August 18, 2008
Mr. Gary Todd
Reviewing Accountant
United States Securities and Exchange Commission
Division of Corporate Finance
Mail Stop 6010
Washington, D.C. 20549-0306
RE: | CONMED Corporation |
Form 10-K for the fiscal year ended December 31, 2007 | |
Filed February 26, 2008 | |
File No. 000-16093 |
Dear Mr. Todd:
We are in receipt of your letter dated July 18, 2008 regarding your review and comments on CONMED Corporation’s filings. Following each of the SEC’s comments is our response.
Form 10-K for the fiscal year ended December 31, 2007
Management’s Discussion and Analysis of Financial Condition and Results of Operations,
Page 34
Critical Accounting Policies, page 36
Comment 1.
We see that you report a significant intangible asset for customer lists that is being amortized over a weighted average life of 36 years. We also see the broad policy statements about how you periodically evaluate the useful life and fair value of amortizing intangibles. However, in light of the unusually long life assigned to the customer relationships asset, in future filings please make disclosure that specifically addresses your policies and procedures for evaluating the useful life and fair value of the customer list asset. Also address how assumptions about customer activity and attrition have compared to that expected when the components of the asset were recorded and address the factors specific to this asset that might lead to impairment.
Mr. Gary Todd
United States Securities and Exchange Commission
August 18, 2008
Page 2 of 5
Response:
In future filings, we will expand our disclosure to specifically address: (i) our policies and procedures for evaluating the useful life and fair value of the customer relationship asset, (ii) how assumptions about customer activity and attrition have compared to that expected when the components of the asset were recorded and (iii) the factors specific to this asset that might lead to impairment. Please see Exhibit A for a revised disclosure in which we discuss our practice of evaluating the useful life and remaining period of amortization of our customer relationship assets by analyzing actual customer attrition (1.8% in 2007) and comparing it to the 2.6% attrition rate expected when the customer relationship asset was recorded. We also make disclosure in Exhibit A of factors specific to this asset that might lead to impairment such as a significant increase in the annual customer attrition rate or otherwise significant loss of customers, significant decreases in sales or current-period operating or cash flow losses or a projection or forecast of losses associated with our Linvatec business.
Form 8-K Dated April 24, 2008
Comment 2.
We see that you present non-GAAP measures in the header to the earnings release without equal or greater presentation of the comparative measures determined according to GAAP. In future earnings releases please provide the comparative measures determined according to GAAP with equal or greater prominence or delete the non-GAAP measures from the header to the release.
Response:
In future earnings releases, we will either eliminate non-GAAP measures from press release headers or provide equal or greater prominence to measures determined according to GAAP. Our second quarter 2008 earnings release, which was filed on Form 8-K on July 24, 2008 and is attached as Exhibit B, reflects consideration of this comment.
Comment 3.
As a related matter, we refer to the disclosures of non-GAAP operating margin and non-GAAP EBITDA margin under the caption “Year over Year Quarterly Highlights.” Tell us how your presentation of disclosures about these measures are complete under 10(e)(i) of Regulation S-K.
Response:
Our disclosures relative to non-GAAP operating margin and non-GAAP EBITDA margin under caption “Year over Year Quarterly Highlights” did not include a complete reconciliation to the comparable GAAP operating measures. In future earnings releases, we will either not include such non-GAAP operating measures or ensure that any such disclosures comply with Item 10(e)(i) of Regulation S-K.
Mr. Gary Todd
United States Securities and Exchange Commission
August 18, 2008
Page 3 of 5
Our second quarter 2008 earnings release, which was filed with a Form 8-K dated July 24, 2008 and is attached as Exhibit B to this response, includes appropriate disclosure relative to this comment.
Comment 4.
Please provide us the calculations of non-GAAP EBITDA margin and non-GAAP operating margin. It appears that these measures may eliminate recurring items. Accordingly, please also tell us how your presentations consider the guidance from Question 8 to the Frequently Asked Questions Regarding the Use of Non-GAAP Financial Measures.
