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 Quarter Ended Jume 30, 2000 Commission File Number 0-16093
CONMED CORPORATION
-------------------------------------------------------------
(Exact name of the registrant as specified in its charter)
New York 16-0977505
- --------------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
310 Broad Street, Utica, New York 13501
---------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (315) 797-8375
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
The number of shares outstanding of registrant's common stock, as of
July 31, 2000 is 15,343,868 shares.
CONMED CORPORATION
TABLE OF CONTENTS
FORM 10-Q
PART I FINANCIAL INFORMATION
Item Number Page
Item 1 Financial Statements
- Consolidated Statements of Income 1
- Consolidated Balance Sheets 2
- Consolidated Statements of Shareholders' Equity 3
- Consolidated Statements of Cash Flows 4
- Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of operations 7
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
Exhibit Index 13
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
(unaudited)
For three months ended For six months ended
------------------------ ------------------------
June June June June
1999 2000 1999 2000
--------- --------- --------- ---------
Net sales ...................... $ 90,483 $ 96,986 $ 181,352 $ 198,899
--------- --------- --------- ---------
Cost and expenses:
Cost of sales .............. 42,825 47,327 86,367 95,988
Selling and administrative
(Note 6) ............... 26,550 32,355 53,116 62,219
Research and development ... 2,842 3,572 5,798 6,978
--------- --------- --------- ---------
Total operating expenses 72,217 83,254 145,281 165,185
--------- --------- --------- ---------
Income from operations ......... 18,266 13,732 36,071 33,714
Interest expense, net .......... (7,814) (8,238) (15,740) (16,643)
--------- --------- --------- ---------
Income before income taxes ..... 10,452 5,494 20,331 17,071
Provision for income taxes ..... (3,762) (1,978) (7,318) (6,146)
--------- --------- --------- ---------
Net income ..................... $ 6,690 $ 3,516 $ 13,013 $ 10,925
========= ========= ========= =========
Per share data (Note 6):
Net Income
Basic ...................... $ .44 $ .23 $ .86 $ .71
Diluted .................... .43 .23 .84 .70
Weighted average common shares
Basic ...................... 15,235 15,311 15,204 15,298
Diluted .................... 15,612 15,551 15,575 15,535
See notes to consolidated financial statements.
1
CONMED CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
ASSETS
(unaudited)
December June
1999 2000
--------- ---------
Current assets:
Cash and cash equivalents ................................................. 3,747 $ 3,353
Accounts receivable, net .................................................. 76,413 78,760
Inventories (Note 3) ...................................................... 89,681 96,471
Deferred income taxes ..................................................... 1,453 1,453
Prepaid expenses and other current assets ................................. 5,423 6,732
--------- ---------
Total current assets .................................................. 176,717 186,769
Property, plant and equipment, net ............................................ 57,834 60,826
Goodwill, net ................................................................. 223,174 220,166
Patents, trademarks, and other assets, net .................................... 204,436 201,864
--------- ---------
Total assets .......................................................... $ 662,161 $ 669,625
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ......................................... $ 32,875 $ 34,471
Accrued interest .......................................................... 4,588 6,540
Accounts payable .......................................................... 16,518 23,412
Income taxes payable ...................................................... 226 2,979
Accrued payroll and withholdings .......................................... 9,658 8,822
Other current liabilities ................................................. 3,326 2,852
--------- ---------
Total current liabilities ............................................. 67,191 79,076
Long-term debt ................................................................ 361,794 345,739
Deferred income taxes ......................................................... 3,330 3,330
Other long-term liabilities ................................................... 18,585 19,114
--------- ---------
Total liabilities ..................................................... 450,900 447,259
--------- ---------
Shareholders' equity:
Preferred stock, par value $.01 per share;
authorized 500,000 shares; none outstanding ........................... -- --
Common stock, par value $.01 per share;
100,000,000 authorized; 15,303,806 and
15,343,868 issued and outstanding, in
1999 and 2000, respectively ........................................... 153 153
Paid-in capital ........................................................... 127,394 127,836
Retained earnings ......................................................... 84,520 95,445
Accumulated other comprehensive income .................................... (387) (649)
Less 25,000 shares of common stock in treasury,
at cost ............................................................... (419) (419)
--------- ---------
Total equity .............................................................. 211,261 222,366
--------- ---------
Total liabilities and shareholders' equity ............................ $ 662,161 $ 669,625
========= =========
See notes to consolidated financial statements.
