Company Quick10K Filing
Quick10K
Conmed
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$73.72 28 $2,070
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2019-02-11 M&A, Off-BS Arrangement, Other Events, Exhibits
8-K 2019-02-07 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-01-24 Other Events, Exhibits
8-K 2019-01-24 Other Events, Exhibits
8-K 2019-01-24 Enter Agreement, Off-BS Arrangement, Sale of Shares, Exhibits
8-K 2019-01-23 Other Events, Exhibits
8-K 2019-01-23 Other Events, Exhibits
8-K 2019-01-22 Earnings, Exhibits
8-K 2019-01-02 Enter Agreement, Exhibits
8-K 2018-12-13 Enter Agreement, Regulation FD, Exhibits
8-K 2018-11-01 Earnings, Exhibits
8-K 2018-09-08 Other Events
8-K 2018-08-14 Other Events
8-K 2018-08-01 Earnings, Exhibits
8-K 2018-05-23 Officers, Shareholder Vote, Other Events
8-K 2018-02-28 Other Events
8-K 2018-01-31 Earnings, Exhibits
8-K 2018-01-02 Officers, Exhibits
NXTM NxStage
BABY Natus Medical
BLFS Biolife Solutions
RMTI Rockwell Medical
CUTR Cutera
IRIX Iridex
ELMD Electromed
DRAD Digirad
MICR Micron Solutions
RSLS Reshape Lifesciences
CNMD 2018-09-30
Part I Financial Information
Item 1.
Note 1 - Operations
Note 2 - Interim Financial Information
Note 3 - Revenues
Note 4 - Comprehensive Income
Note 5 - Fair Value of Financial Instruments
Note 6 - Inventories
Note 7 - Earnings per Share
Note 8 - Goodwill and Other Intangible Assets
Note 9 - Guarantees
Note 10 - Pension Plan
Note 11 - Acquisition, Restructuring and Other Expense
Note 12 - Business Segments
Note 13 - Legal Proceedings
Note 14 - New Accounting Pronouncements
Note 15 - Income Taxes
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II Other Information
Item 1. Legal Proceedings
Item 6. Exhibits
EX-31.1 cnmd93018ex311.htm
EX-31.2 cnmd93018ex312.htm
EX-32.1 cnmd93018ex321.htm

Conmed Earnings 2018-09-30

CNMD 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 cnmd9301810-q.htm 10-Q Document
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

For the quarter ended
Commission File Number
September 30, 2018
0-16093

CONMED CORPORATION
(Exact name of the registrant as specified in its charter)


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 such shorter period that the registrant was required to submit and post such files).  

Yes ý   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company.  See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act (Check one).

Large accelerated filer ý    Accelerated filer o    Non-accelerated filer o

Smaller reporting company o    Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 30, 2018 is 28,128,672 shares.



CONMED CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2018

PART I FINANCIAL INFORMATION
Item Number
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 




PART I FINANCIAL INFORMATION
Item 1.
CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands except per share amounts)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Net sales
$
202,307

 
$
190,117

 
$
617,191

 
$
573,837

 
 
 
 
 
 
 
 
Cost of sales
91,680

 
87,570

 
280,736

 
266,753

 
 
 
 
 
 
 
 
Gross profit
110,627

 
102,547

 
336,455

 
307,084

 
 
 
 
 
 
 
 
Selling and administrative expense
84,983

 
80,807

 
259,156

 
259,396

 
 
 
 
 
 
 
 
Research and development expense
14,122

 
8,270

 
31,817

 
23,929

 
 
 
 
 
 
 
 
  Operating expenses
99,105

 
89,077

 
290,973

 
283,325

 
 
 
 
 
 
 
 
Income from operations
11,522

 
13,470

 
45,482

 
23,759

 
 
 
 
 
 
 
 
Interest expense
5,214

 
4,806

 
15,123

 
13,323

 
 
 
 
 
 
 
 
Income before income taxes
6,308

 
8,664

 
30,359

 
10,436

 
 
 
 
 
 
 
 
Provision for income taxes
483

 
1,467

 
5,158

 
1,645

 
 
 
 
 
 
 
 
Net income
$
5,825

 
$
7,197

 
$
25,201

 
$
8,791

 
 
 
 
 
 
 
 
