UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
or
| For the quarterly period ended | Commission File Number | ||||
(Exact name of the registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
(727 ) 392-6464
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act (Check one).
Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The number of shares outstanding of registrant's common stock, as of July 26, 2021 is 29,162,891 shares.
CONMED CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2021
| PART I FINANCIAL INFORMATION | ||||||||
| Item Number | Page | |||||||
| PART II OTHER INFORMATION | ||||||||
PART I FINANCIAL INFORMATION
Item 1.
CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in thousands except per share amounts)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Selling and administrative expense | |||||||||||||||||||||||
| Research and development expense | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Income (loss) from operations | ( | ( | |||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Other expense | |||||||||||||||||||||||
| Income (loss) before income taxes | ( | ( | |||||||||||||||||||||
| Provision (benefit) for income taxes | ( | ( | |||||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Comprehensive income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Per share data: | |||||||||||||||||||||||
| Net income (loss) | |||||||||||||||||||||||
| Basic | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Diluted | ( | ( | |||||||||||||||||||||
| Weighted average common shares | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See notes to consolidated condensed financial statements.
1
CONMED CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited, in thousands except share and per share amounts)
| June 30, 2021 | December 31, 2020 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Accrued compensation and benefits | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Deferred income taxes | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Shareholders' equity: | |||||||||||
Preferred stock, par value $ | |||||||||||
authorized | |||||||||||
Common stock, par value $ issued in 2021 and 2020, respectively | |||||||||||
| Paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
Less: in treasury, at cost in 2021 and 2020, respectively | ( | ( | |||||||||
| Total shareholders’ equity | |||||||||||
| Total liabilities and shareholders’ equity | $ | $ | |||||||||
See notes to consolidated condensed financial statements.
2
CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited, in thousands except per share amounts)
| Common Stock | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Shareholders’ Equity | ||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||
| Common stock issued under employee plans | |||||||||||||||||||||||
| Stock-based compensation | |||||||||||||||||||||||
Dividends on common stock ($ | ( | ( | |||||||||||||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||||
| Cash flow hedging gain, net | |||||||||||||||||||||||
| Pension liability, net | |||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ||||||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Total comprehensive income | |||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||
| Common stock issued under employee plans | |||||||||||||||||||||||
| Stock-based compensation | |||||||||||||||||||||||
Dividends on common stock ($ | ( | ( | |||||||||||||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||||
| Cash flow hedging gain, net | |||||||||||||||||||||||
| Pension liability, net | |||||||||||||||||||||||
| Foreign currency translation adjustments | |||||||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Total comprehensive income | |||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||
| Common Stock | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Shareholders’ Equity | ||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||
| Common stock issued under employee plans | ( | ( | |||||||||||||||||||||
| Stock-based compensation | |||||||||||||||||||||||
Dividends on common stock ($ | ( | ( | |||||||||||||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||||
| Cash flow hedging gain, net | |||||||||||||||||||||||
| Pension liability, net | |||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ||||||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Total comprehensive loss | ( | ||||||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||
| Common stock issued under employee plans | ( | ||||||||||||||||||||||
| Stock-based compensation | |||||||||||||||||||||||
Dividends on common stock ($ | ( | ( | |||||||||||||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||||
| Cash flow hedging loss, net | ( | ||||||||||||||||||||||
| Pension liability, net | |||||||||||||||||||||||
| Foreign currency translation adjustments | |||||||||||||||||||||||
| Net loss | ( | ||||||||||||||||||||||
| Total comprehensive loss | ( | ||||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||
See notes to consolidated condensed financial statements.
3
CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
| Six Months Ended | |||||||||||
| June 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Depreciation | |||||||||||
| Amortization of debt discount | |||||||||||
| Amortization of deferred debt issuance costs | |||||||||||
| Amortization | |||||||||||
| Stock-based compensation | |||||||||||
| Deferred income taxes | ( | ( | |||||||||
| Increase (decrease) in cash flows from changes in assets and liabilities: | |||||||||||
| Accounts receivable | |||||||||||
| Inventories | ( | ( | |||||||||
| Accounts payable | ( | ||||||||||
| Accrued compensation and benefits | ( | ( | |||||||||
| Other assets | ( | ( | |||||||||
| Other liabilities | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property, plant and equipment | ( | ( | |||||||||
| Payments related to business and asset acquisitions, net of cash acquired | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Payments on term loan | ( | ( | |||||||||
| Payments on revolving line of credit | ( | ( | |||||||||
| Proceeds from revolving line of credit | |||||||||||
| Payments related to contingent consideration | ( | ||||||||||
| Payments related to debt issuance costs | ( | ||||||||||
| Dividends paid on common stock | ( | ( | |||||||||
| Other, net | ( | ||||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ( | |||||||||
| Net increase in cash and cash equivalents | |||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| Non-cash investing and financing activities: | |||||||||||
| Dividends payable | $ | $ | |||||||||
See notes to consolidated condensed financial statements.
4
CONMED CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, in thousands except per share amounts)
Note 1 – Operations
Note 2 - Interim Financial Information
The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. The information herein reflects all normal recurring material adjustments, which are, in the opinion of management, necessary to fairly present the results for the periods presented. The consolidated condensed financial statements herein consist of all wholly-owned domestic and foreign subsidiaries with all significant intercompany transactions eliminated. Results for the period ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
The consolidated condensed financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes for the year ended December 31, 2020 included in our Annual Report on Form 10-K.
Use of Estimates
Preparation of the consolidated condensed financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated condensed financial statements and the reported amounts of revenue and expenses during the reporting period.
Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require an update to our estimates or judgments or a revision of the carrying value of our assets or liabilities as of July 29, 2021, the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.
5
Note 3 - Revenues
The following tables present revenue disaggregated by primary geographic market where the products are sold, by product line and timing of revenue recognition:
| Three Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||
| June 30, 2021 | June 30, 2020 | ||||||||||||||||||||||||||||||||||
| Orthopedic Surgery | General Surgery | Total | Orthopedic Surgery | General Surgery | Total | ||||||||||||||||||||||||||||||
| Primary Geographic Markets | |||||||||||||||||||||||||||||||||||
| United States | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Europe, Middle East & Africa | |||||||||||||||||||||||||||||||||||
| Asia Pacific | |||||||||||||||||||||||||||||||||||
| Americas (excluding the United States) | |||||||||||||||||||||||||||||||||||
| Total sales from contracts with customers | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Timing of Revenue Recognition | |||||||||||||||||||||||||||||||||||
| Goods transferred at a point in time | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Services transferred over time | |||||||||||||||||||||||||||||||||||
| Total sales from contracts with customers | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Six Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
| June 30, 2021 | June 30, 2020 | ||||||||||||||||||||||||||||||||||
| Orthopedic Surgery | General Surgery | Total | Orthopedic Surgery | General Surgery | Total | ||||||||||||||||||||||||||||||
| Primary Geographic Markets | |||||||||||||||||||||||||||||||||||
| United States | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Europe, Middle East & Africa | |||||||||||||||||||||||||||||||||||
| Asia Pacific | |||||||||||||||||||||||||||||||||||
| Americas (excluding the United States) | |||||||||||||||||||||||||||||||||||
| Total sales from contracts with customers | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Timing of Revenue Recognition | |||||||||||||||||||||||||||||||||||
| Goods transferred at a point in time | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Services transferred over time | |||||||||||||||||||||||||||||||||||
| Total sales from contracts with customers | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Contract liability balances related to the sale of extended warranties to customers are as follows:
| June 30, 2021 | December 31, 2020 | ||||||||||
| Contract liability | $ | $ | |||||||||
Revenue recognized during the six months ended June 30, 2021 and June 30, 2020 from amounts included in contract liabilities at the beginning of the period were $6.1 million and $5.5 million, respectively. There were no material contract assets as of June 30, 2021 and December 31, 2020.
