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 March 31, 2002 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 April
30, 2002 is 25,621,202 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 14
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Item 1.
CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Three Months Ended March 31, 2001 and 2002
(in thousands except per share amounts)
(unaudited)
2001 2002
---- ----
Net sales............................................ $105,909 $113,205
-------- --------
Cost of sales........................................ 49,674 54,104
Selling and administrative expense................... 34,829 34,468
Research and development expense..................... 3,696 3,824
-------- --------
88,199 92,396
-------- --------
Income from operations............................... 17,710 20,809
Interest expense, net................................ 8,331 6,628
-------- --------
Income before income taxes........................... 9,379 14,181
Provision for income taxes........................... 3,376 5,105
-------- --------
Net income........................................... $ 6,003 $ 9,076
======= =======
Per share data:
Net income
Basic............................................ $ .26 $ .36
Diluted.......................................... 26 .35
Weighted average common shares
Basic............................................ 23,057 25,397
Diluted.......................................... 23,307 25,969
See notes to consolidated condensed financial statements.
1
CONMED CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands except share amounts)
(unaudited)
December 31, March 31,
2001 2002
---- ----
ASSETS
Current assets:
Cash and cash equivalents................................... $ 1,402 $ 2,634
Accounts receivable, net.................................... 51,188 50,893
Inventories................................................. 107,390 109,951
Deferred income taxes....................................... 1,105 1,105
Prepaid expenses and other current assets................... 3,464 3,698
-------- --------
Total current assets...................................... 164,549 168,281
-------- --------
Property, plant and equipment, net............................ 91,026 92,028
Goodwill, net................................................. 251,140 252,450
Other intangible assets, net.................................. 189,752 188,614
Other assets.................................................. 5,141 5,577
-------- --------
Total assets.............................................. $701,608 $706,950
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........................... $ 73,429 $ 73,914
Accounts payable............................................ 19,877 26,380
Accrued compensation........................................ 11,863 9,256
Income taxes payable........................................ 2,507 2,340
Accrued interest............................................ 4,954 1,573
Other current liabilities................................... 7,207 7,384
-------- --------
Total current liabilities................................. 119,837 120,847
-------- --------
Long-term debt................................................ 262,500 252,077
Deferred income taxes......................................... 18,655 22,924
Other long-term liabilities................................... 16,982 15,891
-------- --------
Total liabilities......................................... 417,974 411,739
-------- --------
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; 25,261,590 and
25,549,358 shares issued and outstanding in
2001 and 2002, respectively............................. 253 255
Paid-in capital............................................. 160,757 162,740
Retained earnings........................................... 128,240 137,316
Accumulated other comprehensive loss........................ (5,197) (4,681)
Less 37,500 shares of common stock in treasury,
at cost................................................... (419) (419)
-------- --------
Total shareholders' equity................................ 283,634 295,211
-------- --------
Total liabilities and shareholders' equity................ $701,608 $706,950
======== ========
See notes to consolidated condensed financial statements.
2
CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2001 and 2002
(in thousands)
(unaudited)
2001 2002
---- ----
Cash flows from operating activities:
Net income........................................................ $ 6,003 $ 9,076
------- -------
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation................................................ 2,185 2,206
Amortization................................................ 5,381 3,197
Increase (decrease) in cash flows
from changes in assets and liabilities:
Accounts receivable............................... (1,837) 289
Inventories....................................... (1,168) (3,605)
Prepaid expenses and
other current assets............................ (677) (247)
Accounts payable.................................. 2,114 6,503
Income taxes payable.............................. 3,036 (167)
Accrued compensation.............................. 180 (2,607)
Accrued interest.................................. (3,114) (3,381)
Other assets/liabilities, net..................... (987) 1,087
------- -------
5,113 3,275
------- -------
Net cash provided by operating activities................... 11,116 12,351
------- -------
Cash flows from investing activities:
Purchases of property, plant, and equipment....................... (3,867) (3,208)
------- -------
Net cash used by investing activities....................... (3,867) (3,208)
------- -------
Cash flows from financing activities:
Borrowings (repayments)under revolving credit facility............ 3,000 (1,000)
Proceeds from issuance of common stock............................ 481 1,985
Payments on long-term debt........................................ (9,023) (8,938)
------- -------
Net cash used by financing activities....................... (5,542) (7,953)
------- -------
Effect of exchange rate changes
on cash and cash equivalents.................................... (1,073) 42
------- -------
Net increase in cash and cash equivalents........................... 634 1,232
Cash and cash equivalents at beginning of period.................... 3,470 1,402
------- -------
Cash and cash equivalents at end of period.......................... $ 4,104 $ 2,634
======= =======
See notes to consolidated condensed financial statements.
3
CONMED CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(in thousands except share amounts)
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, implants and video
equipment for arthroscopic sports medicine, and powered surgical instruments,
such as drills and saws, for orthopedic, ENT, neuro-surgery and other surgical
specialties. We are also a leading developer, manufacturer and supplier of
advanced medical devices, including radio frequency, or RF, electrosurgery
systems used routinely to cut and cauterize tissue in nearly all types of
surgical procedures worldwide and endoscopy products such as trocars, clip
appliers, scissors and surgical staplers. We also manufacture and sell a full
line of ECG electrodes for heart monitoring and other patient care products. 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 months ended March 31, 2001 and 2002 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 31, 2002 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 months ended March 31, 2002 are not necessarily indicative of the
results of operations to be expected for any other quarter nor for the year
ending December 31, 2002. The consolidated condensed financial statements and
notes thereto should be read in conjunction with the financial statements and
notes for the year ended December 31, 2001 included in our Annual Report to the
Securities and Exchange Commission on Form 10-K.
