||||
|
under
employee plans
|
167
|
2
|
2,729
|
2,731
|
||||||||||||||||||
|
|
||||||||||||||||||||||
|
Tax
benefit arising from
|
||||||||||||||||||||||
|
common
stock issued
|
||||||||||||||||||||||
|
under
employee plans
|
139
|
139
|
||||||||||||||||||||
|
Stock-based
compensation
|
|
3,709 |
3,709
|
|||||||||||||||||||
|
Repurchase
of common stock
|
(7,848
|
)
|
(7,848
|
)
|
||||||||||||||||||
|
|
||||||||||||||||||||||
|
Comprehensive
income (loss):
|
||||||||||||||||||||||
|
|
||||||||||||||||||||||
|
Foreign
currency
|
||||||||||||||||||||||
|
translation
adjustments
|
3,375
|
|||||||||||||||||||||
|
|
||||||||||||||||||||||
|
Minimum
pension liability
|
||||||||||||||||||||||
|
(net
of income tax
|
||||||||||||||||||||||
|
expense
of $1,330)
|
3,092
|
|||||||||||||||||||||
|
|
||||||||||||||||||||||
|
Net
income (loss)
|
(12,507
|
)
|
||||||||||||||||||||
|
|
||||||||||||||||||||||
|
Total
comprehensive
|
||||||||||||||||||||||
|
Income
(loss)
|
(6,040
|
)
|
||||||||||||||||||||
|
|
||||||||||||||||||||||
|
Adjustment
to initially
|
||||||||||||||||||||||
|
apply
SFAS No. 158
|
||||||||||||||||||||||
|
(net
of income tax
|
||||||||||||||||||||||
|
benefit
of $3,132)
|
(5,343
|
)
|
(5,343
|
)
|
||||||||||||||||||
|
Balance
at December 31, 2006
|
31,304
|
$
|
313
|
$
|
284,858
|
$
|
247,425
|
$
|
(8,612
|
)
|
$
|
(83,630
|
)
|
$
|
440,354
|
|||||||
See
notes
to consolidated financial statements.
CONMED
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended December 31, 2004, 2005 and 2006
(In
thousands)
|
2004
|
2005
|
2006
|
||||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
income (loss)
|
$
|
33,465
|
$
|
31,994
|
$
|
(12,507
|
)
|
|||
|
Adjustments
to reconcile net income (loss)
|
||||||||||
|
to
net cash provided by operating activities:
|
||||||||||
|
Depreciation
|
10,962
|
12,466
|
11,738
|
|||||||
|
Amortization
|
15,906
|
18,320
|
18,113
|
|||||||
|
Stock-based
compensation
|
-
|
-
|
3,709
|
|||||||
|
Goodwill
impairment
|
-
|
-
|
46,689
|
|||||||
|
Deferred
income taxes
|
4,301
|
10,128
|
(12,289
|
)
|
||||||
|
Income
tax benefit of stock
|
||||||||||
|
option
exercises
|
3,897
|
4,742
|
139
|
|||||||
|
Excess
tax benefits from stock-based
|
||||||||||
|
compensation
|
-
|
-
|
(139
|
)
|
||||||
|
Contributions
to pension plans less than
|
||||||||||
|
net
pension cost
|
3,619
|
2,062
|
1,877
|
|||||||
|
Write-off
of purchased in-process
|
||||||||||
|
research
and development assets
|
16,400
|
-
|
-
|
|||||||
|
Loss
on extinguishment of debt
|
825
|
-
|
203
|
|||||||
|
Loss
on sale of equity investment
|
-
|
794
|
-
|
|||||||
|
Increase
(decrease) in cash flows from
|
||||||||||
|
changes
in assets and liabilities, net
|
||||||||||
|
of
effects from acquisitions:
|
||||||||||
|
Sale
of accounts receivable
|
5,000
|
(9,000
|
)
|
4,000
|
||||||
|
Accounts
receivable
|
(19,144
|
)
|
266
|
(126
|
)
|
|||||
|
Inventories
|
1,441
|
(33,620
|
)
|
(9,380
|
)
|
|||||
|
Accounts
payable
|
4,350
|
8,273
|
7,016
|
|||||||
|
Income
taxes payable
|
(2,532
|
)
|
675
|
(1,944
|
)
|
|||||
|
Accrued
compensation and benefits
|
1,626
|
(194
|
)
|
5,251
|
||||||
|
Accrued
interest
|
469
|
347
|
(368
|
)
|
||||||
|
Other
assets
|
(3,884
|
)
|
(4,402
|
)
|
(1,582
|
)
|
||||
|
Other
liabilities
|
(1,861
|
)
|
(417
|
)
|
4,172
|
|||||
|
|
41,375
|
10,440
|
77,079
|
|||||||
|
Net
cash provided by operating activities
|
74,840
|
42,434
|
64,572
|
|||||||
|
Cash
flows from investing activities:
|
||||||||||
|
Payments
related to business acquisitions,
|
||||||||||
|
net
of cash acquired
|
(81,645
|
)
|
(372
|
)
|
(2,466
|
)
|
||||
|
Proceeds
from sale of equity investment
|
-
|
-
|
1,205
|
|||||||
|
Purchases
of property, plant and equipment, net
|
(12,419
|
)
|
(16,242
|
)
|
(21,895
|
)
|
||||
|
Net
cash used in investing activities
|
(94,064
|
)
|
(16,614
|
)
|
(23,156
|
)
|
||||
|
Cash
flows from financing activities:
|
||||||||||
|
Net
proceeds from common stock issued
|
||||||||||
|
under
employee plans
|
15,200
|
16,998
|
2,731
|
|||||||
|
Excess
tax benefits from stock-based compensation
|
-
|
-
|
139
|
|||||||
|
Repurchase
of common stock
|
(29,989
|
)
|
(45,374
|
)
|
(7,848
|
)
|
||||
See
notes
to consolidated financial statements.
(continued)
CONMED
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended December 31, 2004, 2005 and 2006
(In
thousands)
|
2004
|
2005
|
2006
|
||||||||
|
Payments
on senior credit agreement
|
(114,937
|
)
|
(29,917
|
)
|
(173,160
|
)
|
||||
|
Proceeds
of senior credit agreement
|
-
|
43,000
|
135,000
|
|||||||
|
Payments
on mortgage notes
|
(5,132
|
)
|
(754
|
)
|
(867
|
)
|
||||
|
Proceeds
from issuance of 2.50% convertible
|
||||||||||
|
senior
subordinated notes
|
150,000
|
-
|
-
|
|||||||
|
Payments
related to issuance of debt
|
(5,848
|
)
|
(185
|
)
|
(1,260
|
)
|
||||
|
Net
change in cash overdrafts
|
6,209
|
(6,102
|
)
|
1,166
|
||||||
|
Net
cash provided by (used in) financing
|
||||||||||
|
activities
|
15,503
|
(22,334
|
)
|
(44,099
|
)
|
|||||
|
Effect
of exchange rate changes
|
||||||||||
|
on
cash and cash equivalents
|
1,924
|
(4,221
|
)
|
3,060
|
||||||
|
Net
increase (decrease) in
|
||||||||||
|
cash
and cash equivalents
|
(1,797
|
)
|
(735
|
)
|
377
|
|||||
|
Cash
and cash equivalents at beginning
|
||||||||||
|
of
year
|
5,986
|
4,189
|
3,454
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
4,189
|
$
|
3,454
|
$
|
3,831
|
||||
|
Supplemental
disclosures of cash flow information:
|
||||||||||
|
Cash
paid during the year for:
|
||||||||||
|
Interest
|
$
|
12,680
|
$
|
13,794
|
$
|
18,247
|
||||
|
Income
taxes
|
11,994
|
3,921
|
2,168
|
|||||||
Supplemental
disclosures of non-cash investing and financing
activities:
We
assumed $3.5 million in liabilities in connection with a business acquisition
in
2004 described more fully in Note 2.
See
notes
to consolidated financial statements.
CONMED
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except per share amounts)
Note
1 — Operations and Significant Accounting Policies
Organization
and operations
CONMED
Corporation (“CONMED”, the “Company”, “we” or “us”) is a medical technology
company with an emphasis on surgical devices and equipment for minimally
invasive procedures and monitoring. The Company’s products serve the clinical
areas of arthroscopy, powered surgical instruments, electrosurgery, cardiac
monitoring disposables, endosurgery and endoscopic technologies. They are used
by surgeons and physicians in a variety of specialties including orthopedics,
general surgery, gynecology, neurosurgery, and gastroenterology.
Principles
of consolidation
The
consolidated financial statements include the accounts of CONMED Corporation
and
its controlled subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use
of estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and judgments which affect the reported amounts of assets,
liabilities, related disclosure of contingent assets and liabilities at the
date
of the financial statements, and the reported amount of revenues and expenses
during the reporting period. Estimates are used in accounting for, among other
things, allowances for doubtful accounts, rebates and sales allowances,
inventory allowances, purchased in-process research and development, pension
benefits, goodwill and intangible assets, contingencies and other accruals.
We
base our estimates on historical experience and on various other assumptions
which are believed to be reasonable under the circumstances. Due to the inherent
uncertainty involved in making estimates, actual results reported in future
periods may differ from those estimates. Estimates and assumptions are reviewed
periodically, and the effect of revisions are reflected in the consolidated
financial statements in the period they are determined to be
necessary.
Cash
and cash equivalents
We
consider all highly liquid investments with an original maturity of three months
or less to be cash equivalents.
Accounts
receivable sale
We
have
entered into an accounts receivable sales agreement pursuant to which we and
certain of our subsidiaries sell on an ongoing basis certain accounts receivable
to CONMED Receivables Corporation (“CRC”), a wholly-owned, bankruptcy-remote,
special-purpose subsidiary of CONMED Corporation. CRC may in turn sell up to
an
aggregate $50.0 million undivided percentage ownership interest in such
receivables (the “asset interest”) to a bank (“the “purchaser”). The purchaser’s
share of collections on accounts receivable are calculated as defined in
the
accounts
receivable sales agreement, as amended. Effectively, collections on the pool
of
receivables flow first to the purchaser and then to CRC, but to the extent
that
the purchaser’s share of collections may be less than the amount of the
purchaser’s asset interest, there is no recourse to CONMED or CRC for such
shortfall. For receivables which have been sold, CONMED Corporation and its
subsidiaries retain collection and administrative responsibilities as agent
for
the purchaser. As of December 31, 2005 and 2006, the undivided percentage
ownership interest in receivables sold by CRC to the purchaser aggregated $40.0
million and $44.0 million, respectively, which has been accounted for as a
sale
and reflected in the balance sheet as a reduction in accounts receivable.
