form10q-117422_conmed.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
June 30, 2011
0-16093


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


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

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). ý

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 o    Accelerated filer ý    Non-accelerated filer o    Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o No ý

The number of shares outstanding of registrant's common stock, as of July 27, 2011 is 28,569,319 shares.


 

 
 

 



CONMED CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2011


PART I FINANCIAL INFORMATION


Item Number
Page
     
 
     
 
1
     
 
2
     
 
3
     
 
4
     
     
15
     
32
     
32
     
PART II OTHER INFORMATION
     
32
     
33
     
     
34





 
 



PART I                      FINANCIAL INFORMATION
Item 1.
CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
 (Unaudited, in thousands except per share amounts)
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2011
   
2010
   
2011
 
                         
Net sales
  $ 181,086     $ 183,236     $ 357,451     $ 366,686  
                                 
Cost of sales
    87,403       91,781       171,973       179,515  
                                 
Gross profit
    93,683       91,455       185,478       187,171  
                                 
Selling and administrative expense
    71,494       67,862       142,046       137,940  
                                 
Research and development expense
    6,441       6,797       14,123       14,478  
                                 
Other expense
    970       98       970       792  
                                 
      78,905       74,757       157,139       153,210  
                                 
Income from operations
    14,778       16,698       28,339       33,961  
                                 
Loss on early extinguishment
                               
    of debt
    79       -       79       -  
                                 
Amortization of debt discount
    1,056       1,113       2,108       2,207  
                                 
Interest expense
    1,771       1,707       3,520       3,512  
                                 
Income before income taxes
    11,872       13,878       22,632       28,242  
                                 
Provision for income taxes
    4,566       5,198       8,007       10,567  
                                 
Net income
  $ 7,306     $ 8,680     $ 14,625     $ 17,675  
                                 
                                 
      Per share data:
                               
                                 
Net Income
                               
    Basic
  $ .25     $ .31     $ .50     $ .62  
    Diluted
    .25       .30       .50       .61  
                                 
Weighted average common shares
                               
    Basic
    29,100       28,448       29,125       28,356  
    Diluted
    29,295       28,883       29,342       28,820  
                                 



 
See notes to consolidated condensed financial statements.

 
1



CONMED CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited, in thousands except share and per share amounts)
 
   
December 31,
   
June 30,
 
   
2010
   
2011
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 12,417     $ 24,331  
Accounts receivable, net
    145,350       152,695  
Inventories
    172,796       169,254  
Deferred income taxes
    8,476       8,824  
Prepaid expenses and other current assets
    11,153       13,078  
Total current assets
    350,192       368,182  
Property, plant and equipment, net
    140,895       140,792  
Deferred income taxes
    2,009       2,354  
Goodwill
    295,068       294,874  
Other intangible assets, net
    190,091       186,868  
Other assets
    7,518       7,095  
Total assets
  $ 985,773     $ 1,000,165  
                 
                 
                 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current liabilities:
               
Current portion of long-term debt
  $ 110,433     $ 144,065  
Accounts payable
    21,692       20,981  
Accrued compensation and benefits
    28,411       23,060  
Income taxes payable
    973       1,267  
Other current liabilities
    18,357       20,974  
Total current liabilities
    179,866       210,347  
                 
Long-term debt
    85,182       30,644  
Deferred income taxes
    106,046       114,671  
Other long-term liabilities
    28,116       27,794  
Total liabilities
    399,210       383,456  
                 
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 2010 and 2011, respectively
    313       313  
Paid-in capital
    319,406       319,259  
Retained earnings
    354,020       371,365  
Accumulated other comprehensive loss
    (15,861 )     (10,710 )
Less: 3,077,377 and 2,741,168 shares of common stock
               
 in treasury, at cost in 2010 and 2011, respectively
    (71,315 )     (63,518 )
Total shareholders’ equity
    586,563       616,709  
Total liabilities and shareholders’ equity
  $ 985,773     $ 1,000,165  

 


 
See notes to consolidated condensed financial statements.

 
2


CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 (Unaudited, in thousands)

 
 
Six months ended
 
 
 
June 30,
 
 
 
2010
   
2011
 
Cash flows from operating activities:
           
 Net income
  $ 14,625     $ 17,675  
 Adjustments to reconcile net income
               
  to net cash provided by operating activities:
               
     Depreciation
    8,449       8,983  
     Amortization of debt discount
    2,108       2,207  
     Amortization, all other
    10,024       9,857  
     Stock-based compensation expense
    2,082       2,232  
     Deferred income taxes
    7,239       8,981  
     Loss on early extinguishment of debt
    79       -  
     Sale of accounts receivable to
               
        (collections on behalf of) purchaser
    (29,000 )     -  
        Increase (decrease) in cash flows
               
        from changes in assets and liabilities:
               
           Accounts receivable
    8,718       (4,541 )
           Inventories
    (16,167 )     78  
           Accounts payable
    6,100       2,309  
           Income taxes payable
    (125 )     143  
           Accrued compensation and benefits
    90       (5,684 )
           Other assets
    (2,884 )     (2,226 )
           Other liabilities
    (5,815 )     209  
      (9,102 )     22,548  
     Net cash provided by operating activities
    5,523       40,223  
                 
Cash flows from investing activities:
               
   Purchases of property, plant and equipment
    (7,163 )     (8,576 )
   Payments related to business acquisitions
    (5,157 )     (72 )
     Net cash used in investing activities
    (12,320 )     (8,648 )
                 
Cash flows from financing activities:
               
 Net proceeds from common stock issued
               
    under employee plans
    789       5,495  
    Repurchase of treasury stock
    (9,471 )     -  
    Payments on senior credit agreement
    (10,675 )     (22,675 )
    Payments on mortgage notes
    (404 )     (438 )
    Proceeds from secured borrowings, net
    31,000       -  
    Payments on senior subordinated notes
    (2,933 )     -  
    Net change in cash overdrafts
    (2,068 )     (3,148 )
     Net cash provided by
               
        (used in) financing activities
    6,238       (20,766 )
                 
Effect of exchange rate changes
               
  on cash and cash equivalents
    (1,049 )     1,105  
                 
Net increase (decrease) in cash and cash equivalents
    (1,608 )     11,914  
                 
Cash and cash equivalents at beginning of period
    10,098       12,417  
                 
Cash and cash equivalents at end of period
  $ 8,490     $ 24,331  


 
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 single-uses, 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 June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

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, 2010 included in our Annual Report on Form 10-K.


