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 that provides surgical devices and equipment for minimally invasive procedures. The Company’s products 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. The information herein reflects all normal recurring material adjustments, which are, in the opinion of management, necessary for the fair statements of the results for the periods presented. The consolidated condensed financial statements herein consist of all wholly-owned domestic and foreign subsidiaries with all significant intercompany transactions eliminated. Results for the period ended
June 30, 2017
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2017
.
The consolidated condensed financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes for the year ended
December 31, 2016
included in our Annual Report on Form 10-K.
Note 3 - Business Acquisition
On January 4, 2016, we acquired all of the stock of SurgiQuest, Inc. ("SurgiQuest") for
$257.7 million
in cash (based on an aggregate purchase price of
$265 million
as adjusted pursuant to the merger agreement governing the acquisition). SurgiQuest develops, manufactures and markets the AirSeal
®
System, the first integrated access management technology for use in laparoscopic and robotic procedures. This proprietary and differentiated access system is complementary to our current advanced surgical offering. The acquisition was funded through a combination of cash on hand and long-term borrowings.
The unaudited pro forma information for the
three and six months ended
June 30, 2016
, assuming SurgiQuest occurred as of January 1, 2015 are presented below. This information has been prepared for comparative purposes only and does not purport to be indicative of the results of operations which actually would have resulted had the SurgiQuest acquisition occurred on the dates indicated, or which may result in the future.
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
Six Months Ended
June 30, 2016
|
Net sales
|
$
|
193,433
|
|
|
$
|
374,634
|
|
Net income
|
6,337
|
|
|
12,659
|
|
These pro forma results include certain adjustments, primarily due to increases in amortization expense due to fair value adjustments of intangible assets, increases in interest expense due to additional borrowings incurred to finance the acquisition, and acquisition related costs including transaction costs such as legal, accounting, valuation and other professional services as well as integration costs such as severance and retention.
Acquisition related costs excluded from the determination of pro forma net income for the
three and six months ended
June 30, 2016
totaled
$5.0 million
and
$14.0 million
, respectively.
Net sales associated with SurgiQuest of
$18.5 million
and
$31.2 million
have been recorded in the consolidated condensed statements of comprehensive income for the
three and six months ended
June 30, 2016
. It is impracticable to determine the earnings recorded in the consolidated condensed statements of comprehensive income associated with the SurgiQuest acquisition for the
three and six months ended
June 30, 2016
as these amounts are not separately measured.
On July 3, 2017, the Company completed an acquisition with a total cash purchase price of
$4.4 million
. We are currently assessing the accounting implications.
Note 4 – Comprehensive Income
Comprehensive income consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income
|
$
|
6,139
|
|
|
$
|
2,884
|
|
|
$
|
1,594
|
|
|
$
|
619
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
Pension liability, net of income tax (income tax expense of $293 and $257 for the three months ended June 30, 2017 and 2016, respectively, and $586 and $514 for the six months ended June 30, 2017 and 2016, respectively)
|
501
|
|
|
438
|
|
|
1,001
|
|
|
876
|
|
Cash flow hedging gain (loss), net of income tax (income tax expense (benefit) of ($1,026) and $666 for the three months ended June 30, 2017 and 2016, respectively, and ($1,522) and ($633) for the six months ended June 30, 2017 and 2016, respectively)
|
(1,751
|
)
|
|
1,137
|
|
|
(2,598
|
)
|
|
(1,080
|
)
|
Foreign currency translation adjustment
|
5,255
|
|
|
(3,114
|
)
|
|
9,223
|
|
|
1,717
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
$
|
10,144
|
|
|
$
|
1,345
|
|
|
$
|
9,220
|
|
|
$
|
2,132
|
|
Accumulated other comprehensive loss consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow
Hedging
Gain (Loss)
|
|
Pension
Liability
|
|
Cumulative
Translation
Adjustments