6
Note 4 – Comprehensive Income (Loss)
Comprehensive income (loss) consists of the following:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
Cash flow hedging gain (loss), net of income tax (income tax expense (benefit) of $ | ( | ( | |||||||||||||||||||||
Pension liability, net of income tax (income tax expense of $ | |||||||||||||||||||||||
| Foreign currency translation adjustment | ( | ( | |||||||||||||||||||||
| Comprehensive income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
Accumulated other comprehensive loss consists of the following:
| Cash Flow Hedging Gain (Loss) | Pension Liability | Cumulative Translation Adjustments | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||
| Balance, December 31, 2020 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive income (loss) before reclassifications, net of tax | ( | ||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) before taxa | |||||||||||||||||||||||
| Income tax | ( | ( | ( | ||||||||||||||||||||
| Net current-period other comprehensive income (loss) | ( | ||||||||||||||||||||||
| Balance, June 30, 2021 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Cash Flow Hedging Gain (Loss) | Pension Liability | Cumulative Translation Adjustments | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||
| Balance, December 31, 2019 | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
| Other comprehensive income (loss) before reclassifications, net of tax | ( | ( | |||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) before taxa | ( | ||||||||||||||||||||||
| Income tax | ( | ( | |||||||||||||||||||||
| Net current-period other comprehensive income (loss) | ( | ( | ( | ||||||||||||||||||||
| Balance, June 30, 2020 | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
(a) The cash flow hedging gain (loss) and pension liability accumulated other comprehensive income (loss) components are included in sales or cost of sales and as a component of net periodic pension cost, respectively. Refer to Note 5 and Note 11, respectively, for further details.
7
Note 5 – Fair Value of Financial Instruments
We enter into derivative instruments for risk management purposes only. We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates, foreign exchange rates and commodity prices. These fluctuations can increase the costs of financing, investing and operating the business. We use forward contracts, a type of derivative instrument, to manage certain foreign currency exposures.
By nature, all financial instruments involve market and credit risks. We enter into forward contracts with major investment grade financial institutions and have policies to monitor the credit risk of those counterparties. While there can be no assurance, we do not anticipate any material non-performance by any of these counterparties.
Foreign Currency Forward Contracts. We hedge forecasted intercompany sales denominated in foreign currencies through the use of forward contracts. We account for these forward contracts as cash flow hedges. To the extent these forward contracts meet hedge accounting criteria, changes in their fair value are not included in current earnings but are included in accumulated other comprehensive loss. These changes in fair value will be recognized into earnings as a component of sales or cost of sales when the forecasted transaction occurs.
We also enter into forward contracts to exchange foreign currencies for United States dollars in order to hedge our currency transaction exposures on intercompany receivables designated in foreign currencies. These forward contracts settle each month at month-end, at which time we enter into new forward contracts. We have not designated these forward contracts as hedges and have not applied hedge accounting to them.
The following table presents the notional contract amounts for forward contracts outstanding:
| As of | |||||||||||||||||
| FASB ASC Topic 815 Designation | June 30, 2021 | December 31, 2020 | |||||||||||||||
| Forward exchange contracts | Cash flow hedge | $ | $ | ||||||||||||||
| Forward exchange contracts | Non-designated | ||||||||||||||||
The remaining time to maturity as of June 30, 2021 is within two years for hedge designated foreign exchange contracts and approximately one month for non-hedge designated forward exchange contracts.
8
Statement of comprehensive income (loss) presentation
Derivatives designated as cash flow hedges
Foreign exchange contracts designated as cash flow hedges had the following effects on accumulated other comprehensive income (loss) and net earnings on our consolidated condensed statements of comprehensive income (loss) and our consolidated condensed balance sheets:
| Amount of Gain (Loss) Recognized in AOCI | Consolidated Condensed Statements of Comprehensive Income (Loss) | Amount of Gain (Loss) Reclassified from AOCI | |||||||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||
| Total Amount of Line Item Presented | |||||||||||||||||||||||||||||||||||||||||
| Derivative Instrument | 2021 | 2020 | Location of amount reclassified | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | $ | ( | $ | ( | Net Sales | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||
| Cost of Sales | ( | ||||||||||||||||||||||||||||||||||||||||
| Pre-tax loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||
| Tax benefit | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||
| Amount of Gain (Loss) Recognized in AOCI | Consolidated Condensed Statements of Comprehensive Income (Loss) | Amount of Gain (Loss) Reclassified from AOCI | |||||||||||||||||||||||||||||||||||||||
| Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||
| Total Amount of Line Item Presented | |||||||||||||||||||||||||||||||||||||||||
| Derivative Instrument | 2021 | 2020 | Location of amount reclassified | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | $ | $ | Net Sales | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||
| Cost of Sales | ( | ||||||||||||||||||||||||||||||||||||||||
| Pre-tax gain (loss) | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Tax expense (benefit) | ( | ||||||||||||||||||||||||||||||||||||||||
| Net gain (loss) | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
At June 30, 2021, $1.2 million of net unrealized losses on forward contracts accounted for as cash flow hedges, and included in accumulated other comprehensive loss, are expected to be recognized in earnings in the next twelve months.
9
Derivatives not designated as cash flow hedges
Net losses from derivative instruments not accounted for as hedges and gains and losses on our intercompany receivables on our consolidated condensed statements of comprehensive income (loss) were:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
| Derivative Instrument | Location on Consolidated Condensed Statements of Comprehensive Income (Loss) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||
| Net loss on currency forward contracts | Selling and administrative expense | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||
| Net gain (loss) on currency transaction exposures | Selling and administrative expense | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||||||
Balance sheet presentation
We record these forward foreign exchange contracts at fair value. The following tables summarize the fair value for forward foreign exchange contracts outstanding at June 30, 2021 and December 31, 2020:
| June 30, 2021 | Location on Consolidated Condensed Balance Sheet | Asset Fair Value | Liabilities Fair Value | Net Fair Value | |||||||||||||||||||
| Derivatives designated as hedged instruments: | |||||||||||||||||||||||
| Foreign exchange contracts | Other current liabilities | $ | $ | ( | $ | ( | |||||||||||||||||
| Foreign exchange contracts | Other long-term assets | ( | |||||||||||||||||||||
| $ | $ | ( | $ | ( | |||||||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||||||||
| Foreign exchange contracts | Other current liabilities | ( | ( | ||||||||||||||||||||
| Total derivatives | $ | $ | ( | $ | ( | ||||||||||||||||||
| December 31, 2020 | Location on Consolidated Condensed Balance Sheet | Asset Fair Value | Liabilities Fair Value | Net Fair Value | |||||||||||||||||||
| Derivatives designated as hedged instruments: | |||||||||||||||||||||||
| Foreign exchange contracts | Other current liabilities | $ | $ | ( | $ | ( | |||||||||||||||||
| Foreign exchange contracts | Other long-term liabilities | ( | ( | ||||||||||||||||||||
| $ | $ | ( | $ | ( | |||||||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||||||||
| Foreign exchange contracts | Other current liabilities | ( | ( | ||||||||||||||||||||
| Total derivatives | $ | $ | ( | $ | ( | ||||||||||||||||||
Our forward foreign exchange contracts are subject to a master netting agreement and qualify for netting in the consolidated condensed balance sheets.
10
Fair Value Disclosure. FASB guidance defines fair value and establishes a framework for measuring fair value and related disclosure requirements. This guidance applies when fair value measurements are required or permitted. The guidance indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. Fair value is defined based upon an exit price model.
Valuation Hierarchy. A valuation hierarchy was established for disclosure of the inputs to the valuations used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, including interest rates, yield curves and credit risks, or inputs that are derived principally from or corroborated by observable market data through correlation. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. There have been no significant changes in the assumptions.
Valuation Techniques. Assets and liabilities carried at fair value and measured on a recurring basis as of June 30, 2021 consist of forward foreign exchange contracts. The Company values its forward foreign exchange contracts using quoted prices for similar assets. The most significant assumption is quoted currency rates. The value of the forward foreign exchange contract assets and liabilities were valued using Level 2 inputs and are listed in the table above.
Note 6 - Inventories
Inventories consist of the following:
| June 30, 2021 | December 31, 2020 | ||||||||||
| Raw materials | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Finished goods | |||||||||||
| Total | $ | $ | |||||||||
Note 7 – Earnings (Loss) Per Share
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The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2021 and 2020:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Basic – weighted average shares outstanding | |||||||||||||||||||||||
| Effect of dilutive potential securities | |||||||||||||||||||||||
| Diluted – weighted average shares outstanding | |||||||||||||||||||||||
| Net income (loss) (per share) | |||||||||||||||||||||||
| Basic | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Diluted | ( | ( | |||||||||||||||||||||
The shares used in the calculation of diluted EPS exclude options and SARs to purchase shares where the exercise price was greater than the average market price of common shares for the period and the effect of the inclusion would be anti-dilutive. Such shares aggregated approximately 0.7 million and 0.5 million for the three and six months ended June 30, 2021, respectively. As the Company was in a net loss position for the three and six months ended June 30, 2020, there were no anti-dilutive shares. Our 2.625 % convertible notes due in 2024 (the “Notes”) are convertible under certain circumstances, as defined in the indenture, into a combination of cash and CONMED common stock.
