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 September 30, 2001
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.)
525 French Road, Utica, New York 13502
(Address of principal executive offices) (Zip Code)
(315) 797-8375
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
The number of shares outstanding of registrant's common stock, as
of October 16, 2001 is 25,215,378 shares.
CONMED CORPORATION
TABLE OF CONTENTS
FORM 10-Q
PART I FINANCIAL INFORMATION
Item Number Page
Item 1. Financial Statements
- Consolidated Condensed Statements
of Income 1
- Consolidated Condensed Balance Sheets 2
- Consolidated Condensed Statements
of Cash Flows 3
- Notes to Consolidated Condensed
Financial Statements 4
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 17
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibit Index 24
Item 1.
CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
September September
2000 2001 2000 2001
---- ---- ---- ----
Net sales $ 92,838 $105,318 $293,527 $315,398
-------- -------- -------- --------
Cost of sales 44,136 51,332 140,124 150,971
Selling and administrative 31,495 35,029 95,504 103,780
Research and development 4,109 3,491 11,087 10,663
-------- -------- -------- --------
79,740 89,852 246,715 265,414
-------- -------- -------- --------
Income from operations 13,098 15,466 46,812 49,984
Interest expense, net 8,834 7,630 25,477 23,809
-------- -------- -------- --------
Income before income taxes 4,264 7,836 21,335 26,175
Provision for income taxes 1,535 2,821 7,681 9,423
-------- -------- -------- --------
Net income $ 2,729 $ 5,015 $ 13,654 $ 16,752
======== ======== ======== ========
Per share data:
Net income
Basic $ .12 $ .20 $ .59 $ .71
Diluted .12 .20 .59 .70
Weighted average common shares
Basic 22,986 24,806 22,961 23,657
Diluted 23,132 25,381 23,246 23,990
See notes to consolidated condensed financial statements.
1
CONMED CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands except share amounts)
(unaudited)
December September
2000 2001
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 3,470 $ 2,015
Accounts receivable, net 78,626 85,719
Inventories 104,612 107,337
Deferred income taxes 1,761 1,761
Prepaid expenses and other current assets 3,562 3,806
--------- ---------
Total current assets 192,031 200,638
--------- ---------
Property, plant and equipment, net 62,450 91,898
Goodwill, net 225,801 251,574
Other intangible assets, net 195,008 190,058
Other assets 4,281 5,173
--------- ---------
Total assets $ 679,571 $ 739,341
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 36,068 $ 39,581
Accounts payable 20,350 20,314
Accrued compensation 9,913 9,893
Income taxes payable 1,979 1,378
Accrued interest 5,130 2,541
Other current liabilities 4,836 5,398
--------- ---------
Total current liabilities 78,276 79,105
--------- ---------
Long-term debt 342,680 348,826
Deferred income taxes 12,154 19,318
Other long-term liabilities 15,858 16,285
--------- ---------
Total liabilities 448,968 463,534
--------- ---------
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; 23,028,279 and
25,212,338 shares issued and outstanding in
2000 and 2001, respectively 230 252
Paid-in capital 127,985 159,415
Retained earnings 103,834 120,586
Accumulated other comprehensive loss (1,027) (4,027)
Less 37,500 shares of common stock in treasury,
at cost (419) (419)
--------- ---------
Total shareholders' equity 230,603 275,807
--------- ---------
Total liabilities and shareholders' equity $ 679,571 $ 739,341
========= =========
See notes to consolidated condensed financial statements.
2
CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended September 2000 and 2001
(in thousands)
(unaudited)
2000 2001
-------- --------
Cash flows from operating activities:
Net income ............................................. $ 13,654 $ 16,752
-------- --------
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation ................................. 7,006 6,648
Amortization ................................. 14,813 16,381
Increase (decrease) in cash flows
from changes in assets and liabilities,
net of effects from acquisitions:
Accounts receivable ......... 986 (7,052)
Inventories ................. (18,373) (3,174)
Prepaid expenses and
other current assets ...... (571) (283)
Accounts payable ............ 5,974 (80)
Income taxes payable ........ (4,339) (601)
Accrued compensation ........ (3,014) (20)
Accrued interest ............ (1,934) (2,614)
Other assets/liabilities, net 2,848 (2,385)
-------- --------
3,396 6,820
-------- --------
Net cash provided by operating activities .... 17,050 23,572
-------- --------
Cash flows from investing activities:
Purchases of property, plant, and equipment ............ (11,869) (12,704)
-------- --------
Net cash used by investing activities ........ (11,869) (12,704)
-------- --------
Cash flows from financing activities:
Borrowings under revolving credit facility ............. 19,000 14,000
Proceeds from issuance of common stock ................. 448 1,591
Payments on long-term debt ............................. (24,690) (27,034)
-------- --------
Net cash used by financing activities ........ (5,242) (11,443)
-------- --------
Effect of exchange rate changes
on cash and cash equivalents ......................... (378) (880)
-------- --------
Net decrease in cash and cash equivalents ................ (439) (1,455)
Cash and cash equivalents at beginning of period ......... 3,747 3,470
-------- --------
Cash and cash equivalents at end of period ............... $ 3,308 $ 2,015
======== ========
Supplemental non-cash investing and financing activities:
As more fully described in Note 6, we acquired a business in the third quarter
of 2001 through the exchange of 1,950,000 shares of our common stock.
