form10q-103806_cnmd.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended
Commission File Number 0-16093
September 30, 2009
 


CONMED CORPORATION
(Exact name of the registrant as specified in its charter)
 

New York
16-0977505
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
   
525 French Road, Utica, New York
13502
(Address of principal executive offices)
(Zip Code)


(315) 797-8375
(Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  x  No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).  
Yes  ¨  No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).

Large accelerated filer  x         Accelerated filer  ¨         Non-accelerated filer  ¨         Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨  No  x
 
The number of shares outstanding of registrant's common stock, as of October 29, 2009 is 29,103,687 shares.
 



 
 

 
 
CONMED CORPORATION


QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2009


PART I FINANCIAL INFORMATION


Item Number
Page
       
       
Item 1.
   
       
   
1
       
   
2
       
   
3
       
   
4
       
       
Item 2.
 
19
       
Item 3.
 
39
       
Item 4.
 
39
       
PART II OTHER INFORMATION
       
Item 1.
 
40
       
Item 6.
 
41
       
42

 
 


PART I
FINANCIAL INFORMATION

Item 1.
CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited, in thousands except per share amounts)


   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
                         
   
As Adjusted
         
As Adjusted
       
   
(Note 15)
         
(Note 15)
       
   
2008
   
2009
   
2008
   
2009
 
                         
Net sales
  $ 179,409     $ 175,475     $ 562,937     $ 504,106  
                                 
Cost of sales
    84,721       87,839       269,595       262,806  
                                 
Gross profit
    94,688       87,636       293,342       241,300  
                                 
Selling and administrative expense
    67,768       67,480       205,963       193,480  
                                 
Research and development expense
    8,668       7,705       25,435       23,590  
                                 
Other expense
    709       7,449       709       6,847  
                                 
      77,145       82,634       232,107       223,917  
                                 
Income from operations
    17,543       5,002       61,235       17,383  
                                 
Gain on early extinguishment of debt
    -       -       -       1,083  
                                 
Amortization of debt discount
    1,243       1,018       3,667       3,076  
                                 
Interest expense
    2,444       2,042       8,057       5,297  
                                 
Income before income taxes
    13,856       1,942       49,511       10,093  
                                 
Provision for income taxes
    4,121       654       17,839       2,911  
                                 
Net income
  $ 9,735     $ 1,288     $ 31,672     $ 7,182  
                                 
                                 
Per share data:
                               
                                 
Net income
                               
Basic
  $ .34     $ .04     $ 1.10     $ 0.25  
Diluted
    .33       .04       1.09       0.25  
                                 
Weighted average common shares
                               
Basic
    28,864       29,093       28,718       29,060  
Diluted
    29,415       29,183       29,189       29,096  


See notes to consolidated condensed financial statements.

 
1


CONMED CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited, in thousands except share and per share amounts)

   
As Adjusted (Note 15)
       
   
December 31,
   
September 30,
 
   
2008
   
2009
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 11,811     $ 14,217  
Accounts receivable, net
    96,515       108,825  
Inventories
    159,976       164,929  
Income taxes receivable
    -       769  
Deferred income taxes
    14,742       15,362  
Prepaid expenses and other current assets
    11,218       12,015  
Total current assets
    294,262       316,117  
Property, plant and equipment, net
    143,737       146,397  
Goodwill
    290,245       290,379  
Other intangible assets, net
    195,939       192,101  
Other assets
    7,478       6,488  
Total assets
  $ 931,661     $ 951,482  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current liabilities:
               
Current portion of long-term debt
  $ 3,185     $ 2,142  
Accounts payable
    35,887       31,043  
Accrued compensation and benefits
    20,129       23,222  
Income taxes payable
    1,279       -  
Other current liabilities
    14,434       24,377  
Total current liabilities
    74,914       80,784  
                 
Long-term debt
    182,739       182,917  
Deferred income taxes
    88,468       98,868  
Other long-term liabilities
    45,325       18,300  
Total liabilities
    391,446       380,869  
                 
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 shares authorized; 31,299,203 shares issued in 2008 and 2009, respectively
    313       313  
Paid-in capital
    313,830       316,289  
Retained earnings
    314,373       320,835  
Accumulated other comprehensive loss
    (31,032 )     (11,383 )
Less: 2,274,822 and 2,201,974 shares of common stock in treasury, at cost in 2008 and 2009, respectively
    (57,269 )     (55,441 )
Total shareholders’ equity
    540,215       570,613  
Total liabilities and shareholders’ equity
  $ 931,661     $ 951,482  


See notes to consolidated condensed financial statements.

 
2


CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
   
Nine months ended
 
   
September 30,
 
             
   
As Adjusted (Note 15)
       
   
2008
   
2009
 
Cash flows from operating activities:
           
Net income
  $ 31,672     $ 7,182  
Adjustments to reconcile net income, to net cash provided by operating activities:
               
Depreciation
    10,590       13,311  
Amortization of debt discount
    3,667       3,076  
Amortization, all other
    13,257       13,680  
Stock-based compensation
    3,215       3,203  
Deferred income taxes
    16,626       2,805  
Gain on early extinguishment of debt
    -       (1,083 )
Sale of accounts receivable to (collections on behalf of) purchaser
    (5,000 )     (3,000 )
Increase (decrease) in cash flows from changes in assets and liabilities:
               
Accounts receivable
    (1,398 )     (5,326 )
Inventories
    (2,973 )     (7,593 )
Accounts payable
    (2,205 )     (1,928 )
Income taxes payable (receivable)
    (953 )     (2,466 )
Accrued compensation and benefits
    3,192       2,865  
Other assets
    (1,966 )     (1,228 )
Other liabilities
    (8,038 )     2,281  
      28,014       18,597  
Net cash provided by operating activities
    59,686       25,779  
                 
Cash flows from investing activities:
               
Purchases of property, plant, and equipment
    (25,707 )     (17,090 )
Payments related to business acquisitions
    (22,033 )     (262 )
Net cash used in investing activities
    (47,740 )     (17,352 )
                 
Cash flows from financing activities:
               
Net proceeds from common stock issued under employee plans
    7,048       360  
Payments on senior credit agreement
    (1,012 )     (1,012 )
Proceeds of senior credit agreement
    -       7,000  
Payments on mortgage notes
    (316 )     (1,037 )
Payments on senior subordinated notes
    -       (7,808 )
Net change in cash overdrafts
    -       (2,252 )
Net cash provided by (used in) financing activities
    5,720       (4,749 )
                 
Effect of exchange rate changes on cash and cash equivalents
    2,537       (1,272 )
                 
Net increase in cash and cash equivalents
    20,203       2,406  
                 
Cash and cash equivalents at beginning of period
 
11,695
      11,811  
                 
Cash and cash equivalents at end of period
  $ 31,898     $ 14,217  


See notes to consolidated condensed financial statements.

 
3


CONMED CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, in thousands except per share amounts)

Note 1 – 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.

Note 2 - Interim financial information

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements.  Results for the period ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

The consolidated condensed financial statements and notes thereto should be read in conjunction with the financial statements and notes for the year-ended December 31, 2008 included in our Annual Report on Form 10-K. Effective January 1, 2009, we adopted new accounting guidance relating to our senior subordinated notes, which requires retroactive presentation.  See Note 15 for disclosure of the effect on prior period results.

Note 3 – Other comprehensive income (loss)

Comprehensive income (loss) consists of the following:

 
 
Three months ended
    Nine months ended  
   
September 30,
   
September 30,
 
   
2008
   
2009
   
2008
   
2009
 
                         
Net income
  $ 9,735     $ 1,288     $ 31,672     $ 7,182  
                                 
Other comprehensive income (loss):
                               
                                 
Pension liability, net of income tax
    89       198       269       12,745  
                                 
Cash flow hedging loss, net of income tax
    -       (121 )     -       (121 )
                                 
Foreign currency translation adjustment
    (7,638 )     3,962       (4,938 )     7,025  
                                 
Comprehensive income (loss)
  $ 2,186     $ 5,327     $ 27,003     $ 26,831  

 
4


Accumulated other comprehensive income (loss) consists of the following:

   
Cash Flow Hedging
Loss
   
Pension
Liability
   
Cumulative Translation
Adjustments
   
Accumulated Other Comprehensive
Income (loss)
 
                         
Balance, December 31, 2008
  $ -     $ (27,592 )   $ (3,440 )   $ (31,032 )
                                 
                                 
Pension liability, net of income tax
            12,745       -       12,745  
                                 
Cash flow hedging loss, net of income tax
    (121 )     -       -       (121 )
                                 
Foreign currency translation adjustments
    -       -       7,025       7,025  
                                 
Balance, September 30, 2009
  $ (121 )   $ (14,847 )   $ 3,585     $ (11,383 )

Note 4 – Financial instruments

In March 2008, the Financial Accounting Standards Board (“FASB”) issued guidance which requires entities to provide enhanced disclosure about how and why the entity uses derivative instruments, how the instruments and related hedged items are accounted and how the instruments and related hedged items affect the financial position, results of operations, and cash flows of the entity. We adopted such guidance during the quarter ended March 31, 2009.