Expenses associated with the sale of accounts receivable, including the
purchaser’s financing costs to purchase the accounts receivable, were $1.0
million, $1.9 million and $2.3 million, in 2004, 2005 and 2006, respectively,
and are included in interest expense.
There
are
certain statistical ratios, primarily related to sales dilution and losses
on
accounts receivable, which must be calculated and maintained on the pool of
receivables in order to continue selling to the purchaser. The pool of
receivables is in full compliance with these ratios. Management believes that
additional accounts receivable arising in the normal course of business will
be
of sufficient quality and quantity to meet the requirements for sale under
the
accounts receivable sales agreement. In the event that new accounts receivable
arising in the normal course of business do not qualify for sale, then
collections on sold receivables will flow to the purchaser rather than being
used to fund new receivable purchases. To the extent that such collections
would
not be available to CONMED in the form of new receivables purchases, we would
need to access an alternate source of working capital, such as our $100 million
revolving credit facility. Our accounts receivable sales agreement, as amended,
also requires us to obtain a commitment (the “purchaser commitment”) from the
purchaser to fund the purchase of our accounts receivable. The purchaser
commitment was amended effective October 23, 2006 whereby it was extended
through October 31, 2008 under substantially the same terms and
conditions.
Inventories
Inventories
are valued at the lower of cost or market. Cost is determined on the FIFO
(first-in, first-out) method of accounting.
Property,
plant and equipment
Property,
plant and equipment are stated at cost and depreciated using the straight-line
method over the following estimated useful lives:
|
Building
and improvements
|
40
years
|
|
|
Leasehold
improvements
|
Shorter
of life of asset or life of lease
|
|
|
Machinery
and equipment
|
2
to 15 years
|
Goodwill
and other intangible assets
Goodwill
represents the excess of purchase price over fair value of identifiable net
assets of acquired businesses. Other intangible assets primarily represent
allocations of purchase price to identifiable intangible assets of acquired
businesses. Because of our history of growth through acquisitions, goodwill
and
other intangible assets comprise a substantial portion (55.9% at December 31,
2006) of our total assets.
Goodwill
and intangible assets deemed to have indefinite lives are not amortized. All
other intangible assets are amortized over their estimated useful lives.
We
perform impairment tests of goodwill and indefinite-lived intangible assets
and
evaluate the useful lives of acquired intangible assets subject to amortization.
These tests and evaluations are performed in accordance with Statement of
Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets”
(“SFAS 142”). It is our policy to perform annual impairment tests in the fourth
quarter. These tests resulted in an impairment charge of $46.7 million in the
fourth quarter ending December 31, 2006. See Note 5 for additional discussion.
Other
long-lived assets
We
review
asset carrying amounts for impairment (consisting of intangible assets subject
to amortization and property, plant and equipment) whenever events or
circumstances indicate that such carrying amounts may not be recoverable. If
the
sum of the expected future undiscounted cash flows is less than the carrying
amount of the asset, an impairment loss is recognized by reducing the recorded
value to its current fair value.
Equity
investments
We
have
an investment in the common stock of another company in our industry which
represents less than 20% of the voting stock of this company and in which we
do
not have the ability to exercise significant influence. We have accounted for
this investment under the cost method. We review this investment for impairment
whenever events or circumstances indicate that the carrying amounts of this
investment may not be recoverable. If the sum of the expected future
undiscounted cash flows were less than the carrying amount of the investment,
an
impairment loss would be recognized by reducing the recorded value to its
current fair value.
Fair
value of financial instruments
The
carrying amounts reported in our balance sheets for cash and cash equivalents,
accounts receivable, accounts payable and long-term debt excluding the 2.50%
convertible senior subordinated notes (the “Notes”) approximate fair value. The
fair value of the Notes approximated $132.0 million and $133.7 million at
December 31, 2005 and 2006, respectively, based on their quoted market price.
Translation
of foreign currency financial statements
Assets
and liabilities of foreign subsidiaries have been translated into United States
dollars at the applicable rates of exchange in effect at the end of the period
reported. Revenues and expenses have been translated at the applicable weighted
average rates of exchange in effect during the period reported. Translation
adjustments are reflected in accumulated other comprehensive income (loss).
Transaction gains and losses are included in net income (loss).
Income
taxes
We
provide for income taxes in accordance with the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (“SFAS
109”). Under the liability method specified by SFAS 109, deferred tax assets and
liabilities are based on the difference between the financial statement and
tax
basis of assets and liabilities as measured by the tax rates that are
anticipated to be in effect when these differences reverse. The deferred tax
provision
generally
represents the net change in the assets and liabilities for deferred tax. A
valuation allowance is established when it is necessary to reduce deferred
tax
assets to amounts for which realization is more likely than not.
Revenue
Recognition
Revenue
is recognized when title has been transferred to the customer which is at the
time of shipment. The following policies apply to our major categories of
revenue transactions:
|
·
|
Sales
to customers are evidenced by firm purchase orders. Title and the
risks
and rewards of ownership are transferred to the customer when product
is
shipped under our stated shipping terms. Payment by the customer
is due
under fixed payment terms.
|
|
·
|
We
place certain of our capital equipment with customers in return for
commitments to purchase disposable products over time periods generally
ranging from one to three years. In these circumstances, no revenue
is
recognized upon capital equipment shipment and we recognize revenue
upon
the disposable product shipment. The cost of the equipment is amortized
over the term of individual commitment
agreements.
|
|
·
|
Product
returns are only accepted at the discretion of the Company and in
accordance with our “Returned Goods Policy”. Historically the level of
product returns has not been significant. We accrue for sales returns,
rebates and allowances based upon an analysis of historical customer
returns and credits, rebates, discounts and current market
conditions.
|
|
·
|
Our
terms of sale to customers generally do not include any obligations
to
perform future services. Limited warranties are provided for capital
equipment sales and provisions for warranty are provided at the time
of
product sale based upon an analysis of historical
data.
|
|
·
|
Amounts
billed to customers related to shipping and handling have been included
in
net sales. Shipping and handling costs included in selling and
administrative expense were $9.3 million, $11.2 million and $14.3
million
for 2004, 2005 and 2006,
respectively.
|
|
·
|
We
sell to a diversified base of customers around the world and, therefore,
believe there is no material concentration of credit
risk.
|
|
·
|
We
assess the risk of loss on accounts receivable and adjust the allowance
for doubtful accounts based on this risk assessment. Historically,
losses
on accounts receivable have not been material. Management believes
that
the allowance for doubtful accounts of $1.2 million at December 31,
2006
is adequate to provide for probable losses resulting from accounts
receivable.
|
Earnings
(loss) per share
Basic
earnings per share (“basic EPS”) is computed by dividing net income (loss) by
the weighted average number of shares outstanding for the reporting
period.
Diluted earnings per share (“diluted EPS”) gives effect to all dilutive
potential shares outstanding resulting from employee stock options, restricted
stock units and stock appreciation rights during the period. In the 2006 period,
incremental shares are not included in computing diluted EPS because to do
so
would have reduced the net loss per share. The following table sets forth the
calculation of basic and diluted earnings per share at December 31, 2004, 2005
and 2006, respectively:
|
|
2004
|
2005
|
2006
|
|||||||
|
Net
income (loss)
|
$
|
33,465
|
$
|
31,994
|
$
|
(12,507
|
)
|
|||
|
Basic-weighted
average shares outstanding
|
29,523
|
29,300
|
27,966
|
|||||||
|
Effect
of dilutive potential securities
|
582
|
436
|
-
|
|||||||
|
Diluted-weighted
average shares outstanding
|
30,105
|
29,736
|
27,966
|
|||||||
|
Basic
EPS
|
$
|
1.13
|
$
|
1.09
|
$
|
(.45
|
)
|
|||
|
Diluted
EPS
|
$
|
1.11
|
$
|
1.08
|
$
|
(.45
|
)
|
|||
The
shares used in the calculation of diluted EPS exclude options to purchase shares
where the exercise price was greater than the average market price of common
shares for the year. Such shares aggregated approximately 0.1 million and 0.6
million at December 31, 2004 and 2005, respectively. Upon
conversion of our 2.50% convertible senior subordinated notes (the “Notes”), the
holder of each Note will receive the conversion value of the Note payable in
cash up to the principal amount of the Note and CONMED common stock for the
Note's conversion value in excess of such principal amount. As of December
31,
2006, our share price has not exceeded the conversion price of the Notes,
therefore the conversion value was less than the principal amount of the Notes.
Under the net share settlement method and in accordance with Emerging Issues
Task Force (“EITF”) Issue 04-8, “The Effect of Contingently Convertible Debt on
Diluted Earnings per Share”, there were no potential shares issuable under the
Notes to be used in the calculation of diluted EPS.
The
maximum number of shares we may issue with respect to the Notes is 5,750,000.
See Note 6 for further discussion of the Notes.
Stock
Based Compensation
We
adopted Statement of Financial Accounting Standards No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123R”) effective January 1, 2006. SFAS 123R
requires that all share-based payments to employees, including grants of
employee stock options, restricted stock units, and stock appreciation rights
be
recognized in the financial statements based on their fair values. Prior to
January 1, 2006, we accounted for stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25 “Accounting for Stock
Issued to Employees” (“APB 25”). No compensation expense was recognized for
stock options under the provisions of APB 25 since all options granted had
an
exercise price equal to the market value of the underlying stock on the grant
date.
SFAS
123R
was adopted using the modified prospective transition method. Under this method,
the provisions of SFAS No. 123R apply to all awards granted or modified
after the date of adoption. In addition, compensation expense must be recognized
for any nonvested stock option awards outstanding as of the date of adoption.
We
recognize such expense using a straight-line method over the vesting period.
Prior periods have not been restated.
We
elected to adopt the alternative transition method, as permitted by FASB Staff
Position No. FAS 123R-3 “Transition Election Related to Accounting for Tax
Effects of Share-Based Payment Awards,” to calculate the tax effects of
stock-based compensation pursuant to SFAS 123R for those employee awards that
were outstanding upon adoption of SFAS 123R. The alternative transition method
allows the use of a simplified method to calculate the beginning pool of excess
tax benefits available to absorb tax deficiencies recognized subsequent to
the
adoption of SFAS 123R. See Note 8 for additional discussion.
