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 Septeber 30, 1997 Commission file number 0-16093
CONMED CORPORATION
- --------------------------------------------------------------------------------
(Exact name of 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)
(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
November 8, 1997 is 15,003,203 shares.
CONMED CORPORATION
TABLE OF CONTENTS
FORM 10-Q
PART I FINANCIAL INFORMATION
Item Number
Item 1. Financial Statements
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Notes to Consolidated Financial
Statements
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations
PART II OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
(unaudited)
For the Three Months For the Nine Months
Ended September Ended September
------------------------------------------------
1996 1997 1996 1997
-------- -------- -------- --------
Net sales ................... $ 31,432 $ 38,581 $ 92,422 $100,760
-------- -------- -------- --------
Cost and expenses:
Cost of sales ............. 16,469 21,601 48,141 54,335
Facility consolidation
expense (Note 7) ........ -- -- -- 2,328
Selling and administrative 7,949 9,304 23,645 26,236
Research and development .. 861 752 2,238 2,294
-------- -------- -------- --------
Total operating expenses 25,279 31,657 74,024 85,193
-------- -------- -------- --------
Income from operations ...... 6,153 6,924 18,398 15,567
Interest income (expense),net 148 134 (384) 762
-------- -------- -------- --------
Income before taxes ......... 6,301 7,058 18,014 16,329
Provision for income taxes .. 2,268 2,541 6,485 5,878
-------- -------- -------- --------
Net income .................. $ 4,033 $ 4,517 $ 11,529 $ 10,451
======== ======== ======== ========
Weighted common shares and
equivalents ............... 15,195 15,219 14,285 15,221
======== ======== ======== ========
Earnings per share .......... $ .27 $ .30 $ .81 $ .69
======== ======== ======== ========
See notes to consolidated financial statements.
CONMED CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
ASSETS
December September
1996 1997
--------- ---------
(unaudited)
Current assets:
Cash and cash equivalents ............................. $ 20,173 $ 5,159
Accounts receivable, net .............................. 26,336 32,032
Income taxes receivable ............................... 766 --
Inventories (Note 4) .................................. 23,187 23,373
Deferred income taxes ................................. 626 626
Prepaid expenses and other current assets ............. 740 1,154
--------- ---------
Total current assets ............................... 71,828 62,344
Property, plant and equipment, net ...................... 26,458 31,008
Deferred income taxes ................................... 1,246 1,246
Covenant not to compete, net ............................ 713 383
Goodwill, net ........................................... 64,283 83,964
Patents, trademarks, and other assets, net .............. 5,555 4,829
--------- ---------
Total assets ...................................... $ 170,083 $ 183,774
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 2,433 $ 3,186
Income taxes payable .................................. -- 996
Accrued payroll and withholdings ...................... 2,037 1,868
Accrued pension ....................................... 333 879
Other current liabilities ............................. 951 1,970
--------- ---------
Total current liabilities ......................... 5,754 8,899
Deferred compensation ................................... 1,033 1,192
Accrued pension ......................................... 276 276
Long term leases ........................................ 2,924 2,785
Other long-term liabilities ............................. 1,461 1,742
--------- ---------
Total liabilities .............................. 11,448 14,894
--------- ---------
CONMED CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
(continued)
December September
1996 1997
--------- ---------
(unaudited)
Shareholders' equity:
Preferred stock, par value $.01 per share;
authorized 500,000 shares; none outstanding ....... -- --
Common stock, par value $.01 per share;
40,000,000 authorized; 14,988,783 and
14,991,108 issued and outstanding,
in 1996 and 1997, respectively .................... 150 150
Paid-in capital ....................................... 111,867 112,080
Treasury stock ........................................ -- (419)
Retained earnings ..................................... 46,618 57,069
--------- ---------
Total equity ...................................... 158,635 168,880
--------- ---------
Total liabilities and shareholders' equity ........ $ 170,083 $ 183,774
========= =========
See notes to consolidated financial statements.