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Balance, December 31, 2016
|
$
|
1,546
|
|
|
$
|
(26,458
|
)
|
|
$
|
(33,614
|
)
|
|
$
|
(58,526
|
)
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications, net of tax
|
(2,247
|
)
|
|
—
|
|
|
9,223
|
|
|
6,976
|
|
Amounts reclassified from accumulated other comprehensive income (loss) before tax
a
|
(556
|
)
|
|
1,587
|
|
|
—
|
|
|
1,031
|
|
Income tax
|
205
|
|
|
(586
|
)
|
|
—
|
|
|
(381
|
)
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
(2,598
|
)
|
|
1,001
|
|
|
9,223
|
|
|
7,626
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2017
|
$
|
(1,052
|
)
|
|
$
|
(25,457
|
)
|
|
$
|
(24,391
|
)
|
|
$
|
(50,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow
Hedging
Gain (Loss)
|
|
Pension
Liability
|
|
Cumulative
Translation
Adjustments
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Balance, December 31, 2015
|
$
|
1,201
|
|
|
$
|
(25,982
|
)
|
|
$
|
(29,113
|
)
|
|
$
|
(53,894
|
)
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications, net of tax
|
(750
|
)
|
|
—
|
|
|
1,717
|
|
|
967
|
|
Amounts reclassified from accumulated other comprehensive income (loss) before tax
a
|
(524
|
)
|
|
1,390
|
|
|
—
|
|
|
866
|
|
Income tax
|
194
|
|
|
(514
|
)
|
|
—
|
|
|
(320
|
)
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
(1,080
|
)
|
|
876
|
|
|
1,717
|
|
|
1,513
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2016
|
$
|
121
|
|
|
$
|
(25,106
|
)
|
|
$
|
(27,396
|
)
|
|
$
|
(52,381
|
)
|
(a) The cash flow hedging gain (loss) and pension liability accumulated other comprehensive income (loss) components are included in sales or cost of sales and as a component of net periodic pension cost, respectively. The amounts recorded in the charts above are for the six months ended June 30, 2017 and 2016. For the three months ended June 30, 2017,
$0.2 million
of the cash flow hedging gain and
$0.8 million
of the pension liability were reclassified from accumulated other comprehensive loss to the statement of income. For the three months ended June 30, 2016,
$0.0 million
of the cash flow hedging gain and
$0.7 million
of the pension liability were reclassified from accumulated other comprehensive loss to the statement of income. Refer to Note 5 and Note 10, respectively, for further details.
Note 5 – Fair Value of Financial Instruments
We enter into derivative instruments for risk management purposes only. We operate internationally and in the normal course of business are exposed to fluctuations in interest rates, foreign exchange rates and commodity prices. These fluctuations can increase the costs of financing, investing and operating the business. We use forward contracts, a type of derivative instrument, to manage certain foreign currency exposures.
By nature, all financial instruments involve market and credit risks. We enter into forward contracts with major investment grade financial institutions and have policies to monitor the credit risk of those counterparties. While there can be no assurance, we do not anticipate any material non-performance by any of these counterparties.
Foreign Currency Forward Contracts.
We hedge forecasted intercompany sales denominated in foreign currencies through the use of forward contracts. We account for these forward contracts as cash flow hedges. To the extent these forward contracts meet hedge accounting criteria, changes in their fair value are not included in current earnings but are included in accumulated other comprehensive loss. These changes in fair value will be recognized into earnings as a component of sales or cost of sales when the forecasted transaction occurs. The notional contract amounts for forward contracts outstanding at
June 30, 2017
which have been accounted for as cash flow hedges totaled
$104.3 million
. Net realized gains recognized for forward contracts accounted for as cash flow hedges approximated
$0.2 million
and
$0.0 million
for the
three months ended
June 30, 2017 and 2016
, respectively. Net realized gains recognized for forward contracts accounted for as cash flow hedges approximated
$0.6 million
and
$0.5 million
, respectively, for the
six months ended
June 30, 2017 and 2016
. Net unrealized losses on forward contracts outstanding, which have been accounted for as cash flow hedges and which have been included in accumulated other comprehensive income, totaled
$1.1 million
at
June 30, 2017
. It is expected these unrealized losses will be recognized in the consolidated condensed statement of comprehensive income in
2017
and
2018
.