Note 3 – Comprehensive income

Comprehensive income consists of the following:
 
 
 
Three months ended
   
Six months ended
 
 
 
June 30,
   
June 30,
 
 
 
2010
   
2011
   
2010
   
2011
 
                         
Net income
  $ 7,306     $ 8,680     $ 14,625     $ 17,675  
                                 
Other comprehensive income:
                               
   Pension liability, net of
                               
     income tax
    207       266       414       497  
     Cash flow hedging gain (loss),
                               
     net of income tax
    858       271       1,464       (775 )
     Foreign currency
                               
     translation adjustment
    (5,786 )     1,585       (7,354 )     5,429  
                                 
  Comprehensive income
  $ 2,585     $ 10,802     $ 9,149     $ 22,826  
 
 

 
4





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

 
                     
Accumulated
 
   
Cash Flow
         
Cumulative
   
Other
 
   
Hedging
   
Pension
   
Translation
   
Comprehensive
 
   
Loss
   
Liability
   
Adjustments
   
Income (loss)
 
                         
Balance, December 31, 2010
  $ (1,245 )   $ (18,482 )   $ 3,866     $ (15,861 )
                                 
                                 
  Pension liability,
                               
    net of income tax
    -       497       -       497  
                                 
  Cash flow hedging loss,
                               
    net of income tax
    (775 )     -       -       (775 )
                                 
  Foreign currency translation
                               
    adjustments
    -       -       5,429       5,429  
                                 
Balance, June 30, 2011
  $ (2,020 )   $ (17,985 )   $ 9,295     $ (10,710 )

 
Note 4 – Fair value of financial instruments
 
 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 certain foreign currency exposures.
 
By nature, all financial instruments involve market and credit risks. We enter into forward contracts with major investment grade financial institutions and have policies to monitor the credit risk of those counterparties.  While there can be no assurance, we do not anticipate any material non-performance by any of these counterparties.
 
Foreign Currency Forward Contracts. We hedge forecasted intercompany sales denominated in foreign currencies through the use of forward contracts.   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 be recognized into earnings as a component of sales when the forecasted transaction occurs.  The notional contract amounts for forward contracts outstanding at June 30, 2011 which have been accounted for as cash flow hedges totaled $99.6 million.  Net realized gains (losses) recognized for forward contracts accounted for as cash flow hedges approximated $1.3 million and ($2.3 million) for the three months ended June 30, 2010 and 2011, respectively and $2.2 million and ($3.5 million) for the six months ended June 30, 2010 and 2011, respectively.  Net unrealized losses on forward contracts outstanding, which have been accounted for as cash flow hedges and which have been included in other comprehensive income, totaled $2.0 million at June 30, 2011.  These unrealized losses and any subsequent changes in fair value will be recognized in the consolidated statements of operations in 2011 and 2012 as the related forward contracts mature and gains and losses are realized.

 
5



 

 
We also enter into forward contracts to exchange foreign currencies for United States dollars in order to hedge our currency transaction exposures on 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 June 30, 2011 which have not been designated as hedges totaled $38.0 million.  Net realized gains (losses) recognized in connection with those forward contracts not accounted for as hedges approximated $1.0 million and ($0.6 million) for the three months ended June 30, 2010 and 2011, respectively, offsetting gains (losses) on our intercompany receivables of ($0.1 million) and $0.4 million for the three months ended June 30, 2010 and 2011, respectively.  Net realized gains (losses) recognized in connection with those forward contracts not accounted for as hedges approximated $1.3 million and ($1.6 million) for the six months ended June 30, 2010 and 2011, respectively, offsetting gains (losses) on our intercompany receivables of ($0.8 million) and $1.6 million for the six months ended June 30, 2010 and 2011, respectively.  These gains and losses have been recorded in selling and administrative expense in the consolidated statements of operations.
 
We record these forward foreign exchange contracts at fair value; the following table summarizes the fair value for forward foreign exchange contracts outstanding at June 30, 2011:
 
 
Asset
Balance Sheet
Location
 
Fair
Value
 
Liabilities
Balance Sheet
Location
 
Fair
Value
   
Net
Fair
Value
 
Derivatives designated as hedged instruments:
                     
                       
Foreign Exchange Contracts
Other current liabilities
  $ (135 )
Other current liabilities
  $ 3,339     $ 3,204  
                             
Derivatives not designated as hedging instruments:
                           
                             
Foreign Exchange Contracts
Other current liabilities
     -  
Other current liabilities
     89        89  
                             
Total derivatives
    $ (135 )     $ 3,428     $ 3,293  
 
Our forward foreign exchange contracts are subject to a master netting agreement and qualify for netting in the consolidated balance sheets.  Accordingly, we have recorded the net fair value of $3.3 million in other current liabilities.
 
Fair Value Disclosure. Financial Accounting Standards Board (“FASB”) guidance defines fair value and 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.

 
6



 
As of June 30, 2011, 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 June 30, 2011 consist of forward foreign exchange contracts and two embedded derivatives associated with our 2.50% convertible senior subordinated notes (the “Notes”).  The value of the forward foreign exchange contracts was determined within Level 2 of the valuation hierarchy and is listed in the table above.  The value of the two embedded derivatives associated with the Notes 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.
 
The carrying amounts reported in our balance sheets for cash and cash equivalents, accounts receivable, accounts payable and long-term debt excluding the Notes approximate fair value.  The fair value of the Notes approximated $111.7 million and $112.8 million at December 31, 2010 and June 30, 2011, respectively, based on their quoted market price.  During the quarter ended June 30, 2010, we repurchased and retired $3.0 million of the Notes for $2.9 million and recorded a loss on the early extinguishment of debt of $0.1 million.

Note 5 - Inventories

Inventories consist of the following:
   
December 31,
   
June 30,
 
   
2010
   
2011
 
             
Raw materials
  $ 49,038     $ 44,603  
Work-in-process
    15,460       17,343  
Finished goods
    108,298       107,308  
          Total
  $ 172,796     $ 169,254  
 
Note 6 – Earnings per share

Basic earnings per share (“basic 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 stock options, restricted stock units and stock appreciation rights (“SARs”) during the period. The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2010 and 2011.

 
7




 
 
Three months ended
   
Six months ended
 
 
 
June 30,
   
June 30,
 
 
 
2010
   
2011
   
2010
   
2011
 
                         
Net income
  $ 7,306     $ 8,680     $ 14,625     $ 17,675  
                                 
Basic – weighted average shares
                               
     outstanding
    29,100       28,448       29,125       28,356  
                                 
Effect of dilutive potential
                               
  securities
    195       435       217       464  
 
                               
Diluted – weighted average
                               
  shares outstanding
    29,295       28,883       29,342       28,820  
                                 
     
                               
Net Income
                               
  Basic
  $ .25     $ .31     $ .50     $ .62  
  Diluted
    .25       .30       .50       .61  
 
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 1.5 million and 1.4 million for the three and six months ended June 30, 2010, respectively. Shares excluded from the calculation of diluted EPS aggregated 0.6 million and 0.7 million for the three and six months ended June 30, 2011, respectively.  The shares used in the calculation of diluted EPS also exclude potential shares issuable under the Notes.  Upon conversion of 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 June 30, 2011, 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.  Accordingly, 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.

