CNMD 9.30.12 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended | Commission File Number |
September 30, 2012 | 0-16093 |
CONMED CORPORATION
(Exact name of the registrant as specified in its charter)
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New York (State or other jurisdiction of incorporation or organization) | 16-0977505 (I.R.S. Employer Identification No.) |
525 French Road, Utica, New York (Address of principal executive offices) | 13502 (Zip Code) |
(315) 797-8375
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated filer ý Accelerated filer o Non-accelerated filer o Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý
The number of shares outstanding of registrant's common stock, as of October 25, 2012 is 28,487,170 shares.
CONMED CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2012
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PART I FINANCIAL INFORMATION | |
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PART II OTHER INFORMATION |
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PART I FINANCIAL INFORMATION
Item 1.
CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands except per share amounts)
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| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2011 | | 2012 | | 2011 | | 2012 |
Net sales | $ | 172,814 |
| | $ | 181,885 |
| | $ | 539,500 |
| | $ | 565,896 |
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Cost of sales | 81,503 |
| | 83,972 |
| | 261,018 |
| | 267,340 |
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Gross profit | 91,311 |
| | 97,913 |
| | 278,482 |
| | 298,556 |
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Selling and administrative expense | 68,350 |
| | 74,064 |
| | 206,290 |
| | 222,577 |
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Research and development expense | 7,021 |
| | 7,077 |
| | 21,499 |
| | 21,364 |
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Other expense | — |
| | 2,658 |
| | 792 |
| | 6,421 |
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| 75,371 |
| | 83,799 |
| | 228,581 |
| | 250,362 |
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Income from operations | 15,940 |
| | 14,114 |
| | 49,901 |
| | 48,194 |
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Amortization of debt discount | 1,131 |
| | — |
| | 3,338 |
| | — |
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Interest expense | 1,670 |
| | 1,345 |
| | 5,182 |
| | 4,333 |
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Income before income taxes | 13,139 |
| | 12,769 |
| | 41,381 |
| | 43,861 |
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Provision for income taxes | 4,928 |
| | 3,449 |
| | 15,495 |
| | 14,277 |
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Net income | $ | 8,211 |
| | $ | 9,320 |
| | $ | 25,886 |
| | $ | 29,584 |
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Comprehensive income | $ | 6,437 |
| | $ | 10,197 |
| | $ | 29,263 |
| | $ | 28,929 |
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Per share data: | |
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Net Income | |
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Basic | $ | 0.29 |
| | $ | 0.33 |
| | $ | 0.91 |
| | $ | 1.05 |
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Diluted | 0.29 |
| | 0.32 |
| | 0.90 |
| | 1.03 |
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Dividends per share of common stock | $ | — |
| | $ | 0.15 |
| | $ | — |
| | $ | 0.45 |
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Weighted average common shares | |
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Basic | 28,348 |
| | 28,438 |
| | 28,355 |
| | 28,265 |
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Diluted | 28,546 |
| | 28,721 |
| | 28,734 |
| | 28,621 |
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See notes to consolidated condensed financial statements.
CONMED CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited, in thousands except share and per share amounts)
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| December 31, 2011 | | September 30, 2012 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 26,048 |
| | $ | 19,819 |
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Accounts receivable, net | 135,641 |
| | 132,872 |
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Inventories | 168,438 |
| | 165,326 |
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Income taxes receivable | — |
| | 1,295 |
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Deferred income taxes | 10,283 |
| | 11,759 |
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Prepaid expenses and other current assets | 16,314 |
| | 13,606 |
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Total current assets | 356,724 |
| | 344,677 |
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Property, plant and equipment, net | 139,187 |
| | 139,775 |
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Deferred income taxes | 2,389 |
| | 2,713 |
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Goodwill | 234,815 |
| | 256,825 |
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Other intangible assets, net | 195,531 |
| | 192,721 |
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Other assets | 6,948 |
| | 152,077 |
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Total assets | $ | 935,594 |
| | $ | 1,088,788 |
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LIABILITIES AND SHAREHOLDERS' EQUITY | |
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Current liabilities: | |
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Current portion of long-term debt | $ | 54,557 |
| | $ | 1,009 |
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Accounts payable | 21,162 |
| | 31,938 |
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Accrued compensation and benefits | 31,142 |
| | 27,121 |
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Income taxes payable | 6,470 |
| | — |
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Other current liabilities | 17,853 |
| | 65,475 |
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Total current liabilities | 131,184 |
| | 125,543 |
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Long-term debt | 88,952 |
| | 168,437 |
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Deferred income taxes | 92,785 |
| | 106,316 |
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Other long-term liabilities | 49,602 |
| | 86,045 |
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Total liabilities | 362,523 |
| | 486,341 |
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Commitments and contingencies |
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Shareholders' equity: | |
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Preferred stock, par value $ .01 per share; | |
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authorized 500,000 shares; none outstanding | — |
| | — |
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Common stock, par value $ .01 per share; | |
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100,000,000 shares authorized; 31,299,203 and 31,299,194 shares | |
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issued in 2011 and 2012, respectively | 313 |
| | 313 |
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Paid-in capital | 321,994 |
| | 322,767 |
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Retained earnings | 354,439 |
| | 371,267 |
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Accumulated other comprehensive loss | (26,348 | ) | | (27,003 | ) |
Less: 3,358,078 and 2,818,159 shares of common stock | |
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in treasury, at cost in 2011 and 2012, respectively | (77,327 | ) | | (64,897 | ) |
Total shareholders’ equity | 573,071 |
| | 602,447 |
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Total liabilities and shareholders’ equity | $ | 935,594 |
| | $ | 1,088,788 |
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See notes to consolidated condensed financial statements.
CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands) |
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| Nine Months Ended |
| September 30, |
| 2011 | | 2012 |
Cash flows from operating activities: | | | |
Net income | $ | 25,886 |
| | $ | 29,584 |
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Adjustments to reconcile net income | |
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to net cash provided by operating activities: | |
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Depreciation | 13,700 |
| | 14,018 |
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Amortization of debt discount | 3,338 |
| | — |
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Amortization, all other | 14,764 |
| | 20,752 |
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Stock-based compensation expense | 3,714 |
| | 4,115 |
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Deferred income taxes | 11,961 |
| | 11,752 |
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Increase (decrease) in cash flows | |
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from changes in assets and liabilities: | |
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Accounts receivable | 14,745 |
| | 6,910 |
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Inventories | (10,768 | ) | | (2,436 | ) |
Accounts payable | 2,285 |
| | 1,693 |
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Income taxes receivable (payable) | 829 |
| | (7,996 | ) |
Accrued compensation and benefits | (2,507 | ) | | (5,235 | ) |
Other assets | (2,897 | ) | | (2,723 | ) |
Other liabilities | 1,659 |
| | (9,171 | ) |
| 50,823 |
| | 31,679 |
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Net cash provided by operating activities | 76,709 |
| | 61,263 |
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Cash flows from investing activities: | |
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Purchases of property, plant and equipment | (12,672 | ) | | (15,969 | ) |
Payments related to business acquisitions and distribution agreement, net of cash acquired | (72 | ) | | (82,843 | ) |
Net cash used in investing activities | (12,744 | ) | | (98,812 | ) |
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Cash flows from financing activities: | |
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Net proceeds from common stock issued | |
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under employee plans | 5,759 |
| | 9,414 |
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Repurchase of treasury stock | (15,021 | ) | | — |
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Payments on senior credit agreement | (23,013 | ) | | (53,588 | ) |
Proceeds from senior credit agreement | — |
| | 80,000 |
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Payments on mortgage notes | (438 | ) | | (475 | ) |
Dividends paid on common stock | — |
| | (8,590 | ) |
Other, net | (3,148 | ) | | 5,533 |
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Net cash provided by | | | |
(used in) financing activities | (35,861 | ) | | 32,294 |
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Effect of exchange rate changes | | | |
on cash and cash equivalents | (638 | ) | | (974 | ) |
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Net increase (decrease) in cash and cash equivalents | 27,466 |
| | (6,229 | ) |
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Cash and cash equivalents at beginning of period | 12,417 |
| | 26,048 |
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Cash and cash equivalents at end of period | $ | 39,883 |
| | $ | 19,819 |
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Non-cash financing activities: | | | |
Dividends payable | $ | — |
| | $ | 4,272 |
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See notes to consolidated condensed financial statements.
CONMED CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, in thousands except per share amounts)
Note 1 – Operations
CONMED Corporation (“CONMED”, the “Company”, “we” or “us”) is a medical technology company with an emphasis on surgical devices and equipment for minimally invasive procedures and monitoring. The Company’s products serve the clinical areas of arthroscopy, powered surgical instruments, electrosurgery, cardiac monitoring single-uses, endosurgery and endoscopic technologies. They are used by surgeons and physicians in a variety of specialties including orthopedics, general surgery, gynecology, neurosurgery, and gastroenterology.