The following is intended to describe the impact of the Notes and related hedge transactions on the calculation of diluted EPS. Additional shares to be issued pursuant to the terms of the Notes and related hedge transactions, if any, would occur at maturity.
The calculation of diluted EPS includes potential diluted shares upon conversion of the Notes when the average market price per share of our common stock for the period is greater than the conversion price of the Notes of $88.80 . We intend to settle in cash the principal outstanding and use the treasury stock method when calculating their potential dilutive effect, if any.
During the three and six months ended June 30, 2021, our average share price exceeded the conversion price of the Notes and we included in our diluted share count 1.4 million and 1.2 million shares, respectively, assumed to be issued if the Notes were converted. During the three and six months ended June 30, 2020, our average share price had not exceeded the conversion price of the Notes; therefore, under the net share settlement method, there were no potential shares issuable under the Notes to be used in the calculation of diluted EPS.
We previously entered into convertible notes hedge transactions to increase the effective conversion price of the Notes to $114.92 . However, our convertible notes hedges are not included when calculating potential dilutive shares since their effect is always anti-dilutive.
Concurrently with entering into the hedge transactions, we also previously entered into warrant transactions under which we agreed to sell shares of our common stock at $114.92 .
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Note 8 – Goodwill and Other Intangible Assets
The changes in the net carrying amount of goodwill for the six months ended June 30, 2021 are as follows:
| Balance as of December 31, 2020 | $ | ||||
| Foreign currency translation | ( | ||||
| Balance as of June 30, 2021 | $ | ||||
Assets and liabilities of acquired businesses are recorded at their estimated fair values as of the date of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses.
Other intangible assets consist of the following:
| June 30, 2021 | December 31, 2020 | |||||||||||||||||||||||||
| Weighted Average Amortization Period (Years) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||||||||||||
| Intangible assets with definite lives: | ||||||||||||||||||||||||||
| Customer and distributor relationships | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
| Sales representation, marketing and promotional rights | ( | ( | ||||||||||||||||||||||||
| Developed technology | ( | ( | ||||||||||||||||||||||||
| Patents and other intangible assets | ( | ( | ||||||||||||||||||||||||
| Intangible assets with indefinite lives: | ||||||||||||||||||||||||||
| Trademarks and tradenames | — | — | ||||||||||||||||||||||||
| $ | $ | ( | $ | $ | ( | |||||||||||||||||||||
Customer and distributor relationships, trademarks and tradenames, developed technology and patents and other intangible assets primarily represent allocations of purchase price to identifiable intangible assets of acquired businesses. Sales representation, marketing and promotional rights represent intangible assets created under our agreement with Musculoskeletal Transplant Foundation (“MTF”).
Amortization expense related to intangible assets which are subject to amortization totaled $8.2 million and $8.5 million in the three months ended June 30, 2021 and 2020, respectively, and $16.6 million and $17.0 million in the six months ended June 30, 2021 and 2020, respectively, and is included as a reduction of revenue (for amortization related to our sales representation, marketing and promotional rights) and in selling and administrative expense (for all other intangible assets) in the consolidated condensed statements of comprehensive income (loss). Included in developed technology is $6.0 million of earn-out consideration that is considered probable as of June 30, 2021 associated with a prior asset acquisition. This is recorded in other current liabilities at June 30, 2021.
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The estimated intangible asset amortization expense remaining for the year ending December 31, 2021 and for each of the five succeeding years is as follows:
| Amortization included in expense | Amortization recorded as a reduction of revenue | Total | |||||||||||||||
| Remaining, 2021 | $ | $ | $ | ||||||||||||||
| 2022 | |||||||||||||||||
| 2023 | |||||||||||||||||
| 2024 | |||||||||||||||||
| 2025 | |||||||||||||||||
| 2026 | |||||||||||||||||
Note 9 - Long-Term Debt
Long-term debt consists of the following:
| June 30, 2021 | December 31, 2020 | ||||||||||
| Revolving line of credit | $ | $ | |||||||||
Term loan, net of deferred debt issuance costs of $ | |||||||||||
| Financing leases | |||||||||||
| Total debt | |||||||||||
| Less: Current portion | |||||||||||
| Total long-term debt | $ | $ | |||||||||
On February 7, 2019 we entered into a sixth amended and restated senior credit agreement consisting of: (a) a $265.0 million term loan facility and (b) a $585.0 million revolving credit facility. The revolving credit facility then in effect was due to terminate and the loans outstanding under the term loan facility then in effect were scheduled to mature on the earlier of (i) February 7, 2024 or (ii) 91 days prior to the earliest scheduled maturity date of the 2.625 % convertible notes due in 2024 described below, (if, as of such date, more than $150.0 million in aggregate principal amount of such convertible notes (or any refinancing thereof) remained outstanding). The term loan facility was payable in quarterly installments increasing over the term of the facility. Proceeds from the term loan facility and borrowings under the revolving credit facility were used to repay the then existing senior credit agreement and in part to finance the acquisition of Buffalo Filter. On April 17, 2020, we amended our sixth amended and restated senior credit agreement to suspend our required leverage ratios for up to four quarters as a result of the potential impact from the COVID-19 pandemic. On November 20, 2020, we entered into a third amendment under our senior credit agreement to lower the applicable margin on the loans and lower the interest floor on Eurocurrency loans agreed upon in April 2020. On April 15, 2021, we terminated the suspension period, thus reinstating our required leverage ratios. The applicable margin depended upon CONMED’s consolidated senior secured leverage ratio, using the pricing grid set forth in the November 2020 amendment. Interest rates were at LIBOR (subject to 0.125 % floor) plus an interest rate margin of 2.50 % (2.625 % at June 30, 2021).
There were $233.5 million in borrowings outstanding on the term loan facility as of June 30, 2021. There were $185.0 million in borrowings outstanding under the revolving credit facility as of June 30, 2021. Our available borrowings on the revolving credit facility at June 30, 2021 were $397.4 million with approximately $2.6 million of the facility set aside for outstanding letters of credit.
The sixth amended and restated senior credit agreement was collateralized by substantially all of our personal property and assets. The sixth amended and restated senior credit agreement contained covenants and restrictions which, among other things, required the maintenance of certain financial ratios and restricted dividend payments and the incurrence of certain indebtedness and other activities, including acquisitions and dispositions. We were in full compliance with these covenants and
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restrictions as of June 30, 2021. We were also required, under certain circumstances, to make mandatory prepayments from net cash proceeds from any issuance of equity and asset sales.
On July 16, 2021, we entered into a seventh amended and restated senior credit agreement consisting of: (a) a $233.5 million term loan facility and (b) a $585.0 million revolving credit facility. The revolving credit facility will terminate and the loans outstanding under the term loan facility will expire on the fifth anniversary of the closing date. The term loan is payable in quarterly installments increasing over the term of the facility. Initial interest rates are at LIBOR plus an interest rate margin of 1.75 %. For those borrowings where we elect to use the alternate base rate, the initial base rate will be the greatest of (i) the Prime Rate, (ii) the Federal Funds Rate plus 0.50 % or (iii) the one-month Adjusted LIBOR plus 1.00 %, plus, in each case, an interest rate margin. The seventh amended and restated senior credit agreement contains covenants and restrictions which, among other things, require the maintenance of certain financial ratios and restrict dividend payments and the incurrence of certain indebtedness and other activities, including acquisitions and dispositions.
On January 29, 2019, we issued $345.0 million in 2.625 % convertible notes due in 2024 (the "Notes"). Interest is payable semi-annually in arrears on February 1 and August 1 of each year, commencing August 1, 2019. The Notes will mature on February 1, 2024, unless earlier repurchased or converted. The Notes represent subordinated unsecured obligations and are convertible under certain circumstances, as defined in the indenture, into a combination of cash and CONMED common stock. The Notes may be converted at an initial conversion rate of 11.2608 shares of our common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $88.80 per share of common stock). Holders of the Notes may convert the Notes at their option at any time on or after November 1, 2023 through the second scheduled trading day preceding the maturity date. Holders of the Notes will also have the right to convert the Notes prior to November 1, 2023, but only upon the occurrence of specified events. The conversion rate is subject to anti-dilution adjustments if certain events occur. A portion of the net proceeds from the offering of the Notes were used as part of the financing for the Buffalo Filter acquisition and $21.0 million were used to pay the cost of certain convertible notes hedge transactions as further described below.