Note 7 – Goodwill and other intangible assets

The changes in the net carrying amount of goodwill for the six months ended June 30, 2011 are as follows:

Balance as of January 1, 2011
  $ 295,068  
         
Adjustments to goodwill resulting from
       
   business acquisitions finalized
    -  
         
Foreign currency translation
    (194 )
         
Balance as of June 30, 2011
  $ 294,874  

Total accumulated impairment losses (associated with our CONMED Endoscopic Technologies operating unit) aggregated $46,689 at December 31, 2010 and June 30, 2011.

 
8


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

 
 
December 31,
   
June 30,
 
   
2010
   
2011
 
             
CONMED Electrosurgery
  $ 16,645     $ 16,645  
 
               
CONMED Endosurgery
    42,439       42,439  
                 
CONMED Linvatec
    175,682       175,488  
                 
CONMED Patient Care
    60,302       60,302  
 
               
Balance
  $ 295,068     $ 294,874  

     Other intangible assets consist of the following:

   
December 31, 2010
   
June 30, 2011
 
   
Gross
         
Gross
       
   
Carrying
   
Accumulated
   
Carrying
   
Accumulated
 
Amortized intangible assets:
 
Amount
   
Amortization
   
Amount
   
Amortization
 
                         
Customer relationships
  $ 127,594     $ (40,801 )   $ 127,594     $ (42,957 )
                                 
Patents and other intangible assets
    47,178       (32,224 )     47,208       (33,317 )
                                 
Unamortized intangible assets:
                               
                                 
Trademarks and tradenames
    88,344       -       88,340       -  
                                 
    $ 263,116     $ (73,025 )   $ 263,142     $ (76,274 )

 
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 31 years.  Customer relationships are being amortized over a weighted average life of 34 years.  Patents and other intangible assets are being amortized over a weighted average life of 15 years.  

Amortization expense related to intangible assets which are subject to amortization totaled $1,528 and $3,051 in the three and six months ended June 30, 2010, respectively, and $1,626 and $3,249 in the three and six months ended June 30, 2011, respectively, and is included in selling and administrative expense on the consolidated condensed statements of income.
 
The estimated amortization expense for the year ending December 31, 2011, including the six month period ended June 30, 2011 and for each of the five succeeding years is as follows:

 
2011
    6,077  
2012
    6,023  
2013
    5,796  
2014
    5,369  
2015
    4,734  
2016
    4,619  


 
9


 
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 six months ended June 30, are as follows:
 
   
2010
   
2011
 
             
Balance as of January 1,
  $ 3,383     $ 3,363  
                 
Provision for warranties
    1,669       2,247  
                 
Claims made
    (1,740 )     (2,082 )
                 
Balance as of June 30,
  $ 3,312     $ 3,528  
 
Note 9 – Pension plan

Net periodic pension costs consist of the following:
 
 
 
Three months ended
   
Six months ended
 
 
 
June 30,
   
June 30,
 
 
 
2010
   
2011
   
2010
   
2011
 
                         
Service cost
  $ 44     $ 70     $ 88     $ 141  
                                 
Interest cost on projected
                               
  benefit obligation
    1,006       664       2,012       1,759  
                                 
Expected return on plan assets
    (1,003 )     (1,132 )     (2,007 )     (2,189 )
                                 
Net amortization and deferral
    328       423       657       789  
                                 
Net periodic pension cost
  $ 375     $ 25     $ 750     $ 500  
 
We are required and expect to make $2.1 million in contributions to our pension plan in 2011. We contributed $0.5 million during the second quarter of 2011 and expect to contribute the remaining $1.6 million during the second half of 2011.

Note 10 – Other expense

Other expense consists of the following:
 
   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2010
   
2011
   
2010
   
2011
 
                         
Administrative consolidation costs
    970     $ 98       970     $ 792  
                                 
Other expense
  $ 970     $ 98     $ 970     $ 792  


 
10


 
During 2011, we consolidated certain administrative functions in our Utica, New York facility.  For the three and six months ending June 30, 2011, we incurred $0.1 million and $0.8 million, respectively, in related costs consisting principally of severance charges.
 
During the second quarter of 2010, we incurred $1.0 million in restructuring costs associated with the consolidation of administrative functions in our CONMED Linvatec division.
 
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 their 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 units do not qualify for aggregation since their economic characteristics do not meet the criteria for aggregation as a result of the lower overall operating margin in these segments.

CONMED Endosurgery, CONMED Electrosurgery and CONMED Linvatec consist of a single aggregated segment comprising a complete line of endo-mechanical instrumentation for minimally invasive laparoscopic procedures, electrosurgical generators and related surgical instruments, arthroscopic instrumentation for use in orthopedic surgery and small bone, large bone and specialty powered surgical instruments.  CONMED Patient Care product offerings include a line of vital signs and cardiac monitoring products as well as suction instruments & tubing for use in the operating room.  CONMED Endoscopic Technologies product offerings include a comprehensive line of minimally invasive endoscopic diagnostic and therapeutic instruments used in procedures which require examination of the digestive tract.

The following is net sales information by product line and reportable segment:
 
 
 
Three months ended
   
Six months ended
 
 
 
June 30,
   
June 30,
 
 
 
2010
   
2011
   
2010
   
2011
 
                         
Arthroscopy
    74,821       70,646       147,075       146,065  
Powered Surgical Instruments
    35,769       38,255       70,758       76,291  
     CONMED Linvatec
    110,590       108,901       217,833       222,356  
CONMED Electrosurgery
    23,965       26,053       47,048       49,625  
CONMED Endosurgery
    17,143       19,133       34,223       37,031  
     CONMED Linvatec, Endosurgery,
                               
                and Electrosurgery
    151,698       154,087       299,104       309,012  
CONMED Patient Care
    17,461       16,636       34,620       33,260  
CONMED Endoscopic Technologies
    11,927       12,513       23,727       24,414  
     Total
  $ 181,086     $ 183,236     $ 357,451     $ 366,686  


 
11




   Total assets, capital expenditures, depreciation and amortization information are impracticable to present by reportable segment because the necessary information is not available.

The following is a reconciliation between segment operating income and income before income taxes:
 
 
 
Three months ended
   
Six months ended
 
 
 
June 30,
   
June 30,
 
 
 
2010
   
2011
   
2010
   
2011
 
                         
CONMED Endosurgery, Electrosurgeryand Linvatec
  $ 21,271     $ 20,529     $ 38,527     $ 44,804  
CONMED Patient Care
    1,200       (999 )     1,546       (1,735 )
CONMED Endoscopic Technologies
    (237 )     355       (38 )     165  
Corporate
    (7,456 )     (3,187 )     (11,696 )     (9,273 )
Income from Operations
    14,778       16,698       28,339       33,961  
                                 
Loss on early extinguishment
                               
          of debt
    79       -       79       -  
Amortization of debt discount
    1,056       1,113       2,108       2,207  
Interest expense
    1,771       1,707       3,520       3,512  
                                 
Income before income taxes
  $ 11,872     $ 13,878     $ 22,632     $ 28,242  

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 subpoenas 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 obligations 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 financial condition, results of operations or cash flows.