Accumulated
other comprehensive income (loss)
Accumulated
other comprehensive income (loss) consists of the following:
|
|
Accumulated
|
|||||||||
|
|
Cumulative
|
Other
|
||||||||
|
|
Pension
|
Translation
|
Comprehensive
|
|||||||
|
|
Liability
|
Adjustments
|
Income
(loss)
|
|||||||
|
Balance,
December 31, 2005
|
(10,135
|
)
|
$
|
399
|
$
|
(9,736
|
)
|
|||
|
Foreign
currency translation
|
||||||||||
|
adjustments
|
-
|
3,375
|
3,375
|
|||||||
|
Minimum
pension liability
|
||||||||||
|
(net
of income taxes)
|
3,092
|
-
|
3,092
|
|||||||
|
Adjustment
to initially apply
|
||||||||||
|
SFAS
158 (net of income taxes)
|
(5,343
|
)
|
-
|
(5,343
|
)
|
|||||
|
Balance,
December 31, 2006
|
(12,386
|
)
|
$
|
3,774
|
$
|
(8,612
|
)
|
|||
Note
2 — Business Acquisitions
Assets
and liabilities of acquired businesses are recorded under the purchase method
of
accounting at their estimated fair values as of the date of acquisition.
Goodwill represents costs in excess of fair values assigned to the underlying
net assets of acquired businesses. The results of operations of acquired
businesses have been included in the consolidated statements of operations
since
the date of acquisition.
In
September 2004, we acquired the business operations of the Endoscopic
Technologies Division of C.R. Bard, Inc. (the “Endoscopic Technologies
acquisition”) for aggregate consideration of $81.3 million in cash. We funded
the Endoscopic Technologies acquisition through available cash on hand of $31.3
million with an additional $50.0 million drawn under our revolving credit
facility (See Note 6). Included in cost of sales during 2004 and 2005 is $2.3
million and $0.5 million, respectively, of expense which represents the step-up
to fair value recorded relating to the sale of inventory acquired through the
Endoscopic Technologies acquisition. The acquired business enhanced our product
offerings by adding a comprehensive line of single-use medical devices employed
by gastro-intestinal and pulmonary physicians to diagnose and treat diseases
of
the digestive tract and lungs using minimally invasive endoscopic techniques.
As
determined by management with the assistance of a third-party valuation, $16.4
million of the Endoscopic Technologies acquisition purchase price represents
the
fair value of development-stage projects for which the related products, as
of
the acquisition date had not reached technological feasibility, had not
received
regulatory
approval and had no alternative future use. Accordingly, the entire amount
of
in-process research and development assets were written-off in accordance with
FASB Interpretation No. 4. The $16.4 million write-off of purchased in-process
research and development assets is deductible for income tax purposes.
The
unaudited pro forma statement of operations for the year ended December 31,
2004, assuming the Endoscopic Technologies acquisition occurred as of January
1,
2004 is presented below. This pro forma statement of operations has been
prepared for comparative purposes only and does not purport to be indicative
of
the results of operations which actually would have resulted had the Endoscopic
Technologies acquisition occurred on the dates indicated, or which may result
in
the future.
|
2004
|
||||
|
Net
sales
|
$
|
604,566
|
||
|
Net
income
|
33,749
|
|||
|
Net
income per share
|
||||
|
Basic
|
$
|
1.14
|
||
|
Diluted
|
$
|
1.12
|
||
Goodwill
associated with the Endoscopic Technologies acquisition was determined to be
impaired in the fourth quarter of 2006 as a result of our annual impairment
testing resulting in a $46.7 million impairment charge. See Note 5 for
additional discussion.
Note
3 — Inventories
Inventories
consist of the following at December 31,:
|
2005
|
2006
|
||||||
|
Raw
materials
|
$
|
45,991
|
$
|
50,225
|
|||
|
Work
in process
|
16,472
|
17,815
|
|||||
|
Finished
goods
|
89,965
|
83,647
|
|||||
|
|
$
|
152,428
|
$
|
151,687
|
|||
Note
4 — Property, Plant and Equipment
Property,
plant and equipment consist of the following at December 31,:
|
2005
|
2006
|
||||||
|
Land
|
$
|
4,200
|
$
|
4,200
|
|||
|
Building
and improvements
|
80,713
|
84,944
|
|||||
|
Machinery
and equipment
|
95,300
|
101,218
|
|||||
|
Construction
in progress
|
7,086
|
11,281
|
|||||
|
|
187,299
|
201,643
|
|||||
|
Less:
Accumulated depreciation
|
(83,075
|
)
|
(85,163
|
)
|
|||
|
$
|
104,224
|
$
|
116,480
|
||||
We
lease
various manufacturing facilities, office facilities and equipment under
operating leases. Rental expense on these operating leases was approximately
$2,649, $2,727 and $3,269 for the years ended December 31, 2004, 2005 and 2006,
respectively. The aggregate future minimum lease commitments for operating
leases at December 31, 2006 are as follows:
|
2007
|
$
|
3,265
|
||
|
2008
|
2,944
|
|||
|
2009
|
1,930
|
|||
|
2010
|
1,608
|
|||
|
2011
|
1,278
|
|||
|
Thereafter
|
2,279
|
Note
5 - Goodwill and Other Intangible Assets
The
changes in the net carrying amount of goodwill for the years ended December
31,
are as follows:
|
|
2005
|
2006
|
|||||
|
Balance
as of January 1,
|
$
|
334,483
|
$
|
335,651
|
|||
|
Goodwill
impairment
|
-
|
(46,689
|
)
|
||||
|
Adjustments
to goodwill resulting from business
|
|||||||
|
acquisitions
finalized
|
372
|
1,705
|
|||||
|
Foreign
currency translation
|
796
|
(155
|
)
|
||||
|
|
|||||||
|
Balance
as of December 31,
|
$
|
335,651
|
$
|
290,512
|
|||
Goodwill
associated with each of our principal operating units at December 31,
is
as
follows:
|
|
2005
|
2006
|
|||||
|
CONMED
Electrosurgery
|
$
|
16,645
|
$
|
16,645
|
|||
|
|
|||||||
|
CONMED
Endoscopic Technologies
|
46,649
|
-
|
|||||
|
CONMED
Endosurgery
|
42,404
|
42,419
|
|||||
|
CONMED
Linvatec
|
175,853
|
173,007
|
|||||
|
CONMED
Patient Care
|
54,100
|
58,441
|
|||||
|
|
|||||||
|
Balance
as of December 31,
|
$
|
335,651
|
$
|
290,512
|
|||
The
Endoscopic Technologies acquisition described in Note 2 involved the transfer
of
substantially all of the Endoscopic Technologies production lines from C.R.
Bard
facilities to CONMED facilities. This transfer has proven to be more
time-consuming,
costly and complex than was originally anticipated. In addition, production
and
operational issues at an assembly operation in Mexico under contract to CONMED
have resulted in product shortages and backorders. These operational issues,
in
combination with increased competition and pricing pressures in the marketplace
have resulted in decreased sales and gross margins and operating losses. As
a
result of these factors, during our fourth quarter 2006 goodwill impairment
testing, we determined that the goodwill of our Endoscopic Technologies
operating unit was impaired and consequently we recorded a goodwill impairment
charge of $46.7 million to reduce the carrying amount of the unit to its fair
value. We estimated the fair value of the Endoscopic Technologies operating
unit
using a discounted cash flow valuation methodology and measured the goodwill
impairment in accordance with SFAS 142.
Other
intangible assets consist of the following:
|
|
December
31, 2005
|
December
31, 2006
|
|||||||||||
|
|
Gross
|
Gross
|
|||||||||||
|
|
Carrying
|
Accumulated
|
Carrying
|
Accumulated
|
|||||||||
|
Amortized
intangible assets:
|
Amount
|
Amortization
|
Amount
|
Amortization
|
|||||||||
|
Customer
relationships
|
$
|
110,612
|
$
|
(21,317
|
)
|
$
|
113,376
|
$
|
(24,498
|
)
|
|||
|
|
|||||||||||||
|
Patents
and other intangible assets
|
37,344
|
(22,581
|
)
|
39,609
|
(24,696
|
)
|
|||||||
|
Unamortized
intangible assets:
|
|||||||||||||
|
Trademarks
and tradenames
|
87,344
|
-
|
87,344
|
-
|
|||||||||
|
|
$
|
235,300
|
$
|
(43,898
|
)
|
$
|
240,329
|
$
|
(49,194
|
)
|
|||
Other
intangible assets primarily represent allocations of purchase price to
identifiable intangible assets of acquired businesses. The weighted average
amortization period for intangible assets which are amortized is 25 years.
Customer relationships are being amortized over a weighted average life of
36
years. Patents and other intangible assets are being amortized over a weighted
average life of 12 years.
Customer
relationship assets were acquired primarily in connection with the 1997
acquisition of Linvatec Corporation, 2003 Bionx acquisition and 2004 Endoscopic
Technologies acquisition. These assets represent the value associated with
business expected to be generated from acquired customers as of the acquisition
date. Asset values were determined by measuring the present value of the
projected future earnings attributable to these assets. Additionally, while
the
useful lives of these assets are not limited by contract or any other economic,
regulatory or other known factors, the weighted average useful life of 36 years
was determined as of acquisition date by historical customer attrition. In
accordance with SFAS 142 and as clarified by EITF Issue 02-17, “Recognition of
Customer Relationship Intangible Assets Acquired in a Business Combination”,
customer relationships evidenced by customer purchase orders are contractual
in
nature and therefore continue to be recognized separate from goodwill and are
amortized over their weighted average 36 year life.
Trademarks
and tradenames were recognized in connection with the 1997 acquisition of
Linvatec Corporation, 2003 Bionx acquisition and 2004 Endoscopic Technologies
acquisition. We continue to market products, release new product and product
extensions and maintain and promote these trademarks and tradenames in the
marketplace through legal registration and such methods as advertising, medical
education
and trade shows. It is our belief that these trademarks and tradenames will
generate cash flow for an indefinite period of time. Therefore, in accordance
with SFAS 142, our trademarks and tradenames intangible assets are not
amortized.