Comprehensive income
$
7,136

 
$
10,446

 
$
27,845

 
$
19,666

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Per share data:
 
 
 

 
 
 
 

 
 
 
 
 
 
 
 
Net income
 
 
 

 
 
 
 

Basic
$
0.21

 
$
0.26

 
$
0.90

 
$
0.31

Diluted
0.20

 
0.26

 
0.87

 
0.31

 
 
 
 
 
 
 
 
Dividends per share of common stock
$
0.20

 
$
0.20

 
$
0.60

 
$
0.60

 
 
 
 
 
 
 
 
Weighted average common shares
 
 
 

 
 
 
 

Basic
28,124

 
27,924

 
28,096

 
27,915

Diluted
29,088

 
28,183

 
28,872

 
28,124



 See notes to consolidated condensed financial statements.

1


CONMED CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited, in thousands except share and per share amounts)
 
 
September 30,
2018
 
December 31,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
29,691

 
$
32,622

Accounts receivable, net
161,000

 
167,037

Inventories
153,618

 
141,436

Prepaid expenses and other current assets
19,153

 
15,688

Total current assets
363,462

 
356,783

Property, plant and equipment, net
113,701

 
116,229

Goodwill
400,977

 
401,954

Other intangible assets, net
415,191

 
414,940

Other assets
69,649

 
68,055

Total assets
$
1,362,980

 
$
1,357,961

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 

Current liabilities:
 
 
 

Current portion of long-term debt
$
18,045

 
$
14,699

Accounts payable
48,227

 
42,044

Accrued compensation and benefits
34,422

 
34,258

Other current liabilities
64,199

 
59,002

Total current liabilities
164,893

 
150,003

 
 
 
 
Long-term debt
442,900

 
471,744

Deferred income taxes
79,250

 
77,668

Other long-term liabilities
23,281

 
27,114

Total liabilities
710,324

 
726,529

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Shareholders' equity:
 
 
 

Preferred stock, par value $ .01 per share;
 
 
 

authorized 500,000 shares; none outstanding

 

Common stock, par value $ .01 per share;
 

 
 

100,000,000 shares authorized; 31,299,194 shares
 

 
 

issued in 2018 and 2017, respectively
313

 
313

Paid-in capital
339,033

 
333,795

Retained earnings
448,875

 
440,085

Accumulated other comprehensive loss
(46,434
)
 
(49,078
)
Less: 3,175,822 and 3,338,015 shares of common stock
 

 
 

in treasury, at cost in 2018 and 2017, respectively
(89,131
)
 
(93,683
)
Total shareholders’ equity
652,656

 
631,432

Total liabilities and shareholders’ equity
$
1,362,980

 
$
1,357,961



 See notes to consolidated condensed financial statements.

2


CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Nine Months Ended
 
September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
25,201

 
$
8,791

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 

Depreciation
13,881

 
14,993

Amortization
32,329

 
28,069

Stock-based compensation
7,465

 
6,340

Impairment charges
4,212

 

Deferred income taxes
(1,268
)
 
(5,129
)
Increase in cash flows from changes in assets and liabilities:
 

 
 

Accounts receivable
4,361

 
6,210

Inventories
(13,677
)
 
(12,062
)
Accounts payable
6,212

 
7,801

Accrued compensation and benefits
465

 
(5,151
)
Other assets
(20,323
)
 
(17,917
)
Other liabilities
(8,860
)
 
12,809

 
24,797

 
35,963

Net cash provided by operating activities
49,998

 
44,754

 
 
 
 
Cash flows from investing activities:
 
 
 

Purchases of property, plant and equipment
(11,751
)
 
(9,232
)
Payments related to business and asset acquisitions, net of cash acquired

 
(15,194
)
Net cash used in investing activities
(11,751
)
 
(24,426
)
 
 
 
 
Cash flows from financing activities:
 
 
 

Payments on term loan
(9,844
)
 
(6,563
)
Payments on revolving line of credit
(119,000
)
 
(98,000
)
Proceeds from revolving line of credit
104,000

 
115,000

Dividends paid on common stock
(16,819
)
 
(16,722
)
Other, net
1,043

 
(887
)
Net cash used in financing activities
(40,620
)
 
(7,172
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(558
)
 
3,450

 
 
 
 
Net increase (decrease) in cash and cash equivalents
(2,931
)
 
16,606

 
 
 
 
Cash and cash equivalents at beginning of period
32,622

 
27,428

 
 
 
 
Cash and cash equivalents at end of period
$
29,691

 
$
44,034

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Contractual obligations from asset acquisition
$
25,849

 
$

 
 
 
 
   Dividends payable
$
5,625

 
$
5,585


See notes to consolidated condensed financial statements.