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.

 
12




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 would not have a material adverse effect on our financial condition, results of operations or cash flows.
 
Note 13 – New accounting pronouncements
 
In October 2009, the FASB issued new guidance for arrangements with multiple deliverables under which a company is required to use its best estimate of selling price for the deliverables in an arrangement when vendor specific objective evidence or third party evidence of the selling price is not available.  We adopted the updated guidance, including the requirement for expanded qualitative and quantitative disclosures, effective January 1, 2011.  The implementation of this new guidance did not have a material impact on our consolidated financial statements.

In May 2011, the FASB issued new authoritative guidance to provide a consistent definition of fair value and ensure that fair value measurements and disclosure requirements are similar between GAAP and International Financial Reporting Standards. This guidance changes certain fair value measurement principles and enhances the disclosure requirements for fair value measurements. This guidance is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively.  We are currently evaluating the impact such guidance will have on our consolidated financial statements.

In June 2011, the FASB amended its guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. This guidance is effective for interim and annual periods beginning after December 15, 2011. We do not believe this guidance will have a material impact on our consolidated financial statements.
 
 
13


 
Note 14 – Restructuring

We incurred the following restructuring costs:
 
 
 
Three months ended
   
Six months ended
 
 
 
June 30,
   
June 30,
 
 
 
2010
   
2011
   
2010
   
2011
 
                         
New plant/facility
                       
consolidation costs
  $ 992     $ 986     $ 1,559     $ 1,740  
 
                               
Restructuring costs
                               
included in cost of sales
  $ 992     $ 986     $ 1,559     $ 1,740  
                                 
                                 
Administrative
                               
consolidation costs
  $ 970     $ 98     $ 970     $ 792  
                                 
Restructuring costs
                               
included in other expense
  $ 970     $ 98     $ 970     $ 792  
 
During 2010 and 2011, we continued our operational restructuring plan which includes the transfer of additional production lines from Utica, New York, Largo, Florida and Goleta, California to our manufacturing facility in Chihuahua, Mexico.  We incurred $1.0 million and $1.6 million in costs associated with the restructuring during the three and six months ending June 30, 2010.  We incurred $1.0 million and $1.7 million in the three and six months ending June 30, 2011.  These costs were charged to cost of goods sold and include severance and other charges associated with the transfer of production to Mexico.

Restructuring costs included in other expense are described more fully in Note 10.



 
14



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, 2010 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, 2010 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.

 
15





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
June 30,
   
Six months ended
June 30,
 
   
2010
   
2011
   
2010
   
2011
 
                         
Arthroscopy
    41.3 %     38.6 %     41.1 %     39.8 %
Powered Surgical Instruments
    19.8       20.9       19.8       20.8  
Electrosurgery
    13.2       14.2       13.2       13.5  
Endosurgery
    9.5       10.4       9.6       10.1  
Patient Care
    9.6       9.1       9.7       9.1  
Endoscopic Technologies
    6.6       6.8       6.6       6.7  
Consolidated Net Sales
    100.0 %     100.0 %     100.0 %     100.0 %

A significant amount of our products are used in surgical procedures with the majority of our revenues derived from the sale of single-use products.  We manufacture substantially all of our products in facilities located in the United States, 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 six months ended June 30, 2011, sales to purchasers outside of the United States approximated 51% and 50%, respectively, of total net sales.

Business Environment and Opportunities

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

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

We have a variety of research and development initiatives focused in each of our principal product lines as continued innovation and commercialization of new proprietary products and processes are essential elements of our long-term growth strategy.  Our reputation as an innovator is exemplified by recent new product introductions such as the 2.8 and 3.3mm PopLock® Knotless Suture Anchors, for repair of unstable shoulders and for use in the emerging Endoscopic hip market; the Concept® Suture Passer, for use in rotator cuff repair; the Sequent™ Meniscal Repair System, which offers suture-locking implant cleats that will provide a knotless repair and allow the surgeon to complete an entire meniscal repair with one device without leaving the joint; CrossFT BC™ biocomposite suture anchor for rotator cuff repair; PRO6140 & PRO6240 pin drivers, to allow the use of one device during procedures such as total joint arthroplasty, trauma, sports medicine surgeries as well as small bone orthopedics; and the Altrus® Thermal Tissue Fusion System, which utilizes thermal energy to seal, cut, grasp, and dissect vessels up to 7mm in size utilizing a closed feedback loop between the energy source and the single-use handpiece to precisely control the desired effect on tissue.

 
16





Business Challenges

Significant volatility in the financial markets and foreign currency exchange rates and depressed economic conditions in both domestic and international markets have recently presented significant business challenges.  While we are cautiously optimistic that the overall global economic environment is improving and experienced a return to revenue growth in 2010 and the first half of 2011, there can be no assurance that the improvement in the economic environment will be sustained.  We will continue to monitor and manage the impact of the overall economic environment on the Company.

Over the past few years we successfully completed certain of our operational restructuring plans whereby we consolidated manufacturing and distribution centers as well as restructured certain of our administrative functions.  We continue to restructure both operations and administrative functions as necessary throughout the organization.  However, we cannot be certain such activities will be completed in the estimated time period or that planned cost savings will be achieved.
 
 
Our facilities are subject to periodic inspection by the United States Food and Drug Administration (“FDA”) and foreign regulatory agencies or notified bodies for, among other things, conformance to Quality System Regulation and Current Good Manufacturing Practice (“CGMP”) requirements and foreign or international standards.  We are committed to the principles and strategies of systems-based quality management for improved CGMP compliance, operational performance and efficiencies through our Company-wide quality systems initiatives.  However, there can be no assurance that our actions will ensure that we will not receive a warning letter or other regulatory action, which may include consent decrees or fines, that we will not make product recalls or that we will not experience temporary or extended periods during which we may not be able to sell products in foreign countries.

Critical Accounting Policies

Preparation of our financial statements requires us to make estimates and assumptions which affect the reported amounts of assets, liabilities, revenues and expenses.  Note 1 to the consolidated financial statements in our Annual Report on Form 10-K for the year-ended December 31, 2010 describes significant accounting policies used in preparation of the consolidated financial statements.  The most significant areas involving management judgments and estimates are described below and are considered by management to be critical to understanding the financial condition and results of operations of CONMED Corporation.  There have been no significant changes in our critical accounting estimates during the quarter ended June 30, 2011.


 
17





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

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

 
·
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 $1.0 million at June 30, 2011 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.