We enter into derivative instruments for risk management purposes only.  We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates, foreign exchange rates and commodity prices. These fluctuations can increase the costs of financing, investing and operating the business. We use forward contracts, a type of derivative instrument, to manage our foreign currency exposures.

By nature, all financial instruments involve market and credit risks. We enter into forward contracts with a major investment grade financial institution and have policies to monitor credit risk.  While there can be no assurance, we do not anticipate any material non-performance by our counterparty.

Foreign Currency Forward Contracts.  We manage our foreign currency transaction risks through the use of forward contracts to hedge forecasted cash flows associated with foreign currency transaction exposures.  We account for these forward contracts as cash flow hedges.  To the extent these forward contracts meet  hedge accounting criteria, changes in their fair value are not included in current earnings but are included in Accumulated Other Comprehensive Loss.  These changes in fair value will subsequently be reclassified into earnings as a component of sales when the forecasted transaction occurs.  The notional contract amounts for forward contracts outstanding at September 30, 2009 which have been accounted for as cash flow hedges totaled $12.9 million.  Net realized losses recognized for forward contracts accounted for as cash flow hedges approximated $0.1 million for the three and nine months ended September 30, 2009.  Net unrealized losses recognized for forward contracts outstanding which have been accounted for as cash flow hedges and which have been included in Accumulated Other Comprehensive Loss totaled $0.1 million at September 30, 2009.

 
5


We also enter into forward contracts to exchange foreign currencies for United States dollars in order to hedge our currency transaction exposures with intercompany receivables denominated in foreign currencies.  These forward contracts settle each month at month-end, at which time we enter into new forward contracts.  We have not designated these forward contracts as hedges and have not applied hedge accounting to them.  The notional contract amounts for forward contracts outstanding at September 30, 2009 which have not been designated as hedges totaled $41.6 million.  Net realized losses recognized in connection with those forward contracts not accounted for as hedges approximated $1.8 million and $3.6 million for the three and nine months ended September 30, 2009, offsetting gains on our intercompany receivables of $1.5 million and $3.7 million, for the three and nine months ended September 30, 2009, respectively.  These gains and losses have been recorded in selling and administrative expense in the Consolidated Condensed Statements of Income.

We mark outstanding forward contracts to market.  The market value for forward foreign exchange contracts outstanding at September 30, 2009 was $0.2 million and is included in Other Current Liabilities in the Consolidated Condensed Balance Sheets.

Fair Value Disclosure. FASB guidance, defines fair value, establishes a framework for measuring fair value and related disclosure requirements. This guidance applies when fair value measurements are required or permitted. The guidance indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. Fair value is defined based upon an exit price model.

We adopted this guidance as of January 1, 2008, with the exception of its application to non-recurring nonfinancial assets and nonfinancial liabilities, which was delayed to fiscal years beginning after November 15, 2008, which we therefore adopted as of January 1, 2009. As of September 30, 2009, we do not have any significant non-recurring measurements of nonfinancial assets and nonfinancial liabilities.

Valuation Hierarchy. A valuation hierarchy was established for disclosure of the inputs to the valuations used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, including interest rates, yield curves and credit risks, or inputs that are derived principally from or corroborated by observable market data through correlation. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

Valuation Techniques. Liabilities carried at fair value and measured on a recurring basis as of September 30, 2009 consist of forward foreign exchange contracts and two embedded derivatives associated with our 2.50% convertible senior subordinated notes.  The value of these liabilities was determined within Level 2 of the valuation hierarchy and was not material either individually or in the aggregate to our financial position, results of operations or cash flows.

In April 2009, the FASB issued guidance requiring interim disclosures regarding the fair values of financial instruments.  This guidance requires disclosure of the methods and significant assumptions used to estimate the fair value of financial instruments on an interim basis as well as changes in the methods and significant assumptions from prior periods. This guidance, which does not change the accounting treatment for these financial instruments, was adopted during the quarter ended June 30, 2009.

 
6

 

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 $97.2 million and $104.4 million at December 31, 2008 and September 30, 2009, respectively, based on their quoted market price.  We repurchased and retired $9.9 million of the Notes during the nine months ended September 30, 2009 for $7.8 million and recorded a net gain of $1.1 million on the early extinguishment of debt as further described in Note 15.

Note 5 - Inventories

Inventories consist of the following:
           
   
December 31,
   
September 30,
 
   
2008
   
2009
 
             
Raw materials
  $ 55,022     $ 46,978  
                 
Work-in-process
    22,177       19,541  
                 
Finished goods
    82,777       98,410  
                 
Total
  $ 159,976     $ 164,929  


Note 6 – Earnings per share

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the reporting period.  Diluted earnings per share (“diluted EPS”) gives effect to all dilutive potential shares outstanding resulting from employee share-based awards during the period.  The following table sets forth the computation of basic and diluted earnings per share for the three and nine month periods ended September 30, 2008 and 2009.

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2008
   
2009
   
2008
   
2009
 
                         
Net income
  $ 9,735     $ 1,288     $ 31,672     $ 7,182  
                                 
Basic – weighted average shares outstanding
    28,864       29,093       28,718       29,060  
                                 
Effect of dilutive potential securities
    551       90       471       36  
                                 
Diluted – weighted average shares outstanding
    29,415       29,183       29,189       29,096  
                                 
                                 
Basic EPS
  $ .34     $ .04     $ 1.10     $ 0.25  
Diluted EPS
    .33       .04       1.09       0.25  

The shares used in the calculation of diluted EPS exclude options and SARs to purchase shares where the exercise price was greater than the average market price of common shares for the period.  Shares excluded from the calculation of diluted EPS aggregated 0.8 million and 0.9 million for the three and nine months ended September 30, 2008, respectively.  Shares excluded from the calculation of diluted EPS aggregated 2.3 million and 2.5 million for the three and nine months ended September 30, 2009, 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 September 30, 2009, 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, 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.

 
7



Note 7 – Goodwill and other intangible assets

The changes in the net carrying amount of goodwill for the nine months ended September 30, 2009 are as follows:

Balance as of January 1, 2009:
     
Goodwill
  $ 336,934  
Accumulated impairment losses
    (46,689 )
Goodwill, net
    290,245  
         
Adjustments to goodwill resulting from business acquisitions finalized
    217  
         
Foreign currency translation
    (83 )
         
Balance as of September 30, 2009:
       
Goodwill
    337,068  
Accumulated impairment losses
    (46,689 )
         
Goodwill, net
  $ 290,379  


Goodwill associated with each of our principal operating units is as follows:

   
December 31,
   
September 30,
 
   
2008
   
2009
 
             
CONMED Electrosurgery
  $ 16,645     $ 16,645  
                 
CONMED Endosurgery
    42,439       42,439  
                 
CONMED Linvatec
    171,437       171,354  
                 
CONMED Patient Care
    59,724       59,941  
                 
    $ 290,245     $ 290,379  

 
8


Other intangible assets consist of the following:

   
December 31, 2008
   
September 30, 2009
 
 
 
Gross Carrying Amount
   
Accumulated Amortization
   
Gross Carrying Amount
   
Accumulated Amortization
 
Amortized intangible assets:
                       
                         
Customer relationships
  $ 127,594     $ (32,187 )   $ 127,594     $ (35,412 )
                                 
Patents and other intangible assets
    40,714       (28,526 )     41,552       (29,977 )
                                 
Unamortized intangible assets:
                               
                                 
Trademarks and tradenames
    88,344       -       88,344       -  
                                 
    $ 256,652     $ (60,713 )   $ 257,490     $ (65,389 )


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 24 years.  Customer relationships are being amortized over a weighted average life of 32 years.  Patents and other intangible assets are being amortized over a weighted average life of 13 years.

Amortization expense related to intangible assets which are subject to amortization totaled $1,573 and $4,676 in the three and nine months ended September 30, 2009, respectively, and $1,550 and $4,657 in the three and nine months ended September 30, 2008, respectively, and is included in selling and administrative expense on the consolidated condensed statement of income.