Amortization
expense related to intangible assets for the year ending December 31, 2006
and
estimated amortization expense for each of the five succeeding years is as
follows:
|
2006
|
$
|
5,296
|
||
|
2007
|
5,555
|
|||
|
2008
|
5,555
|
|||
|
2009
|
5,534
|
|||
|
2010
|
4,984
|
|||
|
2011
|
4,777
|
Note
6 — Long Term Debt
Long-term
debt consists of the following at December 31,:
|
|
2005
|
2006
|
|||||
|
Revolving
line of credit
|
$
|
43,000
|
$
|
-
|
|||
|
Term
loan borrowings on senior credit facility
|
98,147
|
102,988
|
|||||
|
2.50%
Convertible senior subordinated notes
|
150,000
|
150,000
|
|||||
|
Mortgage
notes
|
15,704
|
14,836
|
|||||
|
Total
long-term debt
|
306,851
|
267,824
|
|||||
|
Less:
Current portion
|
4,208
|
3,148
|
|||||
|
|
|||||||
|
|
$
|
302,643
|
$
|
264,676
|
|||
During
2006, we entered into an amended and restated $235.0 million senior credit
agreement (the "amended and restated senior credit agreement"). The amended
and
restated senior credit agreement consists of a $100.0 million revolving credit
facility and a $135.0 million term loan. There
were no borrowings outstanding on the revolving credit facility as of December
31, 2006. Our available borrowings on the revolving credit facility at December
31, 2006 were $93.0 million with approximately $7.0 million of the facility
set
aside for outstanding letters of credit. There were $103.0 million in borrowings
outstanding on the term loan at December 31, 2006. The
proceeds of the term loan portion of the amended and restated senior credit
agreement were used to repay borrowings outstanding on the term loan and
revolving credit facility of $142.5 million under the previously existing senior
credit agreement. In connection with the refinancing, we recorded a $0.7 million
loss on early extinguishment of debt of which $0.2 million related to the
write-off of unamortized deferred financing costs under the previously existing
senior credit agreement and $0.5 million related to financing costs associated
with the amended and restated senior credit agreement.
The
scheduled principal payments on the term loan portion of the amended and
restated senior credit agreement are $1.4 million annually through December
2011, increasing to $95.5 million in 2012 with the remaining balance outstanding
due and payable on April 12, 2013. We may also be required, under certain
circumstances, to make additional principal payments based on excess cash flow
as defined in the senior credit agreement. Interest rates on the term loan
portion of the senior credit agreement are at LIBOR plus 2.00% (7.35% at
December 31, 2006) or an alternative base rate; interest rates on the revolving
credit facility portion of the senior credit agreement are at LIBOR plus 2.00%
or an alternative base rate. For those borrowings where the Company elects
to
use the alternative base rate, the base rate will be the greater of the Prime
Rate or the Federal Funds Rate in effect on such date plus 0.50%, plus a margin
of 0.75% for term loan borrowings or 0.50% for borrowings under the revolving
credit facility.
The
amended and restated senior credit agreement is collateralized by substantially
all of our personal property and assets, except for our accounts receivable
and
related rights which are pledged in connection with our accounts receivable
sales agreement. The amended and restated credit agreement contains covenants
and restrictions which, among other things, require the maintenance of certain
financial ratios, and restrict dividend payments and the incurrence of certain
indebtedness and other activities, including acquisitions and dispositions.
We
were in full compliance with these covenants and restrictions as of December
31,
2006. We are also required, under certain circumstances, to make mandatory
prepayments from net cash proceeds from any issue of equity and asset sales
.
Mortgage
notes outstanding in connection with the property and facilities utilized by
our
CONMED Linvatec subsidiary consist of a note bearing interest at 7.50% per
annum
with semiannual payments of principal and interest through June 2009 (the "Class
A note"); and a note bearing interest at 8.25% per annum compounded semiannually
through June 2009, after which semiannual payments of principal and interest
will commence, continuing through June 2019 (the "Class C note"). The principal
balances outstanding on the Class A note and Class C note aggregated $5.2
million and $9.6 million, respectively, at December 31, 2006. These mortgage
notes are collateralized by the CONMED Linvatec property and
facilities.
During
2004, we completed an offering of $150.0 million in 2.50% convertible senior
subordinated notes (the “Notes”) due 2024. The Notes represent subordinated
unsecured obligations and are convertible under certain circumstances, as
defined in the bond indenture, into a combination of cash and CONMED common
stock. Upon conversion, the holder of each Note will receive the conversion
value of the Note payable in cash up to the principal amount of the Note and
CONMED common stock for the Note’s conversion value in excess of such principal
amount. Amounts in excess of the principal amount are at an initial conversion
rate, subject to adjustment, of 26.1849 shares per $1,000 principal amount
of
the Note (which represents an initial conversion price of $38.19 per share).
The
Notes mature on November 15, 2024 and are not redeemable by us prior to November
15, 2011. Holders of the Notes will be able to require that we repurchase some
or all of the Notes on November 15, 2011, 2014 and 2019.
The
Notes
contain two embedded derivatives. The embedded derivatives are recorded at
fair
value in other long-term liabilities and changes in their value are recorded
through the Consolidated Statements of Operations. The embedded derivatives
have
a nominal value, and it is our belief that any change in their fair value would
not have a material adverse effect on our business, financial condition or
results of operations.
Proceeds
from the offering and cash on hand were used to repay $82.2 million on the
term
loan and a further $45.0 million in borrowings then outstanding on the revolving
credit facility under our senior credit agreement. Additionally, in conjunction
with the Notes offering, we repurchased $30.0 million of our common stock in
privately negotiated transactions. As a result of the $82.2 million prepayment
on the term loan, we recorded $0.8 million in losses on the early extinguishment
of debt related to the write-off of unamortized deferred financing fees.
The
scheduled maturities of long-term debt outstanding at December 31, 2006 are
as
follows:
|
2007
|
$
|
3,148
|
||
|
2008
|
3,349
|
|||
|
2009
|
3,185
|
|||
|
2010
|
2,174
|
|||
|
2011
|
2,244
|
|||
|
Thereafter
|
253,724
|
|||
Note
7 — Income Taxes
The
provision for income taxes for the years ended December 31, 2004, 2005 and
2006
consists of the following:
|
|
2004
|
2005
|
2006
|
|||||||
|
Current
tax expense:
|
||||||||||
|
Federal
|
$
|
9,138
|
$
|
3,083
|
$
|
(2,582
|
)
|
|||
|
State
|
975
|
795
|
1,006
|
|||||||
|
Foreign
|
1,683
|
2,170
|
1,846
|
|||||||
|
|
11,796
|
6,048
|
270
|
|||||||
|
Deferred
income tax expense
|
4,301
|
10,128
|
(12,164
|
)
|
||||||
|
Provision
for income taxes
|
$
|
16,097
|
$
|
16,176
|
$
|
(11,894
|
)
|
|||
A
reconciliation between income taxes computed at the statutory federal rate
and
the provision for income taxes for the years ended December 31, 2004, 2005
and
2006 follows:
|
|
2004
|
2005
|
2006
|
|||||||
|
Tax
provision at statutory rate based
|
||||||||||
|
on
income (loss) before income taxes
|
35.00
|
%
|
35.00
|
%
|
(35.00
|
)%
|
||||
|
Extraterritorial
income exclusion
|
(5.30
|
)
|
(2.78
|
)
|
(5.39
|
)
|
||||
|
State
income taxes
|
2.75
|
.66
|
(3.24
|
)
|
||||||
|
Stock-based
compensation
|
-
|
-
|
3.49
|
|||||||
|
Research
& development credit
|
(.64
|
)
|
(.53
|
)
|
(3.87
|
)
|
||||
|
Settlement
of taxing
|
||||||||||
|
authority
examinations
|
-
|
-
|
(6.08
|
)
|
||||||
|
Other
nondeductible permanent differences
|
.36
|
.85
|
1.81
|
|||||||
|
Other,
net
|
.31
|
.38
|
(.46
|
)
|
||||||
|
|
32.48
|
%
|
33.58
|
%
|
(48.74
|
)%
|
The
tax
effects of the significant temporary differences which comprise the deferred
tax
assets and liabilities at December 31, 2005 and 2006 are as
follows:
|
|
2005
|
2006
|
|||||
|
Assets:
|
|||||||
|
Inventory
|
$
|
10,913
|
$
|
10,899
|
|||
|
Net
operating losses
|
8,663
|
13,707
|
|||||
|
Deferred
compensation
|
1,931
|
2,680
|
|||||
|
Accounts
receivable
|
865
|
3,134
|
|||||
|
Accrued
pension
|
5,457
|
7,259
|
|||||
|
Research
and development credit
|
-
|
1,980
|
|||||
|
State
taxes
|
-
|
156
|
|||||
|
Other
|
2,400
|
2,043
|
|||||
|
Valuation
allowance
|
(6,160
|
)
|
(6,892
|
)
|
|||
|
|
24,069
|
34,966
|
|||||
|
Liabilities:
|
|||||||
|
Goodwill
and intangible assets
|
63,601
|
59,969
|
|||||
|
Depreciation
|
5,568
|
5,329
|
|||||
|
Employee
benefits
|
722
|
103
|
|||||
|
State
taxes
|
1,116
|
-
|
|||||
|
Contingent
interest
|
2,729
|
5,357
|
|||||
|
|
73,736
|
70,758
|
|||||
|
Net
liability
|
$
|
(49,667
|
)
|
$
|
(35,792
|
)
|
|
Earnings
before income (loss) taxes consists of the following U.S. and foreign income
(loss):
|
2004
|
2005
|
2006
|
||||||||
|
U.S.
income (loss)
|
$
|
45,876
|
$
|
42,653
|
$
|
(29,659
|
)
|
|||
|
Foreign
income
|
3,686
|
5,517
|
5,258
|
|||||||
|
Total
income (loss)
|
$
|
49,562
|
$
|
48,170
|
$
|
(24,401
|
)
|
|||
The
net
operating loss carryforwards of acquired subsidiaries begin to expire in 2008.
We have established a valuation allowance to reflect the uncertainty of
realizing the benefits of certain net operating loss carryforwards recognized
in
connection with an acquisition. Any subsequently recognized tax benefits
associated with the valuation allowance would be allocated to reduce
goodwill.
We
operate
in
multiple taxing jurisdictions, both within and outside the United States. We
face audits from these various tax authorities regarding the amount of taxes
due. Such audits can involve complex issues and may require an
extended
period
of
time to resolve. Our United States federal income tax returns have been examined
by the Internal Revenue Service (“IRS”) for calendar years ending through 2004.