As more fully described in Note 6, we acquired certain property in the third
quarter of 2001 through the assumption of approximately $22.8 million of debt
and accrued interest.
See notes to consolidated condensed financial statements.
3
CONMED CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1 - Organization and operations
The consolidated condensed financial statements include the accounts of CONMED
Corporation and its subsidiaries ("CONMED", the "Company", "we" or "us"). 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, for orthopaedic,
ENT, neuro-surgery and other surgical specialties. We are 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. Our products are used in a
variety of clinical settings, such as operating rooms, surgery centers,
physicians' offices and critical care areas of hospitals. Our business is
organized, managed and internally reported as a single segment, since our
product offerings have similar economic, operating and other related
characteristics.
Note 2 - Interim financial information
The statements for the three and nine months ended September 2000 and 2001 are
unaudited; in our opinion 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 condensed
financial statements for the year ending December 2001 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 nine months ended September 2001 are not
necessarily indicative of the results of operations to be expected for any other
quarter nor for the year ending December 2001. The consolidated condensed
financial statements and notes thereto should be read in conjunction with the
financial statements and notes for the year ended December 2000 included in our
Annual Report to the Securities and Exchange Commission on Form 10-K. Certain
prior year amounts have been reclassified to conform with the presentation used
in 2001.
Note 3 - Other comprehensive income (loss)
Comprehensive income (loss) consists of the following:
Three months ended Nine months ended
September September
--------- ---------
2000 2001 2000 2001
---- ---- ---- ----
Net income ................ $ 2,729 $ 5,015 $ 13,654 $ 16,752
-------- -------- -------- --------
Other comprehensive income:
Foreign currency
translation adjustment (135) 35 (397) (857)
Cash flow hedging
(net of income taxes) . -- (707) -- (2,143)
-------- -------- -------- --------
Comprehensive income .... $ 2,594 $ 4,343 $ 13,257 $ 13,752
======== ======== ======== ========
4
Accumulated other comprehensive income (loss) consists of the following:
Accumulated
Cumulative Cash Other
Translation Flow Comprehensive
Adjustments Hedges Income (loss)
--------- --------- -------------
Balance, December 2000 ................................$ (1,027) $ -- $ (1,027)
--------- --------- ---------
Foreign currency translation adjustments ........ (857) -- (857)
Cash flow hedging (net of income taxes) ......... -- (2,143) (2,143)
--------- --------- ---------
Balance, September 2001 ...............................$ (1,884) $ (2,143) $ (4,027)
========= ========= =========
Note 4 - Inventories
The components of inventory are as follows (in thousands):
December September
2000 2001
--------- ---------
Raw materials ............................ $ 38,278 $ 39,945
Work-in-process .......................... 12,612 11,288
Finished goods ........................... 53,722 56,104
--------- ---------
Total ................. $ 104,612 $ 107,337
========= =========
Note 5 - Earnings per share
Basic earnings per share (EPS) is computed based on the weighted average number
of common shares outstanding for the period. Diluted EPS gives effect to all
dilutive potential shares outstanding (ie., options and warrants) during the
period. The following is a reconciliation of the weighted average shares used in
the calculation of basic and diluted EPS (in thousands):
Three months ended Nine months ended
September September
--------- ---------
2000 2001 2000 2001
---- ---- ---- ----
Shares used in the calculation
of Basic EPS(weighted average
shares outstanding) ......... 22,986 24,806 22,961 23,657
------ ------ ------ ------
Effect of dilutive potential
securities .................. 146 575 285 333
------ ------ ------ ------
Shares used in the calculation
of Diluted EPS .............. 23,132 25,381 23,246 23,990
====== ====== ====== ======
The shares used in the calculation of diluted EPS exclude warrants and options
to purchase shares where the exercise price was greater than the average market
price of common shares for the period. Such shares aggregated 3,617,000 and
1,988,000 for the three months ended September 2000 and 2001, respectively, and
3,241,000 and 3,027,000 for the nine months ended September 2000 and 2001,
respectively.
5
Note 6 - Business acquisitions
On November 20, 2000 we acquired certain assets of the disposable minimally
invasive surgical business of Imagyn Medical Technologies, Inc. (the "Imagyn
acquisition") for a purchase price of $6,000,000. The acquisition was funded
through borrowings under our revolving credit facility. Annual sales of the
acquired product lines are approximately $5.0 million. The results of operations
of the acquired business are included in our consolidated results from the date
of acquisition.
On June 11, 2001, we reached a definitive agreement to acquire the remaining
assets of the minimally invasive surgical business of Imagyn Medical
Technologies, Inc. that we did not acquire in November 2000 (the "second Imagyn
acquisition"). The results of operations of the acquired business are included
in our consolidated results from July 6, 2001, the date of acquisition. The new
products, with expected annual revenues of $18.0 to $20.0 million, give us a
significant presence in the laparoscopic instrument market. Under the terms of
the acquisition agreement, we issued Imagyn 1,950,000 shares of CONMED common
stock, valuing the transaction at $29.9 million based on the average market
price of our common stock over the 2-day period before and after the terms of
the acquisition were agreed to and announced. The issued stock is subject to
certain sales restrictions. As discussed in Note 7, during the third quarter of
2001, we incurred certain nonrecurring costs in connection with the second
Imagyn acquisition.