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. Results for the period ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.
The consolidated condensed financial statements and notes thereto should be read in conjunction with the financial statements and notes for the year ended December 31, 2011 included in our Annual Report on Form 10-K.
Note 3 – Comprehensive income
Comprehensive income consists of the following:
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| Three months ended September 30, | | Nine months ended September 30, |
| 2011 | | 2012 | | 2011 | | 2012 |
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Net income | $ | 8,211 |
| | $ | 9,320 |
| | $ | 25,886 |
| | $ | 29,584 |
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Other comprehensive income: | | | | | | | |
Pension liability, net of | | | | | | | |
income tax | 249 |
| | 450 |
| | 746 |
| | 1,373 |
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Cash flow hedging gain (loss), | | | | | | | |
net of income tax | 4,292 |
| | (1,607 | ) | | 3,517 |
| | (2,876 | ) |
Foreign currency | | | | | | | |
translation adjustment | (6,315 | ) | | 2,034 |
| | (886 | ) | | 848 |
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Comprehensive income | $ | 6,437 |
| | $ | 10,197 |
| | $ | 29,263 |
| | 28,929 |
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Accumulated other comprehensive income (loss) consists of the following:
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| Cash Flow Hedging Gain (Loss) | | Pension Liability | | Cumulative Translation Adjustments | | Accumulated Other Comprehensive Income (Loss) |
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Balance, December 31, 2011 | $ | 2,973 |
| | $ | (31,250 | ) | | $ | 1,929 |
| | $ | (26,348 | ) |
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Pension liability, |
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net of income tax | — |
| | 1,373 |
| | — |
| | 1,373 |
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Cash flow hedging loss, |
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net of income tax | (2,876 | ) | | — |
| | — |
| | (2,876 | ) |
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Foreign currency translation |
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adjustments | — |
| | — |
| | 848 |
| | 848 |
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Balance, September 30, 2012 | $ | 97 |
| | $ | (29,877 | ) | | $ | 2,777 |
| | $ | (27,003 | ) |
Note 4 – 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 certain forecasted intercompany transactions 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. The notional contract amounts for forward contracts outstanding at September 30, 2012 which have been accounted for as cash flow hedges totaled $125.6 million. Net realized gains (losses) recognized for forward contracts accounted for as cash flow hedges approximated $(0.9) million and $1.0 million for the three months ended September 30, 2011 and 2012, respectively and $(4.4) million and $3.2 million for the nine months ended September 30, 2011 and 2012, respectively. Net unrealized gains on forward contracts outstanding, net of tax, which have been accounted for as cash flow hedges and which have been included in other comprehensive income, totaled $0.1 million at September 30, 2012. These unrealized gains and any subsequent changes in fair value will be recognized in the consolidated statements of operations in 2012 and 2013 as the related forward contracts mature and gains and losses are realized.
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 denominated 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 notional contract amounts for forward contracts outstanding at September 30, 2012 which have not been designated as hedges totaled $41.3 million. Net realized gains (losses) recognized in connection with those forward contracts not accounted for as hedges approximated $1.7 million and $(1.2) million for the three months ended September 30, 2011 and 2012, respectively, offsetting gains (losses) on our intercompany receivables of $(1.6) million and $1.0 million for the three months ended September 30, 2011 and 2012, respectively. Net realized gains (losses) recognized in connection with those forward contracts not accounted for as hedges approximated $0.0 million and $(1.6) million for the nine months ended September 30, 2011 and 2012, respectively, offsetting gains (losses) on our intercompany receivables of $0.0 million and $0.7 million for the nine months ended September 30, 2011 and 2012, respectively. These gains and losses have been recorded in selling and administrative expense in the consolidated statements of operations.
We record these forward foreign exchange contracts at fair value; the following tables summarize the fair value for forward foreign exchange contracts outstanding at December 31, 2011 and September 30, 2012:
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December 31, 2011 | Asset Balance Sheet Location | | Fair Value | | Liabilities Balance Sheet Location | | Fair Value | | | Net Fair Value |
Derivatives designated as hedged instruments: | | | | | | | | | | |
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Foreign exchange contracts | Prepaid expenses and other current assets | | $ | 5,042 |
| | Prepaid expenses and other current assets | | $ | (326 | ) | | | $ | 4,716 |
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Derivatives not designated as hedging instruments: | | | | | | | | | | |
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Foreign exchange contracts | Prepaid expenses and other current assets | | 41 |
| | Prepaid expenses and other current assets | | (95 | ) | | | (54 | ) |
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Total derivatives | | | $ | 5,083 |
| | | | $ | (421 | ) | | | $ | 4,662 |
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September 30, 2012 | Asset Balance Sheet Location | | Fair Value | | Liabilities Balance Sheet Location | | Fair Value | | | Net Fair Value |
Derivatives designated as hedged instruments: | | | | | | | | | | |
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Foreign exchange contracts | Prepaid expenses and other current assets | | $ | 1,731 |
| | Prepaid expenses and other current assets | | $ | (1,577 | ) | | | $ | 154 |
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Derivatives not designated as hedging instruments: | | | |
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Foreign exchange contracts | Prepaid expenses and other current assets | | — |
| | Prepaid expenses and other current assets | | (92 | ) | | | (92 | ) |
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Total derivatives | | | $ | 1,731 |
| | | | $ | (1,669 | ) | | | $ | 62 |
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Our forward foreign exchange contracts are subject to a master netting agreement and qualify for netting in the consolidated balance sheets. Accordingly, we have recorded the net fair value of $4.7 million and $0.1 million in prepaid expenses and other current assets at December 31, 2011 and September 30, 2012, respectively.
Fair Value Disclosure. Financial Accounting Standards Board (“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.
As of September 30, 2012, non-financial assets and liabilities not permitted or required to be measured at fair value on a recurring basis primarily relate to assets and liabilities acquired in the business acquisition described in Note 15. These assets and liabilities consist of working capital, property, plant & equipment, goodwill and other identified intangible assets. The working capital and property, plant & equipment, are valued using Level 2 inputs. Goodwill and other identified intangible assets are valued using Level 3 inputs. The fair value of the acquired identified intangible assets was determined based upon the present value of expected future cash flows adjusted for the probability of technological and commercial risk, utilizing a risk adjusted discount rate.
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.
Valuation Techniques. Assets and liabilities carried at fair value and measured on a recurring basis as of September 30, 2012 consist of forward foreign exchange contracts. The value of the forward foreign exchange contract assets and liabilities were determined within Level 2 of the valuation hierarchy and are listed in the table above.
The carrying amounts reported in our balance sheets for cash and cash equivalents, accounts receivable, accounts payable and long-term debt excluding the Notes approximate fair value. The fair value of the Notes was determined within Level 2 of the valuation hierarchy and approximated $0.3 million at both December 31, 2011 and September 30, 2012 based on their quoted market price.
Note 5 - Inventories
Inventories consist of the following:
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| December 31, 2011 | | September 30, 2012 |
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Raw materials | $ | 52,351 |
| | $ | 45,857 |
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Work-in-process | 15,499 |
| | 15,150 |
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Finished goods | 100,588 |
| | 104,319 |
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Total | $ | 168,438 |
| | $ | 165,326 |
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Note 6 – Earnings and dividends per share
Basic earnings per share (“basic EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share (“diluted EPS”) gives effect to all dilutive potential shares outstanding resulting from employee stock options, restricted stock units, performance share units and stock appreciation rights (“SARs”) during the period. The following table sets forth the computation of basic and diluted earnings per share for three and nine months ended September 30, 2011 and 2012.
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| Three months ended September 30, | | Nine months ended September 30, |
| 2011 | | 2012 | | 2011 | | 2012 |
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Net income | $ | 8,211 |
| | $ | 9,320 |
| | $ | 25,886 |
| | $ | 29,584 |
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Basic – weighted average shares outstanding | 28,348 |
| | 28,438 |
| | 28,355 |
| | 28,265 |
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Effect of dilutive potential securities | 198 |
| | 283 |
| | 379 |
| | 356 |
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Diluted – weighted average shares outstanding | 28,546 |
| | 28,721 |
| | 28,734 |
| | 28,621 |
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Net income | |
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Basic | $0.29 | | $0.33 | | $0.91 | | $1.05 |
Diluted | $0.29 | | $0.32 | | $0.90 | | $1.03 |
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. Shares excluded from the calculation of diluted EPS aggregated 1.5 million and 0.4 million for the three months ended September 30, 2011 and 2012, respectively. Shares excluded from the calculation of diluted EPS aggregated 0.8 million and 0.4 million for the nine months ended September 30, 2011 and 2012, respectively.