Our effective borrowing rate for nonconvertible debt at the time of issuance of the Notes was estimated to be 6.14 %, which resulted in $51.6 million of the $345.0 million aggregate principal amount of Notes issued, or $39.1 million after taxes, being attributable to equity. For both the three months ended June 30, 2021 and 2020, we have recorded interest expense related to the amortization of debt discount on the Notes of $2.5 5.0 million and $4.8 million, respectively, at the effective interest rate of 6.14 %. The debt discount on the Notes is being amortized through February 2024. For both the three months ended June 30, 2021 and 2020, we have recorded interest expense on the Notes of $2.3 4.5 2.625 %.
In connection with the offering of the Notes, we entered into convertible note hedge transactions with a number of financial institutions (each, an “option counterparty”). The convertible note hedge transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Notes, the number of shares of our common stock underlying the Notes. Concurrently with entering into the convertible note hedge transactions, we also entered into separate warrant transactions with each option counterparty whereby we sold to such option counterparty warrants to purchase, subject to customary anti-dilution adjustments, the same number of shares of our common stock.
The convertible note hedge transactions are expected generally to reduce the potential dilution upon conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be, in the event that the market price per share of our common stock, as measured under the terms of the convertible note hedge transactions, is greater than the strike price of the convertible note hedge transactions, which initially corresponds to the conversion price of the Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Notes. If, however, the market price per share of our common stock, as measured under the terms of the warrant transactions, exceeds the strike price ($114.92 ) of the warrants, there would nevertheless be dilution to the extent that such market price exceeds the strike price of the warrants as noted in Note 7, unless we elect to settle the warrants in cash.
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The scheduled maturities of long-term debt outstanding at June 30, 2021 are as follows:
| Remaining 2021 | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
The above amounts exclude debt discount, deferred debt issuance costs and financing leases.
Note 10 – Guarantees
We provide warranties on certain of our products at the time of sale and sell extended warranties. The standard warranty period for our capital equipment is generally one year and our extended warranties typically vary from one to three years. Liability under warranty policies is based upon a review of historical claim experience. Adjustments are made to accruals as claim data and historical experience warrant.
Changes in the liability for standard warranties for the six months ended June 30, are as follows:
| 2021 | 2020 | ||||||||||
| Balance as of January 1, | $ | $ | |||||||||
| Provision for warranties | |||||||||||
| Claims made | ( | ( | |||||||||
| Balance as of June 30, | $ | $ | |||||||||
Costs associated with extended warranty repairs are recorded as incurred and amounted to $3.4 million and $3.0 million for the six months ended June 30, 2021 and 2020, respectively.
Note 11 – Pension Plan
Net periodic pension cost consists of the following:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Service cost | $ | $ | $ | $ | |||||||||||||||||||
| Interest cost on projected benefit obligation | |||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | |||||||||||||||||||
| Net amortization and deferral | |||||||||||||||||||||||
| Net periodic pension cost | $ | $ | $ | $ | |||||||||||||||||||
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Note 12 – Acquisition and Other Expense
Acquisition and other expense consist of the following, which are included in cost of sales or selling and administrative expense depending on the nature of the charge:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Plant underutilization costs | $ | $ | $ | $ | |||||||||||||||||||
| Product rationalization costs - inventory | |||||||||||||||||||||||
| Restructuring costs | |||||||||||||||||||||||
| Manufacturing consolidation costs | |||||||||||||||||||||||
| Acquisition and integration costs | |||||||||||||||||||||||
| Acquisition and other expense included in cost of sales | $ | $ | $ | $ | |||||||||||||||||||
| Restructuring and related costs | $ | $ | $ | $ | |||||||||||||||||||
| Product rationalization costs - field inventory | |||||||||||||||||||||||
| Acquisition and integration costs | |||||||||||||||||||||||
| Acquisition and other expense included in selling and administrative expense | $ | $ | $ | $ | |||||||||||||||||||
During the second quarter of 2020, we recorded a $6.6 million charge to cost of sales related to plant underutilization due to abnormally low production as a result of decreased sales caused by the COVID-19 pandemic.
During the second quarter of 2020, we performed an analysis of our product lines and determined certain catalog numbers, principally related to capital equipment, would be discontinued and consolidated into existing product offerings. We consequently recorded a $2.2 million charge to cost of sales to write-off inventory of the discontinued products. In addition, we incurred $2.1 million in costs related to the write-off of field inventory used for customer demonstration and evaluation of the discontinued products which we charged to selling and administrative expense.
During the second quarter of 2020, we incurred $1.1 million in restructuring costs related to a voluntary separation arrangement with employees as a result of the COVID-19 pandemic that were charged to cost of sales based on the job function of the affected employees. We additionally recorded a charge of $2.1 million primarily related to the restructuring of our Orthopedic sales force and a voluntary separation arrangement with employees as a result of the COVID-19 pandemic that was charged to selling and administrative expenses based on the nature of the costs and function of the affected employees. During the six months ended June 30, 2021, we recorded a charge of $0.4 million related to the restructuring of our sales force which consisted primarily of termination payments to Orthopedic distributors made in exchange for ongoing assistance to transition to employee-based sales representatives and severance that was charged to selling and administrative expenses.
During the three and six months ended June 30, 2020, we incurred $1.6 million and $3.4 million, respectively, in costs related to the consolidation of certain manufacturing operations which were charged to cost of sales. These costs related to winding down operations at certain locations and moving production lines to other facilities.
During the three and six months ended June 30, 2020, we incurred costs for inventory step-up adjustments and other costs of $0.7 million and $1.5 million, respectively, related to a previous acquisition, which were charged to cost of sales.
During the three and six months ended June 30, 2020, we incurred $0.4 million and $1.2 million, respectively, in severance and integration costs mainly related to the Buffalo Filter acquisition which were included in selling and administrative expense.
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Note 13 — Business Segment
We are accounting and reporting for our business as a single operating segment entity engaged in the development, manufacturing and sale on a global basis of surgical devices and related equipment. Our chief operating decision maker (the CEO) evaluates the various global product portfolios on a net sales basis and evaluates profitability, investment, cash flow metrics and allocates resources on a consolidated worldwide basis due to shared infrastructure and resources. Our product lines consist of orthopedic surgery and general surgery. Orthopedic surgery consists of sports medicine instrumentation and small bone, large bone and specialty powered surgical instruments as well as imaging systems for use in minimally invasive surgery procedures and fees related to the sales representation, promotion and marketing of sports medicine allograft tissue. General surgery consists of a complete line of endo-mechanical instrumentation for minimally invasive laparoscopic and gastrointestinal procedures, smoke evacuation devices, a line of cardiac monitoring products as well as electrosurgical generators and related instruments. These product lines' net sales are as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Orthopedic surgery | $ | $ | $ | $ | |||||||||||||||||||
| General surgery | |||||||||||||||||||||||
| Consolidated net sales | $ | $ | $ | $ | |||||||||||||||||||
Note 14 – Legal Proceedings
From time to time, the Company may receive an information request, subpoena or warrant from a government agency such as the Securities and Exchange Commission, Department of Justice, Equal Employment Opportunity Commission, the Occupational Safety and Health Administration, the United States Food and Drug Administration, the Department of Labor, the Treasury Department or other federal and state agencies or foreign governments or government agencies. These information requests, subpoenas or warrants may or may not be routine inquiries, or may begin as routine inquiries and over time develop into enforcement actions of various types. Likewise, if we receive reports of alleged misconduct from employees and third parties, we investigate as appropriate.