On August 3, 2001, we purchased the real estate partnerships which own the
Largo, Florida property leased by our Linvatec subsidiary for an aggregate
purchase price of $22,782,000 (the "Largo acquisition"). In connection with the
acquisition, we assumed the existing debt on the property and financed the
remainder with the seller. The assumed debt on the property consists of a note
bearing interest at 7.50% per annum with semiannual payments of principal and
interest through June 2009 (the "Class A note"); and a note bearing interest at
8.25% per annum compounded semiannually through June 2009, after which
semiannual payments of principal and interest will commence, continuing through
June 2019 (the "Class C note"). The seller-financed note bears interest at 6.50%
per annum with monthly payments of principal and interest through July 2013 (the
"Seller note"). The principal balances assumed on the Class A note, Class C
note and Seller note aggregate $12,185,000, $6,254,000 and $4,228,000,
respectively, at the date of acquisition.
6
Note 7 - Nonrecurring charges
During the quarter ended June 2000, we announced we would replace our
arthroscopy direct sales force with non-stocking, exclusive sales agent groups
in certain geographic regions of the United States. As a result, we incurred a
severance charge of $1,509,000, before income taxes, or $.04 per diluted share,
in the second quarter of 2000. This nonrecurring charge is included in selling
and administrative expense.
During the quarter ended September 2001, we incurred various nonrecurring
charges in connection with the second Imagyn acquisition. These costs were
primarily related to the transition in manufacturing of the Imagyn product lines
from Imagyn's Richland, Michigan facility to our manufacturing plants in Utica,
New York. Such costs totaled $886,000, before income taxes, or $.02 per diluted
share in the third quarter of 2001 and are included in cost of sales. We expect
an additional $500,000 of such costs in the fourth quarter of 2001.
Note 8 - Common stock dividend
On August 8, 2001, our Board of Directors declared a three-for-two split of our
common stock to be effected in the form of a common stock dividend. This
dividend was payable on September 7, 2001 to shareholders of record on August
21, 2001. Accordingly, common stock, the number of shares outstanding, earnings
per share, and the number of shares used in the calculation of earnings per
share have all been restated to retroactively reflect the split.
Note 9 - Subsequent events
On November 1, 2001, we established a five-year accounts receivable
securitization facility pursuant to which we and certain of our subsidiaries
sell on an ongoing basis certain accounts receivable to CONMED Receivables
Corporation ("CRC"), a wholly-owned special-purpose subsidiary of CONMED
Corporation. CRC may in turn sell up to an aggregate $50.0 million undivided
percentage ownership interest in such receivables to a commercial paper conduit.
Sale of these receivables will be reflected in the balance sheet as a reduction
in accounts receivable. Creditors of CRC have a claim to its assets before any
equity becomes available to us. We used the initial $40.0 million in proceeds
from the facility to repay a portion of our loans under our bank credit
facility.
Note 10 - New accounting pronouncements
In June 2001, the Financial Accounting Standards Board approved Statements of
Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141") and
No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") which are effective
for us July 1, 2001 and January 1, 2002, respectively. SFAS 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Under SFAS 142, amortization of goodwill and
certain intangibles, including goodwill and certain intangibles recorded in past
business combinations, will discontinue upon adoption of this standard. In
addition, goodwill and certain intangibles recorded as a result of business
combinations completed during the six-month period ending December 31, 2001 will
not be amortized. All goodwill and intangible assets will be tested for
impairment in accordance with the provisions of the Statement. We are currently
reviewing the provisions of SFAS 141
7
and SFAS 142 and assessing the impact of adoption.
Note 11 - Guarantor financial statements
Our credit facility and subordinated notes (the "Notes") are guaranteed (the
"Subsidiary Guarantees") by each of our subsidiaries except CRC (the "Subsidiary
Guarantors"). The Subsidiary Guarantees provide that each Subsidiary Guarantor
will fully and unconditionally guarantee our obligations under the credit
facility and the Notes on a joint and several basis. Each Subsidiary Guarantor
is wholly-owned by CONMED Corporation. The following supplemental financial
information sets forth on a condensed consolidating basis, consolidating balance
sheet, statement of income and statement of cash flows for the Parent Company
Only, Subsidiary Guarantors and for the Company as of December 2000 and
September 2001 and for the three and nine months ended September 2000 and 2001.