During 2006, as
a
result of the settlement of our 2001 through 2004 income taxes as a result
of
IRS examinations, we adjusted our reserves to consider positions taken in our
income tax return for periods subsequent to 2004. The net effect of these
adjustments and the settlement of the 2001 through 2004 IRS examinations, was
a
$1.5 million reduction in income tax expense in 2006. During the third quarter
of 2006, we filed our United States federal income tax return for 2005. As
a
result of the filing, we identified a greater benefit than was originally
anticipated associated with the extraterritorial income exclusion rules and
research and development tax credit resulting in a $0.7 million reduction in
income tax expense. The net effect of these adjustments was a $2.2 million
reduction in income tax expense in 2006.
Note
8 - Shareholder’s Equity
Our
shareholders have authorized 500,000 shares of preferred stock, par value $.01
per share, which may be issued in one or more series by the Board of Directors
without further action by the shareholders. As of December 31, 2005 and 2006,
no
preferred stock had been issued.
In
November 2004, we repurchased 1.1 million shares of our common stock in
privately negotiated transactions at an aggregate cost of $30 million. This
repurchase coincided with our 2.50% convertible senior subordinated notes
transaction (See Note 6).
On
February 15, 2005, our Board of Directors authorized a share repurchase program
under which we may repurchase up to $50.0 million of our common stock, although
no more than $25.0 million could be purchased in any calendar year. The Board
subsequently amended this program on December 2, 2005 to authorize repurchases
up to $100.0 million of our common stock, although no more than $50.0 million
may be purchased in any calendar year. The repurchase program calls for shares
to be purchased in the open market or in private transactions from time to
time.
We may suspend or discontinue the share repurchase program at any time. We
have
repurchased a total of 2.2 million shares of common stock as of December 31,
2006 under this authorization.
We
adopted Statement of Financial Accounting Standards No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123R”) effective January 1, 2006. SFAS 123R
requires that all share-based payments to employees, including grants of
employee stock options, be recognized in the financial statements based on
their
fair values.
Prior
to
January 1, 2006, we accounted for stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25 “Accounting for Stock
Issued to Employees” (“APB 25”). No compensation expense was recognized for
stock options under the provisions of APB 25 since all options granted had
an
exercise price equal to the market value of the underlying stock on the grant
date.
SFAS
123R
was adopted using the modified prospective transition method. Under this method,
the provisions of SFAS 123R apply to all awards granted or modified after the
date of adoption. In addition, compensation expense must be recognized for
any
nonvested stock option awards outstanding as of the date of adoption. Prior
periods have not been restated.
We
have
elected to adopt the alternative transition method, as permitted by FASB Staff
Position No. FAS 123R-3 “Transition Election Related to Accounting for Tax
Effects of Share-Based Payment Awards,” to calculate the tax effects of
stock-based compensation pursuant to SFAS 123R for those employee awards that
were outstanding upon adoption of SFAS 123R. The alternative transition method
allows the use of a simplified method to calculate the beginning pool of excess
tax benefits available to absorb tax deficiencies recognized subsequent to
the
adoption of SFAS 123R.
Prior
to
the adoption of SFAS 123R, we reported all tax benefits resulting from the
exercise of stock options as operating cash flows in the Consolidated Statements
of Cash Flows. SFAS 123R requires cash flows resulting from the tax deductions
in excess of the related compensation cost recognized in the financial
statements (excess tax benefits) to be classified as financing cash flows.
In
accordance with SFAS 123R, excess tax benefits recognized in periods after
the
adoption date have been classified as financing cash flows. Excess tax benefits
recognized in periods prior to the adoption date are classified as operating
cash flows.
During
the second quarter of 2006, the shareholders approved the 2006 Stock Incentive
Plan (“the 2006 Plan”). Awards under this plan may be made to any officer,
director, employee, consultant or to any other individual who may perform
services for the Company and its subsidiaries and affiliates selected by the
committee that administers the 2006 Plan. The 2006 Plan provides for grants
of
options, stock appreciation rights (“SARs”), dividend equivalent rights,
restricted stock, restricted stock units (“RSUs”), and other equity-based and
equity-related awards.
We
have
reserved 4.7 million shares of common stock for issuance to employees and
directors under three shareholder-approved share-based compensation plans (the
"Plans") of which approximately 785,000 shares remain available for grant at
December 31, 2006. The exercise price on all outstanding options and SARs is
equal to the quoted fair market value of the stock at the date of grant. RSUs
are valued at the market value of the underlying stock on the date of grant.
Stock options, SARs and RSUs are non-transferable other than on death and
generally become exercisable over a five year period from date of grant. Stock
options and SARs expire ten years from date of grant. SARs are only settled
in
shares of the Company’s stock.
Total
pre-tax stock-based compensation expense recognized in the Consolidated
Statements of Operations was $3.7 million for the year ended December 31, 2006.
This amount is included in selling and administrative expenses on the
Consolidated Statements of Operations. Tax related benefits of $440 were also
recognized for the year ended December 31, 2006. Cash received from the exercise
of stock options was $14.4 million, $15.9 million and $1.7 million for the
years
ended December 31, 2004, 2005 and 2006, respectively and is reflected in cash
flows from financing activities in the Consolidated Statements of Cash
Flows.
The
weighted average fair value of awards of options and SARs granted in the years
ended December 31, 2004, 2005 and 2006 was $14.59, $16.51 and $8.92,
respectively. The fair value of these options and SARs was estimated at the
date
of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for options and SARs granted in the years ended
December 31, 2004, 2005 and 2006, respectively: risk-free interest rate of
4.04%, 4.16% and 5.13%; volatility factor of the expected market price of the
Company's common stock of 51.20%, 53.26% and 37.79%; a weighted-average expected
life of the option and
SAR
of
7.3 years, 5.7 years and 5.7 years; and that no dividends would be paid on
common stock. The risk free interest rate is based on the option and SAR grant
date for a traded zero-coupon U.S. Treasury bond with a maturity date equal
to
the expected life. Expected volatilities are based upon historical volatility
of
the Company’s stock over a period equal to the expected life of each option and
SAR grant. The expected life selected for options and SARs granted during the
year ended December 31, 2006 represents the period of time that the options
and
SARs are expected to be outstanding based on a study of historical data of
option holder exercise and termination behavior.
The
following table illustrates the stock option and SAR activity for the years
ended December 31, 2004, 2005 and 2006:
|
|
Weighted-
|
||||||
|
Number
|
Average
|
||||||
|
|
of
|
Exercise
|
|||||
|
Shares
|
Price
|
||||||
|
Outstanding
at December 31, 2003
|
3,994
|
$
|
17.55
|
||||
|
Granted
|
659
|
25.03
|
|||||
|
Forfeited
|
(152
|
)
|
19.16
|
||||
|
Exercised
|
(940
|
)
|
15.28
|
||||
|
Outstanding
at December 31, 2004
|
3,561
|
$
|
19.45
|
||||
|
Granted
|
504
|
30.75
|
|||||
|
Forfeited
|
(26
|
)
|
24.33
|
||||
|
Exercised
|
(954
|
)
|
16.67
|
||||
|
Outstanding
at December 31, 2005
|
3,085
|
$
|
22.12
|
||||
|
Granted
|
265
|
20.04
|
|||||
|
Forfeited
|
(69
|
)
|
23.29
|
||||
|
Exercised
|
(115
|
) |
14.80
|
||||
|
Outstanding
at December 31, 2006
|
3,166
|
$
|
22.23
|
||||
|
Exercisable
at December 31, 2006
|
2,243
|
$
|
21.57
|
||||
The
weighted average remaining contractual term for stock options and SARs
outstanding and exercisable at December 31, 2006 was 6.1 years and 5.3 years,
respectively. The aggregate intrinsic value of stock options and SARs
outstanding and exercisable at December 31, 2006 was $8.8 million and $7.1
million, respectively. The aggregate intrinsic value of stock options exercised
during the year ended December 31, 2005 and 2006 was $12.9 million and $0.7
million, respectively.
The
following table illustrates the RSU activity as of December 31, 2006, including
changes during the year ended December 31, 2006. There were no RSU’s granted
prior to 2006.
|
|
Weighted-
|
||||||
|
Number
|
Average
|
||||||
|
|
of
|
Grant-Date
|
|||||
|
Shares
|
Fair
Value
|
||||||
|
RSUs
outstanding at December 31, 2005
|
-
|
-
|
|||||
|
Granted
|
145
|
$
|
20.21
|
||||
|
Vested
|
-
|
||||||
|
Forfeited
|
(1
|
)
|
19.93
|
||||
|
|
|||||||
|
Outstanding
at December 31, 2006
|
144
|
$
|
20.22
|
||||
As
of
December 31, 2006, there was $9.9 million of total unrecognized compensation
cost related to nonvested stock options, SARs and RSUs granted under the Plan
which is expected to be recognized over 5.0 years (weighted average period
of
1.8 years).
The
following table illustrates the effect on net earnings and earnings per share
as
if we had applied the fair value recognition provisions of SFAS 123R to
stock-based employee compensation for the years ended December 31, 2004 and
2005. The pro forma disclosures are based on the fair value of awards at the
grant date, amortized to expense over the service period.
|
|
2004
|
2005
|
|||||
|
Net
income — as reported
|
$
|
33,465
|
$
|
31,994
|
|||
|
|
|||||||
|
Pro
forma stock-based employee
|
|||||||
|
compensation
expense, net of related
|
|||||||
|
income
tax effect
|
(4,598
|
)
|
(4,075
|
)
|
|||
|
|
|||||||
|
Net
income — pro forma
|
$
|
28,867
|
$
|
27,919
|
|||
|
Earnings
per share - as reported:
|
|||||||
|
Basic
|
$
|
1.13
|
$
|
1.09
|
|||
|
Diluted
|
$
|
1.11
|
$
|
1.08
|
|||
|
Earnings
per share - pro forma:
|
|||||||
|
Basic
|
$
|
0.98
|
$
|
0.95
|
|||
|
Diluted
|
$
|
0.96
|
$
|
0.94
|
|||
We
offer
to our employees a shareholder-approved Employee Stock Purchase Plan (the
“Employee Plan”), under which we have reserved 1.0 million shares of common
stock for issuance to our employees. The Employee Plan provides employees with
the opportunity to invest from 1% to 10% of their annual salary to purchase
shares of CONMED common stock through the exercise of stock options granted
by
the Company at a purchase price equal to 95% of the fair market value of the
common stock on the exercise date. During 2006, we issued approximately 52,000
shares of common stock under the Employee Plan. No stock-based compensation
expense has been recognized in the accompanying consolidated financial
statements as a result of common stock issuances under the Employee
Plan.