The estimated amortization expense for the year ending December 31, 2009, including the nine month period ended September 30, 2009 and for each of the five succeeding years is as follows:

2009
    6,237  
2010
    6,154  
2011
    5,957  
2012
    5,902  
2013
    5,506  
2014
    4,940  

Note 8 — 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 nine months ended September 30, are as follows:

   
2008
   
2009
 
             
Balance as of January 1,
  $ 3,306     $ 3,341  
                 
Provision for warranties
    2,699       2,722  
                 
Claims made
    (2,699 )     (2,728 )
                 
Balance as of September 30,
  $ 3,306     $ 3,335  

 
9


Note 9 – Pension plan

Net periodic pension costs consist of the following:

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2008
   
2009
   
2008
   
2009
 
                         
Service cost
  $ 1,536     $ 46     $ 4,751     $ 1,840  
                                 
Interest cost on projected benefit obligation
    843       927       2,606       2,993  
                                 
Expected return on plan assets
    (845 )     (939 )     (2,614 )     (2,877 )
                                 
Net amortization and deferral
    142       314       285       1,226  
                                 
Curtailment gain
    -       -       -       (4,368 )
                                 
Net periodic pension cost (gain)
  $ 1,676     $ 348     $ 5,028     $ (1,186 )


During the first quarter of 2009, the Company announced the freezing of benefit accruals under the defined benefit pension plan for United States employees (“the Plan”) effective May 14, 2009.  As a result, the Company recorded a curtailment gain of $4.4 million and a reduction in accrued pension of $11.4 million which is included in other long term liabilities.

We are required to contribute approximately $3.0 million to the Plan in 2009 and have contributed $4.1 million during the nine months ended September 30, 2009.  We do not expect to make any further contributions to the pension plan for 2009.


Note 10 – Other expense

Other expense consists of the following:

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2008
   
2009
   
2008
   
2009
 
                         
New plant/facility consolidation costs
  $ 709     $ 1,118     $ 709     $ 2,398  
                                 
CONMED Endoscopic Technologies division consolidation costs
    -       339       -       339  
                                 
Product recall
    -       5,992       -       5,992  
                                 
Net pension gain
    -       -       -       (1,882 )
                                 
Other expense
  $ 709     $ 7,449     $ 709     $ 6,847  



 
10


During the nine months ended September 30, 2009 we incurred $11.2 million in restructuring costs of which $2.4 million (including $1.1 million in the third quarter of 2009) have been recorded in other expense and include charges related to the consolidation of our distribution centers.  The remaining $8.8 million (including $2.2 million in the third quarter of 2009) in restructuring costs have been charged to cost of goods sold and represent startup activities associated with a new manufacturing facility in Chihuahua, Mexico and the closure of two Utica, New York area manufacturing facilities (see Note 14).

During the third quarter of 2009, we began the process of consolidating the administrative offices of the CONMED Endoscopic Technologies division from its offices in Chelmsford, Massachusetts to our Corporate headquarters in Utica, New York.  The sales force and product portfolio remain unchanged and CONMED Endoscopic Technologies continues to operate as a separate division of the Company.  We incurred $0.3 million in costs, including severance and other transition costs, in the third quarter of 2009, related to the consolidation.  We expect to incur total costs associated with the consolidation, including lease termination, severance and other transitional costs, approximating $2.2 million.  The divisional consolidation is expected to be substantially completed during the fourth quarter of 2009.

During the third quarter of 2009, we announced a voluntary recall of certain model numbers of the PRO5 & PRO6 series battery handpieces and certain lots of the MC5057 Universal Cable used with certain of CONMED Linvatec’s powered handpieces.  Current models of products are not affected.  The cost of this recall is expected to be approximately $6.0 million and we have recorded this cost in the third quarter of 2009.  We do not expect any further costs associated with this recall.

During the first quarter of 2009, we elected to freeze benefit accruals under the defined benefit pension plan for United States employees, effective May 14, 2009.  As a result, we recorded a net pension gain of $1.9 million in the first quarter of 2009 associated with the elimination of future benefit accruals under the pension plan (see Note 9).

Note 11 — Business Segments and Geographic Areas

CONMED conducts its business through five principal operating segments, CONMED Endoscopic Technologies, CONMED Endosurgery, CONMED Electrosurgery, CONMED Linvatec and CONMED Patient Care.  We believe each of our segments are similar in the nature of products, production processes, customer base, distribution methods and regulatory environment.  Our CONMED Endosurgery, CONMED Electrosurgery and CONMED Linvatec operating segments also have similar economic characteristics and therefore qualify for aggregation.  Our CONMED Patient Care and CONMED Endoscopic Technologies operating segments do not qualify for aggregation 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 and 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 in the digestive tract.

 
11



The following is net sales information by product line and reportable segment:

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2008
   
2009
   
2008
   
2009
 
                         
Arthroscopy
  $ 69,507     $ 68,669     $ 221,681     $ 194,125  
Powered Surgical Instruments
    38,807       37,312       119,106       103,586  
CONMED Linvatec
    108,314       105,981       340,787       297,711  
CONMED Electrosurgery
    23,567       24,043       76,207       69,112  
CONMED Endosurgery
    15,764       15,938       48,249       47,788  
CONMED Linvatec, Endosurgery and Electrosurgery
    147,645       145,962       465,243       414,611  
CONMED Patient Care
    18,800       17,312       58,918       52,748  
CONMED Endoscopic Technologies
    12,964       12,201       38,776       36,747  
                                 
Total
  $ 179,409     $ 175,475     $ 562,937     $ 504,106  

Total assets, capital expenditures, depreciation and amortization information are not available by segment.

The following is a reconciliation between segment operating income and income before income taxes:

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2008
   
2009
   
2008
   
2009
 
                         
CONMED Linvatec, Endosurgery and Electrosurgery
  $ 21,513     $ 13,139     $ 76,688     $ 40,401  
CONMED Patient Care
    854       592       1,997       (1,030 )
CONMED Endoscopic Technologies
    (1,764 )     (323 )     (6,609 )     (3,546
Corporate
    (3,060 )     (8,406 )     (10,841 )     (18,442 )
Income from Operations
    17,543       5,002       61,235       17,383   
                                 
Gain on early extinguishment of debt
    -       -       -       1,083  
Amortization of debt discount
    1,243       1,018       3,667       3,076  
Interest expense
    2,444       2,042       8,057       5,297  
                                 
Total income before income taxes
  $ 13,856     $ 1,942     $ 49,511     $ 10,093  

Note 12 – 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 subpoena 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, maximum policy limits and certain exclusions in the respective policies or required as a matter of law.  In some cases we may be entitled to indemnification by third parties.  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, or indemnification obligation of a third party we establish reserves sufficient to cover probable losses associated with such claims.  We do not expect that the resolution of any pending claims or investigations will have a material adverse effect on our financial condition, results of operations or cash flows.  There can be no assurance, however, that future claims or investigations, or the costs associated with responding to such claims or investigations, especially claims and investigations not covered by insurance, will not have a material adverse effect on our future performance.

 
12


 
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, that the carriers will be solvent or that such insurance will be available to us in the future at a reasonable cost.

Our operations are subject, and in the past have been subject, to a number of environmental laws and regulations governing, among other things, air emissions, wastewater discharges, the use, handling and disposal of hazardous substances and wastes, soil and groundwater remediation and employee health and safety. In some jurisdictions environmental requirements may be expected to become more stringent in the future. In the United States certain environmental laws can impose liability for the entire cost of site restoration upon each of the parties that may have contributed to conditions at the site regardless of fault or the lawfulness of the party’s activities.  While we do not believe that the present costs of environmental compliance and remediation are material, there can be no assurance that future compliance or remedial obligations could not have a material adverse effect on our financial condition, results of operations or cash flows.
 
On April 7, 2006, CONMED received a copy of a complaint filed in the United States District for the Northern District of New York on behalf of a purported class of former CONMED Linvatec sales representatives.  The complaint alleges that the former sales representatives were entitled to, but did not receive, severance in 2003 when CONMED Linvatec restructured its distribution channels.  The range of loss associated with this complaint ranges from $0 to $3.0 million, not including any interest, fees or costs that might be awarded if the five named plaintiffs were to prevail on their own behalf as well as on behalf of the approximately 70 (or 90 as alleged by the plaintiffs) other members of the purported class.   CONMED Linvatec did not generally pay severance during the 2003 restructuring because the former sales representatives were offered sales positions with CONMED Linvatec’s new manufacturer’s representatives.  Other than three of the five named plaintiffs in the class action, nearly all of CONMED Linvatec’s former sales representatives accepted such positions.