Response:
We strive to provide useful financial information to users. The calculations of non-GAAP EBITDA margin and non-GAAP operating margin are attached as Exhibit C. We have provided the following considerations on Question 8 to the Frequently Asked Questions Regarding the Use of Non-GAAP Financial Measures:
1. | We believed it important for investors to understand, as management did, that the comparison to the prior year’s quarterly performance should recognize that $6.1 million of the prior year’s $23.2 million in pre-tax income from operations was from a one-time litigation gain. On the one hand, we recognize that excluding the one-time litigation gain from the prior year’s results to arrive at a non-GAAP measurement has the impact of increasing growth rates in the current quarter, but, on the other hand, we also reported prior year’s earnings both with GAAP and non-GAAP figures to highlight for investors the gain associated with the litigation was an unusual event that should not be expected as part of the on-going operation of the business. |
2. | It is our belief that users of our financial statements and investors who follow our earnings releases prefer to understand and analyze our performance both with and without the impact of certain unusual financial matters. |
3. | In relation to whether any matters that we have identified as unusual for purposes of non-GAAP financial measures are recurring in nature, we believe that the users of our financial statements and investors who follow our earnings releases are focused on understanding on-going operating performance and potential of our business and are less concerned with unusual adjustments. For example, a manufacturing restructuring plan might involve a definite plant consolidation schedule which could occur over a period greater than a year or two. While expense such as severance and lease termination costs associated with multiple plant consolidations could occur over an extended period of time, it is our belief that the users of our financial statements would expect that our financial results be reported both with and without these unusual expenses. |
Mr. Gary Todd
United States Securities and Exchange Commission
August 18, 2008
Page 4 of 5
Comment 5.
In the paragraph beginning “CONMED has started 2008 with an exceptional first quarter…” there is discussion of a non-GAAP measure without equal or greater prominent discussion of the comparable GAAP measure. Please revise the narratives in future earnings releases to comply with item 10(e)(i)(A) of Regulation S-K.
Response:
To the extent that a non-GAAP measure is included in a future earnings narrative, we will also include a presentation with equal or greater prominence, of the most directly comparable financial measure or measures calculated and presented in accordance with GAAP. Our second quarter 2008 earnings release, which was filed with a Form 8-K dated July 24, 2008 and is attached as Exhibit B, includes appropriate disclosure relative to this comment.
Comment 6.
We refer to the reconciliation of reported net income before unusual items. In future earnings releases please expand the paragraph at the bottom of the disclosure to state why management believes the non-GAAP measures provide a “useful presentation of operating performance.” Refer to Item 10(e)(i)(C) of Regulation S-K.
Response:
In future earnings releases, we will expand the paragraph at the bottom of the disclosure to state why management believes that presentation of non-GAAP financial measures provides useful information to investors regarding our operating performance. Our second quarter 2008 earnings release, which was filed with a Form 8-K dated July 24, 2008 and is attached as Exhibit B, includes revised disclosure which addresses this comment on page 4 under the subheading "Use of Non-GAAP Financial Measures".
In connection with this response, CONMED Corporation acknowledges that:
· | the Company is responsible for the adequacy and accuracy of the disclosure in the filing; |
· | staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and |
· | the Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. |
Thank you for your consideration. Please feel free to contact me at (315) 624-3202 (email luke_pomilio@mail.conmed.com) or Robert D. Shallish, Jr. at (315) 624-3206
Mr. Gary Todd
United States Securities and Exchange Commission
August 18, 2008
Page 5 of 5
(email robert_shallish@mail.conmed.com) should you have any questions or comments relative to this response or any other matters.
Best regards,
/s/ Luke A. Pomilio
Luke A. Pomilio
Vice President, Corporate Controller
Enclosures:
Exhibit A | Proposed Form 10-K Disclosure for Customer Relationships |
Exhibit B | Form 8-K dated July 24, 2008 |
Exhibit C | Non-GAAP EBITDA margin and non-GAAP operating Margin Calculations |
cc: | Brian Cascio |
Praveen Kartholy |
(Division of Corporation Finance) |
Exhibit A –
Form 10-K for the fiscal year ended December 31, 2007
Management’s Discussion and Analysis of Financial condition and Results of Operations, page 34
Critical Accounting Policies, page 36, Revised
Business Acquisitions
We have a history of growth through acquisitions. Assets and liabilities of acquired businesses are recorded under the purchase method of accounting at their estimated fair values as of the date of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Other intangible assets primarily represent allocations of purchase price to identifiable intangible assets of acquired businesses. We have accumulated goodwill of $289.5 million and other intangible assets of $191.8 million at December 31, 2007.