Note
9 — Business Segments and Geographic Areas
CONMED
conducts its business through five principal operating units, CONMED Endoscopic
Technologies, CONMED Endosurgery, CONMED Electrosurgery, CONMED Linvatec and
CONMED Patient Care. We believe each of our segments are similar in the
nature
of
products, production processes, customer base, distribution methods and
regulatory environment. In accordance with Statement of Financial Accounting
Standards No. 131 “Disclosures About Segments of an Enterprise and Related
Information” (“SFAS 131”), our CONMED Endosurgery, CONMED Electrosurgery and
CONMED Linvatec operating units also have similar economic characteristics
and
therefore qualify for aggregation under SFAS 131. Our CONMED Patient Care and
CONMED Endoscopic Technologies operating units do not qualify for aggregation
under SFAS 131 since their economic characteristics do not meet the criteria
for
aggregation as a result of the lower overall operating income (loss) in these
segments.
CONMED
Endosurgery, CONMED Electrosurgery and CONMED Linvatec consist of a single
aggregated segment comprising a complete line of endo-mechanical instrumentation
for minimally invasive laparoscopic procedures, electrosurgical generators
and
related surgical instruments, arthroscopic instrumentation for use in orthopedic
surgery and small bone, large bone and specialty powered surgical instruments.
CONMED Patient Care product offerings include a line of vital signs and cardiac
monitoring products as well as suction instruments & tubing for use in the
operating room. CONMED Endoscopic Technologies product offerings include a
comprehensive line of minimally invasive endoscopic diagnostic and therapeutic
instruments used in procedures which require examination of the digestive
tract.
The
following is net sales information by product line and reportable
segment:
|
2004
|
2005
|
2006
|
||||||||
|
Arthroscopy
|
$
|
204,887
|
$
|
211,397
|
$
|
228,195
|
||||
|
Powered
Surgical Instruments
|
128,572
|
132,045
|
137,150
|
|||||||
|
Electrosurgery
|
85,912
|
88,455
|
97,809
|
|||||||
|
Endosurgery
|
47,400
|
50,694
|
52,783
|
|||||||
|
CONMED
Endosurgery, Electrosurgery,
|
||||||||||
|
and
Linvatec
|
466,771
|
482,591
|
515,937
|
|||||||
|
CONMED
Patient Care
|
75,879
|
75,879
|
75,883
|
|||||||
|
CONMED
Endoscopic Technologies
|
15,738
|
58,835
|
54,992
|
|||||||
|
Total
|
$
|
558,388
|
$
|
617,305
|
$
|
646,812
|
||||
Total
assets, capital expenditures, depreciation and amortization information are
not
available by reportable segment.
The
following is a reconciliation between segment operating income (loss) and income
(loss) before income taxes. The Corporate line includes corporate related items
not allocated to operating units:
|
2004
|
2005
|
2006
|
||||||||
|
CONMED
Endosurgery, Electrosurgery
|
||||||||||
|
And
Linvatec
|
$
|
77,538
|
$
|
69,295
|
$
|
70,193
|
||||
|
CONMED
Patient Care
|
7,314
|
5,734
|
(759
|
)
|
||||||
|
CONMED
Endoscopic Technologies
|
(19,177
|
)
|
(5,513
|
)
|
(63,399
|
)
|
||||
|
Corporate
|
(2,514
|
)
|
(5,768
|
)
|
(10,638
|
)
|
||||
|
Inoome
(loss) from operations
|
63,161
|
63,748
|
(4,603
|
)
|
||||||
|
Loss
on early extinguishment of debt
|
825
|
-
|
678
|
|||||||
|
Interest
expense
|
12,774
|
15,578
|
19,120
|
|||||||
|
Income
(loss) before income taxes
|
$
|
49,562
|
$
|
48,170
|
$
|
(24,401
|
)
|
|||
Net
sales
information for geographic areas consists of the following:
|
2004
|
2005
|
2006
|
||||||||
|
United
States
|
$
|
364,819
|
$
|
390,050
|
$
|
396,953
|
||||
|
Canada
|
27,384
|
36,111
|
43,104
|
|||||||
|
United
Kingdom
|
27,120
|
30,117
|
32,542
|
|||||||
|
Japan
|
19,793
|
22,073
|
25,451
|
|||||||
|
Australia
|
17,536
|
23,237
|
27,249
|
|||||||
|
All
other countries
|
101,736
|
115,717
|
121,513
|
|||||||
|
Total
|
$
|
558,388
|
$
|
617,305
|
$
|
646,812
|
||||
Sales
are
attributed to countries based on the location of the customer. There were no
significant investments in long-lived assets located outside the United States
at December 31, 2005 and 2006. No single customer represented over 10% of our
consolidated net sales for the years ended December 31, 2004, 2005 and
2006.
Note
10 — Employee Benefit Plans
We
sponsor an employee savings plan (“401(k) plan”) and a defined benefit pension
plan (the “pension plan”) covering substantially all our employees.
Total
employer contributions to the 401(k) plan were $1.8 million, $2.2 million and
$2.3 million during the years ended December 31, 2004, 2005 and 2006,
respectively.
We
use a
December 31, measurement date for our pension plan. Gains and losses are
amortized on a straight-line basis over the average remaining service period
of
active participants. The following table provides a reconciliation of the
projected benefit obligation, plan assets and funded status of the pension
plan
at December 31,:
|
2005
|
2006
|
||||||
|
Accumulated
Benefit Obligation
|
$
|
44,971
|
$
|
46,066
|
|||
|
Change
in benefit obligation
|
|||||||
|
Projected
benefit obligation at beginning of year
|
$
|
48,872
|
$
|
51,420
|
|||
|
Service
cost
|
4,503
|
5,444
|
|||||
|
Interest
cost
|
2,575
|
2,905
|
|||||
|
Actuarial
(gain)/loss
|
517
|
(1,176
|
)
|
||||
|
Benefits
paid
|
(5,047
|
)
|
(4,052
|
)
|
|||
|
Projected
benefit obligation at end of year
|
$
|
51,420
|
$
|
54,541
|
|||
|
Change
in plan assets
|
|||||||
|
Fair
value of plan assets at beginning of year
|
$
|
33,188
|
$
|
33,252
|
|||
|
Actual
gain on plan assets
|
1,611
|
2,694
|
|||||
|
Employer
contribution
|
3,500
|
5,000
|
|||||
|
Benefits
paid
|
(5,047
|
)
|
(4,052
|
)
|
|||
|
Fair
value of plan assets at end of year
|
$
|
33,252
|
$
|
36,894
|
|||
|
Funded
status
|
|||||||
|
Funded
status
|
$
|
18,168
|
$
|
17,647
|
|||
|
Unrecognized
net actuarial loss
|
(27,536
|
)
|
-
|
||||
|
Unrecognized
transition liability
|
(40
|
)
|
-
|
||||
|
Unrecognized
prior service cost
|
5,535
|
-
|
|||||
|
Additional
minimum pension liability
|
15,592
|
-
|
|||||
|
Accrued
pension cost
|
$
|
11,719
|
$
|
17,647
|
Amounts
recognized in the consolidated balance sheets consist of the following at
December 31,:
|
|
2005
|
2006
|
|||||
|
Accrued
pension liability
|
$
|
11,719
|
$
|
17,647
|
|||
|
Accumulated
other comprehensive income (loss)
|
(15,592
|
)
|
(19,644
|
)
|
|||
|
Net
amount recognized
|
$
|
(3,873
|
)
|
$
|
(1,997
|
)
|
|
The
following actuarial assumptions were used to determine our accumulated and
projected benefit obligations as of December 31,:
|
|
2005
|
2006
|
|||||
|
Discount
rate
|
5.55
|
%
|
5.90
|
%
|
|||
|
Expected
return on plan assets
|
8.00
|
%
|
8.00
|
%
|
|||
|
Rate
of compensation increase
|
3.00
|
%
|
3.00
|
%
|
|||
The
following table illustrates the effects of adopting SFAS No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans - an
amendment of FASB Statements No. 87, 88, 106, and 132(R)” on each of the balance
sheet line items:
|
Before
|
After
|
|||||||||
|
|
Application of
|
Application of
|
||||||||
|
|
SFAS
158
|
Adjustment
|
SFAS 158
|
|||||||
|
Accrued
pension liability
|
$
|
9,172
|
$
|
8,475
|
$
|
17,647
|
||||
|
Deferred
income taxes
|
54,136
|
(3,132
|
)
|
51,004
|
||||||
|
Total
liabilities
|
415,874
|
5,343
|
421,217
|
|||||||
|
Accumulated
other
|
||||||||||
|
comprehensive
income (loss)
|
(3,269
|
)
|
(5,343
|
)
|
(8,612
|
)
|
||||
|
Shareholders’
equity
|
445,697
|
(5,343
|
)
|
440,354
|
||||||
Accumulated
other comprehensive income (loss) for the year ended December 31, 2006 consists
of the following items not yet recognized in net periodic pension cost (before
income taxes):
|
Net
actuarial loss
|
$
|
24,792
|
||
|
Transition
liability
|
36
|
|||
|
Prior
service cost
|
(5,184
|
)
|
||
|
Accumulated
other comprehensive income (loss)
|
$
|
19,644
|
Net
periodic pension cost for the years ended December 31, consists of the
following:
|
2004
|
2005
|
2006
|
||||||||
|
Service
cost — benefits earned during
|
||||||||||
|
the
period
|
$
|
3,144
|
$
|
4,503
|
$
|
5,444
|
||||
|
Interest
cost on projected benefit obligation
|
2,377
|
2,651
|
2,905
|
|||||||
|
Return
on plan assets
|
(2,562
|
)
|
(2,548
|
)
|
(2,694
|
)
|
||||
|
Transition
amount
|
4
|
4
|
4
|
|||||||
|
Prior
service cost
|
(351
|
)
|
(351
|
)
|
(351
|
)
|
||||
|
Amortization
of loss
|
1,007
|
1,303
|
1,569
|
|||||||
|
Net
periodic pension cost
|
$
|
3,619
|
$
|
5,562
|
$
|
6,877
|
||||
The
following actuarial assumptions were used to determine our net periodic pension
benefit cost for the years ended December 31,:
|
|
2004
|
2005
|
2006
|
|||||||
|
Discount
rate
|
6.25
|
%
|
5.75
|
%
|
5.55
|
%
|
||||
|
Expected
return on plan assets
|
8.00
|
%
|
8.00
|
%
|
8.00
|
%
|
||||
|
Rate
of compensation increase
|
3.00
|
%
|
3.00
|
%
|
3.00
|
%
|
||||
In
determining the expected return on pension plan assets, we consider the relative
weighting of plan
assets,
the historical performance of total plan assets and individual asset classes
and
economic and other indicators of future performance. In addition, we consult
with financial and investment management professionals in developing appropriate
targeted rates of return.