8
CONMED CORPORATION
CONSOLIDATING CONDENSED BALANCE SHEET
December 2000
(in thousands)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
---- ---------- ------------ -----
ASSETS
Current assets:
Cash and cash equivalents ....... $ -- $ 3,470 $ -- $ 3,470
Accounts receivable, net ........ 35,218 43,408 -- 78,626
Inventories ..................... 20,174 84,438 -- 104,612
Deferred income taxes ........... 1,761 -- -- 1,761
Prepaid expenses and other
current assets ............ 598 2,964 -- 3,562
--------- --------- --------- ---------
Total current assets .... 57,751 134,280 -- 192,031
--------- --------- --------- ---------
Property, plant and equipment, net .... 38,275 24,175 -- 62,450
Goodwill, net ......................... 61,651 164,150 -- 225,801
Other intangible assets, net .......... 7,498 187,510 -- 195,008
Other assets .......................... 473,408 5,217 (474,344) 4,281
--------- --------- --------- ---------
Total assets .................... $ 638,583 $ 515,332 $(474,344) $ 679,571
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 36,068 $ -- $ -- $ 36,068
Accounts payable ................ 4,398 15,952 -- 20,350
Accrued compensation ............ 2,147 7,766 -- 9,913
Income taxes payable ............ 1,338 641 -- 1,979
Accrued interest ................ 5,130 -- -- 5,130
Other current liabilities ....... 1,890 2,946 -- 4,836
--------- --------- --------- ---------
Total current liabilities ... 50,971 27,305 -- 78,276
--------- --------- --------- ---------
Long-term debt ........................ 342,680 -- -- 342,680
Deferred income taxes ................. 12,154 -- -- 12,154
Other long-term liabilities ........... 2,175 349,295 (335,612) 15,858
--------- --------- --------- ---------
Total liabilities ............... 407,980 376,600 (335,612) 448,968
--------- --------- --------- ---------
Shareholders' equity:
Preferred stock ................. -- -- -- --
Common stock .................... 230 1 (1) 230
Paid-in capital ................. 127,985 -- -- 127,985
Retained earnings ............... 103,834 139,758 (139,758) 103,834
Accumulated other comprehensive
loss ...................... (1,027) (1,027) 1,027 (1,027)
Less common stock in
treasury, at cost ................ (419) -- -- (419)
--------- --------- --------- ---------
Total shareholders' equity 230,603 138,732 (138,732) 230,603
--------- --------- --------- ---------
Total liabilities and
shareholders' equity ...... $ 638,583 $ 515,332 $(474,344) $ 679,571
========= ========= ========= =========
9
CONMED CORPORATION
CONSOLIDATING CONDENSED BALANCE SHEET
September 2001
(in thousands)
(unaudited)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
---- ---------- ------------ -----
ASSETS
Current assets:
Cash and cash equivalents ....... $ -- $ 2,015 $ -- $ 2,015
Accounts receivable, net ........ 37,252 48,467 -- 85,719
Inventories ..................... 22,747 84,590 -- 107,337
Deferred income taxes ........... 1,761 -- -- 1,761
Prepaid expenses and other
current assets ............ 920 2,886 -- 3,806
--------- --------- --------- ---------
Total current assets .... 62,680 137,958 -- 200,638
--------- --------- --------- ---------
Property, plant and equipment, net .... 45,927 45,971 -- 91,898
Goodwill, net ......................... 86,760 164,814 -- 251,574
Other intangible assets, net .......... 7,727 182,331 -- 190,058
Other assets .......................... 478,923 40,736 (514,486) 5,173
--------- --------- --------- ---------
Total assets .................... $ 682,017 $ 571,810 $(514,486) $ 739,341
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 38,463 $ 1,118 $ -- $ 39,581
Accounts payable ................ 4,478 15,836 -- 20,314
Accrued compensation ............ 3,443 6,450 -- 9,893
Income taxes payable ............ 1,243 135 -- 1,378
Accrued interest ................ 2,274 267 -- 2,541
Other current liabilities ....... 2,653 2,745 -- 5,398
--------- --------- --------- ---------
Total current liabilities ... 52,554 26,551 -- 79,105
--------- --------- --------- ---------
Long-term debt ........................ 327,284 21,542 -- 348,826
Deferred income taxes ................. 19,318 -- -- 19,318
Other long-term liabilities ........... 7,054 372,832 (363,601) 16,285
--------- --------- --------- ---------
Total liabilities ............... 406,210 420,925 (363,601) 463,534
--------- --------- --------- ---------
Shareholders' equity:
Preferred stock ................. -- -- -- --
Common stock .................... 252 1 (1) 252
Paid-in capital ................. 159,415 -- -- 159,415
Retained earnings ............... 120,586 152,768 (152,768) 120,586
Accumulated other comprehensive
loss ...................... (4,027) (1,884) 1,884 (4,027)
Less common stock in
treasury, at cost ................ (419) -- -- (419)
--------- --------- --------- ---------
Total shareholders' equity 275,807 150,885 (150,885) 275,807
--------- --------- --------- ---------
Total liabilities and
shareholders' equity ...... $ 682,017 $ 571,810 $(514,486) $ 739,341
========= ========= ========= =========
10
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Three Months Ended September 2000
(in thousands)
(unaudited)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
---- ---------- ------------ -----
Net sales .......................... $ 17,577 $ 75,261 $ -- $ 92,838
-------- -------- -------- --------
Cost of sales ...................... 9,961 34,175 -- 44,136
Selling and administrative expense . 5,577 25,918 -- 31,495
Research and development expense ... 508 3,601 -- 4,109
-------- -------- -------- --------