On February 29, 2012, the Board of Directors adopted a cash dividend policy and declared an initial quarterly dividend of $0.15 per share. The initial quarterly dividend of $4.3 million was paid on April 5, 2012 to shareholders of record as of March 15, 2012. The second quarter dividend for 2012 of $4.3 million was paid on July 6, 2012 to shareholders of record as of June 15, 2012. The third quarter dividend was paid on October 5, 2012 to shareholders of record as of September 14, 2012. The total dividend payable at September 30, 2012 was $4.3 million and is included in other current liabilities in the consolidated condensed balance sheet.
Note 7 – Goodwill, other intangible assets, and other assets
The changes in the net carrying amount of goodwill for the nine months ended September 30, 2012 are as follows:
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Balance as of January 1, 2012 | $ | 234,815 |
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| |
Goodwill resulting from a business acquisition | 22,004 |
|
| |
Foreign currency translation | 6 |
|
| |
Balance as of September 30, 2012 | $ | 256,825 |
|
Goodwill associated with each of our principal operating reporting units is as follows:
|
| | | | | | | |
| December 31, 2011 | | September 30, 2012 |
CONMED Electrosurgery | $ | 16,645 |
| | $ | 16,645 |
|
| | | |
CONMED Endosurgery | 42,439 |
| | 42,439 |
|
| | | |
CONMED Linvatec | 175,731 |
| | 197,741 |
|
| | | |
Balance | $ | 234,815 |
| | $ | 256,825 |
|
Total accumulated impairment losses (associated with our CONMED Patient Care and CONMED Endoscopic Technologies operating units) aggregated $106,991 at both December 31, 2011 and September 30, 2012.
Other intangible assets consist of the following:
|
| | | | | | | | | | | | | | | |
| December 31, 2011 | | September 30, 2012 |
| Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Amortized intangible assets: | | | | | | | |
| | | | | | | |
Customer relationships | $ | 133,965 |
| | $ | (45,112 | ) | | $ | 135,690 |
| | $ | (48,803 | ) |
| | | | | | | |
Patents and other intangible assets | 52,702 |
| | (34,368 | ) | | 53,958 |
| | (36,468 | ) |
| | | | | | | |
Unamortized intangible assets: | |
| | |
| | |
| | |
|
| | | | | | | |
Trademarks and tradenames | 88,344 |
| | — |
| | 88,344 |
| | — |
|
| | | | | | | |
Balance | $ | 275,011 |
| | $ | (79,480 | ) | | $ | 277,992 |
| | $ | (85,271 | ) |
Other intangible assets primarily represent allocations of purchase price to identifiable intangible assets of acquired businesses. The weighted average amortization period for intangible assets which are amortized is 29 years. Customer relationships are being amortized over a weighted average life of 33 years. Patents and other intangible assets are being amortized over a weighted average life of 14 years.
Amortization expense related to intangible assets which are subject to amortization totaled $1,603 and $4,852 in the three and nine months ended September 30, 2011 and $1,929 and $5,791 in the three and nine months ended September 30, 2012, respectively, and is included in selling and administrative expense on the consolidated condensed statements of income.
The estimated amortization expense for the year ending December 31, 2012, including the nine month period ended September 30, 2012 and for each of the five succeeding years is as follows:
|
| | | |
2012 | $ | 7,793 |
|
2013 | 7,809 |
|
2014 | 7,184 |
|
2015 | 6,794 |
|
2016 | 6,692 |
|
2017 | 6,675 |
|
On January 3, 2012, the Company entered into a Sports Medicine Joint Development and Distribution Agreement (the "JDDA") with Musculoskeletal Tissue Foundation (“MTF”) to obtain (i) MTF's worldwide promotion rights with respect to allograft tissues within the field of sports medicine, and (ii) an exclusive license to an autograft (patient's own) blood Platelet-Rich Plasma (“PRP”) therapy technology and products (collectively, the “Transaction”).
Under the JDDA, we acquired the worldwide marketing, educational and promotion rights for sports medicine allograft tissue. We also acquired certain assets relating to instrument sets used for allograft procedures and approximately 35 MTF sales and marketing employees joined the Company. The JDDA has a term of 25 years with renewals thereafter. This transaction was not accounted for as a business combination as it does not meet the definition of a business as defined by ASC 805. The initial consideration from the Company includes a $63.0 million up-front payment for the rights and certain assets, with an additional $84.0 million contingently payable over a four year period depending on MTF meeting supply targets, as further set forth in the JDDA ($34 million is due within the next fiscal year with the remainder due in equal installments in each year thereafter). As compensation for our marketing efforts, the Company will receive services fees amounting to 50% of the revenue streams relating to MTF's sports medicine allograft product line and 100% of the revenue from the PRP products. At September 30, 2012, the gross carrying amount of this arrangement amounted to $149.4 million and the related accumulated amortization was $4.5 million. This has been recorded in other assets. $84.0 million related to the contingent payment is accrued in other current and other long term liabilities as we believe it is probable MTF will meet the supply targets. The Company is amortizing the upfront payment as well as the accrued $84.0 million over the 25 year term of the JDDA. Amortization expense is recorded as a reduction to sales.
Note 8 – Guarantees
We provide warranties on certain of our products at the time of sale. The standard warranty period for our capital and reusable equipment is generally one year. Liability under service and warranty policies is based upon a review of historical warranty and service claim experience. Adjustments are made to accruals as claim data and historical experience warrant.
Changes in the carrying amount of service and product warranties for the nine months ended September 30, are as follows:
|
| | | | | | | |
| 2011 | | 2012 |
| | | |
Balance as of January 1, | $ | 3,363 |
| | $ | 3,618 |
|
|
|
| |
|
|
Provision for warranties | 3,537 |
| | 3,136 |
|
|
|
| |
|
|
Claims made | (3,273 | ) | | (3,093 | ) |
|
|
| |
|
|
Balance as of September 30, | $ | 3,627 |
| | $ | 3,661 |
|
Note 9 – Pension plan
Net periodic pension costs consist of the following:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2011 | | 2012 | | 2011 | | 2012 |
|
|
| |
|
| |
|
| |
|
|
Service cost | $ | 70 |
| | $ | 65 |
| | $ | 211 |
| | $ | 195 |
|
|
|
| |
|
| |
|
| |
|
|
Interest cost on projected |
| |
| |
| |
|
benefit obligation | 880 |
| | 860 |
| | 2,639 |
| | 2,579 |
|
|
|
| |
|
| |
|
| |
|
|
Expected return on plan assets | (1,094 | ) | | (1,131 | ) | | (3,283 | ) | | (3,394 | ) |
|
|
| |
|
| |
|
| |
|
|
Net amortization and deferral | 394 |
| | 731 |
| | 1,183 |
| | 2,195 |
|
|
|
| |
|
| |
|
| |
|
|
Net periodic pension cost | $ | 250 |
| | $ | 525 |
| | $ | 750 |
| | $ | 1,575 |
|
We contributed $6.5 million during the first quarter of 2012 related to the 2011 plan year. We are required and expect to make a total of $2.7 million in contributions to our pension plan for the 2012 plan year. We contributed $1.3 million during the second and third quarters of 2012 and expect to contribute the remaining $1.4 million during the remainder of 2012 and the first quarter of 2013.
Note 10 – Other expense
Other expense consists of the following:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2011 | | 2012 | | 2011 | | 2012 |
|
|
| |
|
| |
|
| |
|
|
Administrative consolidation costs | $ | — |
| | $ | 1,940 |
| | $ | 792 |
| | $ | 3,444 |
|
Costs associated with legal arbitration | — |
| | — |
| | — |
| | 1,555 |
|
Costs associated with purchase of a distributor | — |
| | — |
| | — |
| | 704 |
|
Costs associated with purchase of a business | — |
| | 718 |
| | — |
| | 718 |
|
|
|
| |
|
| |
|
| |
|
|
Other expense | $ | — |
| | $ | 2,658 |
| | $ | 792 |
| | $ | 6,421 |
|
During 2011, we consolidated certain administrative functions in our Utica, New York facility. For the nine months ended September 30, 2011, we incurred $0.8 million in related costs consisting principally of severance charges. During 2012, we restructured certain administrative functions related to our CONMED Linvatec division. For the three and nine months ended September 30, 2012, we incurred $1.9 million and $3.4 million, respectively, in related costs consisting principally of severance charges, of which $1.4 million is accrued as of September 30, 2012.
During 2012, we incurred legal costs related to a contractual dispute with a former distributor. The dispute was resolved in the second quarter of 2012. For the nine months ended September 30, 2012, we incurred costs totaling $1.6 million.
During the nine months ended September 30, 2012, we incurred $0.7 million in costs associated with the purchase of the Company's former distributor in the Nordic region of Europe.
During the third quarter of 2012, we acquired Viking Systems Inc. as further described in Note 15. We incurred a total of $0.7 million in costs associated with the purchase.