Manufacturers of medical devices have been the subject of various enforcement actions relating to interactions with health care providers domestically or internationally whereby companies are claimed to have provided health care providers with inappropriate incentives to purchase their products. Similarly, the Foreign Corrupt Practices Act ("FCPA") imposes obligations on manufacturers with respect to interactions with health care providers who may be considered government officials based on their affiliation with public hospitals. The FCPA also requires publicly listed manufacturers to maintain accurate books and records, and maintain internal accounting controls sufficient to provide assurance that transactions are accurately recorded, lawful and in accordance with management's authorization. The FCPA poses unique challenges both because manufacturers operate in foreign cultures in which conduct illegal under the FCPA may not be illegal in local jurisdictions, and because, in some cases, a United States manufacturer may face risks under the FCPA based on the conduct of third parties over whom the manufacturer may not have complete control. While CONMED has not experienced any material enforcement action to date, there can be no assurance that the Company will not be subject to a material enforcement action in the future, or that the Company will not incur costs including, in the form of fees for lawyers and other consultants, that are material to the Company’s results of operations in the course of responding to a future inquiry or investigation.
Manufacturers of medical products may face exposure to significant product liability claims, as well as patent infringement and other claims incurred in the ordinary course of business. To date, we have not experienced any claims that have been material to our financial statements or financial condition, but any such claims arising in the future could have a material adverse effect on our business, results of operations or cash flows. We currently maintain commercial product liability insurance of $30 million per incident and $30 million in the aggregate annually, which we believe is adequate. This coverage is on a claims-made basis. There can be no assurance that claims will not exceed insurance coverage, that the carriers will be solvent or that such insurance will be available to us in the future at a reasonable cost.
Our operations are subject, and in the past have been subject, to a number of environmental laws and regulations governing, among other things, air emissions; wastewater discharges; the use, handling and disposal of hazardous substances and wastes; soil and groundwater remediation and employee health and safety. Likewise, the operations of our suppliers and sterilizers are subject to similar environmental laws and regulations. In some jurisdictions, environmental requirements may be
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expected to become more stringent in the future. In the United States, certain environmental laws can impose liability for the entire cost of site restoration upon each of the parties that may have contributed to conditions at the site regardless of fault or the lawfulness of the party’s activities. While we do not believe that the present costs of environmental compliance and remediation are material, there can be no assurance that future compliance or remedial obligations would not have a material adverse effect on our financial condition, results of operations or cash flows.
In 2014, the Company acquired EndoDynamix, Inc. The agreement governing the terms of the acquisition provides that, if various conditions are met, certain contingent payments relating to the first commercial sale of the products (the milestone payment), as well as royalties based on sales (the revenue based payments), are due to the seller. In 2016, we notified the seller that there was a need to redesign the product, and that, as a consequence, the first commercial sale had been delayed. Consequently, the payment of contingent milestone and revenue-based payments were delayed. On January 18, 2017, the seller provided notice ("the Notice") seeking $12.7 million under a liquidated damages clause, which essentially represents the seller's view as to the sum of the projected contingent milestone and revenue-based payments on an accelerated basis. CONMED responded to the Notice denying that there was any basis for acceleration of the payments due under the acquisition agreement. On February 22, 2017, the representative of the former shareholders of EndoDynamix filed a complaint in Delaware Chancery Court claiming breach of contract with respect to the duty to commercialize the product and seeking the contingent payments on an accelerated basis. We believe that there was a substantive contractual basis to support the Company's decision to redesign the product, such that there was no legitimate basis for seeking the liquidated damages. In the third quarter of 2018, the Company decided to halt the development of the EndoDynamix clip applier. We previously recorded a charge to write off assets and released a previously accrued contingent consideration liability. In a pre-trial filing the Plaintiffs claim to seek liquidated damages, as well as additional damages up to $24.8 million. A non-jury trial in the Delaware Chancery Court commenced on March 18, 2021, and testimony concluded on April 7, 2021. The parties have submitted post-trial briefs, and the Court will hear oral arguments at a hearing scheduled for September 2021, with the Court to issue a ruling at some point thereafter. The Company has not recorded any expense related to potential damages in connection with this matter because the Company does not believe any potential loss is probable. We expect to defend the claims asserted by the sellers of EndoDynamix, although there can be no assurance that we will prevail in the trial and/or any resulting appeals.
CONMED is defending two Georgia State Court actions. The first was filed by various employees, former employees, contract workers and others against CONMED, and against a contract sterilizer. The second action is against CONMED’s landlord and other related entities. Plaintiffs in the lawsuits allege personal injury and related claims purportedly arising from or relating to exposure to Ethylene Oxide, a chemical used to sterilize certain products. CONMED is defending the claims asserted directly against it and is providing indemnification for certain other defendants based on contractual provisions. CONMED has submitted all of the claims for insurance coverage. One insurer is providing coverage for certain of the claims asserted directly against the Company. CONMED is currently in litigation with one of the other insurers regarding coverage for one of the indemnification claims and is waiting for the carrier to make a coverage determination for the other indemnification claim. The Company is unable to estimate any range of possible loss at this time, and has not recorded any expense related to potential damages in connection with this matter because the Company does not believe any potential loss is probable.
Both actions are in their early stages and discovery has not yet started. CONMED believes it has strong defenses to the claims and will vigorously defend itself and all parties it is indemnifying. As with any litigation, there are risks, including the risk that CONMED may not prevail with respect to the defense of the underlying claims, or with respect to securing adequate insurance coverage for the indemnification claims.
We record reserves sufficient to cover probable and estimable losses associated with any such pending claims. We do not expect that the resolution of any pending claims, investigations or reports of alleged misconduct will have a material adverse effect on our financial condition, results of operations or cash flows. There can be no assurance, however, that future claims or investigations, or the costs associated with responding to such claims, investigations or reports of misconduct, especially claims and investigations not covered by insurance, will not have a material adverse effect on our financial condition, results of operations or cash flows.
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Note 15 – New Accounting Pronouncements
Recently Issued Accounting Standards, Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance if certain criteria are met for entities that have contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued as a result of reference rate reform. This ASU is effective as of March 12, 2020 through December 31, 2022. The Company has not adopted this ASU as of June 30, 2021, however will continue to monitor the impact of reference rates and will elect to apply this guidance in our consolidated financial statements in the event that we are impacted by reference rate reform.
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments by removing certain separation models requiring separate accounting for embedded conversion features which will result in more convertible debt instruments accounted for as a single liability. The ASU eliminates certain settlement conditions that are required for equity classification to qualify for the derivative scope exception. The ASU addresses how convertible instruments are accounted for in the calculation of diluted earnings per share by using the if-converted method. The ASU is effective for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. The Company is currently assessing the impact of this guidance on our consolidated financial statements.
Note 16 – Subsequent Events
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| Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |||||||
Forward-Looking Statements
In this Report on 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. Such statements may be identified by the use of words such as “anticipates”, “expects”, “estimates”, “intends” and “believes” and variations thereof and other terms of similar meaning.
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, 2020 and the following, among others:
•general economic and business conditions;
•compliance with and changes in regulatory requirements;
•COVID-19 global pandemic poses significant risks to our business, financial condition and results of operations, which may be heightened if the pandemic, and various government responses to it, continue for an extended period of time;
•environmental compliance risks, including lack of availability of sterilization with Ethylene Oxide (“EtO”) or other compliance costs associated with the use of EtO;
•the possibility that United States or foreign regulatory and/or administrative agencies may initiate enforcement actions against us or our distributors;
•competition;
•changes in customer preferences;
•changes in technology;
•the introduction and acceptance of new products;
•the availability and cost of materials;
•the risk of an information security breach, including a cybersecurity breach;
•cyclical customer purchasing patterns due to budgetary and other constraints;
•the quality of our management and business abilities and the judgment of our personnel;
•the availability, terms and deployment of capital;
•future levels of indebtedness and capital spending;
•changes in foreign exchange and interest rates;
•the ability to evaluate, finance and integrate acquired businesses, products and companies;
•changes in business strategy;
•the risk of a lack of allograft tissues due to reduced donations of such tissues or due to tissues not meeting the appropriate high standards for screening and/or processing of such tissues;
•the ability to defend and enforce intellectual property, including the risks related to theft or compromise of intellectual property in connection with our international operations;
•the risk of patent, product and other litigation, as well as the cost associated with such litigation; and
•trade protection measures, tariffs and other border taxes, and import or export licensing requirements.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below and “Risk Factors” and “Business” in our Annual Report on Form 10-K for the year-ended December 31, 2020 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 or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.
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Overview
CONMED Corporation (“CONMED”, the “Company”, “we” or “us”) is a medical technology company that provides surgical devices and equipment for minimally invasive procedures. The Company’s products are used by surgeons and other healthcare professionals in a variety of specialties including orthopedics, general surgery, gynecology, thoracic surgery and gastroenterology.