Asset
management objectives include maintaining an adequate level of diversification
to reduce interest rate and market risk and providing adequate liquidity to
meet
immediate and future benefit payment requirements.
The
allocation of pension plan assets by category is as follows at December
31,:
|
|
Percentage
of Pension
|
Target
|
||||||||
|
|
Plan
Assets
|
Allocation
|
||||||||
|
|
2005
|
2006
|
2007
|
|||||||
|
Equity
securities
|
64
|
%
|
71
|
%
|
75
|
%
|
||||
|
Debt
securities
|
36
|
29
|
25
|
|||||||
|
Total
|
100
|
%
|
100
|
%
|
100
|
%
|
||||
As
of
December 31, 2006,
the
Plan held 27,562 shares of our common stock, which had a fair value of $0.6
million. We believe that our long-term asset allocation on average will
approximate the targeted allocation. We regularly review our actual asset
allocation and periodically rebalance the pension plan’s investments to our
targeted allocation when deemed appropriate.
We
expect
to contribute approximately $12.0 million to our pension plan in 2007.
The
estimated portion of net loss, net prior service cost, and transition obligation
in accumulated other comprehensive income (loss) that is expected to be
recognized as a component of net period benefit cost in 2007 is $1,263, ($351)
and $4, respectively.
The
following table summarizes the benefits expected to be paid by our pension
plan
in each of the next five years and in aggregate for the following five years.
The expected benefit payments are estimated based on the same assumptions used
to measure the Company’s projected benefit obligation at December 31, 2006 and
reflect the impact of expected future employee service.
|
2007
|
$
|
1,629
|
||
|
2008
|
2,445
|
|||
|
2009
|
2,004
|
|||
|
2010
|
2,562
|
|||
|
2011
|
2,279
|
|||
|
2012-2016
|
16,358
|
Note
11 — Legal Matters
From
time
to time, we are a defendant in certain lawsuits alleging product liability,
patent infringement, or other claims incurred in the ordinary course of
business. Likewise, from time to time, the Company may receive a subpoena from
a
government agency such as the Equal Employment Opportunity Commission,
Occupational Safety and Health Administration, the Department of Labor, the
Treasury Department, and other federal and state agencies or foreign governments
or government agencies. These subpoenae may or may not be routine inquiries,
or
may begin as routine inquiries and over time develop into enforcement actions
of
various types. The product liability claims are generally covered by various
insurance policies, subject to certain deductible amounts and maximum policy
limits. When there is no insurance coverage, as would typically be the case
primarily in lawsuits alleging patent infringement or in connection with certain
government investigations, we establish sufficient reserves to cover probable
losses associated with such claims. We do not expect that the resolution of
any
pending claims or investigations will have a material adverse effect on our
financial condition or results of operations.
Manufacturers
of medical products may face exposure to significant product liability claims.
To date, we have not experienced any product liability claims that are material
to our financial statements or condition, but any such claims arising in the
future could have a material adverse effect on our business or results of
operations. We currently maintain commercial product liability insurance of
$25
million per incident and $25 million in the aggregate annually, which we believe
is adequate. This coverage is on a claims-made basis.
Our
operations are subject, and in the past have been subject, to a number of
environmental laws and regulations governing, among other things, air emissions,
wastewater discharges, the use, handling and disposal of hazardous substances
and
wastes,
soil and groundwater remediation and employee health and safety. In some
jurisdictions environmental requirements may be expected to become more
stringent in the future. In the United States certain environmental laws can
impose liability for the entire cost of site restoration upon each of the
parties that may have contributed to conditions at the site regardless of fault
or the lawfulness of the party’s activities. While we do not believe that the
present costs of environmental compliance and remediation are material, there
can be no assurance that future compliance or remedial obligations could not
have a material adverse effect on our financial condition or results of
operations.
In
November 2003, we commenced litigation against Johnson & Johnson and several
of its subsidiaries, including Ethicon, Inc. for violation of federal and state
antitrust laws. The lawsuit claims that Johnson & Johnson engaged in illegal
and anticompetitive conduct with respect to sales of product used in endoscopic
surgery, resulting in higher prices to consumers and the exclusion of
competition. We have sought relief which includes an injunction restraining
Johnson & Johnson from continuing its anticompetitive practice as well as
receiving the maximum amount of damages allowed by law. The discovery phase
is
now essentially completed, and Johnson & Johnson filed a motion for summary
judgment which was denied by the Court by Order dated May 2, 2006. This Order
does not represent a determination on the merits with respect to the Company’s
claims against Johnson & Johnson, but rather represents a determination that
the Company has produced sufficient evidence to warrant submitting the case
to a
jury. The Company expects to submit briefs on certain evidentiary matters in
the
next few weeks, with the case currently scheduled for a jury trial to commence
on April 23, 2007. There can be no assurance that the case will in fact proceed
to trial on that date. The Company believes that its claims are well-grounded
in
fact and law, but there can be no assurance that it will be successful in its
claims in a trial before a jury.
On
April
7, 2006, CONMED received a copy of a complaint filed in the United States
District for the Northern District of New York on behalf of a purported class
of
former CONMED Linvatec sales representatives. The complaint alleges that the
former sales representatives were entitled to, but did not receive, severance
in
2003 when CONMED Linvatec restructured its distribution channels. We believe
that the maximum exposure related to this complaint is $2.5 to $3.0 million,
not
including any interest, fees or costs that might be awarded if the five named
plaintiffs were to prevail on their own behalf as well as on behalf of all
members of the purported class. CONMED Linvatec did not generally pay severance
during the 2003 restructuring because the former sales representatives were
offered sales positions with CONMED Linvatec’s new manufacturer’s
representatives. Other than three of the five named plaintiffs in the class
action, nearly all of CONMED Linvatec’s former sales representatives accepted
such positions.
The
Company has filed motions which, if granted, would result in the dismissal
of
the case, subject to any appeals the plaintiffs could pursue. The Court held
a
hearing on the Company’s motions on January 5, 2007, and took the matter under
advisement. There is no fixed time frame within the Court must rule on the
motions. The Company believes there is no merit to the claims asserted in the
Complaint.
Note
12 — Other expense
Other
expense for the year ended December 31, consists of the following:
|
2004
|
2005
|
2006
|
||||||||
|
Acquisition
transition related costs
|
1,547
|
4,108
|
2,592
|
|||||||
|
Termination
of product offering
|
2,396
|
1,519
|
1,448
|
|||||||
|
Environmental
settlement costs
|
-
|
698
|
-
|
|||||||
|
Loss
on equity investment
|
-
|
794
|
-
|
|||||||
|
Write-off
of inventory in
|
||||||||||
|
settlement
of a patent dispute
|
-
|
-
|
595
|
|||||||
|
Closure
of manufacturing facility
|
-
|
-
|
578
|
|||||||
|
Other
expense (income)
|
$
|
3,943
|
$
|
7,119
|
$
|
5,213
|
||||
On
September 30, 2004, we completed the Endoscopic Technologies acquisition. As
part of the acquisition, manufacturing of the acquired products was conducted
in
various C.R. Bard facilities under a transition agreement. The transition of
the
manufacturing of these products from C.R. Bard facilities to CONMED facilities
was completed during 2006. During the years ended December 31, 2004, 2005 and
2006, we incurred $1.5 million, $4.1 million and $2.6 million, respectively,
of
acquisition and transition-integration related charges associated with the
Endoscopic Technologies acquisition which have been recorded in other expense.
These expenses consist of severance, acquisition, transition and integration
related charges.
During
the quarter ended December 31, 2004, we elected to terminate our surgical lights
product line. We instituted a customer replacement program whereby all currently
installed surgical lights have been or will be replaced by CONMED. The entire
cost of the replacement program, including the write-off of the remaining
surgical lights inventory, purchase of new surgical lights from an alternative
supplier and installation costs are expected to approximate $5.8 million.
Through December 31, 2006, we recorded charges totaling $5.3 million related
to
the surgical lights customer replacement program (including $2.4 million, $1.5
million and $1.4 million in the years ended December 31, 2004, 2005 and 2006,
respectively). It is anticipated that the remaining $0.5 million in costs will
be incurred during 2007 as the surgical lights customer replacement program
is
completed.
During
the quarter ended June 30, 2005, we entered into a settlement of certain
environmental claims related to the operations of one of our subsidiaries during
the 1980s, before it was acquired by CONMED, at a site other than the one it
currently occupies. The current owner alleged that the acquired subsidiary
caused environmental contamination of the property. In order to avoid
litigation, we agreed to reimburse the owner for a certain percentage of past
remediation costs, and to participate in the funding of the remediation
activities. The total sum of past costs, including attorney’s fees, together
with the current estimate of future costs, amounts to approximately $0.7 million
and has been recorded in other expense for the year ended December 31, 2005.
We
believe any future costs incurred in excess of amounts already expensed would
be
covered by insurance.
During
the quarter ended December 31, 2005, we incurred a $0.8 million loss on the
sale
of an equity investment. This investment had a carrying value of $2.0 million
and was sold in January 2006 for $1.2 million resulting in a $0.8 million
loss.
During
the quarter ended June 30, 2006, we were notified by Dolphin Medical, Inc.
(“Dolphin”), that it would discontinue its Dolphin ONE® product line as a result
of an agreement between Dolphin and Masimo Corporation in which Masimo agreed
to
release Dolphin and its affiliates from certain patent infringement claims.
We
sell the Dolphin ONE® and certain other pulse oximetry products
manufactured
by Dolphin under a distribution agreement. As a result of the product line
discontinuation, we recorded a $0.6 million charge to other expense to write-off
on-hand inventory of the discontinued product line. We do not expect the
discontinuation of Dolphin ONE® to have a material impact on our financial
position, results of operations, or cash flows. This matter does not affect
the
majority of our pulse oximetry products and also does not affect sales of our
proprietary Pro2® pulse oximetry product line.