16,046 63,694 -- 79,740
-------- -------- -------- --------
Income from operations ............. 1,531 11,567 -- 13,098
Interest expense, net .............. -- 8,834 -- 8,834
-------- -------- -------- --------
Income before income taxes ......... 1,531 2,733 -- 4,264
Provision for income taxes ......... 551 984 -- 1,535
-------- -------- -------- --------
Income before equity in earnings
of unconsolidated subsidiaries ... 980 1,749 -- 2,729
Equity in earnings of unconsolidated
subsidiaries ..................... 1,749 -- (1,749) --
-------- -------- -------- --------
Net income ......................... $ 2,729 $ 1,749 $ (1,749) $ 2,729
======== ======== ======== ========
11
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Three Months Ended September 2001
(in thousands)
(unaudited)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
---- ---------- ------------ -----
Net sales .......................... $ 24,715 $ 80,603 $ -- $105,318
-------- -------- -------- --------
Cost of sales ...................... 14,342 36,990 -- 51,332
Selling and administrative expense . 7,970 27,059 -- 35,029
Research and development expense ... 332 3,159 -- 3,491
-------- -------- -------- --------
22,644 67,208 -- 89,852
-------- -------- -------- --------
Income from operations ............. 2,071 13,395 -- 15,466
Interest expense, net .............. -- 7,630 -- 7,630
-------- -------- -------- --------
Income before income taxes ......... 2,071 5,765 -- 7,836
Provision for income taxes ......... 746 2,075 -- 2,821
-------- -------- -------- --------
Income before equity in earnings
of unconsolidated subsidiaries ... 1,325 3,690 -- 5,015
Equity in earnings of unconsolidated
subsidiaries ..................... 3,690 -- (3,690) --
-------- -------- -------- --------
Net income ......................... $ 5,015 $ 3,690 $ (3,690) $ 5,015
======== ======== ======== ========
12
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Nine Months Ended September 2000
(in thousands)
(unaudited)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
---- ---------- ------------ -----
Net sales .......................... $ 57,124 $ 236,403 $ -- $ 293,527
--------- --------- --------- ---------
Cost of sales ...................... 31,933 108,191 -- 140,124
Selling and administrative expense . 16,234 79,270 -- 95,504
Research and development expense ... 1,465 9,622 -- 11,087
--------- --------- --------- ---------
49,632 197,083 -- 246,715
--------- --------- --------- ---------
Income from operations ............. 7,492 39,320 -- 46,812
Interest expense, net .............. -- 25,477 -- 25,477
--------- --------- --------- ---------
Income before income taxes ......... 7,492 13,843 -- 21,335
Provision for income taxes ......... 2,697 4,984 -- 7,681
--------- --------- --------- ---------
Income before equity in earnings
of unconsolidated subsidiaries ... 4,795 8,859 -- 13,654
Equity in earnings of unconsolidated
subsidiaries ..................... 8,859 -- (8,859) --
--------- --------- --------- ---------
Net income ......................... $ 13,654 $ 8,859 $ (8,859) $ 13,654
========= ========= ========= =========
13
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Nine Months Ended September 2001
(in thousands)
(unaudited)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
---- ---------- ------------ -----
Net sales .......................... $ 65,688 $ 249,710 $ -- $ 315,398
--------- --------- --------- ---------
Cost of sales ...................... 38,641 112,330 -- 150,971
Selling and administrative expense . 20,135 83,645 -- 103,780
Research and development expense ... 1,064 9,599 -- 10,663
--------- --------- --------- ---------
59,840 205,574 -- 265,414
--------- --------- --------- ---------
Income from operations ............. 5,848 44,136 -- 49,984
Interest expense, net .............. -- 23,809 -- 23,809
--------- --------- --------- ---------
Income before income taxes ......... 5,848 20,327 -- 26,175
Provision for income taxes ......... 2,106 7,317 -- 9,423
--------- --------- --------- ---------
Income before equity in earnings
of unconsolidated subsidiaries ... 3,742 13,010 -- 16,752
Equity in earnings of unconsolidated
subsidiaries ..................... 13,010 -- (13,010) --
--------- --------- --------- ---------
Net income ......................... $ 16,752 $ 13,010 $ (13,010) $ 16,752
========= ========= ========= =========
14
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Nine Months Ended September 2000
(in thousands)
(unaudited)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
---- ---------- ------------ -----
Net cash flows from operating
activities ............................. $ 4,529 $ 12,521 $ -- $ 17,050
-------- -------- -------- --------
Cash flows from investing activities:
Distributions from subsidiaries ....... 9,498 -- (9,498) --
Purchases of property, plant and
equipment ................... (9,383) (2,486) -- (11,869)
-------- -------- -------- --------
Net cash provided (used)
by investing activities . 115 (2,486) (9,498) (11,869)
-------- -------- -------- --------
Cash flows from financing:
Distributions to parent ........... -- (9,498) 9,498 --
Borrowings under revolving
credit facility ............. 19,000 -- -- 19,000
Proceeds from issuance of
common stock ................ 448 -- -- 448
Payments on long-term debt ........ (24,690) -- -- (24,690)
-------- -------- -------- --------
Net cash provided (used) by
financing activities ......... (5,242) (9,498) 9,498 (5,242)
-------- -------- -------- --------
Effect of exchange rate changes on cash