Our product lines consist of orthopedic surgery and general surgery. Orthopedic surgery consists of sports medicine instrumentation and small bone, large bone and specialty powered surgical instruments as well as, imaging systems for use in minimally invasive surgery procedures and service fees related to the promotion and marketing of sports medicine allograft tissue. General surgery consists of a complete line of endo-mechanical instrumentation for minimally invasive laparoscopic and gastrointestinal procedures, smoke evacuation devices, a line of cardiac monitoring products as well as electrosurgical generators and related instruments. These product lines as a percentage of consolidated net sales are as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Orthopedic surgery | 42 | % | 38 | % | 44 | % | 43 | % | |||||||||||||||
| General surgery | 58 | % | 62 | % | 56 | % | 57 | % | |||||||||||||||
| Consolidated net sales | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||||
A significant amount of our products are used in surgical procedures with approximately 81% of our revenues derived from the sale of single-use products. Our capital equipment offerings also facilitate the ongoing sale of related single-use products and accessories, thus providing us with a recurring revenue stream. We manufacture substantially all of our products in facilities located in the United States and Mexico. We market our products both domestically and internationally directly to customers and through distributors. International sales approximated 45% during both the six months ended June 30, 2021 and 2020.
Business Environment
Our business was, and to a lesser extent continues today to be, significantly impacted by the emergence of the COVID-19 pandemic, first in the Asia Pacific geography and later in the United States, Europe and elsewhere as temporary closures occurred and hospitals and surgery centers postponed many non-urgent surgical procedures in order to minimize the risk of infection. In compliance with various governmental orders, beginning in March 2020 we restricted access to our main facilities to only essential personnel required to be onsite while maintaining production and distribution. Although such restrictions continued to be in place as of June 30, 2021, we are developing plans in certain of our facilities to ease such restrictions as the number of COVID-19 cases decline and vaccination rates increase. During the first six months of 2021, revenues increased compared to the first six months of 2020. We have seen and believe we will continue to experience market variability that could influence sales, suppliers, patients and customers. We also have seen and continue to expect general surgery to rebound faster than orthopedic surgery due to the nature of the products. However, there remains uncertainty related to the COVID-19 pandemic, including the duration and severity of future impacts to the business. See additional discussion in Liquidity and Capital Resources below.
Critical Accounting Policies
Preparation of our financial statements requires us to make estimates and assumptions which affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year-ended December 31, 2020 describes the significant accounting policies used in preparation of the Consolidated Financial Statements. On an ongoing basis, we evaluate the critical accounting policies used to prepare our consolidated financial statements, including, but not limited to, those related to goodwill and intangible assets and our pension benefit obligation.
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Consolidated Results of Operations
The following table presents, as a percentage of net sales, certain categories included in our consolidated condensed statements of income for the periods indicated:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||
| Cost of sales | 44.6 | 54.4 | 44.7 | 48.6 | |||||||||||||||||||
| Gross profit | 55.4 | 45.6 | 55.3 | 51.4 | |||||||||||||||||||
| Selling and administrative expense | 40.9 | 53.5 | 41.6 | 48.5 | |||||||||||||||||||
| Research and development expense | 4.4 | 5.5 | 4.4 | 5.1 | |||||||||||||||||||
| Income (loss) from operations | 10.1 | (13.5) | 9.4 | (2.2) | |||||||||||||||||||
| Interest expense | 3.7 | 7.2 | 4.1 | 5.6 | |||||||||||||||||||
| Other expense | — | 0.1 | — | — | |||||||||||||||||||
| Income (loss) before income taxes | 6.4 | (20.7) | 5.3 | (7.9) | |||||||||||||||||||
| Provision (benefit) for income taxes | 1.2 | (3.4) | 0.6 | (2.1) | |||||||||||||||||||
| Net income (loss) | 5.2 | % | (17.4) | % | 4.7 | % | (5.8) | % | |||||||||||||||
Net Sales
The following table presents net sales by product line for the three and six months ended June 30, 2021 and 2020:
| Three Months Ended | |||||||||||||||||||||||||||||
| % Change | |||||||||||||||||||||||||||||
| 2021 | 2020 | As Reported | Impact of Foreign Currency | Constant Currency | |||||||||||||||||||||||||
| Orthopedic surgery | $ | 107.9 | $ | 60.5 | 78.4 | % | -5.5 | % | 72.9 | % | |||||||||||||||||||
| General surgery | 147.3 | 97.3 | 51.4 | % | -2.3 | % | 49.1 | % | |||||||||||||||||||||
| Net sales | $ | 255.2 | $ | 157.8 | 61.7 | % | -3.5 | % | 58.2 | % | |||||||||||||||||||
| Single-use products | $ | 208.9 | $ | 128.5 | 62.6 | % | -3.6 | % | 59.0 | % | |||||||||||||||||||
| Capital products | 46.3 | 29.3 | 58.0 | % | -3.4 | % | 54.6 | % | |||||||||||||||||||||
| Net sales | $ | 255.2 | $ | 157.8 | 61.7 | % | -3.5 | % | 58.2 | % | |||||||||||||||||||
| Six Months Ended | |||||||||||||||||||||||||||||
| % Change | |||||||||||||||||||||||||||||
| 2021 | 2020 | As Reported | Impact of Foreign Currency | Constant Currency | |||||||||||||||||||||||||
| Orthopedic surgery | $ | 215.0 | $ | 159.8 | 34.6 | % | -3.3 | % | 31.3 | % | |||||||||||||||||||
| General surgery | 272.8 | 212.0 | 28.7 | % | -1.7 | % | 27.0 | % | |||||||||||||||||||||
| Net sales | $ | 487.8 | $ | 371.8 | 31.2 | % | -2.3 | % | 28.9 | % | |||||||||||||||||||
| Single-use products | $ | 396.3 | $ | 306.2 | 29.4 | % | -2.2 | % | 27.2 | % | |||||||||||||||||||
| Capital products | 91.5 | 65.6 | 39.6 | % | -2.8 | % | 36.8 | % | |||||||||||||||||||||
| Net sales | $ | 487.8 | $ | 371.8 | 31.2 | % | -2.3 | % | 28.9 | % | |||||||||||||||||||
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Net sales increased 61.7% and 31.2% in the three and six months ended June 30, 2021, respectively, compared to the same periods a year ago driven by increases across all product lines as the COVID-19 pandemic had a significant impact on sales during the second quarter of 2020.
•Orthopedic surgery sales increased 78.4% and 34.6% in the three and six months ended June 30, 2021, respectively. 2020 was significantly impacted by the COVID-19 pandemic as hospitals and surgery centers deferred non-urgent surgeries and customers also deferred capital equipment purchases. Sales have increased since the first quarter of 2021 with growth in single-use products as non-urgent surgeries continue to increase.
•General surgery sales increased 51.4% and 28.7% in the three and six months ended June 30, 2021, respectively. 2020 was significantly impacted by the COVID-19 pandemic as hospitals and surgery centers deferred non-urgent surgeries. General surgery sales increased from the first quarter of 2021 mainly driven by continued growth in our advanced surgical products, including in our Buffalo Filter and AirSeal products, as well as growth in our advanced endoscopic technologies products. We believe the deferral of non-urgent procedures has had a lesser impact on our general surgery products as a result of the nature of the products and procedures in which they are used.
Cost of Sales
Cost of sales increased to $113.7 million in the three months ended June 30, 2021 as compared to $85.9 million in the three months ended June 30, 2020 and increased to $218.0 million in the six months ended June 30, 2021 as compared to $180.7 million in the six months ended June 30, 2020. Gross profit margins increased 980 basis points to 55.4% in the three months ended June 30, 2021 as compared to 45.6% in the three months ended June 30, 2020 and increased 390 basis points to 55.3% in the six months ended June 30, 2021 as compared to 51.4% in the six months ended June 30, 2020.
The increase in gross profit margin of 980 basis points in the three months ended June 30, 2021 and 390 basis points in the six months ended June 30, 2021 was driven by an increase in sales as well as the absence in 2021 of certain costs incurred in 2020 including the following:
•$6.6 million in costs related to plant underutilization due to abnormally low production as a result of decreased sales caused by the COVID-19 pandemic in the second quarter of 2020;
•$2.2 million in costs related to product rationalization in the second quarter of 2020;
•$1.1 million in restructuring costs related to a voluntary separation arrangement as a result of the COVID-19 pandemic in the second quarter of 2020;
•$1.6 million and $3.4 million for the three and six months ended June 30, 2020, respectively, in costs related to the consolidation of certain manufacturing operations related to winding down operations at certain locations and moving production lines to other facilities; and
•$0.7 million and $1.5 million for the three and six months ended June 30, 2020, respectively, related inventory step-up adjustments from a previous acquisition.