3


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 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, thoracic surgery 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 September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

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, 2017 included in our Annual Report on Form 10-K.

Note 3 - Revenues

The Company adopted Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which is codified in Accounting Standards Codification ("ASC") 606, effective January 1, 2018. ASC 606 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. The Company has applied the modified retrospective approach to adoption whereby the standard is applied only to the current period.

Adoption of ASC 606 did not have a material impact on our consolidated condensed financial statements. Certain costs previously included in selling and administrative expense and principally related to administrative fees paid to group purchasing organizations are required to be recorded as a reduction of revenue under the new standard. These costs amounted to $2.4 million and $2.0 million during the three months ended September 30, 2018 and 2017, respectively, and $6.3 million and $5.8 million during the nine months ended September 30, 2018 and 2017, respectively. These costs are included as a reduction in net sales in the three and nine months ended September 30, 2018 and as selling and administrative expense in the three and nine months ended September 30, 2017, respectively. There is no impact on net income or earnings per share as a result of this change.

The Company recognizes revenue when we have satisfied a performance obligation by transferring a promised good or service (that is an asset) to a customer. An asset is transferred when the customer obtains control of that asset. The following policies apply to our major categories of revenue transactions:

Revenue is recognized when product is shipped and the customer obtains control of the product.

We place certain of our capital equipment with customers on a loaned basis and at no charge in exchange 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 which is generally five years.

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.


4


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.

Amounts billed to customers related to shipping and handling have been included in net sales. Shipping and handling costs included in selling and administrative expense were $10.0 million and $9.6 million for the nine months ended September 30, 2018 and 2017, respectively.

We sell to a diversified base of customers around the world and, therefore, believe there is no material concentration of credit risk.

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 $2.7 million at September 30, 2018 is adequate to provide for probable losses resulting from accounts receivable.
    
We recognize revenue in accordance with the terms of our agreement with Musculoskeletal Transplant Foundation (“MTF”) on a net basis as our role is that of an agent earning a commission or fee. MTF is responsible for the sourcing, processing and distribution of allograft tissue for sports medicine procedures while the Company represents, markets and promotes MTF’s sports medicine allograft tissues to customers. The Company is paid a “Service Fee” by MTF which is calculated as a percentage of the amounts invoiced by MTF to customers for sports medicine allograft tissues. The Company accounts for the services as a series of distinct performance obligations and each service is recognized over time as MTF simultaneously receives and consumes the benefit.

We sell extended warranties to customers that are typically for a period of one to three years. The related revenue is recorded as a contract liability and recognized over the life of the contract on a straight-line basis, which is reflective of our obligation to stand ready to provide repair services. The Company previously expensed as incurred commissions paid for the sale of extended warranty contracts to customers. Under the new guidance, the Company capitalizes these contract acquisition costs and realizes the expense in line with the related extended warranty contract revenue recognition. Upon adoption of the new standard, we recorded a cumulative adjustment of $0.4 million net of income taxes to beginning shareholders’ equity in order to capitalize costs incurred to obtain contracts with customers.
    
The following tables present revenue disaggregated by primary geographic market where the products are sold, by product line and timing of revenue recognition:
 
Three Months Ended
 
Three Months Ended
 
September 30, 2018
 
September 30, 2017
 
Orthopedic Surgery
 
General Surgery
 
Total
 
Orthopedic Surgery
 
General Surgery
 
Total
Primary Geographic Markets
 
 
 
 
 
 
 
 
 
 
 
United States
$
39,574

 
$
67,955

 
$
107,529

 
$
38,044

 
$
60,260

 
$
98,304

Americas (excluding the United States)
14,949

 
7,347

 
22,296

 
15,147

 
7,945

 
23,092

Europe, Middle East & Africa
23,206

 
11,492

 
34,698

 
22,623

 
11,027

 
33,650

Asia Pacific
25,200

 
12,584

 
37,784

 
22,767

 
12,304

 
35,071

Total sales from contracts with customers
$
102,929

 
$
99,378

 
$
202,307

 
$
98,581

 
$
91,536

 
$
190,117

 
 