and cash equivalents .................. -- (378) -- (378)
-------- -------- -------- --------
Net increase (decrease) in cash and
cash equivalents ....................... (598) 159 -- (439)
Cash and cash equivalents at
beginning of period .................... 598 3,149 -- 3,747
-------- -------- -------- --------
Cash and cash equivalents at
end of period .......................... $ -- $ 3,308 $ -- $ 3,308
======== ======== ======== ========
15
CONMED CORPORATION
CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended September 2001
(in thousands)
(unaudited)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
---- ---------- ------------ -----
Net cash flows from operating
activities ............................ $ 5,092 $ 18,480 $ -- $ 23,572
-------- -------- -------- --------
Cash flows from investing activities:
Distributions from subsidiaries ...... 15,990 -- (15,990) --
Purchases of property, plant and
equipment .................. (9,639) (3,065) -- (12,704)
-------- -------- -------- --------
Net cash provided (used)
by investing activities 6,351 (3,065) (15,990) (12,704)
-------- -------- -------- --------
Cash flows from financing:
Distributions to parent .......... -- (15,990) 15,990 --
Borrowings under revolving
credit facility ............ 14,000 -- -- 14,000
Proceeds from issuance of
common stock ............... 1,591 -- -- 1,591
Payments on long-term debt ....... (27,034) -- -- (27,034)
-------- -------- -------- --------
Net cash provided (used)by
financing activities ........ (11,443) (15,990) 15,990 (11,443)
-------- -------- -------- --------
Effect of exchange rate changes on cash
and cash equivalents ................. -- (880) -- (880)
-------- -------- -------- --------
Net decrease in cash and
cash equivalents ...................... -- (1,455) -- (1,455)
Cash and cash equivalents at
beginning of period ................... -- 3,470 -- 3,470
-------- -------- -------- --------
Cash and cash equivalents at
end of period ......................... $ -- $ 2,015 $ -- $ 2,015
======== ======== ======== ========
16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain forward-looking statements
(as such term is defined in the Private Securities Litigation Reform Act of
1995) and information that is based on the beliefs of management, as well as
assumptions made by and information currently available to management.
When used in this Form 10-Q, the words "estimate", "project", "believe",
"anticipate", "intend", "expect", and similar expressions are intended to
identify forward-looking statements. These statements involve known and unknown
risks, uncertainties and other factors, including those discussed in our Annual
Report on Form 10-K for the year ended December 2000, 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, among others,
the following: general economic and business conditions; changes in customer
preferences; competition; changes in technology; the introduction of new
products; the integration of any acquisition; changes in business strategy; the
possibility that United States or foreign regulatory and/or administrative
agencies might initiate enforcement actions against us or our distributors; our
indebtedness; 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.
You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. We do not undertake any
obligation to publicly release any revisions to these forward-looking statements
to reflect events or circumstances after the date of this Form 10-Q or to
reflect the occurrence of unanticipated events.
Three months ended September 2001 compared to three months ended September 2000
Sales for the quarter ended September 2001 were $105.3 million, an increase of
13.5% compared to sales of $92.8 million in the same quarter a year ago.
Sales in our orthopaedic businesses grew 4.4% to $63.8 million from $61.1
million in the comparable quarter last year. Arthroscopy sales, which represent
approximately 58.2% of total orthopaedic revenues, grew 11.4% to $37.1 million
from $33.3 million in the same period a year ago. Powered surgical instrument
sales, which represent approximately 41.8% of orthopaedic revenues, declined
4.0% to $26.7 million from $27.8 million in the same quarter last year. Adjusted
for constant foreign currency exchange rates, orthopaedic sales growth in the
third quarter of 2001 would have been approximately 5.5% compared with the third
quarter of 2000.
Patient care sales for the three months ended September 2001 were $16.8 million,
a 5.0% increase from $16.0 million in the same period a year ago, as sales of
our ECG and surgical suction product lines improved compared to the same period
a year ago.
Electrosurgery sales for the three months ended September 2001 were $16.8
million, an increase of 17.5% from $14.3 million in the third quarter of last
year, reflecting improved capital and disposable product sales.
Endoscopy sales for the three months ended September 2001 were $7.9 million, an
increase of 464% from $1.4 million in the third quarter of last year. Excluding
the impact of the Imagyn acquisitions (Note 6 to the consolidated condensed
financial statements), the increase in sales was approximately 12.4%.
Cost of sales increased to $51,332,000 in the current quarter as compared to
$44,136,000 in the same quarter a year ago, primarily as a result of the
increased sales volumes described above. As discussed in Note 7 to the
consolidated condensed
17
financial statements, during the quarter ended September 2001, we incurred
various nonrecurring charges in connection with the second Imagyn acquisition.