In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (“SFAS 142”), goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to at least annual impairment testing. 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 businesses. Estimates of fair value are based on the best information available as of the date of the assessment, which primarily incorporate management assumptions about expected future cash flows and contemplate other valuation techniques. Future cash flows may be affected by changes in industry or market conditions or the rate and extent to which anticipated synergies or cost savings are realized with newly acquired entities.
Intangible assets with a finite life are amortized over the estimated useful life of the asset. SFAS 142 requires that intangible assets which continue to be subject to amortization be evaluated each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. SFAS 142 also requires that intangible assets subject to amortization be reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS 144”). SFAS 144 requires that intangible assets subject to amortization be tested for recoverability 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 and in aggregate are amortized over a weighted average life of 36 years. These assets represented the 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 the 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, which was performed with the assistance of an independent valuation firm, indicated an annual attrition rate of 2.6%. Assuming an exponential attrition pattern, this equated to an average remaining useful life of approximately 36 years for the Linvatec customer relationship assets.
SFAS 142 requires that 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 evaluate the remaining useful life of our customer relationship intangible assets, we perform an annual analysis, with the assistance of an independent valuation firm, of actual customer attrition. Based upon our analysis, actual average annual customer attrition for the period 1998 to 2007 was approximately 1.8%. Since the actual average annual attrition rate observed in our analysis is less than that anticipated in the original customer relationship valuation, we believe the use of a 36 year life for the Linvatec customer relationship assets remains reasonable. In the event that our analysis of actual attrition rates indicated a level of attrition that was in excess of the 2.6% originally contemplated in the 36 year useful life, we would change the estimated useful life of the customer relationship asset with the remaining carrying amount amortized prospectively over the revised remaining useful life.
SFAS 144 requires that we test our customer relationship assets for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Factors specific to our customer relationship assets which might lead to an impairment charge include a significant increase in the annual customer attrition rate or otherwise significant loss of customers, significant decreases in sales or current-period operating or cash flow losses or a projection or forecast of losses associated with the Linvatec business. 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.
During the fourth quarter of 2006, after completing our annual goodwill impairment analysis, we determined that the goodwill of our CONMED Endoscopic Technologies business was impaired and consequently we recorded a goodwill impairment charge of $46.7 million.
See Note 4 to the Consolidated Financial Statements for further discussion of goodwill and other intangible assets.
Exhibit B
NEWS RELEASE | |
CONTACT: | |
CONMED Corporation | |
Robert Shallish | |
Chief Financial Officer | |
315-624-3206 | |
FD | |
Investors: Brian Ritchie/Theresa Kelleher | |
212-850-5600 |
FOR RELEASE: 7:00 AM (Eastern) July 24, 2008
CONMED Corporation Announces Second Quarter 2008 Financial Results
· | EPS Equals $0.43 - Exceeds Expectations |
· | Record Quarterly Sales of $192.8 Million – 13.9% Growth |
· | Increasing 2008 Sales and EPS Guidance |
· | Conference Call to be Held at 10:00 a.m. ET Today |
Utica, New York, July 24, 2008 ----- CONMED Corporation (Nasdaq: CNMD) today announced that it had better than expected second quarter 2008 sales growth of 13.9% over the second quarter of 2007. These sales drove a 34% expansion of earnings per share when compared to GAAP EPS in the second quarter 2007 and 23% when compared to non-GAAP adjusted EPS. As discussed below under “Use of Non-GAAP Financial Measures,” the Company presents various non-GAAP financial measures in this release. Investors should consider non-GAAP measures in addition to, and not a substitute for, or superior to, financial performance measures prepared in accordance with GAAP. Please refer to the attached reconciliation between GAAP and non-GAAP financial measures.
“CONMED’s focus on execution of our plan to expand our profitability at a rate faster than the top-line growth was the driving force behind our successful second quarter. The sales growth this quarter was a result of stronger worldwide sales across our product portfolio with particular strength internationally. Given the strong financial performance for the first half of 2008 and our confidence in the remainder of the year, we have increased our guidance for the full year 2008,” commented Mr. Joseph J. Corasanti, President and Chief Executive Officer.