2
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Six Months Ended June 1999 and 2000
(in thousands)
(unaudited)
1999 2000
--------- ---------
Common stock
Balance at beginning of period .................. $ 152 $ 153
Exercise of stock options ....................... 1 --
--------- ---------
Balance at end of period ........................ $ 153 $ 153
--------- ---------
Paid-in-capital
Balance at beginning of period ................ 125,039 127,394
Exercise of stock options ..................... 1,566 442
--------- ---------
Balance at end of period ...................... 126,605 127,836
--------- ---------
Retained earnings
Balance at beginning of period ................ 57,361 84,520
Net income (A) ................................ 13,013 10,925
--------- ---------
Balance at end of period ...................... 70,374 95,445
--------- ---------
Accumulated other comprehensive income
Balance at beginning of period
Cumulative foreign currency translation
adjustments ........................... 35 (387)
Other comprehensive income
Foreign currency translation adjustments(B) (20) (262)
--------- ---------
Balance at end of period
Cumulative foreign currency translation
adjustments .......................... 15 (649)
--------- ---------
Treasury stock at beginning
and end of period ............................. (419) (419)
--------- ---------
Total shareholders' equity ........................ $ 196,728 $ 222,366
========= =========
Total comprehensive income (A + B) ................ $ 12,993 $ 10,663
========= =========
See notes to consolidated financial statements.
3
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30 1999 and 2000
(in thousands)
(unaudited)
1999 2000
-------- --------
Cash flows from operating activities:
Net income ..................................... $ 13,013 $ 10,925
-------- --------
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation ................................... 4,330 4,612
Amortization ................................... 8,095 8,992
Increase (decrease) in cash flows
from changes in assets and liabilities:
Accounts receivable ........................ (3,716) (2,609)
Inventories ................................ (11,039) (7,970)
Prepaid expenses and
other current assets ..................... 442 (1,309)
Accounts payable ........................... (1,469) 6,894
Income taxes payable ....................... 8,967 2,753
Accrued interest ........................... (1,611) 1,952
Accrued payroll and withholdings ........... (3,146) (836)
Other current liabilities .................. (668) (474)
Other assets/liabilities, net .............. 1,249 (1,491)
-------- --------
1,434 10,514
-------- --------
Net cash provided by operations ......... 14,447 21,439
-------- --------
Cash flows from investing activities:
Acquisition of property, plant,
and equipment .............................. (3,792) (7,816)
-------- --------
Net cash used by investing activities ...... (3,792) (7,816)
-------- --------
Cash flows from financing activities:
Proceeds of long term debt ..................... 900 --
Borrowings (repayments)under revolving
credit facility ................................ (5,000) 2,000
Proceeds from issuance of common stock ......... 1,567 442
Payments on long-term debt ..................... (11,509) (16,459)
-------- --------
Net cash used by financing activities ...... (14,042) (14,017)
-------- --------
Net decrease in cash and cash equivalents .......... (3,387) (394)
Cash and cash equivalents at beginning of period ... 5,906 3,747
-------- --------
Cash and cash equivalents at end of period ......... $ 2,519 $ 3,353
======== ========
See notes to consolidated financial statements.
4
CONMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and Operations
- ------------------------------------
The consolidated financial statements include the accounts of CONMED
Corporation and its subsidiaries (the "Company"). All intercompany accounts and
transactions have been eliminated. CONMED Corporation is a medical technology
company specializing in instruments and implants for arthroscopic sports
medicine, and powered surgical instruments, such as drills and saws, for
orthopaedic, ENT and neuro-surgery. The Company is also a leading developer,
manufacturer and supplier of advanced medical devices, including RF
electrosurgery systems used in all types of surgery, ECG electrodes for heart
monitoring, and minimally invasive surgical devices. The Company's products are
used in a variety of clinical settings, such as operating rooms, surgery
centers, physicians' offices and critical care areas of hospitals. The Company's
business is organized, managed and internally reported as a single segment,
since its product offerings have similar economic, operating and other related
characteristics.
Note 2 - Interim financial information
- --------------------------------------
The financial statements for the three and six months ended June 1999
and 2000 are unaudited; in the opinion of the Company such unaudited statements
include all adjustments (which comprise only normal recurring accruals)
necessary for a fair presentation of the results for such periods. The
consolidated financial statements for the year ending December 2000 are subject
to adjustment at the end of the year when they will be audited by independent
accountants. The results of operations for the three and six months ended June
2000 are not necessarily indicative of the results of operations to be expected
for any other quarter nor for the year ending December 2000. The consolidated
financial statements and notes thereto should be read in conjunction with the
financial statements and notes for the year ended December 1999 included in the
Company's Annual Report to the Securities and Exchange Commission on Form 10-K.