Note 3 - Other comprehensive income (loss)
- ------------------------------------------
Comprehensive income (loss) consists of the following:
Three months ended
March 31,
2001 2002
---- ----
Net income......................................... $ 6,003 $ 9,076
------- -------
Other comprehensive income:
Foreign currency translation adjustment........ (1,063) 36
Cash flow hedging (net of income taxes)........ (1,550) 480
------- -------
Comprehensive income........................... $ 3,390 $ 9,592
======= =======
4
Accumulated other comprehensive income (loss) consists of the following:
Accumulated
Minimum Cumulative Cash Other
Pension Translation Flow Comprehensive
Liability Adjustments Hedges Income (loss)
--------- ----------- ------ -------------
Balance, December 2001............................... $(1,062) $(2,169) $(1,966) $(5,197)
Foreign currency translation
adjustments.................................... - 36 - 36
Cash flow hedging (net of
income taxes).................................. - - 480 480
------- ------- ------- -------
Balance, March 2002.................................. $(1,062) $(2,133) $(1,486) $(4,681)
======= ======= ======= =======
Note 4 - Inventories
- --------------------
The components of inventory are as follows:
December 31, March 31,
2001 2002
---- ----
Raw materials........................................ $38,101 $38,173
Work-in-process...................................... 11,921 13,893
Finished goods....................................... 57,368 57,885
-------- --------
Total ................................... $107,390 $109,951
======== ========
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 (i.e., 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
March 31,
2001 2002
---- ----
Shares used in the calculation of Basic EPS
(weighted average shares outstanding)............... 23,057 25,397
Effect of dilutive potential securities................. 250 572
Shares used in the calculation of Diluted EPS........... 23,307 25,969
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 2,296,000 and
351,000 for the three months ended March 31, 2001 and 2002, respectively.
5
Note 6 - Business acquisitions
- ------------------------------
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 revenues of $6.5 million in the quarter ended March 31, 2002,
complement our existing endoscopy product lines. 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. Goodwill associated with the second
Imagyn acquisition aggregated approximately $26.7 million.
Note 7 - Subsequent events
- --------------------------
On April 30, 2002, we filed a registration statement to sell up to 3,450,000
shares of our common stock. The registration statement is not yet effective. We
plan to use the net proceeds from this offering to repay outstanding debt under
our credit agreement.
In 1997, in connection with the acquisition of Linvatec Corporation, we issued
to Bristol-Myers Squibb Company a warrant exercisable in whole or in part for up
to 1,500,000 shares of our common stock at a price of $22.82 per share. On May
6, 2002, we purchased the warrant for $2.0 million in cash and subsequently
cancelled it. The purchase resulted in a $2.0 million reduction to paid-in
capital.
Note 8 - New accounting pronouncements
- --------------------------------------
In June 2001, the Financial Accounting Standards Board approved Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets",
("SFAS 142"). We adopted SFAS 142 effective January 1, 2002. Under this
standard, amortization of goodwill and certain intangible assets, including
certain intangibles recorded as a result of past business combinations, is to be
discontinued upon adoption of SFAS 142. In addition, in accordance with the
transition provisions of SFAS 142, goodwill recorded as a result of the second
Imagyn acquisition has not been amortized.
During the quarter ended March 31, 2002, we performed tests of goodwill and
indefinite-lived intangible assets as of January 1, 2002. We tested for
impairment using the two-step process prescribed in SFAS 142. The first step is
a screen for potential impairment. The second step, which has been determined
not to be necessary, measures the amount of any impairment. No impairment losses
have been recognized as a result of these tests. The following is a
reconciliation assuming goodwill and other intangible assets had been accounted
for in accordance with SFAS 142 in the quarter ended March 31, 2001:
6
Three months ended
March 31,
2001 2002
---- ----
Reported net income.......................................... $6,003 $ 9,076
------ ------
Adjustments (net of income taxes)
Add back: Goodwill amortization......................... 1,030 --
Add back: Trademarks and tradenames amortization........ 383 --
------ ------
Adjusted net income.......................................... $7,416 $ 9,076
====== =======
Three months ended
March 31,
Basic earnings per share 2001 2002
---- ----
Reported net income.......................................... $ .26 $ .36
Adjustments (net of income taxes)
Add back: Goodwill amortization......................... .04 --
Add back: Trademarks and tradenames amortization........ .02 --
------ ------
Adjusted net income.......................................... $ .32 $ .36
====== ======
Three months ended
March 31,
Diluted earnings per share 2001 2002
---- ----
Reported net income.......................................... $ .26 $ .35
Adjustments (net of income taxes)
Add back: Goodwill amortization......................... .04 --
Add back: Trademarks and tradenames amortization........ .02 --
------ ------
Adjusted net income.......................................... $ .32 $ .35
====== ======
Note 9 - Guarantor financial statements
- ---------------------------------------
Our credit facility and subordinated notes (the "Notes") are guaranteed (the
"Subsidiary Guarantees") by each of our subsidiaries (the "Subsidiary
Guarantors") except CRC (the "Non-Guarantor Subsidiary"). 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 and Non-Guarantor Subsidiary is
wholly-owned by CONMED Corporation. The following supplemental financial
information sets forth on a condensed consolidating basis, condensed
consolidating balance sheet, statement of income and statement of cash flows for
the Parent Company Only, Subsidiary Guarantors and Non-Guarantor Subsidiary and
for the Company as of December 31, 2001 and March 31, 2002 and for the three
months ended March 31, 2001 and 2002.