The Company’s motions to dismiss and for summary judgment, which were heard at a hearing held on January 5, 2007, were denied by a Memorandum Decision and Order dated May 22, 2007.  The District Court also granted the plaintiffs’ motion to certify a class of former CONMED Linvatec sales representatives whose employment with CONMED Linvatec was involuntarily terminated in 2003 and who did not receive severance benefits.   With discovery essentially completed, on July 21, 2008, the Company filed motions seeking summary judgment and to decertify the class.  In addition, on July 21, 2008, Plaintiffs filed a motion seeking summary judgment.  These motions were submitted for decision on August 26, 2008. There is no fixed time frame within which the Court is required to rule on the motions.  The Company believes there is no merit to the claims asserted in the Complaint, and plans to vigorously defend the case.  There can be no assurance, however, that the Company will prevail in the litigation.

 
13



Note 13 – New accounting pronouncements

In December 2008, the FASB issued guidance on an employer’s disclosures about plan assets of a defined benefit pension plan. This guidance is effective for our year ending December 31, 2009.

In June 2009, the FASB issued guidance which requires additional disclosures about the transfer and derecognition of financial assets, eliminates the concept of qualifying special-purpose entities, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. This guidance is effective for fiscal years beginning after November 15, 2009.  We believe our current off balance sheet arrangement in which a wholly-owned, bankruptcy-remote, special purpose subsidiary of CONMED Corporation sells an undivided percentage ownership interest in receivables to a bank under an accounts receivable sales agreement, will no longer be permitted to be accounted for as a sale and reduction in accounts receivable beginning in 2010.  As a result, accounts receivable sold under the agreement (which aggregated $39.0 million at September 30, 2009) would be recorded as additional borrowings rather than as a reduction in accounts receivable. There will be no impact to the results of operations.

In June 2009, the FASB issued the FASB Accounting Standards Codification (“Codification”). The Codification became the single source for all authoritative GAAP recognized by the FASB and has been applied to financial statements issued for periods ending after September 15, 2009. The Codification does not change GAAP and will not have an effect on our financial position, results of operations or liquidity.

Note 14 – Restructuring

During the second quarter of 2008, we announced a plan to restructure certain of our operations.  The restructuring plan includes the closure of two manufacturing facilities located in the Utica, New York area totaling approximately 200,000 square feet with manufacturing to be transferred into either our Corporate headquarters location in Utica, New York or into a newly constructed leased manufacturing facility in Chihuahua, Mexico.  In addition, manufacturing previously done by a contract manufacturing facility in Juarez, Mexico has been transferred in-house to the Chihuahua facility.  Finally, certain domestic distribution activities are being centralized in a new leased consolidated distribution center in Atlanta, Georgia.  We believe our restructuring plan will reduce our cost base by consolidating our Utica, New York operations into a single facility and expanding our lower cost Mexican operations, as well as improve service to our customers by shipping orders from more centralized distribution centers.  The transition of manufacturing operations and consolidation of distribution activities began in the third quarter of 2008 and is expected to be largely completed by the fourth quarter of 2009.

 
14



In conjunction with our restructuring plan, we considered FASB guidance which requires that long-lived assets be tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.  Based on the announced restructuring plan, our current expectation is that it is more likely than not, that the two manufacturing facilities located in the Utica, New York area scheduled to be closed as a result of the restructuring plan, will be sold prior to the end of their previously estimated useful lives.  Even though we expect to sell these facilities prior to the end of their useful lives, we do not believe that at present we meet the criteria to designate these assets as held for sale and accordingly we have tested them for impairment under the guidance for long-lived assets to be held and used.  We performed our impairment testing on the two manufacturing facilities scheduled to close under the restructuring plan by comparing future cash flows expected to be generated by these facilities (undiscounted and without interest charges) against their carrying amounts ($2.1 million and $0.9 million, respectively, as of September 30, 2009).  Since future cash flows expected to be generated by these facilities exceeds their carrying amounts, we do not believe any impairment exists at this time.  However, we cannot be certain an impairment charge will not be taken in the future when the facilities are no longer in use.

As of September 30, 2009, we have incurred $15.2 million (including $3.3 million and $11.2 million, in the quarterly period and nine months ended September 30, 2009, respectively) in costs associated with the restructuring.

Approximately $11.2 million (including $2.2 million and $8.8 million, in the quarterly period and nine months ended September 30, 2009, respectively) of the total $15.2 million in restructuring costs have been charged to cost of goods sold.  The $11.2 million charged to cost of goods sold includes $5.3 million in under utilization of production facilities (including $0.7 million and $4.2 million, in the quarterly period and nine months ended September 30, 2009, respectively), $1.4 million in accelerated depreciation (including $0.3 million and $1.0 million, in the quarterly period and nine months ended September 30, 2009, respectively), $1.6 million in severance related charges (including $0.5 million and $1.5 million, in the quarterly period and nine months ended September 30, 2009, respectively), and $2.9 million in other charges (including $0.7 million and $2.1 million, in the quarterly period and nine months ended September 30, 2009, respectively).

The remaining $4.0 million (including $1.1 million and $2.4 million, in the quarterly period and nine months ended September 30, 2009, respectively) in restructuring costs have been recorded in other expense and primarily include severance, lease and other charges related to the consolidation of our distribution centers.

As our restructuring plan progresses, we will incur additional charges, including employee termination and other exit costs.  Based on the criteria contained within FASB guidance, no accrual for such costs has been made at this time.

We estimate the total costs of the restructuring plan will approximate $13.6 million during 2009, including $2.7 million related to employee termination costs, $4.6 million in expense related to abnormally low production levels at certain of our plants (as we transfer production to alternate sites), $2.0 million in accelerated depreciation at one of the two Utica, New York area facilities which are expected to close and $4.3 million in other restructuring related activities. We estimate approximately $2.7 million of the total anticipated $13.6 million in restructuring costs will be reported in other expense with the remaining $10.9 million charged to cost of goods sold.  The restructuring plan impacts Corporate manufacturing and distribution facilities which support multiple reporting segments.  As a result, costs associated with the restructuring plan will be reflected in the Corporate line within our business segment reporting.

 
15



Note 15 – Convertible senior subordinated notes

In May 2008, the FASB issued guidance which specifies that issuers of convertible debt instruments that permit or require the issuer to pay cash upon conversion should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The Company is required to apply the guidance retrospectively to all past periods presented.  We adopted this guidance on January 1, 2009.

We have outstanding $115.1 million in 2.50% convertible senior subordinated notes due 2024 (“the Notes”).  The Notes represent subordinated unsecured obligations and are convertible under certain circumstances, as defined in the bond indenture, into a combination of cash and CONMED common stock.  Upon conversion, the holder of each Note will receive the conversion value of the Note payable in cash up to the principal amount of the Note and CONMED common stock for the Note’s conversion value in excess of such principal amount.  Amounts in excess of the principal amount are at an initial conversion rate, subject to adjustment, of 26.1849 shares per $1,000 principal amount of the Note (which represents an initial conversion price of $38.19 per share).  As of September 30, 2009, there was no value assigned to the conversion feature because the Company’s share price was below the conversion price.  The Notes mature on November 15, 2024 and are not redeemable by us prior to November 15, 2011.  Holders of the Notes will be able to require that we repurchase some or all of the Notes on November 15, 2011, 2014 and 2019 provided the terms of the indenture are satisfied.

The Notes contain two embedded derivatives.  The embedded derivatives are recorded at fair value in other long-term liabilities and changes in their value are recorded through the consolidated statements of operations.  The embedded derivatives have a nominal value, and it is our belief that any change in their fair value would not have a material adverse effect on our business, financial condition, results of operations or cash flows.

Our effective borrowing rate for nonconvertible debt at the time of issuance of the Notes was estimated to be 6.67%, which resulted in $34.6 million of the $150.0 million aggregate principal amount of Notes issued, or $21.8 million after taxes, being attributable to equity.  For the three months ended September 30, 2008 and 2009, we have recorded interest expense related to the amortization of debt discount on the Notes of $1.2 million and $1.0 million, respectively, at the effective interest rate of 6.67%.  For the nine months ended September 30, 2008 and 2009, we have recorded interest expense related to the amortization of debt discount on the Notes of $3.7 million and $3.1 million, respectively, at the effective interest rate of 6.67%.  The debt discount on the Notes is being amortized through November 2011.  For the three months ended September 30, 2008 and 2009, we have recorded interest expense on the Notes of $0.9 million and $0.7 million, respectively, at the contractual coupon rate of 2.50%.  For the nine months ended September 30, 2008 and 2009, we have recorded interest expense on the Notes of $2.8 million and $2.2 million, respectively, at the contractual coupon rate of 2.50%.