Note 11 — Business segments and geographic areas
CONMED conducts its business through five principal operating segments, CONMED Endoscopic Technologies, CONMED Endosurgery, CONMED Electrosurgery, CONMED Linvatec and CONMED Patient Care. We believe each of our
segments are similar in the nature of their products, production processes, customer base, distribution methods and regulatory environment. Our CONMED Endosurgery, CONMED Electrosurgery and CONMED Linvatec operating segments also have similar economic characteristics and therefore qualify for aggregation. Our CONMED Patient Care and CONMED Endoscopic Technologies operating units do not qualify for aggregation since their economic characteristics do not meet the criteria for aggregation as a result of the lower overall operating margin in these segments.
CONMED Endosurgery, CONMED Electrosurgery and CONMED Linvatec consist of a single aggregated reportable segment comprising a complete line of endo-mechanical instrumentation for minimally invasive laparoscopic procedures, electrosurgical generators and related surgical instruments, arthroscopic instrumentation for use in orthopedic surgery and small bone, large bone and specialty powered surgical instruments. CONMED Patient Care product offerings include a line of vital signs and cardiac monitoring products as well as suction instruments & tubing for use in the operating room. CONMED Endoscopic Technologies product offerings include a comprehensive line of minimally invasive endoscopic diagnostic and therapeutic instruments used in procedures which require examination of the digestive tract.
The following is net sales information by product line and reportable segment:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2011 | | 2012 | | 2011 | | 2012 |
|
|
| |
|
| |
|
| |
|
|
Arthroscopy | $ | 69,384 |
| | $ | 76,605 |
| | $ | 215,449 |
| | $ | 243,853 |
|
Powered Surgical Instruments | 34,790 |
| | 36,063 |
| | 111,081 |
| | 111,783 |
|
CONMED Linvatec | 104,174 |
| | 112,668 |
| | 326,530 |
| | 355,636 |
|
CONMED Electrosurgery | 23,298 |
| | 22,623 |
| | 72,923 |
| | 69,557 |
|
CONMED Endosurgery | 17,676 |
| | 17,768 |
| | 54,707 |
| | 54,088 |
|
CONMED Linvatec, Endosurgery, |
| |
| |
| |
|
and Electrosurgery | 145,148 |
| | 153,059 |
| | 454,160 |
| | 479,281 |
|
CONMED Patient Care | 15,347 |
| | 15,241 |
| | 48,607 |
| | 46,841 |
|
CONMED Endoscopic Technologies | 12,319 |
| | 13,585 |
| | 36,733 |
| | 39,774 |
|
Total | $ | 172,814 |
| | $ | 181,885 |
| | $ | 539,500 |
| | $ | 565,896 |
|
Total assets, capital expenditures, depreciation and amortization information are impracticable to present by reportable segment because the necessary information is not available.
The following is a reconciliation between segment operating income and income before income taxes:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, |
| Nine months ended September 30, |
| 2011 | | 2012 | | 2011 | | 2012 |
| | | | | | | |
CONMED Endosurgery, Electrosurgery and Linvatec | $ | 21,607 |
| | $ | 18,753 |
| | $ | 66,411 |
| | $ | 60,332 |
|
CONMED Patient Care | (785 | ) | | (900 | ) | | (2,520 | ) | | (2,127 | ) |
CONMED Endoscopic Technologies | 520 |
| | 1,558 |
| | 685 |
| | 1,440 |
|
Corporate | (5,402 | ) | | (5,297 | ) | | (14,675 | ) | | (11,451 | ) |
Income from operations | 15,940 |
| | 14,114 |
| | 49,901 |
| | 48,194 |
|
|
|
| |
|
| |
|
| |
|
|
Amortization of debt discount | 1,131 |
| | — |
| | 3,338 |
| | — |
|
Interest expense | 1,670 |
| | 1,345 |
| | 5,182 |
| | 4,333 |
|
|
|
| |
|
| |
|
| |
|
|
Income before income taxes | $ | 13,139 |
| | $ | 12,769 |
| | $ | 41,381 |
| | $ | 43,861 |
|
Note 12 – Legal proceedings
From time to time, we are a defendant in certain lawsuits alleging product liability, patent infringement, or other claims incurred in the ordinary course of business. Likewise, from time to time, the Company may receive a subpoena from a government agency such as the Securities and Exchange Commission, Equal Employment Opportunity Commission, the Occupational Safety and Health Administration, the Department of Labor, the Treasury Department, or other federal and state agencies or foreign governments or government agencies. These subpoenas may or may not be routine inquiries, or may begin as routine inquiries and over time develop into enforcement actions of various types. The product liability claims are generally covered by various insurance policies, subject to certain deductible amounts, maximum policy limits and certain exclusions in the respective policies or as required as a matter of law. In some cases we may be entitled to indemnification by third parties. When there is no insurance coverage, as would typically be the case primarily in lawsuits alleging patent infringement or in connection with certain government investigations, or indemnification obligations of a third party, we establish reserves sufficient to cover probable losses associated with such claims. We do not expect that the resolution of any pending claims or investigations 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 or investigations, 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.
Manufacturers of medical products may face exposure to significant product liability claims. To date, we have not experienced any product liability claims that have been material to our financial statements or condition, but any such claims arising in the future could have a material adverse effect on our business or results of operations. We currently maintain commercial product liability insurance of $25 million per incident and $25 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. In some jurisdictions environmental requirements may be 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 September 2012, Bonutti Skeletal Innovations, LLC filed a complaint in the United States District Court for the Middle District of Florida against CONMED and CONMED Linvatec. The Complaint asserts that certain CONMED Linvatec products infringe patents allegedly owned by Bonutti Skeletal Innovations. On the same day that it sued CONMED, Bonutti Skeletal Innovations sued several other orthopedic companies. CONMED and CONMED Linvatec believe that the products in question do not infringe the patents-in-suit, and CONMED and CONMED Linvatec intend to vigorously defend the claims.
Note 13 – New accounting pronouncements
In May 2011, the FASB issued new authoritative guidance to provide a consistent definition of fair value and ensure that fair value measurements and disclosure requirements are similar between GAAP and International Financial Reporting Standards. This guidance changes certain fair value measurement principles and enhances the disclosure requirements for fair value measurements. We adopted this guidance effective January 1, 2012. The implementation of this new guidance did not have a material impact on our consolidated financial statements.
In June 2011, the FASB amended its guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. We adopted this guidance effective January 1, 2012. The implementation of this new guidance did not have a material impact on our consolidated financial statements.
In September 2011, the FASB issued ASU 2011-08 which provides an entity the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test for goodwill impairment. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. The implementation of this new guidance did not have a material impact on our consolidated financial statements.
Note 14 – Restructuring
We incurred the following restructuring costs:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2011 | | 2012 | | 2011 | | 2012 |
|
|
| |
|
| |
|
| |
|
|
Facility consolidation costs | $ | 826 |
| | $ | 1,843 |
| | $ | 2,566 |
| | $ | 4,519 |
|
|
|
| |
|
| |
|
| |
|
|
Restructuring costs |
| |
| |
| |
|
included in cost of sales | $ | 826 |
| | $ | 1,843 |
| | $ | 2,566 |
| | $ | 4,519 |
|
|
|
| |
|
| |
|
| |
|
|
|
|
| |
|
| |
|
| |
|
|
Administrative |
| |
| |
| |
|
consolidation costs | $ | — |
| | $ | 1,940 |
| | $ | 792 |
| | $ | 3,444 |
|
|
|
| |
|
| |
|
| |
|
|
Restructuring costs |
| |
| |
| |
|
included in other expense | $ | — |
| | $ | 1,940 |
| | $ | 792 |
| | $ | 3,444 |
|
During 2011 and 2012, we continued our operational restructuring plan which includes the transfer of additional production lines from manufacturing facilities located in the United States to our manufacturing facility in Chihuahua, Mexico. During the second quarter of 2012, we began the consolidation of our Finland operations into our Largo, Florida and Utica, New York manufacturing facilities. We incurred $0.8 million and $2.6 million in costs associated with the restructuring during the three and nine months ended September 30, 2011, respectively. We incurred $1.8 million and $4.5 million in costs associated with the restructuring during the three and nine months ended September 30, 2012, respectively, of which we have recorded an accrual of $0.5 million at September 30, 2012. These costs were charged to cost of goods sold and include severance and other charges associated with the transfer of production to Mexico and consolidation of our Finland operations.
Restructuring costs included in other expense are described more fully in Note 10.