 
18



 
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 $294.9 million and other intangible assets of $186.9 million as of June 30, 2011.

In accordance with Financial Accounting Standards Board (“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 completed our goodwill impairment testing as of October 1, 2010 and determined that no impairment existed at that date.  For our CONMED Electrosurgery, CONMED Endosurgery and CONMED Linvatec operating units, our impairment testing utilized CONMED Corporation’s EBIT multiple adjusted for a market-based control premium with the resultant fair values exceeding carrying values by 76% to 121%.  Our CONMED Patient Care operating unit has the least excess of fair value over carrying value of our reporting units;    we therefore utilized both a market-based approach and an income approach when performing impairment testing with the resultant fair value exceeding carrying value by 15%.  The income approach contained certain key assumptions including that revenue would resume historical growth patterns in 2011 while including certain cost savings associated with the operational restructuring plan completed during 2010.  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.

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 34 years.

 
19


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

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

Pension Plan

We sponsor a defined benefit pension plan (“the plan”) covering substantially all our United States-based employees.  The plan was frozen effective May 14, 2009.  Major assumptions used in accounting for the plan include the discount rate, expected return on plan assets, 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.

The weighted-average discount rate used to measure pension liabilities and costs is set by reference to the Citigroup Pension Liability Index. However, this index gives only an indication of the appropriate discount rate because the cash flows of the bonds comprising the index do not precisely match the projected benefit payment stream of the plan. For this reason, we also consider the individual characteristics of the plan, such as projected cash flow patterns and payment durations, when setting the discount rate.  The rates used in determining 2010 and 2011 pension expense are 5.86% and 5.41%, respectively.
    

 
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We have used an expected rate of return on pension plan assets of 8.0% for purposes of determining the net periodic pension benefit cost.  In determining the expected return on pension plan assets, we consider the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance.  In addition, we consult with financial and investment management professionals in developing appropriate targeted rates of return.
 
For the three and six months ending June 30, 2011 we recorded pension expense of $0.0 million and $0.5 million, respectively.  Pension expense in 2011 is expected to be $1.0 million compared to expense of $0.9 million in 2010.  In addition, we will be required to contribute approximately $2.1 million to the pension plan for the 2011 plan year.
 
See Note 9 to the Consolidated Condensed Financial Statements for further discussion.

Stock Based Compensation

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

Income Taxes

The recorded future tax benefit arising from deductible temporary differences and tax carryforwards is approximately $38.3 million at June 30, 2011.  Management believes that 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 2009.  Tax years subsequent to 2009 are subject to future examination.

Results of Operations

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

   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2010
   
2011
   
2010
   
2011
 
                         
Net sales
    100.0 %     100.0 %     100.0 %     100.0 %
Cost of sales
    48.3       50.1       48.1       49.0  
Gross profit
    51.7       49.9       51.9       51.0  
Selling and administrative expense
    39.5       37.0       39.7       37.6  
Research and development expense
    3.6       3.7       4.0       4.0  
Other expense
    0.5       0.1       0.3       0.2  
   Income from operations
    8.1       9.1       7.9       9.2  
Loss on early extinguishment of debt
    0.0       0.0        0.0        0.0  
Amortization of bond discount
    0.6       0.6       0.6       0.6  
Interest expense
    1.0       0.9       1.0       1.0  
Income before income taxes
    6.5       7.6       6.3       7.6  
Provision for income taxes
    2.5       2.8       2.2       2.9  
Net income
    4.0 %     4.8 %     4.1 %     4.7 %


 
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Three months ended June 30, 2011 compared to three months ended June 30, 2010
 
Sales for the quarterly period ended June 30, 2011 were $183.2 million, an increase of $2.1 million (1.2%) compared to sales of $181.1 million in the comparable 2010 period with increases across all product lines except Arthroscopy and Patient Care.  In local currency, excluding the effects of the hedging program, sales decreased 0.3%.  Sales of capital equipment decreased $2.8 million (-6.5%) to $40.1 million in the second quarter of 2011 from $42.9 million in the same period a year ago; sales of single-use products increased $4.9 million (3.5%) to $143.1 million in the second quarter of 2011 from $138.2 million in the same period a year ago.  On a local currency basis, excluding the effects of our hedging program, sales of capital equipment decreased 8.0% while single-use products increased 2.0%.  We believe the overall decline in capital sales is driven by capital purchasing constraints in hospitals due to the depressed economic conditions.

Cost of sales increased to $91.8 million in the quarterly period ended June 30, 2011 as compared to $87.4 million in the same period a year ago on overall increases in sales volumes as described above.  Gross profit margins decreased 1.8 percentage points to 49.9% in the quarterly period ended June 30, 2011 as compared to 51.7% in the same period a year ago.  The decrease in gross profit margins of 1.8 percentage points is primarily a result of unfavorable manufacturing production variances related to absorbing fixed costs into inventory that arose in the fourth quarter of 2010 when manufacturing production was conducted at lower levels in order to reduce inventory.  In periods where we reduce our inventory levels to manage inventory carrying costs, the inventory we produce is carried at a higher unit cost due to absorbing those fixed costs over lower production levels. As a result, when that inventory is sold in subsequent periods, the gross profit margin on those sales is lower.  We experienced this reduced gross profit margin in the second quarter of 2011.

Selling and administrative expense decreased to $67.9 million in the quarterly period ended June 30, 2011 as compared to $71.5 million in the same period a year ago as our restructuring and cost control efforts more than offset the approximately $2.6 million unfavorable impact on expenses of foreign currency exchange rates (when compared to the foreign currency exchange rates in the same period a year ago).  Selling and administrative expense as a percentage of net sales decreased to 37.0% in the quarterly period ended June 30, 2011 as compared to 39.5% in the same period a year ago as selling and administrative expense declined 5.1% while sales increased 1.2%.  

 
22




Research and development expense totaled $6.8 million in the quarterly period ended June 30, 2011 as compared to $6.4 million in the same period a year ago.  As a percentage of net sales, research and development expense remained relatively flat at 3.7% in the quarterly period ending June 30, 2011 compared to 3.6% in the same period a year ago.

As discussed in Note 10 to the Consolidated Condensed Financial Statements, other expense in the quarterly period ended June 30, 2011 consisted of a $0.1 million charge related to the consolidation of administrative functions in our Utica, NY facility.  Other expense in the quarterly period ended June 30, 2010 consisted of a $1.0 million charge related to the consolidation of administrative functions in our CONMED Linvatec division.

During the quarterly period ended June 30, 2010, we repurchased and retired $3.0 million of our 2.50% convertible senior subordinated notes (the “Notes”) for $2.9 million and recorded a loss on the early extinguishment of debt of $0.1 million.  See additional discussion under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources and Note 4 to the Consolidated Condensed Financial Statements.