These costs were primarily related to the transition in manufacturing of the
Imagyn product lines from Imagyn's Richland, Michigan facility to our
manufacturing plants in Utica, New York. Such costs totaled $886,000 in the
third quarter of 2001 and are included in cost of sales. Excluding the impact of
these non-recurring adjustments, cost of sales was $50,446,000. Gross margin
percentage for the third quarter 2001, excluding the Imagyn-related charges, was
52.1% compared to 52.5% in the third quarter of 2000. The decrease in gross
margin percentage is primarily a result of product mix, as sales in the higher
gross margin orthopaedic product lines declined to 60.6% of total sales in the
quarter ended September 2001 compared to 65.8% in the quarter ended September
2000.
Selling and administrative expenses increased to $35,029,000 in the third
quarter of 2001 as compared to $31,495,000 in the third quarter of 2000. As a
percentage of sales, selling and administrative expenses totaled 33.3% in the
third quarter of 2001,consistent with 33.9% in the third quarter of 2000. The
increase in selling and administrative expense is a result of higher commissions
and other selling expenses in the third quarter of 2001 as compared to the third
quarter of 2000 associated with the increased sales volumes described above.
Research and development expense decreased to $3,491,000 in the third quarter of
2001 as compared to $4,109,000 in the third quarter of 2000. As a percentage of
sales, research and development expense decreased to 3.3% in the current quarter
compared to 4.4% in the same quarter a year ago.
Interest expense in the third quarter of 2001 was $7,630,000 compared to
$8,834,000 in the third quarter of 2000. The decrease in interest expense is
primarily a result of lower weighted average interest rates on our term loans
and revolving credit facility which have declined to 5.66% and 5.62%,
respectively at September 2001 as compared to 8.53% and 8.93%, respectively at
September 2001 resulting in decreased interest expense. (See Liquidity and
Capital Resources section of Management's Discussion and Analysis of Financial
Condition and Results of Operations).
Nine months ended September 2001 compared to nine months ended September 2000
Sales for the nine months ended September 2001 were $315.4 million, an increase
of 7.5% compared to sales of $293.5 million in the same quarter a year ago.
Sales in our orthopaedic businesses grew 4.4% to $201.0 million from $192.6
million in the comparable period last year. Arthroscopy sales, which represent
approximately 57.4% of total orthopaedic revenues, grew 6.0% to $115.3 million
from $108.8 million in the same period a year ago. Powered surgical instrument
sales, which represent approximately 42.6% of orthopaedic revenues, grew 2.3% to
$85.7 million from $83.8 million in the same period last year. Adjusted for
constant foreign currency exchange rates, orthopaedic sales growth in the first
nine months of 2001 would have been approximately 6.0% compared with the first
nine months of 2000.
Patient care sales for the nine months ended September 2001 were $52.0 million,
a 1.0% increase from $51.5 million in the same period a year ago, reflecting
modest increases in sales of our ECG and surgical suction product lines.
Electrosurgery sales for the nine months ended September 2001 were $48.9
million, an increase of 8.7% from $45.0 million in the first nine months of last
year, reflecting improved generator and disposable product sales.
Endoscopy sales for the nine months ended September 2001 were $13.4 million, an
increase of 212% from $4.3 million in the same period a year ago. Excluding the
18
impact of the Imagyn acquisitions (Note 6 to the consolidated condensed
financial statements), the increase in sales was approximately 9.5%.
Cost of sales increased to $150,971,000 in the nine months ended September 2001
compared to $140,124,000 in the same period a year ago, primarily as a result of
the increased sales volumes described above. As discussed in Note 7 to the
consolidated condensed financial statements, during the quarter ended September
2001, we incurred various nonrecurring charges in connection with the second
Imagyn acquisition. These costs were primarily related to the transition in
manufacturing of the Imagyn product lines from Imagyn's Richland, Michigan
facility to our manufacturing plants in Utica, New York. Such costs totaled
$886,000 in the third quarter of 2001 and are included in cost of sales.
Excluding the impact of these non-recurring adjustments, cost of sales for the
nine months ended September 2001 was $150,085,000. Gross margin percentage for
the nine months ended September 2001, excluding the Imagyn-related charges, was
52.4% comparable with the 52.3% experienced in the same period a year ago.
Selling and administrative expenses increased to $103,780,000 in the first nine
months of 2001 as compared to $95,504,000 in the first nine months of 2000. As a
percentage of sales, selling and administrative expenses totaled 32.9% in the
first nine months of 2001, consistent with 32.5% in the first nine months of
2000. The increase in selling and administrative expense is a result of higher
commissions and other selling expenses in the first nine months of 2001 as
compared to 2000 associated with the increased sales volumes described above.
Research and development expense decreased to $10,663,000 in the first nine
months of 2001 as compared to $11,087,000 in the first nine months of 2000. As a
percentage of sales, research and development expense decreased to 3.4% in the
current period compared to 3.8% in the same period a year ago.
Interest expense in the first nine months of 2001 was $23,809,000 compared to
$25,477,000 in the first nine months of 2000. The decrease in interest expense
is primarily a result of lower weighted average interest rates on our term loans
and revolving credit facility which have declined, to 5.66% and 5.62%,
respectively, at September 2001 as compared to 8.53% and 8.93%, respectively, at
September 2000 resulting in decreased interest expense. (See Liquidity and
Capital Resources section of Management's Discussion and Analysis of Financial
Condition and Results of Operations).