Year-Over-Year Quarterly Highlights
· | GAAP EPS grew to $0.43 |
o | 34% increase vs. 2Q 2007 GAAP EPS of $0.32 |
o | 23% increase vs. 2Q 2007 non-GAAP EPS of $0.35 |
· | Quarterly Sales Increase to $192.8 million – a new quarterly record |
o | 13.9% increase vs. 2Q 2007 reported revenues |
o | 10.9% increase in constant currency |
CONMED News Release Continued | Page 2 of 10 | July 24, 2008 |
Year-Over-Year Six Months’ Highlights
· | GAAP EPS grew 9% to $0.81 compared to $0.74 (2007 first half includes a non-recurring litigation gain) |
· | Non-GAAP EPS grew 28% to $0.83 compared to $0.65 |
· | Six-month sales increase to $383.5 million |
o | 12.7% increase vs. 1st Half 2007 reported revenues |
o | 9.4% increase in constant currency |
Sales within the United States for the quarter ended June 2008 increased to $104.3 million, a growth of 5.5% compared to the same quarter in 2007. Sales outside the United States were $88.5 million in the second quarter of 2008, growing 25.7% overall and 18.4% on a constant currency basis compared to the second quarter of 2007. International sales in the June 2008 quarter were 45.9% of the Company’s total sales compared to 41.6% of sales in the second quarter last year. Foreign currency exchange rates were favorable to the Company in the second quarter 2008 compared to exchange rates in effect during the second quarter of 2007. As a result, sales were higher by $5.1 million than would have been the case had currency rates remained constant.
In January 2008, the Company completed the purchase of the Italian distributor of CONMED’s products for a purchase price of approximately $21.6 million. In connection with the acquisition, in the first quarter of 2008, the Company recorded a $1.0 million fair value adjustment to inventory acquired as a result of the acquisition; the inventory was subsequently sold in the first quarter of 2008.
CONMED’s cash flow for the first half of 2008 was strong with cash from operations totaling $35.1 million compared to $25.8 million in the first half of 2007. This cash was used to purchase the Italian distributor, fund capital expenditures and increase the Company’s cash balance by $6 million since the end of 2007.
Over the past twelve months the Company has embarked on a number of initiatives to improve manufacturing efficiency, including the use of lean manufacturing techniques. This efficiency program, together with the beneficial effects of foreign currency exchange rates and the effects of the purchase of the Italian distributor, has improved the Company’s gross margin percentage to 52.3% of sales from 50.7% of sales in the second quarter of 2007. Further, the Company has developed an operational restructuring plan to be carried out over the next 18 months including the following:
· | Construction and operation of a 170,000 square foot manufacturing facility in Chihuahua, Mexico |
· | Closure of two of the Company’s manufacturing facilities in the Utica, New York area with the related operational transfer to either our headquarters location in Utica or to the new facility in Chihuahua. |
· | Centralization of certain of the Company’s distribution activities in a new North American distribution center to be located in Atlanta, Georgia. |
During the execution of this plan, the Company expects it may incur certain charges including severance costs associated with the release of approximately 100-150 positions, and the cost of restructuring and relocation activities.
CONMED News Release Continued | Page 3 of 10 | July 24, 2008 |
Following is a summary of the Company’s sales by product line for the three months ended June 30, 2008:
Three Months Ended June 30, | ||||||||||||||||
Constant | ||||||||||||||||
Currency | ||||||||||||||||
2007 | 2008 | Growth | Growth | |||||||||||||
(in millions) | ||||||||||||||||
Arthroscopy | $ | 64.9 | $ | 76.6 | 18.0 | % | 14.2 | % | ||||||||
Powered Surgical Instruments | 36.0 | 39.9 | 10.8 | % | 5.9 | % | ||||||||||
Electrosurgery | 22.1 | 25.8 | 16.7 | % | 15.3 | % | ||||||||||
Endoscopic Technologies | 13.4 | 13.4 | - | % | -1.3 | % | ||||||||||
Endosurgery | 15.5 | 17.3 | 11.6 | % | 9.6 | % | ||||||||||
Patient Care | 17.4 | 19.8 | 13.8 | % | 13.5 | % | ||||||||||
$ | 169.3 | $ | 192.8 | 13.9 | % | 10.9 | % | |||||||||
The Company’s sports medicine Arthroscopy line grew 18.0% over second quarter 2007 on strong sales of single-use surgical devices and placements of integrated operating room systems. Powered Surgical Instruments increased its sales 10.8% as a result of strong growth in international markets. Electrosurgery sales growth was led by improved sales of electrosurgical power units. Endosurgery and Patient Care double digit growth was fueled by higher sales in both domestic and international markets. Endoscopic Technologies experienced flat sales growth when compared to the second quarter of 2007, but demonstrated sequential revenue improvement from the first quarter of 2008.