 
 
 
 
 
 
 
 
 
 
Timing of Revenue Recognition
 
 
 
 
 
 
 
 
 
 
 
Goods transferred at a point in time
$
94,640

 
$
98,992

 
$
193,632

 
$
91,047

 
$
91,307

 
$
182,354

Services transferred over time
8,289

 
386

 
8,675

 
7,534

 
229

 
7,763

Total sales from contracts with customers
$
102,929

 
$
99,378

 
$
202,307

 
$
98,581

 
$
91,536

 
$
190,117



5


 
Nine Months Ended
 
Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
Orthopedic Surgery
 
General Surgery
 
Total
 
Orthopedic Surgery
 
General Surgery
 
Total
Primary Geographic Markets
 
 
 
 
 
 
 
 
 
 
 
United States
$
123,782

 
$
199,653

 
$
323,435

 
$
121,320

 
$
176,421

 
$
297,741

Americas (excluding the United States)
48,307

 
23,374

 
71,681

 
43,256

 
22,902

 
66,158

Europe, Middle East & Africa
80,951

 
38,420

 
119,371

 
76,774

 
35,655

 
112,429

Asia Pacific
68,883

 
33,821

 
102,704

 
66,581

 
30,928

 
97,509

Total sales from contracts with customers
$
321,923

 
$
295,268

 
$
617,191

 
$
307,931


$
265,906

 
$
573,837

 
 
 
 
 
 
 
 
 
 
 
 
Timing of Revenue Recognition
 
 
 
 
 
 
 
 
 
 
 
Goods transferred at a point in time
$
297,096

 
$
294,196

 
$
591,292

 
$
283,728

 
$
265,391

 
$
549,119

Services transferred over time
24,827

 
1,072

 
25,899

 
24,203

 
515

 
24,718

Total sales from contracts with customers
$
321,923

 
$
295,268

 
$
617,191

 
$
307,931

 
$
265,906

 
$
573,837


Contract liability balances related to the sale of extended warranties to customers are as follows:
 
September 30, 2018
 
December 31, 2017
 
 
 
 
Contract liability
$
10,375

 
$
7,786


Revenue recognized during nine months ended September 30, 2018 and September 30, 2017 from amounts included in contract liabilities at the beginning of the period were $6.6 million and $4.7 million, respectively. There were no material contract assets as of September 30, 2018 and December 31, 2017.

Note 4 – Comprehensive Income

Comprehensive income consists of the following:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
5,825

 
$
7,197

 
$
25,201

 
$
8,791

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Pension liability, net of income tax (income tax expense of $162 and $294 for the three months ended September 30, 2018 and 2017, respectively, and $488 and $880 for the nine months ended September 30, 2018 and 2017, respectively)
510

 
500

 
1,529

 
1,501

Cash flow hedging gain (loss) net of income tax (income tax expense (benefit) of $378 and ($790) for the three months ended September 30, 2018 and 2017, respectively, and $2,102 and ($2,312) for the nine months ended September 30, 2018 and 2017, respectively)
1,185

 
(1,348
)
 
6,598

 
(3,946
)
Foreign currency translation adjustment
(384
)
 
4,097

 
(5,483
)
 
13,320

 
 
 
 
 
 
 
 
Comprehensive income
$
7,136

 
$
10,446

 
$
27,845

 
$
19,666



6


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, 2017
$
(3,530
)
 
$
(25,813
)
 
$
(19,735
)
 
$
(49,078
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications, net of tax
5,462

 

 
(5,483
)
 
(21
)
Amounts reclassified from accumulated other comprehensive income (loss) before taxa
1,498

 
2,017

 

 
3,515

Income tax
(362
)
 
(488
)
 

 
(850
)
 
 
 
 
 
 
 
 
Net current-period other comprehensive income (loss)
6,598

 
1,529

 
(5,483
)
 
2,644

 
 
 
 
 
 
 
 
Balance, September 30, 2018
$
3,068

 
$
(24,284
)
 
$
(25,218
)
 
$
(46,434
)

 
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
(3,939
)
 