Amortization of debt discount was $1.1 million in the quarterly period ended June 30, 2011 and in the same period a year ago.

Interest expense in the quarterly period ended June 30, 2011 was $1.7 million compared to $1.8 million in the same period a year ago.  The interest expense decreased due to lower weighted average borrowings outstanding in the quarterly period ended June 30, 2011 as compared to the same period a year ago offset by higher weighted average interest rates.  The weighted average interest rates on our borrowings (inclusive of the finance charge on our accounts receivable sale facility for the quarterly period ended June 30, 2010) increased to 3.74% in the quarterly period ended June 30, 2011 as compared to 3.17% in the same period a year ago.

A provision for income taxes has been recorded at an effective tax rate of 37.5% for the quarterly period ended June 30, 2011 compared to the 38.5% effective tax rate recorded in the same period a year ago.  The effective tax rate for the quarterly period ended June 30, 2011 is lower than that recorded in the same period a year ago as a result of the 2011 tax rate including the benefit of the research and development tax credit which was not included in 2010.  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, 2010, Note 6 to the Consolidated Financial Statements.

Six months ended June 30, 2011 compared to six months ended June 30, 2010
 
Sales for the six months ended June 30, 2011 were $366.7 million, an increase of $9.2 million (2.6%) compared to sales of $357.5 million in the comparable 2010 period with increases across all product lines except Arthroscopy and Patient Care.  In local currency, excluding the effects of the hedging program, sales increased 1.9%.  Sales of capital equipment increased $1.0 million (1.2%) to $82.0 million in the six months ended June 30, 2011 from $81.0 million in the same period a year ago; sales of single-use products increased $8.2 million (3.0%) to $284.7 million in the six months ended June 30, 2011 from $276.5 million in the same period a year ago.  On a local currency basis, excluding the effects of our hedging program, sales of capital equipment increased 0.5% and single-use products increased 2.3%.

 
23




Cost of sales increased to $179.5 million in the six months ended June 30, 2011 as compared to $172.0 million in the same period a year ago on overall increases in sales volumes as described above.  Gross profit margins decreased 0.9 percentage points to 51.0% in the six months ended June 30, 2011 as compared to 51.9% in the same period a year ago.  The decrease in gross profit margins of 0.9 percentage points is primarily a result of unfavorable manufacturing production variances related to absorbing fixed costs into inventory that arose in the fourth quarter of 2010 as further described above.

Selling and administrative expense decreased to $137.9 million in the six months ended June 30, 2011 as compared to $142.0 million in the same period a year ago as our restructuring and cost control efforts more than offset the approximately $3.3 million unfavorable impact on expenses of foreign currency exchange rates (when compared to the foreign currency exchange rates in the same period a year ago).  Selling and administrative expense as a percentage of net sales decreased to 37.6% in the six months ended June 30, 2011 as compared to 39.7% in the same period a year ago as selling and administrative expense declined 2.9% while sales increased 2.6%.

Research and development expense totaled $14.5 million in the six months ended June 30, 2011 as compared to $14.1 million in the same period a year ago.  As a percentage of net sales, research and development expense remained flat at 4.0% for the six months ended June 30, 2011 compared to the same period a year ago.

As discussed in Note 10 to the Consolidated Condensed Financial Statements, other expense in the six months ended June 30, 2011 consisted of a $0.8 million charge related to the consolidation of administrative functions in our Utica, NY facility.  Other expense in the six months ended June 30, 2010 consisted of a $1.0 million charge related to the consolidation of administrative functions in our CONMED Linvatec division.

During the quarter ended June 30, 2010, we repurchased and retired $3.0 million of our 2.50% convertible senior subordinated notes (the “Notes”) for $2.9 million and recorded a loss on the early extinguishment of debt of $0.1 million.  See additional discussion under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources and Note 4 to the Consolidated Condensed Financial Statements.

Amortization of debt discount was $2.2 million in the six months ended June 30, 2011 compared to $2.1 million in the same period a year ago.

Interest expense remained flat at $3.5 million in the six months ended June 30, 2011 and in the same period a year ago.  Interest expense remained flat due to lower weighted average borrowings outstanding in the six month period ended June 30, 2011 as compared to the same period a year ago offset by higher weighted average interest rates.  The weighted average interest rate on our borrowings (inclusive of the finance charge on our accounts receivable sale facility for the six month period ended June 30, 2010) increased to 3.67% in the six months ended June 30, 2011 as compared to 3.14% in the same period a year ago.

A provision for income taxes has been recorded at an effective tax rate of 37.4% for the six months ended June 30, 2011 compared to the 35.4% effective tax rate recorded in the same period a year ago.  The effective tax rate for the six months ended June 30, 2011 is higher than that recorded in the same period a year ago as 2010 included the settlement of our 2008 IRS examination, and a resulting decrease to our reserves and income tax expense.  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, 2010, Note 6 to the Consolidated Financial Statements.

 
24




Operating Segment Results:

 Segment information is prepared on the same basis that we review financial information for operational decision-making purposes.  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 their 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 units do not qualify for aggregation since their economic characteristics do not meet the criteria for aggregation as a result of the lower overall operating margin in these segments.

The following tables summarize the Company’s results of operations by segment for the three and six month periods ended June 30, 2010 and 2011.

CONMED Linvatec, CONMED Electrosurgery and CONMED Endosurgery
 
   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2010
   
2011
   
2010
   
2011
 
                         
  Net sales
  $ 151,698     $ 154,087     $ 299,104     $ 309,012  
                                 
  Income from
                               
    operations
    21,271       20,529       38,527       44,804  
                                 
  Operating Margin
    14.0 %     13.3 %     12.9 %     14.5 %
 
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 $4.3 million (-5.7%) in the quarter ended June 30, 2011 to $70.6 million from $74.9 million in the same period a year ago mainly due to lower sales of our video imaging products for arthroscopy and general surgery.  In local currency, excluding the effects of the hedging program, sales decreased 7.5%.  Sales of capital equipment decreased $6.9 million (-33.7%) to $13.6 million in the second quarter of 2011 from $20.5 million in the same period a year ago; sales of single-use products increased $2.6 million (4.8%) to $57.0 million in the second quarter of 2011 from $54.4 million in the same period a year ago.  On a local currency basis, excluding the effects of the hedging program, sales of capital equipment decreased 34.3% while single-use products increased 2.6%.  Arthroscopy sales decreased $1.1 million (-0.7%) in the six months ended June 30, 2011 to $146.0 million from $147.1 million in the same period a year ago mainly due to lower sales of our video imaging products for arthroscopy and general surgery. In local currency, excluding the effects of the hedging program, sales decreased 1.6%.  Sales of capital equipment decreased $6.9 million (-18.3%) to $30.9 million in the six months ended June 30, 2011 from $37.8 million in the same period a year ago;  sales of single-use products increased $5.8 million (5.3%) to $115.1 million in the six months ended June 30, 2011 from $109.3 million in the same period a year ago.  On a local currency basis, excluding the effects of our hedging program, sales of capital equipment decreased 18.4% while single-use products increased 4.2%.  We believe the overall decline in capital sales is driven by capital purchasing constraints in hospitals due to the depressed economic conditions.