7
CONMED CORPORATION
CONSOLIDATING CONDENSED BALANCE SHEET
December 31,2001
(in thousands)
Parent Non-
Company Subsidiary Guarantor Company
Only Guarantors Subsidiary Eliminations Total
---- ---------- ---------- ------------ -----
ASSETS
Current assets:
Cash and cash equivalents........................ $ -- $ 1,181 $ 221 $ -- $ 1,402
Accounts receivable, net......................... -- 7,198 43,990 -- 51,188
Inventories...................................... 23,045 84,345 -- -- 107,390
Deferred income taxes............................ 1,105 -- -- -- 1,105
Prepaid expenses and other
current assets............................... 831 2,633 -- -- 3,464
-------- -------- ------- --------- --------
Total current assets....................... 24,981 95,357 44,211 -- 164,549
-------- -------- ------- --------- --------
Property, plant and equipment, net................... 45,856 45,170 -- -- 91,026
Goodwill, net........................................ 86,412 164,728 -- -- 251,140
Other intangible assets, net......................... 8,177 181,575 -- -- 189,752
Other assets......................................... 477,798 2,376 -- (475,033) 5,141
-------- -------- ------- --------- --------
Total assets..................................... $643,224 $489,206 $44,211 $(475,033) $701,608
======== ======== ======= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................ $ 72,241 $ 1,188 $ -- $ -- $ 73,429
Accounts payable................................. 5,078 14,799 -- -- 19,877
Accrued compensation............................. 3,979 7,884 -- -- 11,863
Income taxes payable............................. 2,372 135 -- -- 2,507
Accrued interest................................. 4,760 37 157 -- 4,954
Other current liabilities........................ 4,634 2,573 -- -- 7,207
-------- -------- ------- --------- --------
Total current liabilities.................... 93,064 26,616 157 -- 119,837
-------- -------- ------- --------- --------
Long-term debt....................................... 241,404 21,096 -- 262,500
Deferred income taxes................................ 18,655 -- -- 18,655
Other long-term liabilities.......................... 6,467 285,329 41,947 (316,761) 16,982
-------- -------- ------- --------- --------
Total liabilities................................ 359,590 333,041 42,104 (316,761) 417,974
-------- -------- ------- --------- --------
Shareholders' equity:
Preferred stock.................................. -- -- -- --
Common stock..................................... 253 1 -- (1) 253
Paid-in capital.................................. 160,757 -- 2,000 (2,000) 160,757
Retained earnings................................ 128,240 158,333 107 (158,440) 128,240
Accumulated other comprehensive
loss......................................... (5,197) (2,169) -- 2,169 (5,197)
Less common stock in
treasury, at cost............................... (419) -- -- -- (419)
-------- -------- ------- --------- --------
Total shareholders' equity................... 283,634 156,165 2,107 (158,272) 283,634
-------- -------- ------- --------- --------
Total liabilities and
shareholders' equity....................... $643,224 $489,206 $44,211 $(475,033) $701,608
======== ======== ======= ========= ========
8
CONMED CORPORATION
CONSOLIDATING CONDENSED BALANCE SHEET
March 31, 2002
(in thousands)(unaudited)
Parent Non-
Company Subsidiary Guarantor Company
Only Guarantors Subsidiary Eliminations Total
---- ---------- ---------- ------------ -----
ASSETS
Current assets:
Cash and cash equivalents........................ $ -- $ 1,551 $ 1,083 $ -- $ 2,634
Accounts receivable, net......................... -- 10,606 40,287 -- 50,893
Inventories...................................... 24,132 85,819 -- -- 109,951
Deferred income taxes............................ 880 - 225 -- 1,105
Prepaid expenses and other
current assets............................... 755 2,943 -- -- 3,698
-------- -------- ------- --------- --------
Total current assets....................... 25,767 100,919 41,595 -- 168,281
-------- -------- ------- --------- --------
Property, plant and equipment, net................... 46,650 45,378 -- -- 92,028
Goodwill, net........................................ 87,719 164,731 -- -- 252,450
Other intangible assets, net......................... 8,325 180,289 -- -- 188,614
Other assets......................................... 477,232 2,448 -- (474,103) 5,577
-------- -------- ------- --------- --------
Total assets..................................... $645,693 $493,765 $41,595 $(474,103) $706,950
======== ======== ======= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................ $ 72,720 $ 1,194 $ -- $ -- $ 73,914
Accounts payable................................. 7,223 19,157 -- -- 26,380
Accrued compensation............................. 2,680 6,576 -- -- 9,256
Income taxes payable............................. 2,340 -- -- -- 2,340
Accrued interest................................. 1,268 256 49 -- 1,573
Other current liabilities........................ 6,793 591 -- -- 7,384
-------- -------- ------- --------- --------
Total current liabilities.................... 93,024 27,774 49 -- 120,847
-------- -------- ------- --------- --------
Long-term debt....................................... 230,899 21,178 -- 252,077
Deferred income taxes................................ 22,924 -- -- 22,924
Other long-term liabilities.......................... 3,635 282,374 39,430 (309,548) 15,891
-------- -------- ------- --------- --------
Total liabilities................................ 350,482 331,326 39,479 (309,548) 411,739
-------- -------- ------- --------- --------
Shareholders' equity:
Preferred stock.................................. -- -- -- --