Refer to Note 12 for further details on the above items.
Selling and Administrative Expense
Selling and administrative expense increased to $104.4 million in the three months ended June 30, 2021 as compared to $84.5 million in the three months ended June 30, 2020 and increased to $202.7 million in the six months ended June 30, 2021 as compared to $180.3 million in the six months ended June 30, 2020. Selling and administrative expense as a percentage of net sales decreased to 40.9% in the three months ended June 30, 2021 as compared to 53.5% in the three months ended June 30, 2020 and decreased to 41.6% in the six months ended June 30, 2021 as compared to 48.5% in the six months ended June 30, 2020.
The decrease in selling and administrative expense as a percentage of net sales for the three and six months ended June 30, 2021 was mainly driven by higher sales in 2021 while continuing to monitor our expenses in response to the COVID-19 pandemic. In addition, 2020 included the following expenses:
•$2.1 million in severance costs related to a voluntary termination program and costs associated with the restructuring of our Orthopedic sales force in the second quarter of 2020;
•a $2.1 million write-off of field inventory used for customer demonstration and evaluation of products resulting from the product rationalization initiative in the second quarter of 2020; and
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•$0.4 million and $1.2 million, respectively, in severance and integration costs mainly related to the Buffalo Filter acquisition in the three and six months ended June 30, 2020.
Research and Development Expense
Research and development expense increased to $11.3 million in the three months ended June 30, 2021 as compared to $8.7 million in the three months ended June 30, 2020. Research and development expense increased to $21.3 million in the six months ended June 30, 2021 as compared to $18.8 million in the six months ended June 30, 2020. As a percentage of net sales, research and development expense decreased 110 basis points to 4.4% in the three months ended June 30, 2021 as compared to 5.5% in the three months ended June 30, 2020 and decreased 70 basis points to 4.4% in the six months ended June 30, 2021 as compared to 5.1% in the six months ended June 30, 2020. The lower spend as a percentage of sales is driven by higher sales in 2021.
Interest Expense
Interest expense decreased to $9.4 million in the three months ended June 30, 2021 from $11.4 million in the three months ended June 30, 2020 and decreased to $19.8 million in the six months ended June 30, 2021 from $21.0 million in the six months ended June 30, 2020. The weighted average interest rates on our borrowings decreased to 2.97% in the three months ended June 30, 2021 as compared to 3.75% in the three months ended June 30, 2020 and 3.17% in the six months ended June 30, 2021 as compared to 3.44% in the six months ended June 30, 2020. The decrease in interest expense is primarily due to lower borrowings and decreases in our weighted average interest rates compared to the same periods a year ago.
Other Expense
Other expense in the three and six months ended June 30, 2020 is related to non-service pension costs as further described in Note 11.
Provision (Benefit) for Income Taxes
Income tax expense has been recorded at an effective tax rate of 18.4% for the three months ended June 30, 2021 compared to income tax benefit at an effective tax rate of 16.3% for the three months ended June 30, 2020. Income tax expense has been recorded at an effective tax rate of 11.0% for the six months ended June 30, 2021 compared to income tax benefit at an effective tax rate of 26.6% for the six months ended June 30, 2020. We calculate our estimated tax liability each quarter based on the level of income and tax liability on a year-to-date basis. The tax rates for the three months and six months ended June 30, 2020 were primarily the result of our second quarter loss position. The three months ended June 30, 2020 included a discrete income tax benefit associated with stock options which increased the effective tax rate by 1.2%. The six months ended June 30, 2020 included discrete income tax benefit associated with stock options and other federal income tax items which increased the effective tax rate by 10.9%. Our income position for the three and six months ended June 30, 2021 generated tax expense which was offset by discrete income tax benefit from federal tax deductions relating to stock option exercises that decreased the effective tax rate by 9.8% and 15.1%, respectively. A reconciliation of the United States statutory income tax rate to our effective tax rate is included in our Annual Report on Form 10-K for the year ended December 31, 2020, under Note 8 to the consolidated financial statements.
Non-GAAP Financial Measures
Net sales on a "constant currency" basis is a non-GAAP measure. The Company analyzes net sales on a constant currency basis to better measure the comparability of results between periods. To measure percentage sales growth in constant currency, the Company removes the impact of changes in foreign currency exchange rates that affect the comparability and trend of net sales.
Because non-GAAP financial measures are not standardized, it may not be possible to compare this financial measure with other companies' non-GAAP financial measures having the same or similar names. This adjusted financial measure should not be considered in isolation or as a substitute for reported net sales growth, the most directly comparable GAAP financial measure. This non-GAAP financial measure is an additional way of viewing net sales that, when viewed with our GAAP results, provides a more complete understanding of our business. The Company strongly encourages investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.
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Liquidity and Capital Resources
Our liquidity needs arise primarily from capital investments, working capital requirements and payments on indebtedness under the sixth amended and restated senior credit agreement, described below. We have historically met these liquidity requirements with funds generated from operations and borrowings under our revolving credit facility. In addition, we have historically used term borrowings, including borrowings under the sixth amended and restated senior credit agreement, and borrowings under separate loan facilities, in the case of real property purchases, to finance our acquisitions. We also have the ability to raise funds through the sale of stock or we may issue debt through a private placement or public offering.
As a result of the COVID-19 pandemic, we experienced lower sales in 2020. On April 17, 2020 we amended our senior credit agreement to suspend our required leverage ratios for up to four quarters. We continued to have certain minimum liquidity and fixed charge coverage ratio requirements. On November 20, 2020, we entered into a third amendment under our senior credit agreement to lower the applicable margin on loans and lower the interest floor on Eurocurrency loans agreed upon in April 2020. On April 15, 2021, we terminated the suspension period, thus reinstating our required leverage ratios. Management believes that cash flow from operations, including cash and cash equivalents on hand and available borrowing capacity under our revolving credit facility, will be adequate to meet our liquidity needs for the foreseeable future. We continue to monitor our spending and expenses in light of our expectation that our revenues will continue to be impacted by the pandemic. While the results of operations support continued recovery, there remains uncertainty in the financial markets related to the COVID-19 pandemic which may have an impact on the demand for post-pandemic surgery levels that are difficult to predict. If the downturn is more severe and prolonged than we currently expect, we may need to take further steps to reduce our costs, or to refinance our debt.
Operating cash flows
Our net working capital position was $244.7 million at June 30, 2021. Net cash provided by operating activities was $56.6 million and $9.3 million in the six months ended June 30, 2021 and 2020, respectively, generated on net income (loss) of $23.2 million and $(21.5) million for the six months ended June 30, 2021 and 2020, respectively. The increase in cash provided by operating activities in 2021 as compared to 2020 was mainly driven by higher net income in 2021 compared to the same period a year ago.
Investing cash flows
Net cash used in investing activities in the six months ended June 30, 2021 decreased $4.3 million from the same period a year ago due to $3.9 million in payments mainly related to the acquisition of a distributor in 2020. Capital expenditures were $6.1 million in the six months ended June 30, 2021 compared to $6.6 million in the same period a year ago.
Financing cash flows
Net cash used in financing activities in the six months ended June 30, 2021 was $31.0 million compared to cash provided by financing activities of $10.8 million during 2020. Below is a summary of the significant financing activities impacting the change during the six months ended June 30, 2021 compared to 2020:
•We had net payments on our revolving line of credit of $22.0 million compared to $38.0 million in net borrowings during the six months ended June 30, 2020.
•We had net cash proceeds of $13.1 million related to stock issued under employee plans for the six months ended June 30, 2021 compared to $2.2 million in the same period a year ago.
•We paid $2.1 million in contingent consideration related to a prior acquisition during the six months ended June 30, 2020.
•We paid $2.1 million in debt issuance costs related to the April 2020 amendment to our sixth amended and restated senior credit agreement during the six months ended June 30, 2020.