Note 15 - Business acquisition
On September 24, 2012, we purchased Viking Systems, Inc. ("Viking acquisition") for approximately $22.5 million in cash, of which $3.4 million was accrued as of September 30, 2012. Viking Systems, Inc. developed, manufactured and marketed visualization solutions for minimally invasive surgeries.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as a result of the Viking acquisition. The allocation of purchase price is preliminary and therefore subject to adjustment in future periods.
|
| | | | |
Cash | | $ | 390 |
|
Accounts receivable | | 1,349 |
|
Inventory | | 2,562 |
|
Prepaid expenses and other current assets | | 151 |
|
Property, plant & equipment, net | | 117 |
|
Customer relationships | | 1,725 |
|
Patents | | 1,100 |
|
Goodwill | | 22,004 |
|
Total assets acquired | | 29,398 |
|
| |
|
Accounts payable | | 1,324 |
|
Deferred income taxes | | 1,090 |
|
Other liabilities | | 4,456 |
|
Total liabilities assumed | | 6,870 |
|
| | |
Net assets acquired | | $ | 22,528 |
|
The Viking acquisition did not have a material impact on our results of operations or earnings per share in the quarterly period ended September 30, 2012.
|
| | |
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, 2011 and the following, among others:
| |
• | general economic and business conditions; |
| |
• | changes in foreign exchange and interest rates; |
| |
• | cyclical customer purchasing patterns due to budgetary and other constraints; |
| |
• | changes in customer preferences; |
| |
• | the introduction and acceptance of new products; |
| |
• | the ability to evaluate, finance and integrate acquired businesses, products and companies; |
| |
• | changes in business strategy; |
| |
• | the availability and cost of materials; |
| |
• | the possibility that United States or foreign regulatory and/or administrative agencies may initiate enforcement actions against us or our distributors; |
| |
• | future levels of indebtedness and capital spending; |
| |
• | quality of our management and business abilities and the judgment of our personnel; |
| |
• | the availability, terms and deployment of capital; |
| |
• | the risk of litigation, especially patent litigation as well as the cost associated with patent and other litigation; |
| |
• | the risk of a lack of allograft tissue 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; and |
| |
• | changes in regulatory 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, 2011 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.
Overview:
CONMED Corporation (“CONMED”, the “Company”, “we” or “us”) is a medical technology company with six principal product lines. These product lines and the percentage of consolidated revenues associated with each, are as follows:
|
| | | | | | | | | | | |
| Three months ended September 30, |
| Nine months ended September 30, |
| 2011 |
| 2012 |
| 2011 |
| 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
Arthroscopy | 40.2 | % |
| 42.1 | % |
| 39.9 | % |
| 43.1 | % |
Powered Surgical Instruments | 20.1 |
|
| 19.8 |
|
| 20.6 |
|
| 19.7 |
|
Electrosurgery | 13.5 |
|
| 12.4 |
|
| 13.5 |
|
| 12.3 |
|
Endosurgery | 10.2 |
|
| 9.8 |
|
| 10.2 |
|
| 9.6 |
|
Patient Care | 8.9 |
|
| 8.4 |
|
| 9.0 |
|
| 8.3 |
|
Endoscopic Technologies | 7.1 |
|
| 7.5 |
|
| 6.8 |
|
| 7.0 |
|
Consolidated net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
A significant amount of our products are used in surgical procedures with the majority of our revenues derived from the sale of single-use products. 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 represent a significant portion of our business. During the three and nine months ended September 30, 2012, international sales approximated 49.1% and 50.2%, respectively, of total net sales.
Business Environment and Opportunities
The aging of the worldwide population along with lifestyle changes, continued cost containment pressures on healthcare systems and the desire of clinicians and administrators to use less invasive (or noninvasive) procedures are important trends which are driving the long-term growth in our industry. We believe that with our broad product offering of high quality surgical and patient care products, we can capitalize on this growth for the benefit of the Company and our shareholders.
In order to further our growth prospects, we have historically used strategic business acquisitions and exclusive distribution relationships to continue to diversify our product offerings, increase our market share and realize economies of scale.
We have a variety of research and development initiatives focused in each of our principal product lines as continued innovation and commercialization of new proprietary products and processes are essential elements of our long-term growth strategy. Our reputation as an innovator is exemplified by recent new product introductions such as the PressFT™ Suture Anchor, absorbable and non-absorbable implants for use in arthroscopic stabilization procedures of the shoulder and labral repair of the hip; Y-Knot™ All-suture Anchor, a suture anchor implant comprised entirely of high strength suture for instability repair procedures in the shoulder; the Sequent™ Meniscal Repair System, which offers suture-locking implant cleats that will provide a knotless repair and allow the surgeon to complete an entire meniscal repair with one device without leaving the joint; XACTPIN™ Graft Passing Guide Pin is specifically engineered for fast, accurate and minimally invasive referencing of the Aperture to Cortex length; Hip Preservation System™, from access to repair, the system is committed to optimizing patient outcomes by providing a comprehensive solution of joint preserving instrumentation and techniques; Bullseye® Anatomic Cruciate Reconstruction System; the Hall® Lithium Power Battery System offers lithium ion battery technology which will provide greater power and longevity during surgery when compared to present batteries and the Altrus® Thermal Tissue Fusion System which utilizes thermal energy to seal, cut, grasp, and dissect vessels up to 7mm in size utilizing a closed feedback loop between the energy source and the single-use handpiece to precisely control the desired effect on tissue.
Business Challenges
Significant volatility in the financial markets and foreign currency exchange rates and depressed economic conditions in both domestic and international markets, have presented significant business challenges since the second half of 2008. While we returned to revenue growth in 2010, 2011 and the first nine months of 2012 and are cautiously optimistic that the domestic economic environment is improving, conditions in Europe and elsewhere may present significant business challenges for the Company, and there can be no assurance that improvement in the overall economic environment will be sustained. We will continue to monitor and manage the impact of the overall economic environment on the Company.
Over the past few years we successfully completed certain of our operational restructuring plans whereby we consolidated manufacturing and distribution centers as well as restructured certain of our administrative functions. We continue to restructure both operations and administrative functions as necessary throughout the organization. However, we cannot be certain such activities will be completed in the estimated time period or that planned cost savings will be achieved.
Our facilities are subject to periodic inspection by the United States Food and Drug Administration (“FDA”) and foreign regulatory agencies or notified bodies for, among other things, conformance to Quality System Regulation and Current Good Manufacturing Practice (“CGMP”) requirements and foreign or international standards. We are committed to the principles and strategies of systems-based quality management for improved CGMP compliance, operational performance and efficiencies through our Company-wide quality systems initiatives. However, there can be no assurance that our actions will ensure that we will not receive a warning letter or be the subject of other regulatory action, which may include consent decrees or fines, that we will not conduct product recalls or that we will not experience temporary or extended periods during which we may not be able to sell products in foreign countries.
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, 2011 describes significant accounting policies used in preparation of the consolidated financial statements. The most significant areas involving management judgments and estimates are described below and are considered by management to be critical to understanding the financial condition and results of operations of CONMED Corporation. There have been no significant changes in our critical accounting estimates during the nine months ended September 30, 2012.
Revenue Recognition
Revenue is recognized when title has been transferred to the customer which is at the time of shipment. Service fees earned for our marketing efforts related to sports medicine allograft tissue are recorded in accordance with the contractual terms of the agreement with Musculoskeletal Tissue Foundation ("MTF"). The following policies apply to our major categories of revenue transactions:
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• | Sales to customers are evidenced by firm purchase orders. Title and the risks and rewards of ownership are transferred to the customer when product is shipped under our stated shipping terms. Payment by the customer is due under fixed payment terms. |
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• | We place certain of our capital equipment with customers on a loaned basis in return for commitments to purchase related single-use products over time periods generally ranging from one to three years. In these circumstances, no revenue is recognized upon capital equipment shipment as the equipment is loaned and subject to return if certain minimum single-use purchases are not met. Revenue is recognized upon the sale and shipment of the related single-use products. The cost of the equipment is amortized over its estimated useful life. |
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• | Product returns are only accepted at the discretion of the Company and in accordance with our “Returned Goods Policy”. Historically the level of product returns has not been significant. We accrue for sales returns, rebates and allowances based upon an analysis of historical customer returns and credits, rebates, discounts and current market conditions. |
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• | Our terms of sale to customers generally do not include any obligations to perform future services. Limited warranties are provided for capital equipment sales and provisions for warranty are provided at the time of product sale based upon an analysis of historical data. |
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• | Amounts billed to customers related to shipping and handling have been included in net sales. Shipping and handling costs are included in selling and administrative expense. |
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• | We sell to a diversified base of customers around the world and, therefore, believe there is no material concentration of credit risk. |
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• | We assess the risk of loss on accounts receivable and adjust the allowance for doubtful accounts based on this risk assessment. Historically, losses on accounts receivable have not been material. Management believes that the allowance for doubtful accounts of $1.2 million at September 30, 2012 is adequate to provide for probable losses resulting from accounts receivable. |
Inventory Valuation
We write-off excess and obsolete inventory resulting from the inability to sell our products at prices in excess of current carrying costs. The markets in which we operate are highly competitive, with new products and surgical procedures introduced
on an on-going basis. Such marketplace changes may result in our products becoming obsolete. We make estimates regarding the future recoverability of the costs of our products and record a provision for excess and obsolete inventories based on historical experience, expiration of sterilization dates and expected future trends. If actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, additional inventory write-downs may be required.