 
13,320

 
9,381

Amounts reclassified from accumulated other comprehensive income (loss) before taxa
(11
)
 
2,381

 

 
2,370

Income tax
4

 
(880
)
 

 
(876
)
 
 
 
 
 
 
 
 
Net current-period other comprehensive income (loss)
(3,946
)
 
1,501

 
13,320

 
10,875

 
 
 
 
 
 
 
 
Balance, September 30, 2017
$
(2,400
)
 
$
(24,957
)
 
$
(20,294
)
 
$
(47,651
)

(a) The cash flow hedging gain (loss) and pension liability accumulated other comprehensive income (loss) components are included in sales or cost of sales and as a component of net periodic pension cost, respectively. Refer to Note 5 and Note 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 September 30, 2018 which have been accounted for as cash flow hedges totaled $147.8 million. Net realized gains (losses)

7


recognized for forward contracts accounted for as cash flow hedges approximated $0.1 million and $(0.5) million for the three months ended September 30, 2018 and 2017, respectively, and $(1.5) million and $0.0 million for the nine months ended September 30, 2018 and 2017, respectively. At September 30, 2018, $1.7 million of net unrealized gains on forward contracts accounted for as cash flow hedges, and included in accumulated other comprehensive loss, are expected to be recognized in earnings in the next twelve months.

We also enter into forward contracts to exchange foreign currencies for United States dollars in order to hedge our currency transaction exposures.  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, 2018 which have not been designated as hedges totaled $30.8 million. Net realized gains (losses) recognized in connection with those forward contracts not accounted for as hedges approximated $0.2 million and $(0.5) million for the three months ended September 30, 2018 and 2017, respectively, offsetting gains (losses) on our intercompany receivables of $(0.5) million and $0.4 million for the three months ended September 30, 2018 and 2017, respectively. Net realized gains (losses) approximated $0.6 million and $(1.2) million for the nine months ended September 30, 2018 and 2017, respectively, offsetting gains (losses) on our intercompany receivables of $(1.2) million and $0.7 million for the nine months ended September 30, 2018 and 2017, 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 September 30, 2018 and December 31, 2017:
September 30, 2018
Asset Fair Value
 
Liabilities Fair Value
 
Net
Fair
Value
Derivatives designated as hedged instruments:
 
 
 
 
 
Foreign exchange contracts
$
3,787

 
$
(685
)
 
$
3,102

 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 

 
 

 
 

Foreign exchange contracts
28

 
(135
)
 
(107
)
 
 
 
 
 


Total derivatives
$
3,815

 
$
(820
)
 
$
2,995

December 31, 2017
Asset Fair Value
 
Liabilities Fair Value
 
Net
Fair
Value
Derivatives designated as hedged instruments:
 
 
 
 
 
Foreign exchange contracts
$
346

 
$
(5,945
)
 
$
(5,599
)
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 

 
 

 
 
Foreign exchange contracts
4

 
(78
)
 
(74
)
 
 
 
 
 
 
Total derivatives
$
350

 
$
(6,023
)
 
$
(5,673
)

Our forward foreign exchange contracts are subject to a master netting agreement and qualify for netting in the consolidated condensed balance sheets. Accordingly, at September 30, 2018, we have recorded the net fair value of $2.4 million and $0.7 million in prepaid expenses and other current assets and non-current other assets, respectively. At December 31, 2017, we have recorded the net fair value of $5.7 million in other current liabilities.
 
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)

8


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 September 30, 2018 consist of forward foreign exchange contracts. The Company values its forward foreign exchange contracts using quoted prices for similar assets. The most significant assumption is quoted currency rates. The value of the forward foreign exchange contract assets and liabilities were valued using Level 2 inputs and are listed in the table above.  
    
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:
 
September 30,
2018
 
December 31,
2017
Raw materials
$
43,474

 
$
41,844

Work-in-process
15,837

 
14,666

Finished goods
94,307

 
84,926

Total
$
153,618

 
$
141,436

 
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 nine months ended September 30, 2018 and 2017:


Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
5,825

 
$
7,197

 
$
25,201

 
$
8,791


 
 


 
 
 


Basic – weighted average shares outstanding
28,124

 
27,924

 
28,096

 
27,915


 
 
 
 
 
 
 
Effect of dilutive potential securities
964

 
259

 
776

 
209


 
 
 
 
 
 
 
Diluted – weighted average shares outstanding
29,088

 
28,183

 
28,872

 
28,124


 
 
 
 
 
 
 
Net income (per share)
 

 
 

 
 

 
 

Basic
$
0.21

 
$
0.26

 
$
0.90

 
$
0.31

Diluted
0.20

 
0.26

 
0.87

 
0.31

 
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.