Note 3 - Inventories
- --------------------
The components of inventory are as follows (in thousands):
December June
1999 2000
------- -------
Raw materials......... $35,651 $36,377
Work-in-process....... 9,803 11,258
Finished goods........ 44,227 48,836
------- -------
Total........... $89,681 $96,471
======= =======
5
Note 4 - Subsidiary Guarantees
- ------------------------------
The Company's credit facility and subordinated notes (the "Notes") are
guaranteed (the "Subsidiary Guarantees") by each of the Company's subsidiaries
(the "Subsidiary Guarantors"). The Subsidiary Guarantees provide that each
Subsidiary Guarantor will fully and unconditionally guarantee the Company's
obligations on a joint and several basis. Each Subsidiary Guarantor is
wholly-owned by the Company.
Separate financial statements and other disclosures concerning the
Subsidiary Guarantors are not presented because management has determined such
financial statements and other disclosures are not material to investors. The
combined condensed financial information of the Company's Subsidiary Guarantors
is as follows (in thousands):
December June
1999 2000
---- ----
Current assets............. $117,541 $129,062
Non-current assets......... 385,363 379,536
Current liabilities........ 21,921 29,006
Non-current liabilities.... 355,012 326,143
For the Six
Months Ended June
-------------------------
1999 2000
---- ----
Revenues................... $139,222 $160,554
Operating income........... 30,205 27,776
Net income................. 9,229 7,126
Note 5 - Business Acquisitions
- ------------------------------
On June 29, 1999, the Company agreed to purchase certain assets of the
powered surgical instrument business of Minnesota Mining and Manufacturing
Company ("3M") (the "Powered Instrument Acquisition"). The Company and 3M also
agreed to a series of transition-related matters in order to facilitate the
transfer of the business. The acquisition was completed on August 11, 1999 for a
purchase price of $39,000,000, which was funded through borrowings under the
Company's credit facility. This acquisition is being accounted for using the
purchase method. The results of operations of the acquired business are included
in the consolidated results of the Company from the date of acquisition.
Goodwill associated with the acquisition is being amortized on a straight-line
basis over a 40-year period.
Note 6 - Nonrecurring Severance Charge
- --------------------------------------
During the quarter ended June 2000, the Company announced it would
replace its arthroscopy direct sales force with non-stocking, exclusive sales
agent groups in certain geographic regions of the United States. As a result,
the Company incurred a severance charge of $1,509,000, before income taxes, or
$.06 per diluted share, in the second quarter of 2000. This nonrecurring charge
is included in selling and administrative expense.
6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion includes certain forward-looking statements.
Such forward-looking statements are subject to a number of factors, including
material risks, uncertainties and contingencies, which could cause actual
results to differ materially from the forward-looking statements. Such factors
include, among others, the following: general economic and business conditions;
changes in customer preferences; competition; changes in technology; the
integration of any acquisitions, changes in business strategy; the indebtedness
of the Company; quality of management, business abilities and judgment of the
Company's personnel; and the availability, terms and deployment of capital.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company does not
undertake any obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Three months ended June 2000 compared to three months ended June 1999
Sales for the quarter ended June 2000 were $96,986,000, an increase of
7.2% compared to sales of $90,483,000 in the quarter ended June 1999. For the
quarter ended June 2000, arthroscopy sales grew 1.2% to $35,600,000 and powered
surgical instruments sales grew 37.0% to $26,400,000. Of the total increase in
powered surgical instrument sales, 4.0% was due to internal growth while 33.0%
was due to the Powered Instrument Acquisition in August 1999. Electrosurgery and
patient care lines had sales of $35,000,000 in the quarter ended June 2000, a
decline of 2.6% from a year prior.
Cost of sales increased to $47,327,000 in the quarter ended June 2000
compared to $42,825,000 in the same quarter a year ago as a result of the
increased sales volumes described above. The Company's gross margin percentage
for the second quarter of 2000 was 51.2% compared to 52.7% for the second
quarter of 1999. The decrease in gross margin percentage is largely the result
of the effects of the decline in the value of the Euro and lower selling prices
in the Company's surgical suction product lines as a result of increased
competition.
Selling and administrative costs increased to $32,355,000 in the
quarter ended June 2000 as compared to $26,550,000 in the quarter ended June
1999. The increase in selling and administrative expense is a result of
increased spending on sales and marketing programs in the second quarter of 2000
in an effort to increase market share, as well as increased spending associated
with the increase in sales in the second quarter of 2000 as compared to the
second quarter of 1999. Additionally, during the quarter ended June 2000, the
Company announced it would replace its arthroscopy direct sales force with
non-stocking, exclusive sales agent groups in certain geographic regions of the
United States. As a result, the Company recorded a nonrecurring severance charge
of $1,509,000 in the second quarter of 2000 (Note 6) which is included in
selling and administrative expense. As a result of the factors described above,
as a percentage of sales, selling and administrative expense increased to 33.4%
in the second quarter of 2000 as compared to 29.3% in the second quarter of
1999.