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
June 30, 2017
which have not been designated as hedges totaled
$32.8 million
. Net realized gains (losses) recognized in connection with those forward contracts not accounted for as hedges approximated
$(0.4) million
and
$0.0 million
for the
three months ended
June 30, 2017 and 2016
, respectively, offsetting gains (losses) on our intercompany receivables of
$0.3 million
and
$(0.3) million
for the
three months ended
June 30, 2017 and 2016
, respectively. Net realized losses recognized in connection with those forward contracts not accounted for as hedges approximated
$(0.6) million
and
$(0.2) million
for the
six months ended
June 30, 2017 and 2016
, respectively, offsetting gains on our intercompany receivables of
$0.3 million
and
$0.1 million
for the
six months ended
June 30,
2017 and 2016
, respectively. These gains and losses have been recorded in selling and administrative expense in the consolidated condensed statements of comprehensive income.
We record these forward foreign exchange contracts at fair value. The following tables summarize the fair value for forward foreign exchange contracts outstanding at
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
Asset Fair Value
|
|
Liabilities Fair Value
|
|
Net
Fair
Value
|
Derivatives designated as hedged instruments:
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
1,290
|
|
|
$
|
(2,958
|
)
|
|
$
|
(1,668
|
)
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
—
|
|
|
(133
|
)
|
|
(133
|
)
|
|
|
|
|
|
|
Total derivatives
|
$
|
1,290
|
|
|
$
|
(3,091
|
)
|
|
$
|
(1,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
Asset Fair Value
|
|
Liabilities Fair Value
|
|
Net
Fair
Value
|
Derivatives designated as hedged instruments:
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
3,962
|
|
|
$
|
(1,510
|
)
|
|
$
|
2,452
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
48
|
|
|
(54
|
)
|
|
(6
|
)
|
|
|
|
|
|
|
Total derivatives
|
$
|
4,010
|
|
|
$
|
(1,564
|
)
|
|
$
|
2,446
|
|
Our forward foreign exchange contracts are subject to a master netting agreement and qualify for netting in the consolidated balance sheets. Accordingly, at
June 30, 2017
and
December 31, 2016
, we have recorded the net fair value of
$1.8 million
in other current liabilities and
$2.4 million
in prepaid expenses and other current assets, respectively.
Fair Value Disclosure.
FASB guidance defines fair value and establishes a framework for measuring fair value and related disclosure requirements. This guidance applies when fair value measurements are required or permitted. The guidance indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. Fair value is defined based upon an exit price model.
Valuation Hierarchy.
A valuation hierarchy was established for disclosure of the inputs to the valuations used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets in markets that are not active; inputs other than quoted prices that are observable for the asset or liability, including interest rates, yield curves and credit risks or inputs that are derived principally from, or corroborated by, observable market data through correlation. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. There have been no significant changes in the assumptions.
Valuation Techniques.
Assets and liabilities carried at fair value and measured on a recurring basis as of
June 30, 2017
consist of forward foreign exchange contracts and contingent liabilities associated with a business acquisition. The Company values its forward foreign exchange contracts using quoted prices for similar assets. The most significant assumption is quoted currency rates. The value of the forward foreign exchange contract assets and liabilities were valued using Level 2 inputs and are listed in the table above.
The carrying amounts reported in our consolidated condensed balance sheets for cash and cash equivalents, accounts receivable, accounts payable and long-term debt approximate fair value.
Note 6 - Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Raw materials
|
$
|
40,952
|
|
|
$
|
42,821
|
|
Work-in-process
|
13,805
|
|
|
13,315
|
|
Finished goods
|
81,717
|
|
|
79,733
|
|
Total
|
$
|
136,474
|
|
|
$
|
135,869
|
|
Note 7 – Earnings 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 the
three and six months ended
June 30, 2017 and 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
6,139
|
|
|
$
|
2,884
|
|
|
$
|
1,594
|
|
|
$
|
619
|
|
|
|
|
|
|
|
|
|
|
|
Basic – weighted average shares outstanding
|
27,891
|
|
|
27,776
|
|
|
27,894
|
|
|
27,753
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive potential securities
|
248
|
|
|
165
|
|
|
192
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
Diluted – weighted average shares outstanding
|
28,139
|
|
|
27,941
|
|
|
28,086
|
|
|
27,926
|
|
|
|
|
|
|
|
|
|
|
|
Net income (per share)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.22
|
|
|
$
|
0.10
|
|
|
$
|
0.06
|
|
|
$
|
0.02
|
|
Diluted
|
0.22
|
|
|
0.10
|
|
|
0.06
|
|
|
0.02
|
|
The shares used in the calculation of diluted EPS exclude options and SARs to purchase shares where the exercise price was greater than the average market price of common shares for the period and the effect of the inclusion would be anti-dilutive. Such shares aggregated approximately
1.4 million
and
2.0 million
for the
three and six months ended
June 30, 2017
, respectively, and approximately
1.7 million
and
1.3 million
for the
three and six months ended
June 30, 2016
, respectively.