9


Such shares aggregated approximately 0.0 million and 0.6 million for the three and nine months ended September 30, 2018, respectively, and approximately 1.3 million and 1.2 million for the three and nine months ended September 30, 2017.


Note 8 – Goodwill and Other Intangible Assets

The changes in the net carrying amount of goodwill for the nine months ended September 30, 2018 are as follows:
Balance as of December 31, 2017
$
401,954

 
 
Foreign currency translation
(977
)
 
 
Balance as of September 30, 2018
$
400,977


Assets and liabilities of acquired businesses are recorded at their estimated fair values as of the date of acquisition.  Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. 

Other intangible assets consist of the following:
 
September 30, 2018
 
December 31, 2017
 
Weighted Average Amortization Period (Years)
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Amortized intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer and distributor relationships
29
$
214,598

 
$
(94,371
)
 
$
214,685

 
$
(86,137
)
 
 
 
 
 
 
 
 
 
Sales representation, marketing and promotional rights
25
149,376

 
(40,500
)
 
149,376

 
(36,000
)
 
 
 
 
 
 
 
 
 
Patents and other intangible assets
15
61,292

 
(43,700
)
 
69,668

 
(42,127
)
 
 
 
 
 
 
 
 
 
Developed technology
16
88,132

 
(6,180
)
 
62,283

 
(3,352
)
 
 
 
 
 
 
 
 
 
Unamortized intangible assets:
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
Trademarks and tradenames
 
86,544

 

 
86,544

 

 
 
 
 
 
 
 
 
 
 
24
$
599,942

 
$
(184,751
)
 
$
582,556

 
$
(167,616
)

Customer and distributor relationships, trademarks and tradenames, developed technology and patents and other intangible assets primarily represent allocations of purchase price to identifiable intangible assets of acquired businesses. Sales representation, marketing and promotional rights represent intangible assets created under our agreement with Musculoskeletal Transplant Foundation (“MTF”).

Amortization expense related to intangible assets which are subject to amortization totaled $6.0 million and $5.3 million in the three months ended September 30, 2018 and 2017, respectively, and $17.2 million and $15.6 million in the nine months ended September 30, 2018 and 2017, respectively, and is included as a reduction of revenue (for amortization related to our sales representation, marketing and promotional rights) and in selling and administrative expense (for all other intangible assets) in the consolidated condensed statements of comprehensive income. Included in developed technology is $25.8 million of earn-out consideration that is considered probable as of September 30, 2018 associated with a prior asset acquisition. This is recorded in other current liabilities at September 30, 2018. This acquired developed technology has a weighted average useful life of 14 years.

10


During the three months ended September 30, 2018, the Company wrote off $9.5 million related to an in-process research and development asset and recorded the net charge to research and development expense. Refer to Notes 11 and 13 for further details.
 
The estimated intangible asset amortization expense remaining for the year ending December 31, 2018 and for each of the five succeeding years is as follows:
 
 
Amortization included in expense
 
Amortization recorded as a reduction of revenue
 
Total
Remaining, 2018
$
4,493

 
$
1,500

 
$
5,993

2019
17,622

 
6,000

 
23,622

2020
17,639

 
6,000

 
23,639

2021
16,686

 
6,000

 
22,686

2022
15,227

 
6,000

 
21,227

2023
14,615

 
6,000

 
20,615



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 equipment is generally one year and our extended warranties typically vary from one to three years. 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 standard warranties for the nine months ended September 30, are as follows:
 
2018
 
2017
Balance as of January 1,
$
1,750

 
$
1,954

 
 
 
 
Provision for warranties
1,036

 
787

 
 
 
 
Claims made
(937
)
 
(907
)
 
 
 


Balance as of September 30,
$
1,849

 
$
1,834

 
Costs associated with extended warranty repairs are recorded as incurred and amounted to $4.0 million and $2.8 million for the nine months ended September 30, 2018 and 2017, respectively.