Following is a summary of the Company’s sales by product line for the six months ended June 30, 2008:
Six Months Ended June 30, | ||||||||||||||||
Constant | ||||||||||||||||
Currency | ||||||||||||||||
2007 | 2008 | Growth | Growth | |||||||||||||
(in millions) | ||||||||||||||||
Arthroscopy | $ | 127.1 | $ | 152.3 | 19.8 | % | 15.4 | % | ||||||||
Powered Surgical Instruments | 73.6 | 80.1 | 8.8 | % | 3.6 | % | ||||||||||
Electrosurgery | 46.1 | 52.5 | 13.9 | % | 12.4 | % | ||||||||||
Endoscopic Technologies | 26.6 | 25.9 | -2.6 | % | -4.1 | % | ||||||||||
Endosurgery | 29.1 | 32.5 | 11.7 | % | 9.6 | % | ||||||||||
Patient Care | 37.8 | 40.2 | 6.3 | % | 5.9 | % | ||||||||||
$ | 340.3 | $ | 383.5 | 12.7 | % | 9.4 | % | |||||||||
CONMED News Release Continued | Page 4 of 10 | July 24, 2008 |
Use of Non-GAAP Financial Measures
Management has disclosed financial measurements in this press announcement that present financial information that is not in accordance with Generally Accepted Accounting Principles (GAAP). These measurements are not a substitute for GAAP measurements, although Company management uses these measurements as aids in monitoring the Company’s on-going financial performance from quarter-to-quarter and year-to-year on a regular basis, and for benchmarking against other medical technology companies. Non-GAAP net income and non-GAAP earnings per share measure the income of the Company excluding unusual credits or charges that are considered by management to be outside of the normal on-going operations of the Company. Management uses and presents non-GAAP net income and non-GAAP earnings per share because management believes that in order to properly understand the Company’s short and long-term financial trends, the impact of unusual items should be eliminated from on-going operating activities. These adjustments for unusual items are derived from facts and circumstances that vary in frequency and impact on the Company’s results of operations. Management uses non-GAAP net income and non-GAAP earnings per share to forecast and evaluate the operational performance of the Company as well as to compare results of current periods to prior periods on a consistent basis.
Non-GAAP financial measures used by the Company may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies. Investors should consider non-GAAP measures in addition to, and not a substitute for, or superior to, financial performance measures prepared in accordance with GAAP.
Please refer to the attached reconciliation between GAAP and non-GAAP financial measures.
Outlook
Mr. Corasanti noted, “As was the case in the first quarter of this year, the Company has outperformed our original financial expectations for the second quarter. Further, our outlook for the remainder of 2008 continues to be positive. For the third quarter of 2008, we anticipate revenues in the range of $175-$180 million and non-GAAP diluted earnings per share (excluding unusual charges) of $0.32 - $0.36. For the full year of 2008, we are again increasing our earnings guidance based on the better than expected results of the first six months of 2008. Accordingly, we foresee full year 2008 sales of $755-$760 million and non-GAAP diluted earnings per share approximating $1.56 - $1.64, excluding unusual items.”
At this time, the Company is unable to provide GAAP diluted earnings per share guidance for the third quarter of 2008 and for the full year of 2008 because it is unable to estimate unusual credits or charges that may be recorded in the third or fourth quarter of 2008.
Conference Call
The Company will webcast its second quarter 2008 conference call live over the Internet on Thursday, July 24, 2008 at 10:00 a.m. Eastern Time. This broadcast can be accessed from CONMED's web site at www.conmed.com. Replays of the call will be made available through July 31, 2008.
CONMED Profile
CONMED is a medical technology company with an emphasis on surgical devices and equipment for minimally invasive procedures and monitoring. The Company’s products serve the clinical areas of arthroscopy, powered surgical instruments, electrosurgery, cardiac monitoring disposables, endosurgery and endoscopic technologies. They are used by surgeons and physicians in a variety of specialties including orthopedics, general surgery, gynecology, neurosurgery, and gastroenterology. Headquartered in Utica, New York, the Company’s 3,200 employees distribute its products worldwide from several manufacturing locations.