Note 8 – Goodwill and Other Intangible Assets
The changes in the net carrying amount of goodwill for the
six
months ended
June 30, 2017
are as follows:
|
|
|
|
|
Balance as of December 31, 2016
|
$
|
397,664
|
|
|
|
Goodwill resulting from business acquisitions
|
2,209
|
|
|
|
Foreign currency translation
|
1,256
|
|
|
|
Balance as of June 30, 2017
|
$
|
401,129
|
|
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. During the
six months ended
June 30, 2017
, we entered into a business acquisition and recorded goodwill of
$2.2 million
.
Other intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer and distributor relationships
|
$
|
213,654
|
|
|
$
|
(80,551
|
)
|
|
$
|
213,259
|
|
|
$
|
(75,164
|
)
|
|
|
|
|
|
|
|
|
Promotional, marketing and distribution rights
|
149,376
|
|
|
(33,000
|
)
|
|
149,376
|
|
|
(30,000
|
)
|
|
|
|
|
|
|
|
|
Patents and other intangible assets
|
68,802
|
|
|
(41,372
|
)
|
|
67,509
|
|
|
(40,335
|
)
|
|
|
|
|
|
|
|
|
Developed technology
|
49,600
|
|
|
(2,109
|
)
|
|
49,600
|
|
|
(1,240
|
)
|
|
|
|
|
|
|
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and tradenames
|
86,544
|
|
|
—
|
|
|
86,544
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
$
|
567,976
|
|
|
$
|
(157,032
|
)
|
|
$
|
566,288
|
|
|
$
|
(146,739
|
)
|
Customer and distributor relationships, trademarks and tradenames, developed technology and patents and other intangible assets primarily represent allocations of purchase price to identifiable intangible assets of acquired businesses. Promotional, marketing and distribution rights represent intangible assets created under our Sports Medicine Joint Development and Distribution Agreement (the "JDDA") with Musculoskeletal Transplant Foundation (“MTF”).
Amortization expense related to intangible assets which are subject to amortization totaled
$5.2 million
and
$5.0 million
in the
three months ended
June 30, 2017 and 2016
, respectively, and
$10.3 million
and
$10.0 million
in the
six months ended
June 30, 2017 and 2016
, respectively, and is included as a reduction of revenue (for amortization related to our promotional, marketing and distribution rights) and in selling and administrative expense (for all other intangible assets) in the consolidated condensed statements of comprehensive income. The weighted average amortization period for intangible assets which are amortized is
25
years. Customer and distributor relationships are being amortized over a weighted average life of
29
years. Developed technology is being amortized over a weighted average life of
17
years. Promotional, marketing and distribution rights are being amortized over a weighted average life of
25
years. Patents and other intangible assets are being amortized over a weighted average life of
13
years. Included in patents and other intangible assets at
June 30, 2017
is an in-process research and development asset that is not currently amortized.