7
Research and development expense increased to $3,572,000 in the quarter
ended June 2000 as compared to $2,842,000 in the quarter ended June 1999. As a
percentage of sales, research and development expense increased to 3.7% of sales
in the second quarter of 2000 compared to 3.1% in the second quarter of 1999.
These increases are the result of the Company's increased investment in new
product development.
Interest expense for the quarter ended June 2000 was $8,238,000
compared to $7,814,000 in the quarter ended June 1999. In conjunction with the
Powered Instrument Acquisition, the Company's existing credit facility was
amended in the third quarter of 1999 to provide for an additional $40,000,000
loan commitment which was used to fund the acquisition purchase price. The
increase in interest expense is primarily a result of these higher term loan
borrowings. (See discussion under Liquidity and Capital Resources section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations).
Six months ended June 2000 compared to six months ended June 1999
Sales for the six months ended June 2000 were $198,899,000, an increase
of 9.7% compared to sales of $181,352,000 in the six months ended June 1999. For
the six months ended June 2000, arthroscopy sales grew 4.0% to $74,600,000 and
powered surgical instrument sales grew 49.4% to $55,600,000. Of the total
increase in powered surgical instrument sales, 10.7% was due to internal growth
while 38.7% was due to the Powered Instrument Acquisition in August 1999.
Electrosurgery and patient care lines had sales of $68,700,000 in the first half
of 2000, a decline of 5.1% from the same period a year ago.
Cost of sales increased to $95,988,000 in the six months ended June
2000 compared to $86,367,000 in the six months ended June 1999 as a result of
the increased sales volumes described above. The Company's gross margin
percentage for the first half of 2000 was 51.7% compared to 52.4% for the first
half of 1999. The decrease in gross margin percentage is largely the result of
the effects of the decline in the value of the Euro and lower selling prices in
the Company's surgical suction product lines in the second quarter as a result
of increased competition.
Selling and administrative costs increased to $62,219,000 in the six
months ended June 2000 as compared to $53,116,000 in the six months ended June
1999. The increase in selling and administrative expense is a result of
increased spending on sales and marketing programs in the second quarter of 2000
in an effort to increase market share, as well as increased spending associated
with the increase in sales in the first half of 2000 as compared to the first
half of 1999. Additionally, during the second quarter of 2000, the Company
announced it would replace its arthroscopy direct sales force with non-stocking,
exclusive sales agent groups in certain geographic regions of the United States.
As a result, the Company recorded a nonrecurring severance charge of $1,509,000
in the second quarter of 2000 (Note 6) which is included in selling and
administrative expense. As a result of the factors described above, as a
percentage of sales, selling and administrative expense increased to 31.3% in
the first half of 2000 as compared to 29.3% in the first half of 1999.
Research and development expense increased to $6,978,000 in the six
months ended June 2000 as compared to $5,798,000 in the six months ended
8
June 1999. As a percentage of sales, research and development expense increased
to 3.5% of sales in the first half of 2000 as compared to 3.2% in the same
period a year ago. These increases are the result of the company's increased
investment in new product development.
Interest expense for the six months ended June 2000 was $16,643,000
compared to $15,740,000 in the six months ended June 1999. In conjunction with
the Powered Instrument Acquisition, the Company's existing credit facility was
amended in the third quarter of 1999 to provide for an additional $40,000,000
loan commitment which was used to fund the acquisition purchase price. The
increase in interest expense is primarily a result of these higher term loan
borrowings. (See discussion under Liquidity and Capital Resources section of
Management's Discussion and Analysis of Financial condition and Results of
Operations).
Liquidity and Capital Resources
The Company's net working capital position decreased $1,833,000 or 1.7%
to $107,693,000 at June 2000 compared to $109,526,000 at December 1999. Net cash
provided by operations was $21,439,000 for the first six months of 2000 compared
to $14,447,000 for the first six months of 1999. Operating cash flow was
positively impacted by increases in accounts payable, income taxes payable and
accrued interest as well as higher depreciation and amortization in the six
months ended June 2000 as compared to the six months ended June 1999. Operating
cash flow was negatively impacted by decreased net income, and increases in
accounts receivable, inventories, prepaid expenses and other assets/liabilities.