CONMED News Release Continued | Page 5 of 10 | July 24, 2008 |
Forward Looking Information
This press release contains forward-looking statements based on certain assumptions and contingencies that involve risks and uncertainties. The forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and relate to the Company’s performance on a going-forward basis. The forward-looking statements in this press release involve risks and uncertainties which could cause actual results, performance or trends, to differ materially from those expressed in the forward-looking statements herein or in previous disclosures. The Company believes that all forward-looking statements made by it have a reasonable basis, but there can be no assurance that management’s expectations, beliefs or projections as expressed in the forward-looking statements will actually occur or prove to be correct. In addition to general industry and economic conditions, factors that could cause actual results to differ materially from those discussed in the forward-looking statements in this press release include, but are not limited to: (i) the failure of any one or more of the assumptions stated above, to prove to be correct; (ii) the risks relating to forward-looking statements discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007; (iii) cyclical purchasing patterns from customers, end-users and dealers; (iv) timely release of new products, and acceptance of such new products by the market; (v) the introduction of new products by competitors and other competitive responses; (vi) the possibility that any new acquisition or other transaction may require the Company to reconsider its financial assumptions and goals/targets; and/or (vii) the Company’s ability to devise and execute strategies to respond to market conditions.
CONMED News Release Continued | Page 6 of 10 | July 24, 2008 |
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
(unaudited)
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2007 | 2008 | 2007 | 2008 | |||||||||||||
Net sales | $ | 169,258 | $ | 192,755 | $ | 340,272 | $ | 383,528 | ||||||||
Cost of sales | 83,398 | 91,865 | 169,187 | 183,863 | ||||||||||||
Cost of sales, acquisition- Note A | - | - | - | 1,011 | ||||||||||||
Gross profit | 85,860 | 100,890 | 171,085 | 198,654 | ||||||||||||
Selling and administrative | 58,207 | 69,549 | 118,012 | 138,195 | ||||||||||||
Research and development | 7,453 | 8,689 | 15,047 | 16,767 | ||||||||||||
Other expense (income) – Note B | 1,312 | - | (4,102 | ) | - | |||||||||||
66,972 | 78,238 | 128,957 | 154,962 | |||||||||||||
Income from operations | 18,888 | 22,652 | 42,128 | 43,692 | ||||||||||||
Interest expense | 4,329 | 2,439 | 8,845 | 5,613 | ||||||||||||
Income before income taxes | 14,559 | 20,213 | 33,283 | 38,079 | ||||||||||||
Provision for income taxes | 5,214 | 7,758 | 12,016 | 14,614 | ||||||||||||
Net income | $ | 9,345 | $ | 12,455 | $ | 21,267 | $ | 23,465 | ||||||||
Per share data: | ||||||||||||||||
Net Income | ||||||||||||||||
Basic | $ | .33 | $ | .43 | $ | .76 | $ | .82 | ||||||||
Diluted | .32 | .43 | .74 | .81 | ||||||||||||
Weighted average common shares | ||||||||||||||||
Basic | 28,180 | 28,662 | 27,988 | 28,643 | ||||||||||||
Diluted | 28,831 | 29,063 | 28,608 | 29,035 |
Note A – Included in cost of sales in the six months ended June 30, 2008 is a $1.0 million fair value adjustment as a result of purchase accounting for inventory which was subsequently sold.
Note B – Included in other expense (income) in the three months ended June 30, 2007 are $1.2 million in facility closure costs and $0.1 million in costs related to the termination of a product offering. Included in other expense (income) in the six months ended June 30, 2007 are $1.8 million in facility closure costs, $0.2 million in costs related to the termination of a product offering and a $6.1 million gain on a legal settlement.