The estimated intangible asset amortization expense remaining for the year ending
December 31, 2017
and for each of the five succeeding years is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization included in expense
|
|
Amortization recorded as a reduction of revenue
|
|
Total
|
Remaining, 2017
|
$
|
7,362
|
|
|
$
|
3,000
|
|
|
$
|
10,362
|
|
2018
|
15,934
|
|
|
6,000
|
|
|
21,934
|
|
2019
|
15,789
|
|
|
6,000
|
|
|
21,789
|
|
2020
|
15,810
|
|
|
6,000
|
|
|
21,810
|
|
2021
|
14,573
|
|
|
6,000
|
|
|
20,573
|
|
2022
|
13,217
|
|
|
6,000
|
|
|
19,217
|
|
Note 9 – Guarantees
We provide warranties on certain of our products at the time of sale and sell extended warranties. The standard warranty period for our capital and reusable equipment is generally
one
year and our extended warranties can vary in length. 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
six months ended
June 30
, are as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Balance as of January 1,
|
$
|
1,954
|
|
|
$
|
2,509
|
|
|
|
|
|
|
Provision for warranties
|
1,633
|
|
|
1,692
|
|
|
|
|
|
|
Claims made
|
(1,712
|
)
|
|
(1,770
|
)
|
|
|
|
|
|
Balance as of June 30,
|
$
|
1,875
|
|
|
$
|
2,431
|
|
Note 10 – Pension Plan
Net periodic pension cost consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service cost
|
$
|
151
|
|
|
$
|
113
|
|
|
$
|
302
|
|
|
$
|
226
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost on projected benefit obligation
|
693
|
|
|
719
|
|
|
1,387
|
|
|
1,438
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets
|
(1,325
|
)
|
|
(1,297
|
)
|
|
(2,650
|
)
|
|
(2,594
|
)
|
|
|
|
|
|
|
|
|
|
|
Net amortization and deferral
|
794
|
|
|
695
|
|
|
1,587
|
|
|
1,390
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
$
|
313
|
|
|
$
|
230
|
|
|
$
|
626
|
|
|
$
|
460
|
|
We do not expect to make any pension contributions during
2017
.
Note 11 – Acquisition, Restructuring and Other Expense
Acquisition, restructuring and other expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
Facility consolidation costs
|
$
|
303
|
|
|
$
|
127
|
|
|
$
|
1,472
|
|
|
$
|
991
|
|
Termination of a product offering
|
—
|
|
|
4,546
|
|
|
—
|
|
|
4,546
|
|
Restructuring costs included in cost of sales
|
$
|
303
|
|
|
$
|
4,673
|
|
|
$
|
1,472
|
|
|
$
|
5,537
|
|
|
|
|
|
|
|
|
|
Restructuring costs
|
$
|
26
|
|
|
$
|
953
|
|
|
$
|
1,348
|
|
|
$
|
3,744
|
|
Business acquisition costs
|
405
|
|
|
3,624
|
|
|
892
|
|
|
11,852
|
|
Legal matters
|
2,465
|
|
|
1,372
|
|
|
16,714
|
|
|
2,189
|
|
Acquisition, restructuring and other expense included in selling and administrative expense
|
$
|
2,896
|
|
|
$
|
5,949
|
|
|
$
|
18,954
|
|
|
$
|
17,785
|
|
|
|
|
|
|
|
|
|
Debt refinancing costs included in other expense
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,942
|
|
During the
three and six months ended
June 30, 2017
, we incurred
$0.4 million
and
$0.9 million
, respectively, in costs associated with the January 4, 2016 acquisition of SurgiQuest, Inc. as further described in Note 3. During the
three and six months ended
June 30, 2016
, we incurred
$3.6 million
and
$11.9 million
in costs, respectively. The costs incurred in 2016 consist of investment banking fees, consulting fees, legal fees associated with the acquisition, costs associated with expensing of unvested options acquired and integration related costs. The costs incurred in 2017 consist of costs associated with expensing of unvested options acquired and integration related costs.
During the
six months ended
June 30, 2017
, we incurred
$12.2 million
in costs associated with the SurgiQuest, Inc. vs. Lexion Medical litigation verdict whereby SurgiQuest was found liable for
$2.2 million
in compensatory damages with an additional
$10.0 million
in punitive damages as further described in Note 13. We have recorded an accrual in other current liabilities at
June 30, 2017
. In addition, during the
three and six months ended
June 30, 2017
, we incurred
$2.5 million
and
$4.5 million
, respectively, in costs associated with this litigation and other legal matters. In the
three and six months ended
June 30, 2016
, we incurred
$1.4 million
and
$2.2 million
, respectively, in legal fees associated with the SurgiQuest, Inc. vs. Lexion Medical litigation.