 
16



The following table illustrates the effects of adopting the new guidance on each Consolidated Condensed Balance Sheet line item as of December 31, 2008:

   
As Originally
Reported
   
As
Adjusted
   
Effect
of Change
 
                   
                   
Long-term debt
  $ 196,190     $ 182,739     $ (13,451 )
                         
Deferred income taxes
    83,498       88,468       4,970  
                         
Total liabilities
    399,927       391,446       (8,481 )
                         
Paid-in capital
    292,251       313,830       21,579  
                         
Retained earnings
    327,471       314,373       (13,098 )
                         
Total shareholders’ equity
    531,734       540,215       8,481  


The following tables illustrate the effects of adopting the new guidance on each Consolidated Condensed Statement of Income for the three and nine months ended September 30, 2008 and Consolidated Condensed Statement of Cash Flows line item for the nine months ended September 30, 2008:

   
As Originally
Reported
   
As
Adjusted
   
Effect
of Change
 
                   
Consolidated condensed statement of income for the three months ended September 30, 2008:
                 
                   
Amortization of debt discount
  $ -     $ 1,243     $ 1,243  
 
                       
Income before income taxes
    15,099       13,856       (1,243 )
                         
Provision for income taxes
    4,580       4,121       (459 )
                         
Net income
    10,519       9,735       (784 )
                         
EPS:
                       
                         
Basic
  $ .36       .34     $ (.02 )
Diluted
    .36       .33       (.03 )


Consolidated condensed statement of income for the nine months ended September 30, 2008:
                 
                   
Amortization of debt discount
  $ -     $ 3,667     $ 3,667  
                         
Income before income taxes
    53,178       49,511       (3,667 )
                         
Provision for income taxes
    19,194       17,839       (1,355 )
                         
Net income
    33,984       31,672       (2,312 )
                         
EPS:
                       
                         
Basic
  $ 1.18       1.10     $ (.08 )
Diluted
    1.16       1.09       (.07 )

 
17


Consolidated condensed statement of cash flow:
                 
                   
Net income
    33,984       31,672       (2,312 )
                         
Amortization of debt discount
    -       3,667       3,667  
                         
Deferred income taxes
    17,981       16,626       (1,355 )
 
Amounts recognized in the consolidated condensed balance sheets consist of the following:
 
   
December 31,
   
September 30,
 
   
2008
   
2009
 
             
Principal value of the Notes
  $ 125,000     $ 115,093  
                 
Unamortized discount
    (13,451 )     (9,359 )
                 
Carrying value of the Notes
  $ 111,549     $ 105,734  
                 
Equity component
  $ 21,579     $ 21,491  


During the nine months ended September 30, 2009, we repurchased and retired $9.9 million of the Notes for $7.8 million and recorded a gain on the early extinguishment of debt of $1.1 million net of the write-offs of $0.1 million in unamortized deferred financing costs and $1.0 million in unamortized debt discount.

Note 16 – Subsequent events

We evaluated subsequent events through November 2, 2009, the date the financial statements have been issued.

 
18


Item 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

In this Report on Form 10-Q, we make forward-looking statements about our financial condition, results of operations and business. Forward-looking statements are statements made by us concerning events that may or may not occur in the future.  These statements may be made directly in this document or may be “incorporated by reference” from other documents. Such statements may be identified by the use of words such as “anticipates”, “expects”, “estimates”, “intends” and “believes” and variations thereof and other terms of similar meaning.

Forward-Looking Statements are not Guarantees of Future Performance

Forward-looking statements involve known and unknown risks, uncertainties and other factors, including those that may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  Such factors include those identified under “Risk Factors” in our Annual Report on Form 10-K for the year-ended December 31, 2008 and the following, among others:

 
·
general economic and business conditions;

 
·
changes in foreign exchange and interest rates;

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

 
·
changes in customer preferences;

 
·
competition;

 
·
changes in technology;

 
·
the introduction and acceptance of new products;

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

 
·
changes in business strategy;

 
·
the availability and cost of materials;

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

 
·
future levels of indebtedness and capital spending;

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

 
·
the availability, terms and deployment of capital;

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

 
·
changes in regulatory requirements.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below and “Risk Factors” and “Business” in our Annual Report on Form 10-K for the year-ended December 31, 2008 for a further discussion of these factors. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.

 
19



Overview:

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

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2008
   
2009
   
2008
   
2009
 
                         
Arthroscopy
    38.7 %     39.1 %     39.4 %     38.5 %
Powered Surgical Instruments
    21.6       21.2       21.1       20.5  
Electrosurgery
    13.2       13.7       13.5       13.7  
Endosurgery
    8.8       9.1       8.6       9.5  
Patient Care
    10.5       9.9       10.5       10.5  
Endoscopic Technologies
    7.2       7.0       6.9       7.3  
Consolidated Net Sales
    100.0 %     100.0 %     100.0 %     100.0 %


A significant amount of our products are used in surgical procedures with the majority of our revenues derived from the sale of disposable products.  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 represent a significant portion of our business.  During the three and nine months ended September 30, 2009, sales to purchasers outside of the United States accounted for 44.0% and 44.4%, respectively, of total net sales.

Business Environment and Opportunities

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

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

We have a variety of research and development initiatives focused in each of our principal product lines as continued innovation and commercialization of new proprietary products and processes are essential elements of our long-term growth strategy.  Our reputation as an innovator is exemplified by recent new product introductions, which include the CONMED Linvatec Shoulder Restoration System, a comprehensive system for rotator cuff repair;  the Zen™ Wireless Footswitch and Adaptor, incorporating the power of Zigbee® communications technology to provide three pedal control of CONMED Linvatec control consoles and hand pieces;  the ReAct™ Arthroscopic Shaver Blades which have the ability to reciprocate while rotating;  MPower® 2, the latest in our next generation of battery power systems for large bone and small bone orthopedic surgery; the VP1600 Digital Documentation System, a 1080p digital still capture unit which enables users to save and print the highest quality medical images, and our Endotracheal Cardiac Output Monitor, which provides an innovative alternative to catheter monitoring of cardiac output.

 
20



Business Challenges

Given significant volatility in the financial markets and foreign currency exchange rates and depressed economic conditions in both domestic and international markets, 2009 has presented significant business challenges.  While we are cautiously optimistic that the overall economic outlook is improving, we still expect 2009 total revenues to be lower by approximately 8% as compared to 2008 levels, reflecting lower sales volumes, especially of our capital products, and a significant unfavorable impact from foreign currency translation due to a stronger United States dollar as compared with currencies such as the Euro.  We will continue to monitor and manage the impact of the overall economic environment on the Company.

We are in the process of executing our operational restructuring plan which began in the third quarter of 2008.  The restructuring plan includes the closure of two manufacturing facilities located in the Utica, New York area with manufacturing to be transferred into either our Corporate headquarters location in Utica, New York or into a newly constructed leased manufacturing facility in Chihuahua, Mexico.  In addition, manufacturing that was done by a contract manufacturing facility in Juarez, Mexico has been transferred in-house to the Chihuahua facility.  Finally, certain domestic distribution activities are being centralized in a new leased consolidated distribution center in Atlanta, Georgia.  We believe the successful execution of our restructuring plan will lower our costs by consolidating our Utica, New York operations into a single facility and expanding our lower cost Mexican operations, as well as improve service to our customers by shipping orders from more centralized distribution centers.  We expect the transition of manufacturing operations and consolidation of distribution activities to be largely completed by the fourth quarter of 2009.  However, we cannot be certain such activities will be completed in the estimated time period or that planned cost savings will be achieved.

Our CONMED Endoscopic Technologies operating segment has suffered from sales declines and operating losses since its acquisition from C.R. Bard in September 2004.  We have corrected the operational issues associated with product shortages that resulted following the acquisition of the Endoscopic Technologies business and have begun consolidating the administrative functions of the Endoscopic Technologies business from Chelmsford, Massachusetts to our Corporate Headquarters in Utica, New York.  We believe by reducing costs while continuing to invest in new product development, we can achieve increased sales and ensure a return to profitability.