On February 7, 2019 we entered into a sixth amended and restated senior credit agreement consisting of: (a) a $265.0 million term loan facility and (b) a $585.0 million revolving credit facility. The revolving credit facility then in effect was due to terminate and the loans outstanding under the term loan facility then in effect were scheduled to mature on the earlier of (i) February 7, 2024 or (ii) 91 days prior to the earliest scheduled maturity date of the 2.625% convertible notes due in 2024 described below, (if, as of such date, more than $150.0 million in aggregate principal amount of such convertible notes (or any refinancing thereof) remained outstanding). The term loan facility was payable in quarterly installments increasing over the term of the facility. Proceeds from the term loan facility and borrowings under the revolving credit facility were used to repay the then existing senior credit agreement and in part to finance the acquisition of Buffalo Filter. As noted above, on April 17, 2020 we amended our sixth amended and restated senior credit agreement to suspend our required leverage ratios for up to four
26
quarters. We continued to have certain minimum liquidity and fixed charge coverage ratio requirements. On November 20, 2020, we entered into a third amendment under our senior credit agreement to lower the applicable margin on the loans and lower the interest floor on Eurocurrency loans agreed upon in April 2020. On April 15, 2021, we terminated the suspension period, thus reinstating our required leverage ratios. The applicable margin depended upon CONMED’s consolidated senior secured leverage ratio, using the pricing grid set forth in the November 2020 amendment. Interest rates were at LIBOR (subject to 0.125% floor) plus an interest rate margin of 2.50% (2.625% at June 30, 2021).
There were $233.5 million in borrowings outstanding on the term loan facility as of June 30, 2021. There were $185.0 million in borrowings outstanding under the revolving credit facility as of June 30, 2021. Our available borrowings on the revolving credit facility at June 30, 2021 were $397.4 million with approximately $2.6 million of the facility set aside for outstanding letters of credit.
The sixth amended and restated senior credit agreement was collateralized by substantially all of our personal property and assets. The sixth amended and restated senior credit agreement contained covenants and restrictions which, among other things, required the maintenance of certain financial ratios and restricted dividend payments and the incurrence of certain indebtedness and other activities, including acquisitions and dispositions. We were in full compliance with these covenants and restrictions as of June 30, 2021. We were also required, under certain circumstances, to make mandatory prepayments from net cash proceeds from any issuance of equity and asset sales.
On July 16, 2021, we entered into a seventh amended and restated senior credit agreement consisting of: (a) a $233.5 million term loan facility and (b) a $585.0 million revolving credit facility. The revolving credit facility will terminate and the loans outstanding under the term loan facility will expire on the fifth anniversary of the closing date. The term loan is payable in quarterly installments increasing over the term of the facility. Proceeds from the term loan facility and borrowings under the revolving credit facility were used to repay the then existing senior credit agreement. Initial interest rates are at LIBOR plus an interest rate margin of 1.75%. For those borrowings where we elect to use the alternate base rate, the initial base rate will be the greatest of (i) the Prime Rate, (ii) the Federal Funds Rate plus 0.50% or (iii) the one-month Adjusted LIBOR plus 1.00%, plus, in each case, an interest rate margin. The seventh amended and restated senior credit agreement contains covenants and restrictions which, among other things, require the maintenance of certain financial ratios and restrict dividend payments and the incurrence of certain indebtedness and other activities, including acquisitions and dispositions.
On January 29, 2019, we issued $345.0 million in 2.625% convertible notes due in 2024 (the "Notes"). Interest is payable semi-annually in arrears on February 1 and August 1 of each year, commencing August 1, 2019. The Notes will mature on February 1, 2024, unless earlier repurchased or converted. The Notes represent subordinated unsecured obligations and are convertible under certain circumstances, as defined in the indenture, into a combination of cash and CONMED common stock. The Notes may be converted at an initial conversion rate of 11.2608 shares of our common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $88.80 per share of common stock). Holders of the Notes may convert the Notes at their option at any time on or after November 1, 2023 through the second scheduled trading day preceding the maturity date. Holders of the Notes will also have the right to convert the Notes prior to November 1, 2023, but only upon the occurrence of specified events. The conversion rate is subject to anti-dilution adjustments if certain events occur. A portion of the net proceeds from the offering of the Notes were used as part of the financing for the Buffalo Filter acquisition and $21.0 million were used to pay the cost of certain convertible notes hedge transactions as further described below.
In connection with the offering of the Notes, we entered into convertible note hedge transactions with a number of financial institutions (each, an “option counterparty”). The convertible note hedge transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Notes, the number of shares of our common stock underlying the Notes. Concurrently with entering into the convertible note hedge transactions, we also entered into separate warrant transactions with each option counterparty whereby we sold to such option counterparty warrants to purchase, subject to customary anti-dilution adjustments, the same number of shares of our common stock.
The convertible note hedge transactions are expected generally to reduce the potential dilution upon conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be, in the event that the market price per share of our common stock, as measured under the terms of the convertible note hedge transactions, is greater than the strike price of the convertible note hedge transactions, which initially corresponds to the conversion price of the Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Notes. If, however, the market price per share of our common stock, as measured under the terms of the warrant transactions, exceeds the strike price ($114.92) of the warrants, there would nevertheless be dilution to the extent that such market price exceeds the strike price of the warrants as noted in Note 7, unless we elect to settle the warrants in cash.
Our Board of Directors has authorized a $200.0 million share repurchase program. Through June 30, 2021, we have repurchased a total of 6.1 million shares of common stock aggregating $162.6 million under this authorization and have $37.4
27
million remaining available for share repurchases. The repurchase program calls for shares to be purchased in the open market or in private transactions from time to time. We may suspend or discontinue the share repurchase program at any time. We have not purchased any shares of common stock under the share repurchase program during 2021. We have financed the repurchases and may finance additional repurchases through operating cash flow and from available borrowings under our revolving credit facility.
Management believes that cash flow from operations, including cash and cash equivalents on hand and available borrowing capacity under our seventh amended and restated senior credit agreement, will be adequate to meet our anticipated operating working capital requirements, debt service, funding of capital expenditures, dividend payments and common stock repurchases in the foreseeable future.
New accounting pronouncements
See Note 15 to the consolidated condensed financial statements for a discussion of new accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in our primary market risk exposures or in how these exposures are managed during the six months ended June 30, 2021. Reference is made to Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2020 for a description of Qualitative and Quantitative Disclosures About Market Risk.
Item 4. Controls and Procedures
As of the end of the period covered by this report, an evaluation was carried out by CONMED Corporation’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) occurred during the quarter ended June 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 3 of the Company’s Annual Report on Form 10-K for the year-ended December 31, 2020 and to Note 14 of the Notes to Consolidated Condensed Financial Statements included in Part I of this Report for a description of certain legal matters.
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Item 6. Exhibits
| Exhibit Index | |||||
| Exhibit No. | Description of Exhibit | ||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | ||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | ||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||||
| 104 | Cover Page - Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document (included in Exhibit 101) | ||||
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the date indicated below.
| CONMED CORPORATION | ||||||||
| By: /s/ Todd W. Garner | ||||||||
| Todd W. Garner | ||||||||
| Executive Vice President and | ||||||||
| Chief Financial Officer | ||||||||
| Date: | ||||||||
| July 29, 2021 | ||||||||
30
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Curt R. Hartman, certify that:
1.I have reviewed this quarterly report on Form 10-Q of CONMED Corporation;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
July 29, 2021
| /s/ Curt R. Hartman | |||||
| Curt R. Hartman | |||||
| Chair of the Board, President & Chief Executive Officer | |||||
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Todd W. Garner, certify that:
1.I have reviewed this quarterly report on Form 10-Q of CONMED Corporation;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
July 29, 2021
| /s/ Todd W. Garner | |||||
| Todd W. Garner | |||||
| Executive Vice President and | |||||
| Chief Financial Officer | |||||
Exhibit 32.1
CERTIFICATIONS
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of CONMED Corporation, a Delaware corporation (the “Corporation”), does hereby certify that:
The Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 (the “Form 10-Q”) of the Corporation fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Corporation.
| Date: | July 29, 2021 | /s/ Curt R. Hartman | ||||||
| Curt R. Hartman | ||||||||
| Chair of the Board, President & Chief Executive Officer | ||||||||
| Date: | July 29, 2021 | /s/ Todd W. Garner | ||||||
| Todd W. Garner | ||||||||
| Executive Vice President and | ||||||||
| Chief Financial Officer | ||||||||