Common stock..................................... 255 1 -- (1) 255
Paid-in capital.................................. 162,740 -- 2,000 (2,000) 162,740
Retained earnings................................ 137,316 164,571 116 (164,687) 137,316
Accumulated other comprehensive
loss......................................... (4,681) (2,133) -- 2,133 (4,681)
Less common stock in
treasury, at cost............................... (419) -- -- -- (419)
-------- -------- ------- --------- --------
Total shareholders' equity................... 295,211 162,439 2,116 (164,555) 295,211
-------- -------- ------- --------- --------
Total liabilities and
shareholders' equity....................... $645,693 $493,765 $41,595 $(474,103) $706,950
======== ======== ======= ========= ========
9
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Three Months Ended March 31, 2001
(in thousands)
(unaudited)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
---- ---------- ------------ -----
Net sales............................................ $ 20,470 $ 85,439 $ -- $105,909
-------- -------- -------- --------
Cost of sales........................................ 12,483 37,191 -- 49,674
Selling and administrative expense................... 6,098 28,731 -- 34,829
Research and development expense..................... 382 3,314 -- 3,696
-------- -------- -------- --------
18,963 69,236 -- 88,199
-------- -------- -------- --------
Income from operations............................... 1,507 16,203 -- 17,710
Interest expense, net................................ - 8,331 -- 8,331
-------- -------- -------- --------
Income before income taxes........................... 1,507 7,872 -- 9,379
Provision for income taxes........................... 543 2,833 -- 3,376
-------- -------- -------- --------
Income before equity in earnings
of unconsolidated subsidiaries..................... 964 5,039 -- 6,003
Equity in earnings of unconsolidated
subsidiaries....................................... 5,039 -- (5,039) --
-------- -------- -------- --------
Net income........................................... $ 6,003 $ 5,039 $ (5,039) $ 6,003
======== ======== ======== ========
10
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Three Months Ended March 31, 2002
(in thousands)
(unaudited)
Parent
Company Subsidiary Non-Guarantor Company
Only Guarantors Subsidiary Eliminations Total
---- ---------- ---------- ------------ -----
Net sales............................... $26,299 $ 86,906 $ -- $ -- $113,205
------- -------- ------ ------- -------
Cost of sales........................... 14,003 40,101 -- -- 54,104
Selling and administrative
expense............................. 7,447 27,355 (334) -- 34,468
Research and development
expense............................. 429 3,395 -- -- 3,824
------- -------- ------ ------- -------
21,879 70,851 (334) -- 92,396
------- -------- ------ ------- -------
Income from operations.................. 4,420 16,055 334 -- 20,809
Interest expense, net................... - 6,308 320 -- 6,628
------- -------- ------ ------- -------
Income before income taxes.............. 4,420 9,747 14 -- 14,181
Provision for income taxes.............. 1,591 3,509 5 -- 5,105
------- -------- ------ ------- -------
Income before equity in
earnings of unconsolidated
subsidiaries........................ 2,829 6,238 9 -- 9,076
Equity in earnings of
unconsolidated subsidiaries......... 6,247 -- -- (6,247) --
------- -------- ------ ------- -------
Net income.............................. $ 9,076 $ 6,238 $ 9 $ (6,247) $ 9,076
======= ======== ====== ======== =======
11
CONMED CORPORATION
CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2001
(in thousands)
(unaudited)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
---- ---------- ------------ -----
Net cash flows from operating
activities.......................................... $ 3,120 $ 7,996 $ -- $ 11,116
------- ------- ------- --------
Cash flows from investing activities:
Distributions from subsidiaries.................... 5,661 -- (5,661) --
Purchases of property, plant and
equipment.................................... (3,239) (628) -- (3,867)
------- ------- ------- --------
Net cash provided (used)
by investing activities................. 2,422 (628) (5,661) (3,867)
------- ------- ------- --------
Cash flows from financing:
Distributions to parent.......................... -- (5,661) 5,661 --
Borrowings under revolving
credit facility.............................. 3,000 -- -- 3,000
Proceeds from issuance of
common stock................................. 481 -- -- 481
Payments on long-term debt....................... (9,023) -- -- (9,023)
------- ------- ------- --------
Net cash provided (used)by
financing activities...................... (5,542) (5,661) 5,661 (5,542)
------- ------- ------- --------
Effect of exchange rate changes on cash
and cash equivalents............................... -- (1,073) -- (1,073)
------- ------- ------- --------
Net increase (decrease) in cash and
cash equivalents.................................... -- 634 -- 634
Cash and cash equivalents at
beginning of period................................. -- 3,470 -- 3,470
------- ------- ------- --------
Cash and cash equivalents at
end of period....................................... $ -- $ 4,104 $ -- $ 4,104
======= ======== ======= ========
12
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2002
(in thousands)
(unaudited)
Parent Non-
Company Subsidiary Guarantor Company
Only Guarantors Subsidiary Eliminations Total
---- ---------- ---------- ------------ -----
Net cash flows from operating
activities....................................... $ 2,761 $ 6,090 $ 3,500 $ -- $12,351
------- -------- ------- -------- -------