During
2006, we elected to close our facility in Montreal, Canada which manufactured
products for our CONMED Linvatec line of integrated operating room systems
and
equipment. The products which had been manufactured in the Montreal facility
will now largely be purchased from a third party vendor. The closing of this
facility is scheduled to be completed during the first quarter of 2007. We
estimate the total cost of the closure to be in the range of $2.5 million to
$3.0 million. During the year ended December 31, 2006, we incurred a total
of
$1.9 million in costs associated with this closure, of which $1.3 million
relates to the write-off of inventory and is included in cost of goods sold.
The
remaining $0.6 million primarily relates to severance expense, which we have
recorded in other expense. It is anticipated the remaining costs will be
incurred during the first quarter of 2007 and will consist of severance, lease
and other closure-related costs.
Note
13 — Guarantees
We
provide warranties on certain of our products at the time of sale. The standard
warranty period for our capital and reusable equipment is generally one year.
Liability under service and warranty policies is based upon a review of
historical warranty and service claim experience. Adjustments are made to
accruals as claim data and historical experience warrant.
Changes
in the carrying amount of service and product warranties for the year ended
December 31, are as follows:
|
2004
|
2005
|
2006
|
||||||||
|
Balance
as of January 1,
|
$
|
3,588
|
$
|
3,524
|
$
|
3,416
|
||||
|
Provision
for warranties
|
3,961
|
4,035
|
5,774
|
|||||||
|
Claims
made
|
(4,025
|
)
|
(4,143
|
)
|
(5,573
|
)
|
||||
|
Balance
as of December 31,
|
$
|
3,524
|
$
|
3,416
|
$
|
3,617
|
||||
Note
14 - New Accounting Pronouncements
In
June
2006, the FASB issued FASB Interpretation No. 48 “Accounting for
Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)”
which is effective for fiscal years beginning after December 15, 2006 with
earlier adoption encouraged. This interpretation was issued to clarify the
accounting for uncertainty in income taxes recognized in the financial
statements by prescribing a recognition threshold and measurement attribute
for
the financial statement recognition and measurement of a tax position taken
or
expected to be taken in a tax return. We are currently evaluating our tax
positions and anticipate that this interpretation will result in a cumulative
effect credit adjustment to opening retained earnings of approximately $0.3
million.
In
August
2006, the Pension Protection Act of 2006 (the “Pension Act”) was signed into law
by President Bush. Under the Pension Act, companies will be required to fully
fund the value of accrued benefits in their pension plans over a seven-year
period. We are currently assessing the Pension
Act and its potential impact on pension funding pending further regulations
and
guidance to be released by the Internal Revenue Service, Department of Labor
and
Department of Treasury.
In
September 2006, the FASB issued Statement of Financial Accounting Standard
No.
157, “Fair Value Measurements” which is effective for fiscal years beginning
after November 15, 2007 and for interim periods within those years. This
statement defines fair value, establishes a framework for measuring fair value
and expands the related disclosure requirements. We are currently evaluating
the
potential impact of this statement.
In
September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 was
issued to provide interpretive guidance on how the effects of the carryover
or
reversal of prior year misstatements should be considered in quantifying a
current year misstatement. We adopted the provisions of SAB 108 effective
December 31, 2006. The adoption of SAB 108 did not have an impact on our
financial position or results of operations.
Note
15 — Selected Quarterly Financial Data (Unaudited)
Selected
quarterly financial data for 2005 and 2006 are as follows:
|
Three
Months Ended
|
|||||||||||||
|
March
|
June
|
September
|
December
|
||||||||||
|
2005
|
|||||||||||||
|
Net
sales
|
$
|
155,859
|
$
|
158,276
|
$
|
149,970
|
$
|
153,200
|
|||||
|
Gross
profit
|
80,475
|
82,124
|
75,954
|
74,468
|
|||||||||
|
Net
income
|
10,765
|
10,508
|
7,914
|
2,807
|
|||||||||
|
EPS:
|
|||||||||||||
|
Basic
|
$
|
.37
|
$
|
.36
|
$
|
.27
|
$
|
.10
|
|||||
|
Diluted
|
.36
|
.35
|
.26
|
.10
|
|||||||||
|
Three
Months Ended
|
|||||||||||||
|
March
|
June
|
September
|
December
|
||||||||||
|
2006
|
|||||||||||||
|
Net
sales
|
$
|
158,466
|
$
|
163,473
|
$
|
154,981
|
$
|
169,892
|
|||||
|
Gross
profit
|
77,900
|
77,774
|
74,731
|
82,441
|
|||||||||
|
Net
income (loss)
|
4,340
|
3,414
|
3,332
|
(23,593
|
)
|
||||||||
|
EPS:
|
|||||||||||||
|
Basic
|
$
|
.15
|
$
|
.12
|
$
|
.12
|
$
|
(.84
|
)
|
||||
|
Diluted
|
.15
|
.12
|
.12
|
(.84
|
)
|
||||||||
Unusual
Items Included In Selected Quarterly Financial Data:
2005
First
quarter
During
the first quarter of 2005, we recorded $0.5 million of Endoscopic Technologies
acquisition-related charges in cost of sales - see Note 2.
During
the first quarter of 2005, we recorded a charge of $0.5 million related to
our
termination of our surgical lights product line and $1.4 million of acquisition
and transition-integration related costs associated with the Endoscopic
Technologies acquisition to other expense - see Note 12.
Second
quarter
During
the second quarter of 2005, we recorded a charge of $0.4 million related to
our
termination of our surgical lights product line; $1.4 million of acquisition
and
transition-integration related costs associated with the Endoscopic Technologies
acquisition; and $0.7 million related to a settlement of certain environmental
claims to other expense - see Note 12.
Third
quarter
During
the third quarter of 2005, we recorded a charge of $0.1 million related to
our
termination of our surgical lights product line and $0.7 million of acquisition
and transition-integration related costs associated with the Endoscopic
Technologies acquisition to other expense - see Note 12.
Fourth
quarter
During
the fourth quarter of 2005, we recorded a charge of $0.5 million related to
our
termination of our surgical lights product line; $0.6 million of acquisition
and
transition-integration related costs associated with the Endoscopic Technologies
acquisition and a $0.8 million charge related to the loss on the sale of an
equity investment to other expense - see Note 12.
The
decline in net income in the fourth quarter is a result of a decrease in gross
profit margin as a result of increased costs associated with higher raw material
costs and increased spending related to quality assurance. We also incurred
significantly higher selling and administrative costs associated with higher
distribution costs as well as increased spending on corporate quality systems
and management and the Johnson & Johnson litigation (see Note 11).
2006
First
quarter
During
the first quarter of 2006, we recorded a charge of $0.1 million related to
our
termination of our surgical lights product line and $0.5 million of acquisition
and transition-integration related costs associated with the Endoscopic
Technologies acquisition to other expense - see Note 12
Second
Quarter
During
the second quarter of 2006, we recorded a charge of $0.6 million related to
the
write-off of inventory in settlement of a patent dispute and $1.0 million of
acquisition and transition-integration related costs associated with the
Endoscopic Technologies acquisition to other expense - see Note 12.
During
the second quarter of 2006, we recorded a loss on the early extinguishment
of
debt of $0.7 million - see Note 6.
Third
Quarter
During
the third quarter of 2006, we recorded a charge of $0.4
million related to severance payments due to the closing of a manufacturing
plant, $1.0 million in charges related to the termination of our surgical lights
product line, and $0.6 million of acquisition and transition-integration related
costs associated with the Endoscopic Technologies acquisition to other expense
-
see Note 12.
Fourth
Quarter
During
the fourth quarter of 2006, we recorded a charge of $1.3
million to cost of sales to write-off inventory related to the closing of a
manufacturing plant. In addition, we recorded $0.1 million in severance costs
due to the closing of a manufacturing plant, $0.4 million in charges related
to
the termination of our surgical lights product line, and $0.5 million of
acquisition and transition-integration related costs associated with the
Endoscopic Technologies acquisition to other expense - see Note 12.
During
the fourth quarter of 2006, after completing our annual goodwill impairment
testing, we determined that the goodwill of our Endoscopic Technologies
operating unit was impaired and consequently we recorded a goodwill impairment
charge of $46.7 million - see Note 5.
SCHEDULE
II—Valuation and Qualifying Accounts
(in
thousands)
|
Column
C
|
||||||||||||||||
|
Additions
|
||||||||||||||||
|
Column
B
|
||||||||||||||||
|
Balance
at
|
Charged
to
|
Charged
to
|
Column
E
|
|||||||||||||
|
Column
A
|
Beginning
of
|
Costs
and
|
Other
|
Column
D
|
Balance
at End
|
|||||||||||
|
Description
|
Period
|
Expenses
|
Accounts
|
Deductions
|
of
Period
|
|||||||||||
|
2006
|
||||||||||||||||
|
Allowance
for bad debts
|
$
|
1,522
|
$
|
640
|
$
|
(350
|
)
|
$
|
(602
|
)
|
$
|
1,210
|
||||
|
Sales
returns and
|
||||||||||||||||
|
allowance
|
1,339
|
852
|
773
|
-
|
2,964
|
|||||||||||
|
Deferred
tax asset
|
||||||||||||||||
|
valuation
allowance
|
6,160
|
772
|
-
|
$
|
(40
|
)
|
6,892
|
|||||||||
|
2005
|
||||||||||||||||
|
Allowance
for bad debts
|
$
|
1,235
|
$
|
951
|
$
|
-
|
$
|
(664
|
)
|
$
|
1,522
|
|||||
|
Sales
returns and
|
||||||||||||||||
|
allowance
|
1,417
|
-
|
-
|
(78
|
)
|
1,339
|
||||||||||
|
Deferred
tax asset
|
||||||||||||||||
|
valuation
allowance
|
5,887
|
829
|
-
|
$
|
(556
|
)
|
6,160
|
|||||||||
|
2004
|
||||||||||||||||
|
Allowance
for bad debts
|
$
|
1,672
|
$
|
380
|
$
|
-
|
$
|
(817
|
)
|
$
|
1,235
|
|||||
|
Sales
returns and
|
||||||||||||||||
|
Allowance
|
1,396
|
21
|
-
|
-
|
1,417
|
|||||||||||
|
Deferred
tax asset
|
||||||||||||||||
|
valuation
allowance
|
8,462
|
-
|
-
|
(2,575
|
)
|
5,887
|
||||||||||
-99-