During the
six months ended
June 30, 2016
, we incurred a
$2.7 million
charge related to commitment fees paid to certain of our lenders, which provided a financing commitment for the SurgiQuest acquisition and recorded a loss on the early extinguishment of debt of
$0.3 million
in conjunction with the fifth amended and restated senior credit agreement.
During
2017
and
2016
, we continued our operational restructuring plan. We incurred
$0.3 million
and
$0.1 million
in costs associated with the operational restructuring during the
three months ended
June 30, 2017 and 2016
, respectively, and
$1.5 million
and
$1.0 million
for the
six months ended
June 30, 2017 and 2016
, respectively. These costs were charged to cost of sales and include severance and other charges.
During
2016
, the Company discontinued our Altrus product offering as part of our ongoing restructuring and incurred
$4.5 million
in non-cash charges primarily related to inventory and fixed assets which were included in cost of sales for the
three and six months ended
June 30, 2016
.
During
2017
and
2016
, we restructured certain selling and administrative functions and incurred severance and other related costs in the amount of
$0.0 million
and
$1.0 million
for the
three months ended
June 30, 2017 and 2016
, respectively, and
$1.3 million
and
$3.7 million
for the
six months ended
June 30, 2017 and 2016
, respectively.
We have recorded an accrual in current and other long term liabilities of
$1.5 million
at
June 30, 2017
mainly related to severance costs associated with the restructuring. Below is a roll forward of the costs incurred and cash expenditures associated with these activities during the
six months ended
June 30, 2017 and 2016
:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Balance as of January 1,
|
$
|
2,643
|
|
|
$
|
7,175
|
|
|
|
|
|
Expenses incurred
|
2,820
|
|
|
4,735
|
|
|
|
|
|
Payments made
|
(3,917
|
)
|
|
(9,755
|
)
|
|
|
|
|
Balance at June 30,
|
$
|
1,546
|
|
|
$
|
2,155
|
|
Note 12 — Business Segments
We are accounting and reporting for our business as a single operating segment entity engaged in the development, manufacturing and sale on a global basis of surgical devices and related equipment. Our chief operating decision maker (the executive management team) evaluates the various global product portfolios on a net sales basis and evaluates profitability, investment and cash flow metrics on a consolidated worldwide basis due to shared infrastructure and resources.
We adjusted our product line disclosures to align with the way we review net sales beginning in fiscal year 2017. In doing so, we consolidated our surgical visualization line into our orthopedic surgery product line disclosure. Our product lines consist of orthopedic surgery and general surgery. Orthopedic surgery consists of sports medicine instrumentation and small bone, large bone and specialty powered surgical instruments as well as imaging systems for use in minimally invasive surgery procedures including 2DHD and 3DHD vision technologies and service fees related to the promotion and marketing of sports medicine allograft tissue. General surgery consists of a complete line of endo-mechanical instrumentation for minimally invasive laparoscopic and gastrointestinal procedures, a line of cardiac monitoring products as well as electrosurgical generators and related instruments. These product lines' net sales are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Orthopedic surgery
|
$
|
105,561
|
|
|
$
|
105,863
|
|
|
$
|
209,350
|
|
|
$
|
211,164
|
|
General surgery
|
91,593
|
|
|
87,570
|
|
|
174,370
|
|
|
163,470
|
|
Consolidated net sales
|
$
|
197,154
|
|
|
$
|
193,433
|
|
|
$
|
383,720
|
|
|
$
|
374,634
|
|
Note 13 – Legal Proceedings
From time to time, we are subject to claims alleging product liability, patent infringement or other claims incurred in the ordinary course of business. These may involve our United States or foreign operations, or sales by foreign distributors. Likewise, from time to time, the Company may receive an information request or subpoena from a government agency such as the Securities and Exchange Commission, Department of Justice, Equal Employment Opportunity Commission, the Occupational Safety and Health Administration, the Department of Labor, the Treasury Department or other federal and state agencies or foreign governments or government agencies. These information requests or subpoenas may or may not be routine inquiries, or may begin as routine inquiries and over time develop into enforcement actions of various types. Likewise, we receive reports of alleged misconduct from employees and third parties, which we investigate as appropriate.