Cash flows from investing activities:
Distributions from subsidiaries.................. 6,752 -- -- (6,752) --
Purchases of property, plant and
equipment.................................... (1,560) (1,648) -- -- (3,208)
------- -------- ------- -------- -------
Net cash provided (used)
by investing activities.................. 5,192 (1,648) -- -- (3,208)
------- -------- ------- -------- -------
Cash flows from financing:
Distributions to parent.......................... -- (4,114) -- 4,114 --
Repayment on note payable to parent.............. -- -- (2,638) 2,638 --
Borrowings (repayments) under
revolving credit facility...................... (1,000) -- -- -- (1,000)
Proceeds from issuance of
common stock................................... 1,985 -- -- -- 1,985
Payments on long-term debt....................... (8,938) -- -- -- (8,938)
------- -------- ------- -------- -------
Net cash provided (used) by
financing activities.................... (7,953) (4,114) (2,638) 6,752 (7,953)
------- -------- ------- -------- -------
Effect of exchange rate changes on cash
and cash equivalents............................. -- 42 -- -- 42
------- -------- ------- -------- -------
Net increase (decrease) in cash and
cash equivalents................................. -- 370 862 -- 1,232
Cash and cash equivalents at
beginning of period.............................. -- 1,181 221 -- 1,402
------- -------- ------- -------- -------
Cash and cash equivalents at
end of period.................................... $ -- $ 1,551 $ 1,083 $ -- $ 2,634
======= ======== ======= ======== =======
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements Made in this Form 10-Q
In this Form 10-Q, we make forward-looking statements about our financial
condition, results of operations and business. Forward-looking statements are
statements made by us concerning events that may or may not occur in the future.
These statements may be made directly in this document or may be "incorporated
by reference" from other documents. You can find many of these statements by
looking for words like "believes," "expects," "anticipates," "estimates" or
similar expressions.
Forward-Looking Statements are not Guarantees of Future Performance
Forward-looking statements involve known and unknown risks, uncertainties and
other factors, including those that may cause our actual results, performance or
achievements, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include those identified under "Risk
Factors" in our Annual Report on Form 10-K for the year-ended December 31, 2001
and the following, among others:
o general economic and business conditions;
o changes in customer preferences;
o changes in technology;
o the introduction of new products;
o changes in business strategy;
o the possibility that United States or foreign regulatory and/or
administrative agencies might initiate enforcement actions against us or
our distributors;
o quality of our management and business abilities and the judgment of our
personnel; and
o the availability, terms and deployment of capital.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" below and "Business" in our Annual Report on Form 10-K for the
year-ended December 31, 2001 for a further discussion of these factors. You are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. We do not undertake any obligation to publicly
release any revisions to these forward-looking statements to reflect events of
circumstances after the date of this prospectus or to reflect the occurrence of
unanticipated events.
Critical Accounting Policies
The accounting policies discussed below are considered by management to be
critical to understanding our financial condition and results of operations.
Accounts receivable sale
On November 1, 2001, we entered into a five-year accounts receivable sales
agreement pursuant to which we and certain of our subsidiaries sell on an
ongoing basis certain accounts receivable to CONMED Receivables Corporation,
("CRC"), our wholly-owned special-purpose subsidiary. CRC may in turn sell up to
an aggregate $50.0 million
14
undivided percentage ownership interest in such receivables to a commercial
paper conduit (the "conduit purchaser"). For receivables that have been sold, we
retain collection and administrative responsibilities as agent for the conduit
purchaser. As of December 31, 2001 and March 31, 2002, the undivided percentage
ownership interest in receivables sold by CRC to the conduit purchaser
aggregated $40.0 million, which has been accounted for as a sale and reflected
in the balance sheet as a reduction in accounts receivable. We used the initial
$40.0 million in proceeds from the sale of accounts receivable in November 2001
to repay a portion of our term loans under our credit agreement. Expenses
associated with the sale of accounts receivable, including the conduit
purchaser's financing cost of issuing commercial paper, were $0.3 million in the
quarter ended March 31, 2002.
There are certain statistical ratios, primarily related to sales dilution and
losses on accounts receivable which must be calculated and maintained on the
pool of receivables in order to continue selling to the conduit purchaser. We
believe that additional accounts receivable arising in the normal course of
business will be of sufficient quality and quantity to qualify for sale under
the accounts receivable sales agreement. In the event that new accounts
receivable arising in the normal course of business do not qualify for sale,
then collections on sold receivables will flow to the conduit purchaser rather
than being used to fund new receivable purchases. If this were to occur, we
would need to access an alternate source of working capital.