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
Nine Months Ended September 1996 and 1997
(in thousands)
(unaudited)
1996 1997
-------- --------
Cash flows from operating activities:
Net income ....................................... $ 11,529 $ 10,451
-------- --------
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation ................................. 2,979 2,979
Amortization ................................. 2,269 2,504
Increase (decrease) in cash flows
from changes in assets and liabilities:
Accounts receivable .................... (958) (5,696)
Inventories ............................ (2) 2,864
Prepaid expenses and other assets ...... (441) (414)
Deferred income taxes .................. 2,000 --
Other assets ........................... (1,334) 155
Accounts payable ....................... (225) 753
Income taxes payable ................... 1,361 1,762
Income tax benefit of stock
option exercises ..................... 1,035 --
Accrued payroll and withholdings ....... (981) (169)
Accrued pension ........................ (162) 546
Other current liabilities .............. 679 321
Other liabilities ...................... (570) 159
-------- --------
5,650 5,764
-------- --------
Net cash provided by operations ............... 17,179 16,215
-------- --------
Cash flows from investing activities:
Business acquisitions ............................ (33,705) (24,000)
Acquisition of property, plant, and equipment .... (3,992) (6,884)
-------- --------
Net cash used by investing activities ......... (37,697) (30,884)
-------- --------
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
Nine Months Ended September 1996 and 1997
(in thousands)
(unaudited)
(continued)
1996 1997
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net ...... 65,802 213
Payment for purchase of treasury stock ........... -- (419)
Proceeds of long and short term debt ............. 32,660 --
Payments on debt and other obligations ........... (65,505) (139)
-------- --------
Net cash provided (used) by financing
activities .................................. 32,957 (345)
-------- --------
Net increase (decrease) in
cash and cash equivalents ........................ 12,439 (15,014)
Cash and cash equivalents at beginning of period ... 1,539 20,173
-------- --------
Cash and cash equivalents at end of period ......... $ 13,978 $ 5,159
======== ========
See notes to consolidated financial statements.
CONMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Consolidation
The consolidated financial statements include the accounts of CONMED
Corporation ("the Company") and its subsidiaries. The Company is primarily
engaged in the development, manufacturing and marketing of disposable medical
products and related devices. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Note 2 - Interim financial information
The statements for the three and nine months ended September 1996 and
1997 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 1997 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 1996 and 1997 are not necessarily indicative of the results of
operations to be expected for any other quarter nor for the year ending December
1997. The consolidated financial statements and notes thereto should be read in
conjunction with the financial statements and notes for the year ended December
1996 included in the Company's Annual Report to the Securities and Exchange
Commission on Form 10-K.
Note 3 - Earnings per share
Earnings per share was computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period.
Note 4 - Inventories
The components of inventory are as follows (in thousands):
December September
1996 1997
-------- -------
Raw Material.............. $ 7,079 $ 9,145
Work-in-process........... 7,541 6,938
Finished goods............ 8,567 7,290
-------- -------
Total................ $ 23,187 $ 23,373
======== ========
Note 5 - Business acquisitions
On February 23, 1996, the Company acquired the business and certain
assets of New Dimensions in Medicine, Inc. ("NDM") for a cash purchase price of
approximately $31.2 million and the assumption of $3.3 million of liabilities.
The acquisition is being accounted for using the purchase method of accounting.
Accordingly, 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.
On July 1, 1997, the Company completed the acquisition of a product
line from Davol Inc., a subsidiary of C.R. Bard, Inc., for a cash purchase price
of $24,000,000. Annual sales associated with the product line approximate $25
million. This acquisition is being accounted for using the purchase method of
accounting. Accordingly, 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. The allocation of the purchase price
for this acquisition is based on management's preliminary estimates; it is
possible that re-allocations will be required as additional information becomes
available. Management does not believe that such re-allocations will have a
material effect on the Company's results of operations or financial position.
On an unaudited pro forma basis, assuming each of the acquisitions had
occurred as of the beginning of the periods, the consolidated results of the
Company would have been as follows (in thousands, except per share amounts):
For the Nine Months
For the Three Ended September
Months Ended ---------------------
September 1996 1996 1997
-------------- ---- ----
Pro forma net sales ......... $ 37,682 $113,672 $113,260
Pro forma net income ........ 4,456 12,960 11,411
Pro forma earnings per
common, and common
equivalent shares ......... 0.29 0.91 0.75
Note 6 - Stock offering
On March 20, 1996, the Company completed a public offering of its
common stock whereby 3,000,000 and 850,000 shares of common stock were sold by
the Company and certain shareholders, respectively. The common shares sold by
the shareholders were received upon the exercise of a warrant and options during
the first quarter of 1996. Net proceeds to the Company related to the sale of
3,000,000 shares and exercise of the warrant and options amounted to
approximately $62,500,000 and $3,500,000, respectively. Of the aggregate
proceeds, $65,000,000 was used to eliminate the Company's indebtedness under its
credit agreements.