Manufacturers of medical devices have been the subject of various enforcement actions relating to interactions with health care providers domestically or internationally whereby companies are claimed to have provided health care providers with inappropriate incentives to purchase their products. Similarly, the Foreign Corrupt Practices Act ("FCPA") imposes obligations on manufacturers with respect to interactions with health care providers who may be considered government officials based on their affiliation with public hospitals. The FCPA also requires publicly listed manufacturers to maintain accurate books and records, and maintain internal accounting controls sufficient to provide assurance that transactions are accurately recorded, lawful and in accordance with management's authorization. The FCPA poses unique challenges both because manufacturers operate in foreign cultures in which conduct illegal under the FCPA may not be illegal in local jurisdictions, and because, in some cases, a United States manufacturer may face risks under the FCPA based on the conduct of third parties over whom the manufacturer may not have complete control.
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 financial condition, but any such claims arising in the future could have a material adverse effect on our business, results of operations or cash flows. We currently maintain commercial product liability insurance of
$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.
We establish reserves sufficient to cover probable losses associated with any such pending claims. We do not expect that the resolution of any pending claims, investigations or reports of alleged misconduct will have a material adverse effect on our financial condition, results of operations or cash flows. There can be no assurance, however, that future claims or investigations, or the costs associated with responding to such claims, investigations or reports of misconduct, especially claims and investigations not covered by insurance, will not have a material adverse effect on our financial condition, results of operations or cash flows.
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 2013, Lexion Medical ("Lexion") filed suit against SurgiQuest in federal court in the District of Minnesota alleging false advertising under the Lanham Act, as well as various state law claims, including common law trade libel and unfair competition. In March 2014, SurgiQuest’s motion to dismiss for lack of personal jurisdiction was granted and that same day, SurgiQuest filed suit against Lexion in federal court in the District of Delaware seeking, among other claims, a declaratory judgment that SurgiQuest’s actions did not violate the Lanham Act. Lexion filed an answer generally denying SurgiQuest’s claims, and asserted counterclaims that were substantially similar to the claims Lexion brought in the Minnesota action. The underlying claims were that SurgiQuest had engaged in false advertising under the Lanham Act, and had engaged in violations of Delaware state laws, including deceptive trade practices and unfair competition. Lexion sought damages of
$22.0 million
for alleged lost profits and
$18.7 million
for costs related to alleged “corrective advertising” as well as an unspecified sum for disgorgement of SurgiQuest’s alleged profit. On January 4, 2016, SurgiQuest became a subsidiary of CONMED as further described in Note 3, and we assumed the costs and liabilities related to the Lexion lawsuit subject to the terms of the merger agreement referenced in Note 3. On April 11, 2017, a jury returned a verdict finding SurgiQuest liable for
$2.2 million
in compensatory damages with an additional
$10.0 million
in punitive damages. These costs are recorded in selling and administrative expense as of
June 30, 2017
. The Court entered judgment on April 13, 2017. We are currently evaluating our plans for an appeal. There can be no assurance an appeal will be successful, if we pursue one.
In 2014, the Company acquired EndoDynamix, Inc. The agreement governing the terms of the acquisition provide that, if various conditions are met, certain contingent payments relating to the first commercial sale of the products (the milestone payment), as well as royalties based on sales (the revenue based payments), are due to the seller. We have notified the seller that there is a need to redesign the product, and that as a consequence, the first commercial sale has been delayed. Consequently, the payment of contingent milestone and revenue-based payments have been delayed. On January 18, 2017, the seller provided notice ("the Notice") seeking
$12.7 million
, which essentially represents the sum of the projected contingent milestone and revenue-based payments on an accelerated basis. CONMED responded to the Notice denying that there was any basis for acceleration of the payments due under the acquisition agreement. On February 22, 2017, the representative of the former shareholders of EndoDynamix filed a complaint in Delaware Chancery Court claiming breach of contract and seeking the contingent payments on an accelerated basis. We do not believe that there is a legitimate basis for seeking the acceleration of the contingent payments, and expect to defend the claims asserted by the sellers of EndoDynamix in the Delaware Court.