Goodwill and Intangible Assets
We have a history of growth through acquisitions. 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 primarily represent allocations of purchase price to identifiable intangible assets of acquired businesses. We have accumulated goodwill of $256.8 million and other intangible assets of $192.7 million as of September 30, 2012.
In accordance with FASB guidance, goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to at least annual impairment testing. It is our policy to perform our annual impairment testing in the fourth quarter. The identification and measurement of goodwill impairment involves the estimation of the fair value of our reporting units. Estimates of fair value are based on the best information available as of the date of the assessment, which primarily incorporate management assumptions about expected future cash flows and other valuation techniques. Future cash flows may be affected by changes in industry or market conditions or the rate and extent to which anticipated synergies or cost savings are realized with newly acquired entities. The Company evaluates EBITDA multiples to value its reporting units relative to the Company's market capitalization plus a market-based control premium. The market-based control premium is defined as the premiums paid by acquirers of comparable businesses. The sum of the individual reporting units' estimated market values are compared to the Company's market value, with the sum of the individual values typically being larger than the market value of the Company. The Company considers premiums paid by acquirers of comparable businesses to determine the reasonableness of the implied control premium.
During the fourth quarter of 2011, we completed our goodwill impairment testing with data as of October 1, 2011. For our CONMED Electrosurgery, CONMED Endosurgery and CONMED Linvatec operating units, our impairment testing utilized CONMED Corporation’s EBITDA multiple adjusted for a market-based control premium with the resultant fair values exceeding carrying values by 42% to 107%.
We estimated the fair value of the CONMED Patient Care operating unit utilizing both a market-based approach and an income approach. Under the income approach, we utilized a discounted cash flow valuation methodology and measured the goodwill impairment in accordance with ASC 350. The first step of the impairment test determined the carrying value exceeded fair value and therefore we proceeded to Step 2. Under Step 2, we calculated the amount of impairment loss by measuring the amount the carrying value of goodwill exceeded the implied fair value of the goodwill. We determined the goodwill of our CONMED Patient Care operating unit was impaired as a result of lower future earnings due to pricing pressures in a number of our product lines and consequently we recorded a goodwill impairment charge of $60.3 million in the fourth quarter of 2011 to reduce the carrying amount of the unit's goodwill to its implied fair value.
Intangible assets with a finite life are amortized over the estimated useful life of the asset and are evaluated each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. Intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The carrying amount of an intangible asset subject to amortization is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset. An impairment loss is recognized by reducing the carrying amount of the intangible asset to its current fair value.
Customer relationship assets arose principally as a result of the 1997 acquisition of Linvatec Corporation. These assets represent the acquisition date fair value of existing customer relationships based on the after-tax income expected to be derived during their estimated remaining useful life. The useful lives of these customer relationships were not and are not limited by contract or any economic, regulatory or other known factors. The estimated useful life of the Linvatec customer relationship assets was determined as of the date of acquisition as a result of a study of the observed pattern of historical revenue attrition during the 5 years immediately preceding the acquisition of Linvatec Corporation. This observed attrition pattern was then applied to the existing customer relationships to derive the future expected retirement of the customer relationships. This analysis indicated an annual attrition rate of 2.6%. Assuming an exponential attrition pattern, this equated to an average remaining useful life of approximately 38 years for the Linvatec customer relationship assets. Customer relationship intangible assets arising as a result of other business acquisitions are being amortized over a weighted average life of 15 years. The weighted average life for customer relationship assets in aggregate is 33 years.
We evaluate the remaining useful life of our customer relationship intangible assets each reporting period in order to determine whether events and circumstances warrant a revision to the remaining period of amortization. In order to further evaluate the remaining useful life of our customer relationship intangible assets, we perform an analysis and assessment of actual customer attrition and activity as events and circumstances warrant. This assessment includes a comparison of customer activity since the acquisition date and review of customer attrition rates. In the event that our analysis of actual customer attrition rates indicates a level of attrition that is in excess of that which was originally contemplated, we would change the estimated useful life of the related customer relationship asset with the remaining carrying amount amortized prospectively over the revised remaining useful life.
We test our customer relationship assets for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Factors specific to our customer relationship assets which might lead to an impairment charge include a significant increase in the annual customer attrition rate or otherwise significant loss of customers, significant decreases in sales or current-period operating or cash flow losses or a projection or forecast of losses. We do not believe that there have been events or changes in circumstances which would indicate the carrying amount of our customer relationship assets might not be recoverable.
Pension Plan
We sponsor a defined benefit pension plan (“the plan”) covering substantially all our United States-based employees. The plan was frozen effective May 14, 2009. Major assumptions used in accounting for the plan include the discount rate, expected return on plan assets and expected mortality. Assumptions are determined based on Company data and appropriate market indicators, and are evaluated annually as of the plan’s measurement date. A change in any of these assumptions would have an effect on net periodic pension costs reported in the consolidated financial statements.
The weighted-average discount rate used to measure pension liabilities and costs is set by reference to the Citigroup Pension Liability Index. However, this index gives only an indication of the appropriate discount rate because the cash flows of the bonds comprising the index do not precisely match the projected benefit payment stream of the plan. For this reason, we also consider the individual characteristics of the plan, such as projected cash flow patterns and payment durations, when setting the discount rate. The rates used in determining 2011 and 2012 pension expense are 5.41% and 4.30%, respectively.
We have used an expected rate of return on pension plan assets of 8.0% for purposes of determining the net periodic pension benefit cost. In determining the expected return on pension plan assets, we consider the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance. In addition, we consult with financial and investment management professionals in developing appropriate targeted rates of return.
For the three and nine months ending September 30, 2012 we recorded pension expense of $0.5 million and $1.6 million, respectively. Pension expense in 2012 is expected to be $2.1 million compared to expense of $1.0 million in 2011. We are required and expect to make $2.7 million in contributions to our pension plan for the 2012 plan year. We contributed $1.3 million during the second and third quarters of 2012 and expect to contribute the remaining $1.4 million during the remainder of 2012 and the first quarter of 2013.
See Note 9 to the Consolidated Condensed Financial Statements for further discussion.
Stock Based Compensation
All share-based payments to employees, including grants of employee stock options, restricted stock units, performance share units and stock appreciation rights are recognized in the financial statements based at their fair values. Compensation expense is generally recognized using a straight-line method over the vesting period. Compensation expense for performance share units is recognized using the graded vesting method.
Income Taxes
The recorded future tax benefit arising from deductible temporary differences and tax carryforwards is approximately $34.3 million at September 30, 2012. Management believes that earnings during the periods when the temporary differences become deductible will be sufficient to realize the related future income tax benefits.
The Company is subject to taxation in the United States and various states and foreign jurisdictions. Taxing authority examinations can involve complex issues and may require an extended period of time to resolve. Our Federal income tax returns
have been examined by the Internal Revenue Service (“IRS”) for calendar years ending through 2010. Tax years subsequent to 2010 are subject to future examination.
Results of Operations
The following table presents, as a percentage of net sales, certain categories included in our consolidated statements of income for the periods indicated:
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| Three months ended September 30, | | Nine months ended September 30, |
| 2011 | | 2012 | | 2011 | | 2012 |
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Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of sales | 47.2 |
| | 46.2 |
| | 48.4 |
| | 47.2 |
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Gross profit | 52.8 |
| | 53.8 |
| | 51.6 |
| | 52.8 |
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Selling and administrative expense | 39.5 |
| | 40.7 |
| | 38.2 |
| | 39.3 |
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Research and development expense | 4.1 |
| | 3.9 |
| | 4.0 |
| | 3.8 |
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Other expense | — |
| | 1.5 |
| | 0.1 |
| | 1.1 |
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Income from operations | 9.2 |
| | 7.7 |
| | 9.3 |
| | 8.6 |
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Amortization of bond discount | 0.6 |
| | — |
| | 0.6 |
| | — |
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Interest expense | 1.0 |
| | 0.7 |
| | 1.0 |
| | 0.8 |
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Income before income taxes | 7.6 |
| | 7.0 |
| | 7.7 |
| | 7.8 |
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Provision for income taxes | 2.9 |
| | 1.9 |
| | 2.9 |
| | 2.5 |
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Net income | 4.7 | % | | 5.1 | % | | 4.8 | % | | 5.3 | % |
Three months ended September 30, 2012 compared to three months ended September 30, 2011
Sales for the quarterly period ended September 30, 2012 were $181.9 million , an increase of $9.1 million (5.3%) compared to sales of $172.8 million in the same period a year ago with increases in our Arthroscopy, Powered Instruments, Endosurgery and Endoscopic Technologies product lines. The distribution agreement with Musculoskeletal Tissue Foundation (“MTF”) accounted for a 3.7% quarterly sales increase. In local currency, excluding the effects of the hedging program, sales increased 6.0%. Sales of capital equipment decreased $0.4 million (-1.1%) to $36.9 million in the quarterly period ended September 30, 2012 from $37.3 million in the same period a year ago; sales of single-use products increased $9.5 million (7.0%) to $145.0 million in the quarterly period ended September 30, 2012 from $135.5 million in the same period a year ago. On a local currency basis, excluding the effects of our hedging program, sales of capital equipment increased 0.3% and single-use products increased 7.6%.