Our facilities are subject to periodic inspection by the United States Food and Drug Administration (“FDA”) and foreign regulatory agencies for, among other things, conformance to Quality System Regulation and Current Good Manufacturing Practice (“CGMP”) requirements.  We are committed to the principles and strategies of systems-based quality management for improved CGMP compliance, operational performance and efficiencies through our Company-wide quality systems initiative.  However, there can be no assurance that our actions will ensure that we will not receive a warning letter or other regulatory action which may include consent decrees or fines.

 
21



Critical Accounting Estimates

Preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.  Note 1 to the consolidated financial statements in our Annual Report on Form 10-K for the year-ended December 31, 2008 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.  There have been no significant changes in our critical accounting estimates during the third quarter of 2009.

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 single-use 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 single-use product shipment.  The cost of the equipment is amortized over the term of the 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 are included in selling and administrative expense.

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

 
22


 
·
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 $1.1 million at September 30, 2009 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.

Goodwill and Intangible Assets

We have a history of growth through acquisitions.  Assets and liabilities of acquired businesses are recorded at their estimated fair values as of the date of acquisition.  Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses.  Other intangible assets primarily represent allocations of purchase price to identifiable intangible assets of acquired businesses.  We have accumulated goodwill of $290.4 million and other intangible assets of $192.1 million as of September 30, 2009.

In accordance with FASB guidance, goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to at least annual impairment testing.  It is our policy to perform our annual impairment testing in the fourth quarter.  The identification and measurement of goodwill impairment involves the estimation of the fair value of our reporting units.  Estimates of fair value are based on the best information available as of the date of the assessment, which primarily incorporate management assumptions about expected future cash flows and other valuation techniques.  Future cash flows may be affected by changes in industry or market conditions or the rate and extent to which anticipated synergies or cost savings are realized with newly acquired entities.  We last completed our goodwill impairment testing as of October 1, 2008 and determined that no impairment existed at that date.  Our CONMED Patient Care operating segment has the least excess of fair value over invested capital of our reporting units, although a 10% decrease in the estimated fair value of any of our reporting units at the date of our 2008 assessment would not have resulted in a goodwill impairment charge.  We continue to monitor events and circumstances for triggering events which would more likely than not reduce the fair value of any of our reporting units and require us to perform impairment testing.

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


 
23


 
Customer relationship assets arose principally as a result of the 1997 acquisition of Linvatec Corporation.  These assets represent the acquisition date fair value of existing customer relationships based on the after-tax income expected to be derived during their estimated remaining useful life.  The useful lives of these customer relationships were not and are not limited by contract or any economic, regulatory or other known factors.  The estimated useful life of the Linvatec customer relationship assets was determined as of the date of acquisition as a result of a study of the observed pattern of historical revenue attrition during the 5 years immediately preceding the acquisition of Linvatec Corporation.  This observed attrition pattern was then applied to the existing customer relationships to derive the future expected retirement of the customer relationships.  This analysis indicated an annual attrition rate of 2.6%.  Assuming an exponential attrition pattern, this equated to an average remaining useful life of approximately 38 years for the Linvatec customer relationship assets.  Customer relationship intangible assets arising as a result of other business acquisitions are being amortized over a weighted average life of 17 years.  The weighted average life for customer relationship assets in aggregate is 32 years.

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

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

Pension Plan

We sponsor a defined benefit pension plan (“the plan”) covering substantially all our United States-based employees.  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.


 
24


 
During the first quarter of 2009, we elected to freeze benefit accruals under the plan effective May 14, 2009.  As a result, we recorded a curtailment gain of $4.4 million and a reduction in accrued pension of $11.4 million which is included in other long term liabilities.  See Note 9 to the Consolidated Condensed Financial Statements.

The weighted-average discount rate used to measure pension liabilities and costs is set by reference to the Citigroup Pension Liability Index. However, this index gives only an indication of the appropriate discount rate because the cash flows of the bonds comprising the index do not match the projected benefit payment stream of the plan precisely. For this reason, we also consider the individual characteristics of the plan, such as projected cash flow patterns and payment durations, when setting the discount rate.  This discount rate, which is used in determining pension expense, increased from 5.90% in 2008 to 6.48% in the first quarter of 2009.  The discount rate used for purposes of remeasuring plan liabilities and costs as of the date of the plan freeze was 7.30%.

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 3.5% consistent with our internal budgeting.

For the third quarter of 2009 we recorded pension expense of $0.3 million. For the nine months ending September 30, 2009 we recorded a net pension gain of $1.2 million (including a $4.4 million curtailment gain and pension expense of $3.2 million).  Pension expense for the full year 2009 is estimated at a gain of $0.9 million (including a $4.4 million curtailment gain and pension expense of $3.5 million) compared to a $6.9 million charge in 2008.  The reduction in estimated pension expense in 2009 as compared with 2008 is due to the freeze in benefit accruals.

We have recorded additional expense of approximately $1.0 million and $3.0 million in the three and nine months ending September 30, 2009 related to an additional employer 401(k) contribution which is intended to offset some of the impact on employees of the freeze in pension benefit accruals.  We expect the full year 2009 cost of the additional employer 401(k) contribution to approximate $4.0 million.
 
Stock Based Compensation

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

 
25



Income Taxes

The recorded future tax benefit arising from net deductible temporary differences and tax carryforwards is approximately $32.3 million at September 30, 2009.  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.  The Internal Revenue Service (“IRS”) has completed examinations of our United States federal income tax returns through 2007.  Tax years subsequent to 2007 are subject to future examination.

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.  Effective January 1, 2009, changes in deferred tax valuation allowances and income tax uncertainties after the acquisition date, including those associated with acquisitions that closed prior to this effective date, generally will affect income tax expense. In assessing the need for a valuation allowance, we estimate future taxable income, considering the feasibility of ongoing tax planning strategies and the realizability of tax loss carryforwards.  Valuation allowances related to deferred tax assets may be impacted by changes to tax laws, changes to statutory tax rates and ongoing and future taxable income levels.

Results of Operations

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

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2008
   
2009
   
2008
   
2009
 
                         
Net sales
    100.0 %     100.0 %     100.0 %     100.0 %
Cost of sales
    47.2       50.1       47.9       52.1  
Gross profit
    52.8       49.9       52.1       47.9  
Selling and administrative expense
    37.8       38.4       36.6       38.4  
Research and development expense
    4.8       4.4       4.5       4.6  
Other expense
    0.4       4.2       0.1       1.4  
Income from operations
    9.8       2.9       10.9       3.5  
Gain on early extinguishment of debt
    0.0       0.0       0.0       0.2  
Amortization of bond discount
    0.7       0.6       0.7       0.6  
Interest expense
    1.4       1.2       1.4       1.1  
Income before income taxes
    7.7       1.1       8.8       2.0  
Provision for income taxes
    2.3       0.4       3.2       0.6  
Net income
    5.4 %     0.7 %     5.6 %     1.4 %



 
26

 
Three months ended September 30, 2009 compared to three months ended September 30, 2008
 
Sales for the quarterly period ended September 30, 2009 were $175.5 million, a decrease of $3.9 million (-2.2%) compared to sales of $179.4 million in the comparable 2008 period with decreases across all product lines except Electrosurgery and EndoSurgery.  Foreign currency exchange rates (when compared to the foreign currency exchange rates in the same period a year ago) accounted for approximately $4.7 million of the decrease.  In local currency, sales increased 0.4%.  Sales of capital equipment decreased $3.4 million (-7.1%) from $47.6 million in the third quarter of 2008 to $44.2 million in the third quarter of 2009; sales of single-use products decreased $0.5 million (-0.4%) from $131.8 million in the third quarter of 2008 to $131.3 million in the third quarter of 2009.  On a local currency basis, sales of capital equipment decreased 4.4% while single-use products increased 2.2%.

Cost of sales increased to $87.8 million in the quarterly period ended September 30, 2009 as compared to $84.7 million in the same period a year ago on overall decreases in sales volumes as described above.  Gross profit margins decreased 2.9 percentage points to 49.9% in the quarterly period ended September 30, 2009 as compared to 52.8% in the same period a year ago.  The decrease in gross profit margins of 2.9 percentage points is primarily a result of the effects of unfavorable foreign currency exchange rates on sales (1.3 percentage points), restructuring of the Company’s operations as more fully described in Note 14 (1.2 percentage points) and product mix (0.4 percentage points).

Selling and administrative expense decreased $0.3 million (-0.4%) to $67.5 million in the quarterly period ended September 30, 2009 as compared to $67.8 million in the same period a year ago.  Foreign currency exchange rates (when compared to the foreign currency exchange rates in the same period a year ago) accounted for approximately $1.7 million of the decrease, offset by $1.4 million in increased spending on sales force and other administrative expenses.  Selling and administrative expense as a percentage of net sales increased to 38.4% in the quarterly period ended September 30, 2009 as compared to 37.8% in the same period a year ago as a result of lower sales.  This increase of 0.6 percentage points is primarily attributable to higher sales force and other administrative expenses (0.6 percentage points) as a percent of sales.