Note 14 – New Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers. This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the company expects to receive in exchange for those goods or services. In March, April and May 2016, the FASB issued ASU 2016-08 related to principal versus agent considerations; ASU 2016-10 related to identifying performance obligations and licensing; and ASU 2016-12 clarifying the guidance on assessing collectability, presenting sales taxes, measuring noncash consideration, and certain transition matters, respectively. These additional ASUs provide supplemental adoption guidance and clarification to ASU 2014-09. The guidance
in these ASUs is effective for annual reporting periods beginning after December 15, 2017 and early adoption is permitted as of January 1, 2017. The standard allows the option of either a full retrospective adoption, meaning the standard is applied to all periods presented, or a modified retrospective adoption, meaning the standard is applied only to the most current period. The Company will adopt the new standard on January 1, 2018, and anticipates applying the modified retrospective approach. We have performed an initial assessment of each of the Company’s revenue streams and we do not expect the new guidance to have a material impact on the consolidated financial statements. We are reviewing existing and new contracts on a sample basis to identify any factors that may affect our initial conclusions.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. An entity should measure inventory within the scope of this ASU at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This ASU is effective for annual periods beginning after December 15, 2016. We implemented this new guidance during the first quarter of 2017 and it did not have a material impact on the consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). This requires lessees to put most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The new standard is effective for interim and annual periods beginning after December 15, 2018 and early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-02.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. We adopted this new guidance effective January 1, 2017. This ASU requires the following:
|
|
•
|
All tax effects are now recorded in the statement of operations and are accounted for as an operating activity in the statement of cash flows on a prospective basis. Historically, tax benefits in excess of compensation cost were recorded in equity and were accounted for in the financing section of the cash flow. This ASU resulted in a
$0.2 million
tax benefit during the
six months ended
June 30, 2017
. There can be no assurance it will not have any material impact in future periods.
|
|
|
•
|
All cash payments made to taxing authorities on the employee's behalf for withheld shares are to be presented as financing activities in the statement of cash flows on a retrospective basis. As a result, we reclassified a
$1.5 million
cash outflow from operating activities to financing activities for the
six months ended
June 30, 2016
.
|
|
|
•
|
In the diluted net earnings per share calculation, when applying the treasury stock method for shares that could be repurchased, the assumed proceeds no longer include the amount of excess tax benefit. This did not have a material impact on the Company's diluted net earnings per share calculation.
|
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (A Consensus of the FASB Emerging Issues Task Force). This ASU provides amendments to specific statement of cash flows classification issues. This new guidance is effective for periods beginning after December 15, 2017, however early adoption is permitted. The Company adopted this new guidance effective January 1, 2017 and it did not have a material impact on the consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this ASU require that a statement of cash flows explain the change during the period in total cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. The ASU is effective for periods beginning after December 15, 2017, however early adoption is permitted. The Company is currently assessing the impact of this guidance on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business. This ASU states w
hen substantially all of the fair value of gross assets acquired is concentrated in a single asset (or a group of similar assets), the assets acquired would not represent a business. In addition, this guidance states in order to be a business, an input and a substantive process must significantly contribute to the ability to produce outputs. This new guidance is effective for periods beginning after December 15, 2017, however early adoption is permitted.
The Company is currently assessing the impact of this guidance on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. This ASU removes Step 2 of the goodwill impairment test, which requires hypothetical purchase price allocation. A goodwill impairment will now be the amount by which the reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
This new guidance is effective for periods beginning after December 15, 2019, however early adoption is permitted.
The Company is currently assessing the impact of this guidance on our consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07 Compensation Retirement Benefits (ASC 715) - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires companies to record the service component of net periodic pension cost in the same income statement line as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net periodic pension cost would be presented in the income statement separately from the service cost component and outside the subtotal of income from operations, if one is presented. This guidance is applicable for periods beginning after December 15, 2017 and must be applied retrospectively. Early adoption is permitted. The Company is currently assessing the impact of this guidance on our consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Based Compensation (ASC 718) - Scope of Modification Accounting. This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the changes are considered non-substantive. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted. This guidance is in line with the Company’s current interpretation of ASC 718, Stock Compensation, and we do not expect this clarification to have a material impact on the consolidated financial statements.