Goodwill and other intangible assets
Goodwill represents the excess of purchase price over fair value of identifiable
net assets of acquired businesses. Other intangible assets primarily represent
allocations of purchase price to identifiable intangible assets of acquired
businesses. Goodwill and other intangible assets have been amortized over
periods ranging from 5 to 40 years. Because of our history of growth through
acquisitions, goodwill and other intangible assets comprise a substantial
portion (62.4% at March 31, 2002) of our total assets.
In June 2001, the Financial Accounting Standards Board approved Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets",
("SFAS 142"). We adopted SFAS 142 effective January 1, 2002. Under this
standard, amortization of goodwill and certain intangible assets, including
certain intangibles recorded as a result of past business combinations, is to be
discontinued upon adoption of SFAS 142. In addition, in accordance with the
transition provisions of SFAS 142, goodwill recorded as a result of our
acquisition of certain product lines from Imagyn Medical Technologies, Inc. in
July 2001 (the "second Imagyn acquisition") has not been amortized.
During the quarter ended March 31, 2002, we performed tests of goodwill and
indefinite-lived intangible assets as of January 1, 2002. We tested for
impairment using the two-step process prescribed in SFAS 142. The first step is
a screen for potential impairment. The second step, which has been determined
not to be necessary, measures the amount of any impairment. No impairment losses
have been recognized as a result of these tests. During the quarter ended March
31, 2002, net income increased by approximately $1.4 million or $.05 per share
as a result of the adoption of SFAS 142.
Derivative financial instruments
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 $50.0 million of LIBOR-based floating rate
debt under our credit facility into fixed rate debt with a
15
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
$2.3 million. During the quarter ended March 31, 2002, gross holding gains on
the interest rate swap were $.1 million, before income taxes, and holding losses
of $.6 million, before income taxes, were reclassified and included in net
income. There were no material changes in our market risk during the quarter
ended March 31, 2002. For a detailed discussion of market risk, see our Annual
Report on Form 10-K for the year ended December 31, 2001, Part II, Item 7A,
Quantitative and Qualitative Disclosures About Market Risk.
Revenue recognition
Revenue is recognized when title to the goods and risk of loss pass to our
customers. Amounts billed to customers related to shipping and handling costs
are included in net sales. We assess the risk of loss on accounts receivable and
adjust the allowance for doubtful accounts based on this risk assessment.
Historically, losses on accounts receivable have not been material. We believe
the allowance for doubtful accounts of $1.5 million at March 31, 2002 is
adequate to provide for any potential losses from accounts receivable.
Results of Operations
Three months ended March 31, 2002 compared to three months ended March 31, 2001
The following table presents, as a percentage of net sales, certain categories
included in our unaudited consolidated statements of income for the periods
indicated:
Three Months Ended
March 31,
2001 2002
---- ----
(unaudited)
Net sales......................................... 100.0% 100.0%
Cost of sales..................................... 46.9 47.8
----- -----
Gross margin................................. 53.1 52.2
Selling and administrative expense................ 32.9 30.4
Research and development expense.................. 3.5 3.4
----- -----
Income from operations....................... 16.7 18.4
Interest expense, net............................. 7.8 5.9
----- -----
Income before income taxes................... 8.9 12.5
Provision for income taxes........................ 3.2 4.5
----- -----
Net income................................... 5.7% 8.0%
===== =====
Sales for the quarter ended March 31, 2002 were $113.2 million, an increase of
6.9% compared to sales of $105.9 million in the same quarter a year ago.
Excluding the effects of the second Imagyn acquisition, sales would have grown
by approximately 1.0%. Fluctuations in foreign currency exchange rates in the
first quarter of 2002 as compared to the same period a year ago did not have a
significant effect on sales.
o Sales in our orthopedic businesses decreased 1.6% to $69.7 million from
$70.8 million in the comparable quarter last year.
o Arthroscopy sales, which represented approximately 59.3% of total first
quarter 2002 orthopedic revenues, grew 2.7% to $41.3 million from $40.2
million in the same period a year ago on strength in sales of disposable
products and video equipment.
16
o Powered surgical instrument sales, which represented approximately 40.7% of
orthopedic revenues, decreased 7.2% to $28.4 million from $30.6 million in
the same quarter last year, which was a record quarter for powered surgical
instrument sales. In the last three quarters of 2001, powered surgical
instrument sales averaged $27.9 million per quarter. We introduced our
PowerPro(R) battery powered product line in February 2002, replacing older
versions of battery powered instruments. First shipments of this new
product line occurred in March 31, 2002.
o Patient care sales for the three months ended March 31, 2002 were $17.3
million, a 1.7% decline from $17.6 million in the same period a year ago,
driven primarily by declines in sales of our surgical suction product lines
as a result of significant competition and pricing pressures. Sales of ECG
and other patient care products were largely stable in the first quarter of
2002 as compared with the same period a year ago.
o Electrosurgery sales for the three months ended March 31, 2002 were $16.8
million, an increase of 12.0% from $15.0 million in the first quarter of
last year, driven by strong increases in disposable electrosurgical pencil
and ground pad sales.