Research and development expense totaled $7.7 million in the quarterly period ended September 30, 2009 as compared to $8.6 million in the same period a year ago.  As a percentage of net sales, research and development expense decreased 0.4 percentage points to 4.4% for the quarterly period ending September 30, 2009 compared to 4.8% in the same period a year ago, with decreased spending in all operating segments except CONMED Endosurgery and CONMED Linvatec.

As discussed in Note 10 to the Consolidated Condensed Financial Statements, other expense in the quarterly period ended September 30, 2009 consisted of a $1.1 million charge related to the restructuring of certain of the Company’s operations, a $0.3 million charge related to the consolidation of the administrative functions of the CONMED Endoscopic Technologies division, and a $6.0 million charge related to a voluntary recall of certain of our powered instrument products.  Other expense in the quarterly period ended September 30, 2008 consisted of a $0.7 million charge related to the restructuring of certain of the Company’s operations.

Amortization of debt discount in the quarterly period ended September 30, 2009 was $1.0 million compared to $1.2 million in the same period a year ago. This amortization is associated with the implementation of FASB guidance as of January 1, 2009 as further described in Note 15 to the Consolidated Condensed Financial Statements.

 
27


 

Interest expense in the quarterly period ended September 30, 2009 was $2.0 million as compared to $2.4 million in the same period a year ago.  The decrease in interest expense is due to lower weighted average borrowings outstanding in the quarterly period ended September 30, 2009 as compared to the same period a year ago.  The weighted average interest rates on our borrowings (inclusive of the finance charge on our accounts receivable sale facility) also declined to 3.34% in the quarterly period ended September 30, 2009 as compared to 3.60% in the same period a year ago.

A provision for income taxes has been recorded at an effective tax rate of 33.7% for the quarterly period ended September 30, 2009 compared to the 29.7% effective tax rate recorded in the same period a year ago.  The effective tax rate for the quarterly period ended September 30, 2009 is higher than that recorded in the same period a year ago primarily due to adjustments in 2008 resulting from the filing of Federal and state corporate tax returns for the 2007 tax year and receipt of tax refunds and related interest income attributable to the 2002 through 2004 amended Federal tax returns.  A reconciliation of the United States statutory income tax rate to our effective tax rate is included in our Annual Report on Form 10-K for the year-ended December 31, 2008, Note 6 to the Consolidated Financial Statements.

Nine months ended September 30, 2009 compared to nine months ended September 30, 2008

Sales for the nine months ended September 30, 2009 were $504.1 million, a decrease of $58.8 million (-10.4%) compared to sales of $562.9 million in the comparable 2008 period with decreases across all product lines.  Foreign currency exchange rates (when compared to the foreign currency exchange rates in the same period a year ago) accounted for approximately $27.2 million of the decrease.  In local currency, sales decreased 5.6%.  Sales of capital equipment decreased $35.5 million (-23.3%) from $152.1 million in the nine months ended September 30, 2008 to $116.6 million in the nine months ended September 30, 2009; sales of single-use products decreased $23.3 million (-5.7%) from $410.8 million in the nine months ended September 30, 2008 to $387.5 million in the nine months ended September 30, 2009.  On a local currency basis, sales of capital equipment decreased 18.7% while single-use products decreased 0.8%.

Cost of sales decreased to $262.8 million in the nine months ended September 30, 2009 as compared to $269.6 million in the same period a year ago on overall decreases in sales volumes as described above.  Gross profit margins decreased 4.2 percentage points to 47.9% in the nine months ended September 30, 2009 as compared to 52.1% in the same period a year ago.  The decrease in gross profit margins of 4.2 percentage points is primarily a result of the effects of unfavorable foreign currency exchange rates on sales (2.7 percentage points) and restructuring of the Company’s operations as more fully described in Note 14 (1.7 percentage points) offset by improved product mix (0.2 percentage points).

Selling and administrative expense decreased $12.5 million (-6.1%) to $193.5 million in the nine months ended September 30, 2009 as compared to $206.0 million in the same period a year ago.  Foreign currency exchange rates (when compared to the foreign currency exchange rates in the same period a year ago) accounted for approximately $9.9 million of the decrease.  Selling and administrative expense as a percentage of net sales increased to 38.4% in the nine months ended September 30, 2009 as compared to 36.6% in the same period a year ago as a result of lower sales.  This increase of 1.8 percentage points is primarily attributable to higher benefit related costs (0.6 percentage points) and higher sales force and other administrative expenses (1.2 percentage points) as a percent of sales.

 
28



Research and development expense totaled $23.6 million in the nine months ended September 30, 2009 as compared to $25.4 million in the same period a year ago.  As a percentage of net sales, research and development expense increased to 4.6% for the nine months ended September 30, 2009 compared to 4.5% in the same period a year ago. The increase in research and development expense of 0.1 percentage point is due to increased spending on our CONMED Linvatec orthopedic products (0.6 percentage points) offset by decreases in other research and development spending (0.5 percentage points).

As discussed in Note 10 to the Consolidated Condensed Financial Statements, other expense in the nine months ended September 30, 2009 consisted of a $2.4 million charge related to the restructuring of certain of the Company’s operations, a $0.3 million charge related to the consolidation of the administrative functions of the CONMED Endoscopic Technologies division, a $6.0 million charge related to a voluntary recall of certain of our powered instrument products, and a $1.9 million first quarter net pension gain resulting from the freezing of future benefit accruals effective May 14, 2009.  Other expense in the nine months ended September 30, 2008 consisted of a $0.7 million charge related to the restructuring of certain of the Company’s operations

During the first quarter of 2009, we repurchased and retired $9.9 million of our 2.50% convertible senior subordinated notes (the “Notes”) for $7.8 million and recorded a gain on the early extinguishment of debt of $1.1 million net of the write-offs of $0.1 million in unamortized deferred financing costs and $1.0 million in unamortized Notes discount.  See additional discussion under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources and Note 15 to the Consolidated Condensed Financial Statements.

Amortization of debt discount in the nine months ended September 30, 2009 was $3.1 million compared to $3.7 million in the same period a year ago. This amortization is associated with the implementation of FASB guidance as of January 1, 2009 as further described in Note 15 to the Consolidated Condensed Financial Statements.

Interest expense in the nine months ended September 30, 2009 was $5.3 million as compared to $8.1 million in the same period a year ago.  The decrease in interest expense is due to lower weighted average borrowings outstanding in the nine months ended September 30, 2009 as compared to the same period a year ago.  The weighted average interest rates on our borrowings (inclusive of the finance charge on our accounts receivable sale facility) also declined to 2.85% in the nine months ended September 30, 2009 as compared to 3.70% in the same period a year ago.

A provision for income taxes has been recorded at an effective tax rate of 28.8% for the nine months ended September 30, 2009 compared to the 36.0% effective tax rate recorded in the same period a year ago.  The effective tax rate for the nine months ended September 30, 2009 is lower than that recorded in the same period a year ago as a result of the settlement of our 2007 IRS examination in the first quarter of 2009, and the resulting adjustment to our reserves and reduction of income tax expense as well as the benefit of the research and development tax credit recognized in 2009 (not extended or recognized in 2008 until the fourth quarter).  A reconciliation of the United States statutory income tax rate to our effective tax rate is included in our Annual Report on Form 10-K for the year-ended December 31, 2008, Note 6 to the Consolidated Financial Statements.

 
29



Operating Segment Results:

Segment information is prepared on the same basis that we review financial information for operational decision-making purposes.  We conduct our business through five principal operating segments: CONMED Endoscopic Technologies, CONMED Endosurgery, CONMED Electrosurgery, CONMED Linvatec and CONMED Patient Care.  Based upon the aggregation criteria for segment reporting, we have grouped our CONMED Endosurgery, CONMED Electrosurgery and CONMED Linvatec operating segments into a single reporting segment.  The economic characteristics of CONMED Patient Care and CONMED Endoscopic Technologies do not meet the criteria for aggregation due to the lower overall operating income (loss) of these segments.

The following tables summarize the Company’s results of operations by reportable segment for the three and nine months ended September 30, 2008 and 2009.