Note 7 - Facility consolidation
During the first quarter of 1997, the Company recorded a pre-tax charge
of $2,328,000 related to the closure of the Company's Dayton, Ohio manufacturing
facility. Operations of the Dayton facility, which was acquired in connection
with the February 1996 acquisition of NDM, were transferred to the Company's
manufacturing facilities in Rome and Utica, New York during the second and third
quarters of 1997. The components of the charge consisted primarily of costs
associated with employee severance and termination, and the impairment of the
carrying value of fixed assets.
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.
Three months ended September 1997 compared to three months ended September 1996
Sales for the quarter ended September 1997 were $38,581,000, an
increase of 22.7% compared to sales of $31,432,000 in the quarter ended
September 1996. The increase is largely a result of incremental sales volume
associated with the Davol product line acquisition which became effective July
1, 1997. Other factors impacting net sales for the third quarter of 1997 as
compared to the third quarter of 1996 include increased sales of the Company's
surgical disposables offset partially by lower pricing on ECG electrodes.
Cost of sales increased to $21,601,000 in the current quarter compared
to the $16,469,000 in the same quarter a year ago as a result of increased sales
volume. The Company's gross margin was 44.0% in the third quarter of 1997 as
compared to 47.6% in the third quarter of 1996. The decrease is primarily a
result of the Davol product line which currently has a lower gross margin
percentage than the Company's overall gross margin percentage.
Selling and administrative expenses increased to $9,304,000 in the
third quarter of 1997 as compared to $7,949,000 in the third quarter of 1996.
This increase resulted from the effects of the Davol product line acquisition.
As a percentage of sales, however, selling and administrative expense declined
from 25.3% in the third quarter of 1996 to 24.1% in the third quarter of 1997
due to economies of scale resulting from incremental sales.
Research and development expense was $752,000 in the third quarter of
1997 as compared to $861,000 in the comparable 1996 period. The Company
continues to conduct research activities in all of its product lines, with a
particular emphasis on products for minimally-invasive surgery.
The third quarter of 1997 had interest income of $134,000 as compared
to $366,000 in the second quarter of 1997 and $148,000 in the third quarter of
1996. As discussed below under Liquidity and Capital Resources, the Company's
invested cash balances declined in the third quarter of 1997 as a result of the
acquisition of the Davol product line and the purchase of a building in Utica,
New York.
Nine months ended September 1997 compared to nine months ended September 1996
Sales for the nine months ended September 1997 were $100,760,000 as
compared to sales of $92,422,000 in the nine months ended September 1996. The
increase was primarily a result of the Davol product line acquisition effective
July 1, 1997, and the NDM acquisition that was reflected in 1996 results only
from February 23, 1996, the date of acquisition. Offsetting the incremental
sales volume associated with the acquisitions was the effect of realignment of
the Company's domestic sales force effective January 1, 1997, the effect of
discontinuing certain end of quarter dealer incentives and lower pricing
relative to ECG electrode sales.
Prior to 1997, the Company maintained separate sales forces, each of
which sold only a portion of the Company's product offerings. With the
realignment, each of the Company's territory managers sell the entire product
line of the Company. While management believes that this change has enhanced the
Company's sales efforts, management believes that sales for the first six months
of 1997 were negatively impacted by this change due to training and transition
issues. Additionally, during the second quarter of 1997, the Company announced
that it would immediately discontinue certain end of quarter dealer incentives
which had previously been offered. Management believes that this had a negative
effect on the Company's sales in the second quarter of 1997 by as much as $2.0
million.
Cost of sales increased to $54,335,000 in the first nine months of 1997
as compared to the $48,141,000 in the same 1996 period. The Company's gross
margin percentage was 46.1% for the first nine months of 1997 as compared to
47.9% in the first nine months of 1996. Factors adversely impacting the gross
margin percentage in 1997 include the third quarter sales of the Davol product
line which currently has a lower gross margin percentage than the Company's
overall gross margin percentage and the effect of lower pricing on ECG
electrodes.
During the first quarter of 1997, the Company recorded a charge of
$2,328,000 related to the closure of its Dayton, Ohio manufacturing facility.
Operations of the Dayton facility, which was acquired in connection with the
February 1996 acquisition of NDM, were transferred to the Company's
manufacturing facilities in Utica and Rome, New York during the second and third
quarters of 1997.
Selling and administrative costs increased to $26,236,000 in the first
nine months of 1997 as compared to $23,645,000 in the first nine months of 1996.
As a percentage of sales, selling and administrative expense was 26.0% in the
nine months of 1997 as compared to 25.6% in the comparable 1996 period. This
increase reflects incremental expenses during the first and second quarters of
1997 related to increased marketing efforts and the domestic sales force
realignment.