 
25




 
·
Powered surgical instrument sales increased $2.6 million (7.3%) in the quarterly period ended June 30, 2011 to $38.3 million from $35.7 million in the comparable 2010 period mainly due to increases in large bone handpiece products and our burs and blades.  In local currency, excluding the effects of the hedging program, sales increased 4.8%.  Sales of capital equipment increased $1.9 million (11.4%) to $18.5 million in the second quarter of 2011 from $16.6 million in the same period a year ago; sales of single-use products increased $0.7 million (3.7%) in the second quarter of 2011 to $19.8 million from $19.1 million in the same period a year ago.  On a local currency basis, excluding the effects of the hedging program, sales of capital equipment increased 9.1% while single-use products increased 1.1%.  Powered surgical instrument sales increased $5.7 million (8.1%) in the six months ended June 30, 2011 to $76.4 million from $70.7 million in the comparable 2010 period mainly due to increases in our large bone handpiece products and burs and blades.  In local currency, excluding the effects of the hedging program, sales increased 6.9%.  Sales of capital equipment increased $4.8 million (15.3%) to $36.2 million in the six months ended June 30, 2011 from $31.4 million in the same period a year ago; sales of single-use products increased $0.9 million (2.3%) to $40.2 million in the six months ended June 30, 2011 from $39.3 million in the same period a year ago.  On a local currency basis, excluding the effects of the hedging program, sales of capital equipment increased 14.1% while single-use products increased 1.0%.

 
·
Electrosurgery sales increased $2.1 million (8.8%) in the quarterly period ended June 30, 2011 to $26.1 million from $24.0 million in the comparable 2010 period mainly due to increased sales of generators and our new smoke evacuation accessories.  In local currency, excluding the effects of the hedging program, sales increased 7.9%.  Sales of capital equipment increased $2.2 million (37.9%) to $8.0 million in the second quarter of 2011 from $5.8 million in the same period a year ago;  sales of single-use products decreased $0.1 million (-0.5%) to $18.1 million in the second quarter of 2011 from $18.2 million in the same period a year ago.  On a local currency basis, excluding the effects of our hedging program, sales of capital equipment increased 36.2% while single-use products decreased 1.1%.  Electrosurgery sales increased $2.6 million (5.5%) in the six months ended June 30, 2011 to $49.7 million from $47.1 million in the comparable 2010 period mainly due to increased sales of generators and our new smoke evacuation accessories.  In local currency, excluding the effects of the hedging program, sales increased 4.9%.  Sales of capital equipment increased $3.1 million (26.3%) to $14.9 million in the six months ended June 30, 2011 from $11.8 million in the same period a year ago;  sales of single-use products decreased $0.5 million (-1.4%) to $34.8 million in the six months ended June 30, 2011 from $35.3 million in the same period a year ago.  On a local currency basis, excluding the effects of the hedging program, sales of capital equipment increased 24.6% while single-use products decreased 1.7%.
 
 

 
26




 
·
Endosurgery sales increased $2.0 million (11.7%) in the quarterly period ended June 30, 2011 to $19.1 million compared to $17.1 million in the same period a year ago mainly due to increased sales of our VCARE and suction/irrigation products. In local currency, excluding the effects of the hedging program, sales increased 10.6%. Endosurgery sales increased $2.8 million (8.2%) in the six months ended June 30, 2011 to $37.0 million from $34.2 million in the comparable 2010 period mainly due to increased sales of our VCARE and suction/irrigation products.  In local currency, excluding the effects of the hedging program, sales increased 7.9%.

 
·
Operating margins as a percentage of net sales decreased 0.7 percentage points to 13.3% in the quarterly period ended June 30, 2011 compared to 14.0% in 2010 principally as a result of lower gross margins (1.0 percentage points) is primarily a result of unfavorable manufacturing production variances related to absorbing fixed costs into inventory that arose in the fourth quarter of 2010 as further described above offset by 2010 including charges related to the restructuring of administrative functions in our CONMED Linvatec division (0.6 percentage points).

 
·
Operating margins as a percentage of net sales increased 1.6 percentage points to 14.5% in the six months ended June 30, 2011 compared to 12.9% in 2010 principally as a result of lower spending on selling and administrative expenses (1.5 percentage points) and 2010 including charges related to the restructuring of administrative functions in our CONMED Linvatec division (0.3 percentage points).
 
CONMED Patient Care

 
 
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2010
   
2011
   
2010
   
2011
 
                         
Net sales
  $ 17,461     $ 16,636     $ 34,620     $ 33,260  
                                 
Income (loss) from
                               
   operations
    1,200       (999 )     1,546       (1,735 )
                                 
Operating Margin
    6.9 %     (6.0 %)     4.5 %     (5.2 %)

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.

 
·
Patient Care sales decreased $0.9 million (-5.1%) in the quarter ended June 30, 2011 to $16.6 million from $17.5 million in the same period a year ago mainly due to decreased sales of I.V. devices and ECG electrodes.  In local currency, excluding the effects of the hedging program, sales decreased 4.6%.  Patient Care sales decreased $1.5 million (-4.3%) in the six months ended June 30, 2011 to $33.2 million from $34.7 million in the same period a year ago as a result of decreased sales of I.V. devices and ECG electrodes.  In local currency, excluding the effects of the hedging program, sales decreased 3.8%.

 
27




 
·
Operating margins as a percentage of net sales decreased 12.9 percentage points to (-6.0%) for the quarter ended June 30, 2011 compared to 6.9% in 2010 while operating margins decreased 9.7 percentage points to (-5.2%) for the six months ended June 30, 2011 compared to 4.5% in the same period a year ago. The decrease in operating margins of 12.9 percentage points and 9.7 percentage points, in the quarter and six months ended June 30, 2011, respectively was driven by $0.1 million $0.6 million, respectively, in administrative restructuring charges (0.6 and 1.8 percentage points, respectively) and lower gross margins as a result of lower sales volumes (13.9 and 8.8 percentage points, respectively), offset by lower administrative expenses (1.6 and 0.9 percentage points, respectively).
 
CONMED Endoscopic Technologies

 
 
Three months ended
   
Six months ended
 
 
 
June 30,
   
June 30,
 
 
 
2010
   
2011
   
2010
   
2011
 
                         
Net sales
  $ 11,927     $ 12,513     $ 23,727     $ 24,414  
                                 
Income (loss) from
                               
   operations
    (237 )     355       (38 )     165  
                                 
Operating Margin
    (2.0 %)     2.8 %     (0.2 %)     0.7 %
 
Product offerings include a comprehensive line of single-use minimally invasive endoscopic diagnostic and therapeutic instruments used in procedures which require examination of the digestive tract.