o Sales of endoscopy products increased to $9.4 million in the three months
ended March 31, 2002 from $2.5 million in the same period a year ago,
primarily as a result of the second Imagyn acquisition. Sales of the Imagyn
product lines, acquired as a result of the second Imagyn acquisition,
contributed approximately $6.5 million in sales in the quarter ended March
31, 2002. Excluding the impact of the second Imagyn acquisition, endoscopy
sales increased approximately 16.0%. In July 2001, concurrent with the
second Imagyn acquisition, we created a separate sales force focused on
selling endoscopy products. Previously, endoscopy products were sold
through the electrosurgery sales force. We believe the continued strong
sales growth we have experienced in the endoscopy product lines was
enhanced by the focus provided by a separate, dedicated sales force.
Cost of sales increased to $54.1 million in the first quarter of 2002 as
compared to $49.7 million in the same quarter a year ago as a result of the
increased sales volumes described above, while gross margin percentage declined
slightly to 52.2% in the first quarter of 2002 compared to 53.1% in the first
quarter of 2001, primarily as a result of decreased sales of powered surgical
instruments which carry higher gross margins than certain of our other product
lines.
Selling and administrative expense decreased to $34.5 million in the first
quarter of 2002 as compared to $34.8 million in the first quarter of 2001. As a
percentage of sales, selling and administrative expense totaled 30.4% in the
first quarter of 2002 compared to 32.9% in the first quarter of 2001. During the
quarter ended March 31, 2002, selling and administrative expense decreased by
approximately $2.2 million, before income taxes, as a result of the adoption of
SFAS 142. Excluding the impact of the adoption of SFAS 142, selling and
administrative expense in the first quarter of 2002 would have been
approximately $36.7 million or 32.4% as a percentage of sales, declining
slightly when compared with the same period a year ago, as a result of the
increase in sales.
Research and development expense increased to $3.8 million in the first quarter
of 2002 as compared to $3.7 million in the first quarter of 2001. This increase
represents continued research and development efforts primarily focused on new
product development in the orthopedic product lines. As a percentage of sales,
research and development expense decreased to 3.4% in the current quarter
compared to 3.5% in the same quarter a year ago as a result of higher sales
levels.
Interest expense in the first quarter of 2002 was $6.6 million compared to $8.3
million in the first quarter of 2001. The decrease in interest expense is a
result of lower total borrowings during the current quarter as compared to the
same period a year ago,
17
as well as lower weighted average interest rates on the term loans and revolving
credit facility under our credit agreement, which have declined to 4.20% and
3.70%, respectively, at March 31, 2002 as compared to 7.94% and 8.14%,
respectively at March 31, 2001.
Liquidity and Capital Resources
Cash generated from our operations and borrowings under our revolving credit
facility have traditionally provided the working capital for our operations,
debt service under our credit facility and the funding of our capital
expenditures. In addition, we have used term borrowings,including (1) borrowings
under our credit facility, (2) Senior Subordinated Notes issued to refinance
borrowings under our credit facility, in the case of the Linvatec acquisition in
1997, and (3) borrowings under separate loan facilities, in the case of real
property acquisitions, to finance our acquisitions. Following the use of the
proceeds of the offering to repay term loan borrowings under our credit
facility, we expect to continue to use cash flow from our operations and
borrowings under our revolving credit facility to finance our operations, our
debt service under our credit facility and the funding of our capital
expenditures.
Our term loans under our credit facility at March 31, 2002 aggregate $115.9
million. Our term loans are repayable quarterly over remaining terms of
approximately three years. Our credit facility also includes a $100.0 million
revolving credit facility which expires December 31, 2002, of which $43.0
million was available at March 31, 2002. The borrowings under the credit
facility carry interest rates based on a spread over LIBOR or an alternative
base interest rate. The weighted average interest rates at March 31, 2002 under
the term loans and the revolving credit facility were 4.20% and 3.70%,
respectively.
The Senior Subordinated Notes are in aggregate principal amount of $130.0
million, have a maturity date of March 15, 2008 and bear interest at 9.0% per
annum which is payable semi-annually.
We used term loans to purchase the property in Largo, Florida utilized by our
Linvatec subsidiary. The term loans consist of a Class A note bearing interest
at 7.50% per annum with semiannual payments of principal and interest through
June 2009, a Class C 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 and a seller-financed note
bearing interest at 6.50% per annum with monthly payments of principal and
interest through July 2013. The principal balances outstanding on the Class A
note, Class C note and seller-financed note aggregate $11.7 million, $6.5
million and $4.1 million, respectively, at March 31, 2002.
Our net working capital position was $47.4 million at March 31, 2002 as compared
to $44.7 million at December 31, 2001. Included in net working capital is $57.0
million owed on our revolving credit facility which terminates on December 31,
2002. We have begun discussions with our bank group regarding extending the
revolving credit facility or, as an alternative, renegotiating the entire senior
credit agreement. Based on our current discussions, we believe that we will be
able to successfully complete a senior credit arrangement which will provide
sufficient capital for our business. However, because of changed economic
conditions compared to market conditions in 1997 when our present credit
agreement was completed, we expect, based on discussions with our bank group,
that any new facility will carry interest costs 75 to 100 basis points higher
than our present credit agreement. Based on the amounts outstanding at March 31,
2002 under the credit agreement, an increase of 75 to 100 basis points would
result in an increase in annual interest expense of approximately $1.3 million
to $1.7 million.