The increases in accounts payable, accrued income taxes, accrued interest,
prepaid expenses and other assets/liabilities is primarily related to the timing
of payment. The increase in accounts receivable and inventories is primarily
related to the increase in sales.
Net cash used by investing activities for the six months ended June
2000 consisted of $7,816,000 in capital expenditures as compared to $3,792,000
for the six months ended June 1999.
Financing activities during the six months ended June 2000 consisted
primarily of scheduled payments of $16,459,000 on the Company's term loans and
$2,000,000 in borrowings on the Company's revolving credit facility. Financing
activities during the six months ended June 1999 consisted primarily of
scheduled payments of $11,509,000 on the Company's term loans and repayments of
$5,000,000 on the Company's revolving credit facility.
The Company's term loans under its credit facility at June 30, 2000
aggregate $217,365,000. The Company's term loans are repayable quarterly over
remaining terms of approximately five years. The Company's credit facility also
includes a $100,000,000 revolving credit facility which expires December 2002,
of which $68,000,000 was available on June 30, 2000. The borrowings under the
credit facility carry interest rates based on a spread over LIBOR or an
alternative base interest rate. The covenants of the credit facility provide for
increase and decrease to this interest rate spread based on the operating
results of the Company. The weighted average interest rates at June 30, 2000
under the term loans and the revolving credit facility were 8.26% and 8.27%,
respectively. Additionally, the Company is obligated to pay a fee of .375% per
annum on the unused portion of the revolving credit facility.
9
The Company does not use derivative financial instruments for trading
or other speculative purposes. Interest rate swaps, a form of derivative, are
used to manage interest rate risk. Currently, the Company has entered into two
interest rate swaps expiring in June 2001 and June 2003 which convert
$100,000,000 of LIBOR-based floating rate debt under the Company's credit
facility into fixed rate debt with a base interest rate averaging 6.50%.
Provisions in one of the interest rate swaps cancels such agreement when LIBOR
exceeds 7.35%. There were no material changes in the Company's market risk
during the six months ended June 2000. For a detailed discussion of market risk,
see the Company's Form 10-K for the year ended December 31, 1999, Part II, Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
The credit facility is collateralized by all the Company's personal
property. The credit facility contains covenants and restrictions which, among
other things, require maintenance of certain working capital levels and
financial ratios, prohibit dividend payments and restrict the incurrence of
certain indebtedness and other activities, including acquisitions and
dispositions. The Company is also required to make mandatory prepayments from
net cash proceeds from any issue of equity and asset sales.
The Notes are in aggregate principal amount of $130,000,000 and have a
maturity date of March 15, 2008. The Notes bear interest at 9.0% per annum which
is payable semi-annually. The indenture governing the Notes has certain
restrictive covenants and provides for, among other things, mandatory and
optional redemptions by the Company.
The credit facility and Notes are guaranteed by each of the Company's
subsidiaries. The Subsidiary Guarantees provide that each Subsidiary Guarantor
will fully and unconditionally guarantee the Company's obligations on a joint
and several basis. Each Subsidiary Guarantor is wholly-owned by the Company.
Under the credit facility and Note indenture, the Company's subsidiaries are
subject to the same covenants and restrictions that apply to the Company (except
that the Subsidiary Guarantors are permitted to make dividend payments and
distributions, including cash dividend payments, to the Company or another
Subsidiary Guarantor).
Management believes that cash generated from operations, its current
cash resources and funds available under its credit facility will provide
sufficient liquidity to ensure continued working capital for operations, debt
service and funding of capital expenditures in the foreseeable future.
Foreign Operations
The Company's foreign operations are subject to special risks inherent
in doing business outside the United States, including governmental instability,
war and other international conflicts, civil and labor disturbances,
requirements of local ownership, partial or total expropriation,
nationalization, currency devaluation, foreign exchange controls and foreign
laws and policies, each of which may limit the movement of assets or funds or
result in the deprivation of contract rights or the taking of property without
fair compensation.
10
Item 6. Exhibits and Reports on Form 8-K
List of Exhibits
Exhibit No. Description of Instrument
----------- -------------------------
11 Computation of weighted average number of shares of common stock
27 Financial Data Schedule (included in EDGAR filing only)
Reports on Form 8-K
None
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONMED CORPORATION
(Registrant)
Date: August 11, 2000
/s/Robert D. Shallish, Jr.
--------------------------
Robert D. Shallish, Jr.
Vice President - Finance
(Principal Financial Officer)
12
Exhibit Index
Sequential
Page
Exhibit Number
11 - Computations of weighted average E-1
number of shares of common stock
27 - Financial Data Schedule (included in EDGAR
filing only)
13