 
·
Endoscopic Technologies sales increased $0.6 million (5.0%) in the quarter ended June 30, 2011 to $12.5 million compared to $11.9 million in the same period a year ago due to increased sales of our bite blocks and cleaning brushes.  In local currency, excluding the effects of the hedging program, sales increased 3.4%.  Endoscopic Technologies sales increased $0.7 million (3.0%) in the six months ended June 30, 2011 to $24.4 million from $23.7 million in the same period a year ago due to increased sales of our bite blocks, cleaning brushes and polypectomy products.  In local currency, excluding the effects of the hedging program, sales increased 1.7%.

 
·
Operating margins as a percentage of net sales increased 4.8 percentage points  to 2.8% in the  quarterly period ending June 30, 2011 compared to    -2.0% in 2010.  The increase in operating margins in the quarter ending June 30, 2011 is principally due to overall lower selling and administrative expenses (5.9 percentage points) offset by increased spending in research and development (0.8 percentage points) and lower gross margins (0.3 percentage points) due to product mix.  Operating  margins increased 0.9 percentage points to 0.7% in the six months ended June 30, 2011 compared to -0.2% in the same period a year ago.  The increase in operating margins in the six months ending June 30, 2011 is principally due to overall lower selling and administrative expenses (4.6 percentage points) offset by increased spending in research and development (1.2 percentage points), $0.2 million in administrative restructuring charges during the first quarter of 2011 (0.8 percentage points) and lower gross margins (1.7 percentage points) primarily a result of unfavorable manufacturing production variances related to absorbing fixed costs into inventory that arose in the fourth quarter of 2010 as further described above.

 
28


 
Liquidity and Capital Resources

Our liquidity needs arise primarily from capital investments, working capital requirements and payments on indebtedness under the senior credit agreement.  We have historically met these liquidity requirements with funds generated from operations, including sales of accounts receivable and borrowings under our revolving credit facility.  In addition, we have historically used term borrowings, including borrowings under the senior credit agreement and borrowings under separate loan facilities, in the case of real property purchases, to finance our acquisitions.  We also have the ability to raise funds through the sale of stock or we may issue debt through a private placement or public offering.

Cash provided by operations

Our net working capital position was $157.8 million at June 30, 2011.  Net cash provided by operating activities was $40.2 million in the six months ended June 30, 2011 and $5.5 million in the same period a year ago.

The increase in cash provided by operating activities is primarily the result of a new accounting pronouncement effective January 1, 2010, which required accounts receivable sold under our accounts receivable sale agreement to be recorded as additional borrowings rather than as a reduction in accounts receivable.  Accordingly, in the six months ended June 30, 2010, $29.0 million in cash collections related to accounts receivable sold prior to January 1, 2010 have been presented as a reduction in cash from operations while net sales of additional accounts receivable generated subsequent to January 1, 2010 have been reflected as an increase in cash flows from financing activities.  We terminated this agreement on November 4, 2010 at which time we repaid the outstanding balance in full. 
 
Investing cash flows

Net cash used in investing activities in the quarterly period ended June 30, 2011 consisted primarily of capital expenditures.  Capital expenditures were $7.2 million and $8.6 million for the six month periods ended June 30, 2010 and 2011, respectively and are expected to approximate $20.0 million in 2011.

Financing cash flows

Net cash used in financing activities during 2011 consisted of the following:  $5.5 million in proceeds from the issuance of common stock under our equity compensation plans and employee stock purchase plan, $22.0 million in repayments on our revolver under our senior credit agreement, $0.7 million in repayments of term borrowings under our senior credit agreement, and $0.4 million in repayments of our mortgage notes.

 
29




           On November 30, 2010, we entered into the First Amendment to our Amended and Restated Credit Agreement (the "senior credit agreement”) providing for an expanded revolving credit facility expiring on November 30, 2015.  The senior credit agreement continues to consist of a $135.0 million term loan of which $54.3 million was outstanding as of June 30, 2011. There were no borrowings outstanding on the $250.0 million revolving credit facility as of June 30, 2011.  Our available borrowings on the revolving credit facility at June 30, 2011 were $240.2 million with approximately $9.8 million of the facility set aside for outstanding letters of credit.

Borrowings outstanding on the revolving credit facility are due and payable on November 30, 2015.  The scheduled principal payments on the term loan portion of the senior credit agreement are $0.7 million for the remainder of 2011, $0.3 million due on March 31, 2012, $31.7 million due June 30, 2012 and the remaining $21.5 million due on September 30, 2012.  We may also be required, under certain circumstances, to make additional principal payments based on excess cash flow as defined in the senior credit agreement.  Interest rates on the term loan portion of the senior credit agreement are at LIBOR plus 1.50% (1.69% at June 30, 2011) or an alternative base rate; interest rates on the revolving credit facility portion of the senior credit agreement are at LIBOR plus 1.75% or an alternative base rate.  For those borrowings where the Company elects to use the alternative base rate, the base rate will be the greater of the Prime Rate or the Federal Funds Rate in effect on such date plus 0.50%, plus a margin of 0.50% for term loan borrowings or 0.25% for borrowings under the revolving credit facility.

The senior credit agreement is collateralized by substantially all of our property and assets.  The senior credit agreement contains covenants and restrictions which, among other things, require the maintenance of certain financial ratios, and restrict dividend payments and the incurrence of certain indebtedness and other activities, including acquisitions and dispositions.  We were in full compliance with these covenants and restrictions as of June 30, 2011. We are also required, under certain circumstances, to make mandatory prepayments from net cash proceeds from any issuance of equity and asset sales.

We have a mortgage note outstanding in connection with the property and facilities utilized by our CONMED Linvatec subsidiary bearing interest at 8.25% per annum with semiannual payments of principal and interest through June 2019.  The principal balance outstanding on the mortgage note aggregated $10.0 million at June 30, 2011.  The mortgage note is collateralized by the CONMED Linvatec property and facilities.

We have outstanding $112.1 million in 2.50% convertible senior subordinated notes due 2024 (“the Notes”).  During the quarterly period ended June 30, 2010, we repurchased and retired $3.0 million of our 2.50% convertible senior subordinated notes (the “Notes”) for $2.9 million and recorded a loss on the early extinguishment of debt of $0.1 million.  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 June 30, 2011, 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 have the right to put to us some or all of the Notes for repurchase on November 15, 2011, 2014 and 2019 and, provided the terms of the indenture are satisfied, we will be required to repurchase those Notes, and therefore we have classified the Notes as a current liability.  If the Notes are put to us on November 15, 2011, we plan to utilize our $250.0 million revolving credit facility for payment of the Notes.

 
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The Notes contain two embedded derivatives.  The