Cost of sales increased to $84.0 million in the quarterly period ended September 30, 2012 as compared to $81.5 million in the same period a year ago on overall increases in sales volumes as described above. Gross profit margins increased 1.0 percentage points to 53.8% in the quarterly period ended September 30, 2012 as compared to 52.8% in the same period a year ago. The increase in gross profit margins of 1.0 percentage point is primarily a result of the distribution agreement with MTF offset by costs associated with the restructuring of operations and the unfavorable impact of foreign currency exchange rates when compared to foreign currency exchange rates in the same period a year ago.
Selling and administrative expense increased to $74.1 million in the quarterly period ended September 30, 2012 as compared to $68.4 million in the same period a year ago. Selling and administrative expense as a percentage of net sales increased to 40.7% in the quarterly period ended September 30, 2012 as compared to 39.5% in the same period a year ago. This increase of 1.2 percentage points is attributable to higher selling expenses related to the distribution agreement with MTF.
Research and development expense totaled $7.1 million in the quarterly period ended September 30, 2012 as compared to $7.0 million in the same period a year ago. As a percentage of net sales, research and development expense decreased to 3.9% in the quarterly period ending September 30, 2012 compared to 4.1% in the same period a year ago. The decrease of 0.2 percentage points is mainly a result of lower spending as a percentage of sales across our product lines.
As discussed in Note 10 to the Consolidated Condensed Financial Statements, other expense in the quarterly period ended September 30, 2012 consisted of a $1.9 million charge related to administrative consolidation expenses in our CONMED Linvatec division and $0.7 million in costs associated with the purchase of Viking Systems, Inc..
Amortization of debt discount was $1.1 million in the quarterly period ended September 30, 2011.
Interest expense in the quarterly period ended September 30, 2012 was $1.3 million compared to $1.7 million in the same period a year ago. The decrease in interest expense is due to lower weighted average interest rates on higher weighted average borrowings outstanding in the quarterly period ended September 30, 2012 as compared to the same period a year ago. The weighted average interest rates on our borrowings decreased to 3.09% in the quarterly period ended September 30, 2012 as compared to 3.79% in the same period a year ago.
A provision for income taxes has been recorded at an effective tax rate of 27.0% for the quarterly period ended September 30, 2012 compared to the 37.5% effective tax rate recorded in the same period a year ago. The effective tax rate for the quarterly period ended September 30, 2012 is lower than that recorded in the same period a year ago as a result of higher earnings in foreign jurisdictions where the tax rates are lower than the statutory federal rate and due to tax benefits recorded in the third quarter of 2012 as a result of determinations received from multiple taxing authorities. 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, 2011, Note 6 to the Consolidated Financial Statements.
Nine months ended September 30, 2012 compared to the nine months ended September 30, 2011
Sales for the nine months ended September 30, 2012 were $565.9 million, an increase of $26.4 million (4.9%) compared to sales of $539.5 million in the same period a year ago with increases in our Arthroscopy, Powered Instruments and Endoscopic Technologies product lines. The distribution agreement with Musculoskeletal Tissue Foundation (“MTF”) accounted for 3.9% of the 4.9% increase. In local currency, excluding the effects of the hedging program, sales increased 5.1%. Sales of capital equipment decreased $6.5 million (5.5%) to $112.7 million in the nine months ended September 30, 2012 from $119.2 million in the same period a year ago; sales of single-use products increased $32.9 million (7.8%) to $453.2 million in the nine months ended September 30, 2012 from $420.3 million in the same period a year ago. On a local currency basis, excluding the effects of our hedging program, sales of capital equipment decreased 5.0% while single-use products increased 7.9%. We believe the overall decline in capital sales is driven by capital purchasing constraints in hospitals due to the depressed economic conditions.
Cost of sales increased to $267.3 million in the nine months ended September 30, 2012 as compared to $261.0 million in the same period a year ago on overall increases in sales volumes as described above. Gross profit margins increased 1.2 percentage points to 52.8% in the nine months ended September 30, 2012 as compared to 51.6% in the same period a year ago. The increase in gross profit margins of 1.2 percentage points is primarily a result of the distribution agreement with MTF and product mix offset by unfavorable foreign exchange rates on sales and higher restructuring charges than the same period a year ago.
Selling and administrative expense increased to $222.6 million in the nine months ended September 30, 2012 as compared to $206.3 million in the same period a year ago. Selling and administrative expense as a percentage of net sales increased to 39.3% in the nine months ended September 30, 2012 as compared to 38.2% in the same period a year ago. This increase of 1.1 percentage points is attributable to higher selling expenses mainly related to our MTF distribution agreement.
Research and development expense totaled $21.4 million in the nine months ended September 30, 2012 as compared to $21.5 million in the same period a year ago. As a percentage of net sales, research and development expense decreased to 3.8% in the nine months ended September 30, 2012 compared to 4.0% in the same period a year ago. The decrease of 0.2 percentage points is mainly a result of lower spending on our ECOM project in our CONMED Patient Care division.
As discussed in Note 10 to the Consolidated Condensed Financial Statements, other expense in the nine months ended September 30, 2012 consisted of a $3.4 million charge related to administrative consolidation expenses in our CONMED Linvatec division, $0.7 million in costs associated with the acquisition of our former distributor in the Nordic region of Europe, $1.6 million in costs associated with a contractual dispute with a former distributor and $0.7 million in costs associated with the purchase of Viking Systems, Inc.. Other expense in the nine months ended September 30, 2011 consisted of a $0.8 million charge related to the consolidation of certain of our administrative functions in our Utica, NY facility.
Amortization of debt discount was $3.3 million in the nine months ended September 30, 2011.
Interest expense in the nine months ended September 30, 2012 was $4.3 million compared to $5.2 million in the same period a year ago. The decrease in interest expense is due to lower weighted average interests rates on higher weighted average
borrowings outstanding in the nine months ended September 30, 2012 as compared to the same period a year ago. The weighted average interest rates on our borrowings decreased to 3.02% in the nine months ended September 30, 2012 as compared to 3.71% in the same period a year ago.
A provision for income taxes has been recorded at an effective tax rate of 32.6% for the nine months ended September 30, 2012 compared to the 37.4% effective tax rate recorded in the same period a year ago. The effective tax rate for the nine months ended September 30, 2012 is lower than that recorded in the same period a year ago as a result of higher earnings in foreign jurisdictions where the tax rates are lower than the statutory federal rate and due to tax benefits recorded in the second quarter of 2012 as a result of examination results and tax returns filed with multiple taxing authorities and tax benefits recorded in the third quarter of 2012 as a result of determinations received from multiple taxing authorities. 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, 2011, Note 6 to the Consolidated Financial Statements.
Operating Segment Results:
Segment information is prepared on the same basis that we review financial information for operational decision-making purposes. CONMED conducts its business through five principal operating segments, CONMED Endoscopic Technologies, CONMED Endosurgery, CONMED Electrosurgery, CONMED Linvatec and CONMED Patient Care. We believe each of our segments are similar in the nature of their products, production processes, customer base, distribution methods and regulatory environment. Our CONMED Endosurgery, CONMED Electrosurgery and CONMED Linvatec operating segments also have similar economic characteristics and therefore qualify for aggregation. Our CONMED Patient Care and CONMED Endoscopic Technologies operating units do not qualify for aggregation since their economic characteristics do not meet the criteria for aggregation as a result of the lower overall operating margin in these segments.
The following tables summarize the Company’s results of operations by segment for the three and nine months ended September 30, 2011 and 2012.
CONMED Linvatec, CONMED Electrosurgery and CONMED Endosurgery
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| Three months ended September 30, | | Nine months ended September 30, |
| 2011 | | 2012 | | 2011 | | 2012 |
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Net sales | $ | 145,148 |
| | $ | 153,059 |
| | $ | 454,160 |
| | $ | 479,281 |
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Income from operations | 21,607 |
| | 18,753 |
| | 66,411 |
| | 60,332 |
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Operating margin | 14.9 | % | | 12.3 | % | | 14.6 | % | | 12.6 | % |
Product offerings include capital equipment such as electrosurgical generators, video systems, small bone, large bone and specialty hand pieces, and arthroscopic instrumentation for use in orthopedic surgery. Single-use product offerings include a complete line of endo-mechanical instrumentation for minimally invasive laparoscopic procedures, electrosurgical single-use products including pencils and ground pads and orthopedic single-use products such as burs, blades, and implants.