On November 1, 2001, we entered into a five-year accounts receivable sales
agreement pursuant to which we and certain of our subsidiaries sell on an
ongoing basis certain
18
accounts receivable to CONMED Receivables Corporation, a wholly-owned
special-purpose subsidiary. CRC may in turn sell up to an aggregate $50.0
million undivided percentage ownership interest in those receivables to a
commercial paper conduit. As of December 31, 2001 and March 31, 2002, the
undivided percentage ownership interest in receivables sold by CRC to a
commercial paper conduit aggregated $40.0 million, which has been accounted for
as a sale and reflected in the balance sheet as a reduction in accounts
receivable. We used the $40.0 million in proceeds from the sale of accounts
receivable in November 2001 to repay a portion of our term loans under our
credit agreement. The sale of accounts receivable is expected to enable us to
lower our cost of capital by approximately $0.5 million annually by effectively
accessing the commercial paper market. There are certain statistical ratios
primarily related to sales dilution and losses on accounts receivable which must
be calculated and maintained on the pool of receivables in order to continue
selling to the conduit purchaser. Management believes that additional accounts
receivable arising in the normal course of business will be of sufficient
quality and quantity to qualify for sale under the accounts receivable sales
agreement. In the event that new accounts receivable arising in the normal
course of business do not qualify for sale, then collections on sold receivables
will flow to the conduit purchaser rather than being used to fund new receivable
purchases. If this were to occur, we would need to access an alternate source of
working capital.
Net cash provided by operations, which we also refer to as "operating cash
flow," increased to $12.4 million for the first three months of 2002 compared to
$11.1 million for the same period a year ago, primarily as a result of higher
net income. In reconciling net income to operating cash flow, operating cash
flow in the first quarter of 2002 was positively impacted by depreciation,
amortization and increases in accounts payable and deferred income taxes and
negatively impacted primarily by an increase in inventory and decreases in
accrued compensation and accrued interest. The increase in inventory is
primarily related to expected increases in sales. The increases in accounts
payable and deferred income taxes and decreases in accrued compensation and
interest are primarily related to the timing of the payment of these
liabilities.
Capital expenditures in the three months ended March 31, 2002 were $3.2 million
compared to $3.9 million in the same period a year ago. These capital
expenditures represent the ongoing capital investment requirements of our
business and are expected to continue at the rate of approximately $12.0 to
$14.0 million annually.
Financing activities in the three months ended March 31, 2002 consisted
primarily of scheduled payments of $8.9 million on our term loans and $1.0
million in repayments under our revolving credit facility. Financing activities
in the three months ended March 31, 2001 consisted primarily of scheduled
payments of $9.0 million on our term loans and $3.0 million in borrowings under
our revolving credit facility. Proceeds from the issuance of common stock
related to our employee incentive stock option plans totaled $2.0 million in the
three months ended March 31, 2002 as compared to $.5 million in the three months
ended March 31, 2001.
Assuming the successful renegotiation of the revolving credit facility discussed
above, management believes that cash generated from operations, our current cash
resources and funds available under our revolving credit facility will provide
sufficient liquidity to ensure continued working capital for operations, debt
service and funding of capital expenditures in the foreseeable future.
19
Contractual Obligations
There were no capital lease obligations or unconditional purchase obligations as
of March 31, 2002. The following table summarizes our contractual obligations
related to operating leases and long-term debt as of March 31, 2002:
(Amount in thousands)
2002 2003 2004 2005 2006 Thereafter
---- ---- ---- ---- ---- ----------
Long-term debt............. $63,368 $43,364 $36,749 $35,181 $1,943 $145,386
Operating lease
obligations.............. 1,300 1,255 1,036 962 933 1,950
------- ------- ------- ------- ------ --------
Total contractual
cash obligations......... $64,668 $44,619 $37,785 $36,143 $2,876 $147,336
======= ======= ======= ======= ====== ========
Included in long-term debt obligations in 2002 is $57.0 million due under our
revolving credit facility.
As indicated under "Liquidity and Capital Resources," we have begun discussions
with our bank group regarding extending our revolving credit facility or, as an
alternative, renegotiating our entire senior credit agreement. If those
negotiations are successful, payments on a substantial portion of our long-term
debt due in 2002 through 2005, including the current portion of that long-term
debt represented by our revolving credit facility, would be due at later dates.
As discussed in Note 7 to the consolidated condensed financial statements, on
April 30, 2002, we filed a registration statement to sell up to 3,450,000 shares
of our common stock. The registration statement is not yet effective. We plan to
use the net proceeds from this offering to repay outstanding debt under our
credit agreement.
20
Item 6. Exhibits and Reports on Form 8-K
List of Exhibits
None
Reports on Form 8-K
None
21
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: May 13, 2002
/s/ Robert D. Shallish, Jr.
---------------------------
Robert D. Shallish, Jr.
Vice President - Finance
(Principal Financial Officer)
22