CONMED Endosurgery, CONMED Electrosurgery and CONMED Linvatec

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2008
   
2009
   
2008
   
2009
 
                         
Net sales
  $ 147,645     $ 145,962     $ 465,243     $ 414,611  
                                 
Income from operations
    21,513       13,139       76,688       40,401  
                                 
Operating margin
    14.6 %     9.0 %     16.5 %     9.7 %

Product offerings include capital equipment such as electrosurgical generators, video systems, small bone, large bone and specialty hand pieces, and arthroscopic instrumentation for use in orthopedic surgery.  Single-use product offerings include a complete line of endo-mechanical instrumentation for minimally invasive laparoscopic procedures, electrosurgical single-use products including pencils and ground pads and orthopedic single-use products such as burs, blades, and implants.

 
·
Arthroscopy sales decreased $0.8 million (-1.2%) in the quarter ended September 30, 2009 to $68.7 million from $69.5 million in the same period a year ago.  Unfavorable foreign currency exchange rates (when compared to the foreign currency exchange rates in the same period a year ago) accounted for approximately $2.1 million of the decrease.  Sales of capital equipment decreased $2.1 million (-9.7%) from $21.7 million in the third quarter of 2008 to $19.6 million in the third quarter of 2009; sales of single-use products increased $1.3 million (2.7%) from $47.8 million in the third quarter of 2008 to $49.1 million in the third quarter of 2009.  On a local currency basis, sales of capital equipment decreased 6.9% while single-use products increased 5.9%.  Arthroscopy sales decreased $27.6 million (-12.4%) in the nine months ended September 30, 2009 to $194.1 million from $221.7 million in the same period a year ago. Unfavorable foreign currency exchange rates (when compared to the foreign currency exchange rates in the same period a year ago) accounted for approximately $12.5 million of the decrease.  Sales of capital equipment decreased $19.0 million (-26.7%) from $71.1 million in the nine months ended September 30, 2008 to $52.1 million in the nine months ended September 30, 2009;  sales of single-use products decreased $8.6 million (-5.7%) from $150.6 million in the nine months ended September 30, 2008 to $142.0 million in the nine months ended September 30, 2009.  On a local currency basis, sales of capital equipment decreased 22.6% while single-use products increased 0.7%.

 
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Powered surgical instrument sales decreased $1.5 million (-3.9%) in the quarterly period ended September 30, 2009 to $37.3 million from $38.8 million in the comparable 2008 period.  Unfavorable foreign currency exchange rates (when compared to the same period a year ago) accounted for approximately $1.4 million of the decrease.  Sales of capital equipment decreased $1.5 million (-7.6%) from $19.8 million in the third quarter of 2008 to $18.3 million in the third quarter of 2009;  sales of single-use products remained flat at $19.0 million in the third quarter of 2009 compared to the third quarter of 2008.  On a local currency basis, sales of capital equipment decreased 4.5% while single-use products increased 4.2%.  Powered surgical instrument sales decreased $15.5 million (-13.0%) in the nine months ended September 30, 2009 to $103.6 million from $119.1 million in the comparable 2008 period.  Unfavorable foreign currency exchange rates (when compared to the same period a year ago) accounted for approximately $8.2 million of the decrease.  Sales of capital equipment decreased $11.5 million (-19.5%) from $58.9 million in the nine months ended September 30, 2008 to $47.4 million in the nine months ended September 30, 2009;  sales of single-use products decreased $4.0 million (-6.6%) from $60.2 million in the nine months ended September 30, 2008 to $56.2 million in the nine months ended September 30, 2009.  On a local currency basis, sales of capital equipment decreased 14.1% while single-use products increased 1.7%.

 
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Electrosurgery sales increased $0.6 million (2.6%) in the quarterly period ended September 30, 2009 to $24.1 million from $23.5 million in the comparable 2008 period.  Unfavorable foreign currency exchange rates (when compared to the foreign currency exchange rates in the same period a year ago) decreased sales approximately $0.3 million.  Sales of capital equipment increased $0.2 million (3.3%) from $6.1 million in the third quarter of 2008 to $6.3 million in the third quarter of 2009; sales of single-use products increased $0.4 million (2.3%) from $17.4 million in the third quarter of 2008 to $17.8 million in the third quarter of 2009.  On a local currency basis, sales of capital equipment increased 4.9% while single-use products increased 3.4%.  Electrosurgery sales decreased $7.1 million (-9.3%) in the nine months ended September 30, 2009 to $69.1 million from $76.2 million in the comparable 2008 period.  Unfavorable foreign currency exchange rates (when compared to the foreign currency exchange rates in the same period a year ago) accounted for approximately $2.1 million of the decrease.  Sales of capital equipment decreased $5.0 million (-22.6%) from $22.1 million in the nine months ended September 30, 2008 to $17.1 million in the nine months ended September 30, 2009;  sales of single-use products decreased $2.1 million (-3.9%) from $54.1 million in the nine months ended September 30, 2008 to $52.0 million in the nine months ended September 30, 2009.  On a local currency basis, sales of capital equipment decreased 18.6% while single-use products decreased 1.7%.

 
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Endosurgery single-use sales remained flat at $15.9 in the quarterly period ended September 30, 2009 compared to $15.8 million in the same period a year ago. Unfavorable foreign currency exchange rates (when compared to the foreign currency exchange rates in the same period a year ago) decreased sales approximately $0.4 million.  On local currency basis, sales increased 3.2%. Endosurgery single-use sales decreased $0.4 million (-0.8%) in the nine months ended September 30, 2009 to $47.8 million from $48.2 million in the comparable 2008 period.  Unfavorable foreign currency exchange rates (when compared to the foreign currency exchange rates in the same period a year ago) account for approximately $2.0 million of the decrease.  On a local currency basis, sales increased 3.3%.

 
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Operating margins as a percentage of net sales decreased 5.6 percentage points to 9.0% in the quarterly period ended September 30, 2009 compared to 14.6% in 2008 principally as a result of lower gross margins (1.5 percentage points) due to unfavorable foreign currency exchange rates and costs associated with the voluntary recall of certain powered instrument products (4.1 percentage points);  see Note 10 to the Consolidated Condensed Financial Statements for further discussion.

 
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Operating margins as a percentage of net sales decreased 6.8 percentage points to 9.7% in the nine months ended September 30, 2009 compared to 16.5% in 2008 principally as a result of lower gross margins (2.5 percentage points) due to unfavorable foreign currency exchange rates, higher research and development spending (0.7 percentage points) due to increased emphasis on our CONMED Linvatec orthopedic products, and costs associated with the voluntary recall of certain powered instrument products (1.4 percentage points);  see Note 10 to the Consolidated Condensed Financial Statements for further discussion.  In addition, sales force and other administrative expenses increased 2.2 points as a percentage of lower overall sales.  

CONMED Patient Care

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2008
   
2009
   
2008
   
2009
 
                         
Net sales
  $ 18,800     $ 17,312     $ 58,918     $ 52,748  
                                 
Income from operations
    854       592       1,997       (1,030 )
                                 
Operating margin
    4.5 %     3.4 %     3.4 %     -2.0 %

Product offerings include a line of vital signs and cardiac monitoring products including pulse oximetry equipment and sensors, ECG electrodes and cables, cardiac defibrillation and pacing pads and blood pressure cuffs.  We also offer a complete line of single-use suction instruments and tubing for use in the operating room, as well as a line of IV products.

 
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Patient care sales decreased $1.5 million (-8.0%) in the quarter ended September 30, 2009 to $17.3 million from $18.8 million in the same period a year ago.  Unfavorable foreign currency exchange rates (when compared to the foreign currency exchange rates in the same period a year ago) decreased sales approximately $0.1 million.  On a local currency basis, sales decreased 7.4%.  Patient care sales decreased $6.1 million (-10.4%) in the nine months ended September 30, 2009 to $52.8 million from $58.9 million in the same period a year ago.  Unfavorable foreign currency exchange rates (when compared to the foreign currency exchange rates in the same period a year ago) decreased sales approximately $0.6 million.  On a local currency basis, sales decreased 9.3%.

 
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Operating margins as a percentage of net sales decreased 1.1 percentage points to 3.4% for the quarter ended September 30, 2009 compared to 4.5% in 2008 while operating margins decreased 5.4 percentage points to -2.0% for the nine months ended September 30, 2009 compared to 3.4% in the same period a year ago. The decrease in operating margins in the quarter and nine months ended September 30, 2009 is primarily due to the decreases in gross margins of 1.9 and 2.2 percentage points, respectively, compared to the same period a year ago.  Higher selling and administrative costs (3.1 and 5.0 percentage points, respectively) accounted for the remaining increase and w