CONMED News Release Continued | Page 7 of 10 | July 24, 2008 |
CONMED CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
(unaudited)
ASSETS
December 31, | June 30, | |||||||
2007 | 2008 | |||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 11,695 | $ | 17,850 | ||||
Accounts receivable, net | 80,642 | 106,317 | ||||||
Inventories | 164,969 | 161,057 | ||||||
Deferred income taxes | 11,697 | 11,664 | ||||||
Other current assets | 10,019 | 9,971 | ||||||
Total current assets | 279,022 | 306,859 | ||||||
Property, plant and equipment, net | 123,679 | 134,805 | ||||||
Goodwill | 289,508 | 289,767 | ||||||
Other intangible assets, net | 191,807 | 198,021 | ||||||
Other assets | 9,935 | 8,595 | ||||||
Total assets | $ | 893,951 | $ | 938,047 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of long-term debt | $ | 3,349 | $ | 3,830 | ||||
Other current liabilities | 73,935 | 72,255 | ||||||
Total current liabilities | 77,284 | 76,085 | ||||||
Long-term debt | 219,485 | 224,791 | ||||||
Deferred income taxes | 71,188 | 84,512 | ||||||
Other long-term liabilities | 20,992 | 18,623 | ||||||
Total liabilities | 388,949 | 404,011 | ||||||
Shareholders' equity: | ||||||||
Capital accounts | 220,657 | 223,664 | ||||||
Retained earnings | 284,850 | 307,997 | ||||||
Accumulated other comprehensive income (loss) | (505 | ) | 2,375 | |||||
Total equity | 505,002 | 534,036 | ||||||
Total liabilities and shareholders' equity | $ | 893,951 | $ | 938,047 |
CONMED News Release Continued | Page 8 of 10 | July 24, 2008 |
CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
Six months ended | ||||||||
June 30, | ||||||||
2007 | 2008 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 21,267 | $ | 23,465 | ||||
Adjustments to reconcile net income | ||||||||
to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 15,400 | 15,529 | ||||||
Stock-based compensation expense | 1,885 | 2,094 | ||||||
Deferred income taxes | 10,470 | 12,360 | ||||||
Sale of accounts receivable | 2,000 | (3,000 | ) | |||||
Increase (decrease) in cash flows from changes in assets and liabilities: | ||||||||
Accounts receivable | (3,924 | ) | (4,768 | ) | ||||
Inventories | (15,150 | ) | 3,028 | |||||
Accounts payable | (2,579 | ) | (5,299 | ) | ||||
Income taxes receivable (payable) | (1,809 | ) | 670 | |||||
Accrued compensation and benefits | (2,388 | ) | (843 | ) | ||||
Accrued interest | 59 | (132 | ) | |||||
Other assets | 619 | (1,081 | ) | |||||
Other liabilities | ( 52 | ) | (6,937 | ) | ||||
Net cash provided by operating activities | 25,798 | 35,086 | ||||||
Cash flow from investing activities: | ||||||||
Purchases of property, plant, and equipment | (9,556 | ) | (15,212 | ) | ||||
Payments related to business acquisitions | (1,278 | ) | (21,838 | ) | ||||
Net cash used in investing activities | (10,834 | ) | (37,050 | ) | ||||
Cash flow from financing activities: | ||||||||
Payments on debt | (26,797 | ) | (1,213 | ) | ||||
Proceeds of debt | - | 7,000 | ||||||
Net proceeds from common stock issued under employee plans | 10,604 | 595 | ||||||
Other, net | (236 | ) | - | |||||
Net cash provided by (used in) financing activities | (16,429 | ) | 6,382 | |||||
Effect of exchange rate change | ||||||||
on cash and cash equivalents | 1,513 | 1,737 | ||||||
Net increase in cash and cash equivalents | 48 | 6,155 | ||||||
Cash and cash equivalents at beginning of period | 3,831 | 11,695 | ||||||
Cash and cash equivalents at end of period | $ | 3,879 | $ | 17,850 |
CONMED News Release Continued | Page 9 of 10 | July 24, 2008 |
CONMED CORPORATION
RECONCILIATION OF REPORTED NET INCOME TO NET INCOME
BEFORE UNUSUAL ITEMS
(In thousands except per share amounts)
(unaudited)
Three months ended | ||||||||
June 30, | ||||||||
2007 | 2008 | |||||||
Reported net income | $ | 9,345 | $ | 12,455 | ||||
Termination of product offering | 58 | - | ||||||
Facility closure costs | 1,254 | - | ||||||
Total other expense | 1,312 | - | ||||||
Unusual expense before income taxes | 1,312 | - | ||||||
Provision (benefit) for income taxes on unusual expense | (472 | ) | - | |||||
Net income before unusual items | $ | 10,185 | $ | 12,455 | ||||
Per share data: | ||||||||
Reported net income | ||||||||
Basic | $ | 0.33 | $ | 0.43 | ||||
Diluted | 0.32 | 0.43 | ||||||
Net income before unusual items | ||||||||
Basic | $ | 0.36 | $ | 0.43 | ||||
Diluted | 0.35 | 0.43 |
Management has provided the above reconciliation of net income before unusual items as an additional measure that investors can use to compare operating performance between reporting periods. Management believes this reconciliation provides a useful presentation of operating performance as discussed in the section “Use of Non-GAAP Financial Measures” above.