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• | Arthroscopy sales increased $7.2 million (10.4%) in the quarter ended September 30, 2012 to $76.6 million from $69.4 million in the same period a year ago mainly due to the distribution agreement with MTF and the acquisition of Viking Systems, Inc.. The distribution agreement with MTF accounted for 9.0 % of the 10.4% increase. In local currency, excluding the effects of the hedging program, sales increased 11.5%. Sales of capital equipment increased $0.6 million (4.0%) to $15.6 million in the third quarter of 2012 from $15.0 million in the same period a year ago; sales of single-use products increased $6.6 million (12.1%) to $61.0 million in the third quarter of 2012 from $54.4 million in the same period a year ago. On a local currency basis, excluding the effects of the hedging program, sales of capital equipment increased 6.0% while single-use products increased 13.0%. Arthroscopy sales increased $28.4 million (13.2%) in the nine months ended September 30, 2012 to $243.9 million from $215.5 million in the same period a year ago mainly due to the distribution agreement with MTF and higher procedure specific product sales. The distribution agreement with MTF accounted for 9.7% of the 13.2% increase. In local currency, excluding the effects of the hedging program, sales |
increased 13.5%. Sales of capital equipment increased $0.3 million (0.7%) to $46.2 million in the nine months ended September 30, 2012 from $45.9 million in the same period a year ago; sales of single-use products increased $28.1 million (16.6%) to $197.7 million in the nine months ended September 30, 2012 from $169.6 million in the same period a year ago. On a local currency basis, excluding the effects of the hedging program, sales of capital equipment increased 1.3% while single-use products increased 16.7%.
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• | Powered surgical instrument sales increased $1.3 million (3.7%) in the quarterly period ended September 30, 2012 to $36.1 million from $34.8 million in the same period a year ago mainly due to higher sales of our large bone burs and blades and small bone hand piece products. In local currency, excluding the effects of the hedging program, sales increased 4.9%. Sales of capital equipment increased $0.3 million (1.9%) to $16.4 million in the third quarter of 2012 from $16.1 million in the same period a year ago; sales of single-use products increased $1.0 million (5.3%) in the third quarter of 2012 to $19.7 million from $18.7 million in the same period a year ago. On a local currency basis, excluding the effects of the hedging program, sales of capital equipment increased 3.1% and single-use products increased 6.4%. Powered surgical instrument sales increased $0.7 million (0.6%) in the nine months ended September 30, 2012 to $111.8 million from $111.1 million in the same period a year ago mainly due to higher sales of our large bone burs and blades and small bone hand piece products. In local currency, excluding the effects of the hedging program, sales increased 0.9%. Sales of capital equipment decreased $2.6 million (-5.0%) to $49.7 million in the nine months ended September 30, 2012 from $52.3 million in the same period a year ago; sales of single-use products increased $3.3 million (5.6%) in the nine months ended 2012 to $62.1 million from $58.8 million in the same period a year ago. On a local currency basis, excluding the effects of the hedging program, sales of capital equipment decreased 4.5% and single-use products increased 5.7%. We believe the overall decline in capital sales is due to a very strong performance in the first half of 2011 making for a difficult comparison to sales in 2012. |
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• | Electrosurgery sales decreased $0.7 million (-3.0%) in the quarterly period ended September 30, 2012 to $22.6 million from $23.3 million in the same period a year ago mainly due to lower generator sales offset by sales of our new vessel sealing products and increased sales of our smoke management products. In local currency, excluding the effects of the hedging program, sales decreased 3.0%. Sales of capital equipment decreased $1.3 million (-21.0%) to $4.9 million in the third quarter of 2012 from $6.2 million in the same period a year ago; sales of single-use products increased $0.6 million (3.5%) to $17.7 million in the third quarter of 2012 from $17.1 million in the same period a year ago. On a local currency basis, excluding the effects of our hedging program, sales of capital equipment decreased 21.0% while single-use products increased 3.5%. We believe the overall decline in capital sales is due to capital purchasing constraints in hospitals due to the depressed economic conditions. Electrosurgery sales decreased $3.4 million (-4.7%) in the nine months ended September 30, 2012 to $69.5 million from $72.9 million in the same period a year ago mainly due to lower generator and pencil sales offset by sales of our new vessel sealing products and increased sales of our smoke management products. In local currency, excluding the effects of the hedging program, sales decreased 4.8%. Sales of capital equipment decreased $4.2 million (-20.0%) to $16.8 million in the nine months ended September 30, 2012 from $21.0 million in the same period a year ago; sales of single-use products increased $0.8 million (1.5%) to $52.7 million in the nine months ended September 30, 2012 from $51.9 million in the same period a year ago. On a local currency basis, excluding the effects of our hedging program, sales of capital equipment decreased 19.9% while single-use products increased 1.3%. We believe the overall decline in capital sales is due to a very strong performance in the first half of 2011 making for a difficult comparison to sales in 2012 as well as capital purchasing constraints in hospitals due to the depressed economic conditions. |
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• | Endosurgery sales remained relatively flat with a $0.1 million (0.6%) increase in the quarterly period ended September 30, 2012 to $17.8 million compared to $17.7 million in the same period a year ago. In local currency, excluding the effects of the hedging program, sales increased 1.1%. Endosurgery sales decreased $0.6 million (-1.1%) in the nine months ended September 30, 2012 to $54.1 million compared to $54.7 million in the same period a year ago mainly due to decreased sales of our trocars and hand held instruments. In local currency, excluding the effects of the hedging program, sales decreased 1.1%. |
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• | Operating margins as a percentage of net sales decreased 2.6% percentage points to 12.3% in the quarterly period ended September 30, 2012 compared to 14.9% in the same period a year ago principally as a result of administrative consolidation expenses in our CONMED Linvatec division, higher selling expenses primarily related to the distribution agreement with MTF and costs associated with the purchase of Viking Systems, Inc.. These increases are offset by higher gross margins due to the distribution agreement with MTF. |
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• | Operating margins as a percentage of net sales decreased 2.0% percentage points to 12.6% in the nine months ended September 30, 2012 compared to 14.6% in the same period a year ago principally as a result of administrative consolidation expenses in our CONMED Linvatec division, costs associated with the acquisition of our former distributor in the Nordic |
region of Europe, costs associated with a contractual dispute with a former distributor, higher selling expenses primarily related to the distribution agreement with MTF and costs associated with the purchase of Viking Systems, Inc.. These increases are offset by higher gross margins due to the distribution agreement with MTF.
CONMED Patient Care
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| Three months ended September 30, |
| Nine months ended September 30, |
| 2011 | | 2012 | | 2011 | | 2012 |
| | | | | | | |
Net sales | $ | 15,347 |
|
| $ | 15,241 |
|
| $ | 48,607 |
|
| $ | 46,841 |
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Income (loss) from operations | (785 | ) |
| (900 | ) |
| (2,520 | ) |
| (2,127 | ) |
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Operating margin | (5.1 | )% |
| (5.9 | )% |
| (5.2 | )% |
| (4.5 | )% |
Product offerings include a line of vital signs and cardiac monitoring products including pulse oximetry equipment and sensors, ECG electrodes and cables, cardiac defibrillation and pacing pads and blood pressure cuffs. We also offer a complete line of single-use suction instruments and tubing for use in the operating room, as well as a line of IV products.
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• | Patient Care sales remained relatively flat with a $0.1 million (-0.7%) decrease in the quarter ended September 30, 2012 to $15.2 million from $15.3 million in the same period a year ago. In local currency, excluding the effects of the hedging program, sales decreased 0.6%. Patient Care sales decreased $1.8 million (-3.7%) in the nine months ended September 30, 2012 to $46.8 million from $48.6 million in the same period a year ago mainly due to decreased sales of ECG electrodes and suction instruments. In local currency, excluding the effects of the hedging program, sales decreased 3.7%. |
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• | Operating margins as a percentage of net sales decreased 0.8% percentage points to -5.9% for the quarter ended September 30, 2012 compared to -5.1% in the same period a year ago principally due to higher research and development expense (2.4 percentage points) offset by lower selling and administrative expenses (1.6 percentage points). |
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• | Operating margins as a percentage of net sales increased 0.7% percentage points to -4.5% for the nine months ended September 30, 2012 compared to -5.2% in the same period a year ago principally as a result of 2011 including administrative restructuring charges (1.2 percentage points) and lower research and development expense (1.4 percentage points) offset by lower gross margins as a result of lower sales volumes (1.5 percentage points) and higher selling expenses (0.4 percentage points). |
CONMED Endoscopic Technologies
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| Three months ended September 30, |
| Nine months ended September 30, |
| 2011 | | 2012 | | 2011 | | 2012 |
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Net sales | $ | 12,319 |
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| $ | 13,585 |
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| $ | |