The first nine months of 1997 had interest income of $762,000 as
compared to interest expense of $384,000 in the first nine months of 1996. As
discussed under Liquidity and Capital Resources, maximum borrowings during the
first quarter of 1996 were $65,000,000 of which $32,660,000 related to
borrowings associated with the February 23, 1996 acquisition of NDM. All such
indebtedness was repaid in late March 1996 with proceeds from the Company's
equity offering.
The provision for income taxes decreased in 1997 due to the lower
income before tax.
Liquidity and Capital Resources
Cash flows provided or used by operating, investing and financing
activities for the first nine months of 1996 and 1997 are disclosed in the
Consolidated Statements of Cash Flow. Net cash provided by operations was
$16,215,000 in the first nine months of 1997 as compared to $17,179,000 in the
first nine months of 1996. Operating cash flows in the first nine months of 1997
were negatively impacted by lower net income as compared to the first nine
months of 1996. Depreciation and amortization in 1997 increased primarily due to
the effects of the NDM and Davol product line acquisitions. Operating cash flows
for the first nine months of 1997 were positively impacted by a reduction in
inventories and an increase in income taxes payable. Adversely impacting
operating cash flows in the first nine months of 1997 was an increase in
accounts receivable resulting from incremental sales associated with the Davol
product line acquisition.
Net cash used by investing activities was $30,884,000 in the first nine
months of 1997 compared to $37,697,000 in the first nine months of 1996. Cash
used for the July 1, 1997 acquisition of the Davol product line was $24.0
million. During the first nine months of 1997, additions to property, plant and
equipment were $6,884,000 including $4,000,000 used to purchase a building in
Utica, New York. Cash used for the 1996 acquisition of NDM approximated $33.7
million. Additions to property, plant and equipment for the first nine months of
1996 amounted to $3,992,000.
Cash flows used by financing activities were $345,000 in the first nine
months of 1997 as compared to $32,957,000 provided by financing activities in
the first nine months of 1996. During the third quarter of 1997, the Company
repurchased 25,000 shares of its common stock for approximately $419,000. In
connection with the NDM acquisition on February 23, 1996, the Company borrowed
$32,660,000 bringing aggregate borrowings under its credit facility to
$65,000,000. On March 20, 1996, the Company completed an equity offering of
common stock and used $65,000,000 of the proceeds to eliminate the indebtedness
of the Company.
Management believes that cash generated from operations, its current
cash resources and funds available under its banking agreement will provide
sufficient liquidity to ensure continued working capital for operations and
funding of capital expenditures in the foreseeable future.
The Company's credit facility consists of a $60,000,000 secured
revolving line of credit which expires on March 2001. This facility carries an
interest rate of 0.5%-1.25% over LIBOR depending on defined cash flow
performance ratios. There were no borrowings outstanding under this facility
during the nine months ended September 1997.
Item 5. Other Information
On May 6, 1997, the Company announced that its Board of Directors
authorized the Company to repurchase $30,000,000 of its common stock. The
repurchase program calls for shares to be purchased in the open market or in
private transactions from time to time. The Company may suspend or discontinue
the program at any time. The timing of the purchases will depend upon market
conditions, the market price of the common stock and management's assessment of
the Company's liquidity and cash flow needs. The Company will finance the
repurchases from cash-on-hand and amounts available under the Company's bank
credit facility.
Item 6. Exhibits and Reports on Form 8-K
List of Exhibits
Exhibit No. Description
----------- -----------
11 Computation of weighted average number
of shares of common stock
Reports on Form 8-K
None
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 14, 1997
/s/Robert D. Shallish, Jr.
--------------------------
Robert D. Shallish, Jr.
Vice President - Finance
(Principal Financial
Officer)
Exhibit Index
Exhibit
11 - Computations of weighted average
number of shares of common stock
EXHIBIT 11
Computation of weighted average number of shares of common stock
For the Three Months For the Nine Months
Ended September Ended September
--------------------- ---------------------
1996 1997 1996 1997
------- ------- ------- -------
Shares outstanding at
beginning of period .... 14,933 14,999 11,105 14,989
Net weighted average share
issued and repurchased . 6 (12) 2,644 6
Incremental shares of
common stock outstanding
giving effect to stock
options and warrant .... 256 232 536 226
------- ------- ------- -------
15,195 15,219 14,285 15,221
======= ======= ======= =======
5
9-MOS
DEC-31-1997
SEP-30-1997
5,159
0
32,782
(750)
23,373
62,344
51,369
(20,361)
183,774
8,899
0
0
0
150
111,661
183,774
100,760
100,760
54,335
85,193
0
0
(762)
16,329
5,878
10,451
0
0
0
10,451
.69
0