CONMED News Release Continued | Page 10 of 10 | July 24, 2008 |
CONMED CORPORATION
RECONCILIATION OF REPORTED NET INCOME TO NET INCOME
BEFORE UNUSUAL ITEMS
(In thousands except per share amounts)
(unaudited)
Six months ended | ||||||||
June 30, | ||||||||
2007 | 2008 | |||||||
Reported net income | $ | 21,267 | $ | 23,465 | ||||
Fair value inventory adjustment from purchase accounting | ||||||||
included in cost of sales | - | 1,011 | ||||||
Termination of product offering | 148 | - | ||||||
Facility closure costs | 1,822 | - | ||||||
Gain on legal settlement | (6,072 | ) | - | |||||
Total other expense (income) | (4,102 | ) | - | |||||
Unusual expense (income) before income taxes | (4,102 | ) | 1,011 | |||||
Provision (benefit) for income taxes on unusual expense | 1,477 | (364 | ) | |||||
Net income before unusual items | $ | 18,642 | $ | 24,112 | ||||
Per share data: | ||||||||
Reported net income | ||||||||
Basic | $ | 0.76 | $ | 0.82 | ||||
Diluted | 0.74 | 0.81 | ||||||
Net income before unusual items | ||||||||
Basic | $ | 0.67 | $ | 0.84 | ||||
Diluted | 0.65 | 0.83 |
Management has provided the above reconciliation of net income before unusual items as an additional measure that investors can use to compare operating performance between reporting periods. Management believes this reconciliation provides a useful presentation of operating performance as discussed in the section “Use of Non-GAAP Financial Measures” above.
Exhibit C
CONMED Corporation
Q1 2008 Earnings Release
Non-GAAP Operating Margin and EBITDA Margin Calculations
Calculation of non-GAAP Operating Margin | ||||||||
2007 | 2008 | |||||||
Net sales | 171,014 | 190,773 | ||||||
GAAP income from operations | 23,240 | 21,040 | ||||||
GAAP operating margin | 13.6 | % | 11.0 | % | ||||
Adjustments to GAAP operating margin: | ||||||||
Fair value inventory adjustment from purchase accounting | ||||||||
included in cost of sales | 1,011 | |||||||
Termination of product offering | 90 | |||||||
Facility closure related costs | 568 | |||||||
Gain on legal settlement | (6,072 | ) | ||||||
(5,414 | ) | 1,011 | ||||||
Adjusted non-GAAP income from operations | 17,826 | 22,051 | ||||||
Adjusted non-GAAP operating margin | 10.4 | % | 11.6 | % | ||||
Calculation of non-GAAP EBITDA Margin | ||||||||
2007 | 2008 | |||||||
Net sales | 171,014 | 190,773 | ||||||
GAAP income from operations | 23,240 | 21,040 | ||||||
Add: Depreciation | 3,059 | 3,510 | ||||||
Amortization | 4,253 | 4,239 | ||||||
Stock compensation expense | 852 | 942 | ||||||
GAAP EBITDA | 31,404 | 29,731 | ||||||
GAAP operating margin | 18.4 | % | 15.6 | % | ||||
Adjustments to GAAP operating margin: | ||||||||
Fair value inventory adjustment from purchase accounting | ||||||||
included in cost of sales | 1,011 | |||||||
Termination of product offering | 90 | |||||||
Facility closure related costs | 568 | |||||||
Gain on legal settlement | (6,072 | ) | ||||||
(5,414 | ) | 1,011 | ||||||
Adjusted non- GAAP income from operations | 25,990 | 30,742 | ||||||
Adjusted non-GAAP operating margin | 15.2 | % | 16.1 | % |