Liquidity and Capital Resources
Our net working capital position increased to $121,533,000 at September 2001
compared to $113,755,000 at December 2000. The increase in net working capital
is largely a result of increases in accounts receivable and inventories at
September 2001 compared to December 2000 as a result of higher overall sales
levels in 2001 compared to 2000 and the effects of the second Imagyn
acquisition.
Net cash used by investing activities for the nine months ended September 2001
and 2000 consisted of $12,704,000 and $11,869,000, respectively, in capital
expenditures.
Financing activities during the nine months ended September 2001 consisted
primarily of scheduled payments of $27,034,000 on our term loans and $14,000,000
in borrowings on our revolving credit facility. Financing activities during the
nine months ended September 2000 consisted primarily of scheduled payments of
$24,690,000 on our term loans and $19,000,000 in borrowings on our revolving
credit facility.
Our term loans under our credit facility at September 2001 aggregate
$173,952,000. Our term loans are repayable quarterly over remaining terms of
approximately four years. Our credit facility also includes a $100,000,000
revolving credit facility which expires and is expected to be renegotiated prior
to December 2002, of which
19
$39,000,000 was available at September 2001. 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 our operating results. The
weighted average interest rates at September 2001 under the term loans and the
revolving credit facility were 5.66% and 5.62%, respectively. Additionally, we
are obligated to pay a fee of .375% per annum on the unused portion of the
revolving credit facility.
The credit facility is collateralized by all of our personal property, except
for our accounts receivable and related rights, which are pledged in connection
with the accounts receivable securitization facility described below. 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. We are also required to
make mandatory prepayments from net cash proceeds from any issue of equity and
asset sales. Mandatory prepayments are to be applied first to the prepayment of
the term loans and then to reduce borrowings under the revolving credit
facility.
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 us.
The credit facility and Notes are guaranteed by each of our subsidiaries except
CRC. The Subsidiary Guarantees provide that each Subsidiary Guarantor will fully
and unconditionally guarantee our obligations on a joint and several basis. Each
Subsidiary Guarantor is wholly-owned by CONMED Corporation. Under the credit
facility and Note indenture, our subsidiaries except CRC are subject to the same
covenants and restrictions that apply to us (except that the Subsidiary
Guarantors are permitted to make dividend payments and distributions, including
cash dividend payments, to us or another Subsidiary Guarantor).
The principal balances outstanding related to the Largo acquisition, discussed
in Note 6 to the consolidated condensed financial statements, aggregated
$12,185,000, $6,275,000 and $4,200,000, at September 2001 on the Class A note,
Class C note and Seller note respectively, which are secured by, among other
things, recorded and unrecorded mortgage liens on the Largo property.
As discussed in Note 9 to the consolidated condensed financial statements, on
November 1, 2001, we established a five-year accounts receivable securitization
facility. We used the initial $40.0 million in proceeds from the facility to
repay a portion of our loans under the credit facility.
We use an interest rate swap, a form of derivative financial instrument, to
manage interest rate risk. We have designated as a cash-flow hedge, an interest
rate swap which effectively converts $50,000,000 of LIBOR-based floating rate
debt under our credit facility into fixed rate debt with a base interest rate of
7.01%. The interest rate swap expires in June 2003 and is included in
liabilities on the balance sheet with a fair value approximating $3,348,000.
There were no material changes in our market risk during the quarter ended
September 2001. For a detailed discussion of market risk, see our Annual Report
on Form 10-K for the year ended December 2000, Part II, Item 7A, Quantitative
and Qualitative Disclosures About Market Risk.
We believe that cash generated from operations, our current cash resources and
funds available under our credit facility will provide sufficient liquidity to
ensure continued working capital for operations, debt service and funding of
capital expenditures in the foreseeable future.
20
Foreign Operations
Our 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.
21
Item 6. Exhibits and Reports on Form 8-K
List of Exhibits
Exhibit No. Description of Instrument
- ----------- -------------------------
10.1 The Purchase and Sale Agreement dated November 1, 2001 among
CONMED Corporation, et al and CONMED Receivables Corporation
(included in EDGAR filing only)
10.2 The Receivables Purchase Agreement dated November 1, 2001 among
CONMED Receivables Corporation, Blue Keel Funding, LLC and
Fleet National Bank (included in EDGAR filing only)
Reports on Form 8-K
None
22
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: November 13, 2001
/s/ Robert D. Shallish, Jr.
-----------------------------
Robert D. Shallish, Jr.
Vice President - Finance
(Principal Financial Officer)
23
Exhibit Index
Sequential Page
Exhibit Number
- ------- ------
10.1 The Purchase and Sale Agreement dated November 1, 2001 among CONMED
Corporation, et al and CONMED Receivables Corporation (included in EDGAR
filing only)
10.2 The Receivables Purchase Agreement dated November 1, 2001 among CONMED
Receivables Corporation, Blue Keel Funding, LLC and Fleet National Bank.
(included in EDGAR
filing only)
24