11


Note 10 – Pension Plan

Net periodic pension cost consists of the following: 

Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Service cost
$
169

 
$
151

 
$
506

 
$
452


 
 


 
 
 


Interest cost on projected benefit obligation
701

 
693

 
2,104

 
2,080


 
 


 
 
 


Expected return on plan assets
(1,354
)
 
(1,325
)
 
(4,063
)
 
(3,975
)

 
 


 
 
 


Net amortization and deferral
672

 
794

 
2,017

 
2,381


 
 


 
 
 


Net periodic pension cost
$
188

 
$
313

 
$
564

 
$
938

 
We do not expect to make any pension contributions during 2018.

Note 11 – Acquisition, Restructuring and Other Expense

Acquisition, restructuring and other expense consists of the following:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Restructuring costs included in cost of sales
$

 
$
1,306

 
$

 
$
2,778

 
 
 
 
 
 
 
 
Business acquisition costs
$
1,073

 
$
128

 
$
1,073

 
$
1,020

Restructuring costs

 

 

 
1,347

Legal matters

 
327

 

 
17,041

Acquisition, restructuring and other expense included in selling and administrative expense
$
1,073

 
$
455

 
$
1,073

 
$
19,408

 
 
 
 
 
 
 
 
Impairment charges included in research and development expense
$
4,212

 
$

 
$
4,212

 
$

        
During the three and nine months ended September 30, 2018, we recorded a $1.1 million charge to selling and administrative expense associated with a vacant lease related to a prior acquisition. During the three and nine months ended September 30, 2017, we incurred $0.1 million and $1.0 million, respectively, in costs associated with the January 4, 2016 acquisition of SurgiQuest, Inc. The costs were associated with expensing of unvested options acquired and integration related costs.

During the three and nine months ended September 30, 2018, we recorded a net charge of $4.2 million to research and development expense mainly associated with the impairment of an in-process research and development asset, net of the release of previously accrued contingent consideration in other current and long-term liabilities, as further described in Note 13.

During 2017, we continued our operational restructuring plan. As part of this plan, we engaged a consulting firm to assist us in streamlining our product offering and improving our operational efficiency. As a result, we identified certain catalog numbers to be discontinued and consolidated into existing product offerings and recorded a $1.3 million charge during the three months ended September 30, 2017 to write-off inventory which no longer is offered for sale. For the nine months ended September 30, 2017 we incurred $2.8 million in costs associated with the operational restructuring. These costs were charged to cost of sales and included severance, inventory and other charges.

During the nine months ended September 30, 2017, we restructured certain selling and administrative functions and incurred $1.3 million in costs consisting principally of severance charges.

12


    
During the nine months ended September 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. These costs were paid on July 10, 2018. In addition, during the three and nine months ended September 30, 2017, we incurred $0.3 million and $4.8 million, respectively, in costs associated with this litigation and other legal matters.

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 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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Orthopedic surgery
$
102,929

 
$
98,581

 
$
321,923

 
$
307,931

General surgery
99,378

 
91,536

 
295,268

 
265,906

Consolidated net sales
$
202,307

 
$
190,117

 
$
617,191

 
$
573,837


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. While CONMED has not experienced any material enforcement action to date, there can be no assurance that the Company will not be subject to a material enforcement action in the future, or that the Company will not incur costs including, in the form of fees for lawyers and other consultants, that are material to the Company’s results of operations in the course of responding to a future inquiry or investigation.

Manufacturers of medical products may face exposure to significant product liability claims. 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 $30 million per incident and $30 million in the aggregate annually, which we believe is adequate. This coverage is on a claims-made basis. There can be no assurance that claims will not exceed insurance coverage, that the carriers will be solvent or that such insurance will be available to us in the future at a reasonable cost.


13


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 April 2017, the previously disclosed lawsuit involving a false advertising claim by Lexion Medical ("Lexion") against SurgiQuest arising prior to the acquisition of SurgiQuest by CONMED went to trial in federal court in the District of Delaware.  The claims arose under the Lanham Act, as well as Delaware state laws.  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 damages claimed for disgorgement of SurgiQuest’s alleged profits and attorneys' fees.  On January 4, 2016, SurgiQuest became a subsidiary of CONMED, and we assumed the costs and liabilities related to the Lexion lawsuit subject to the terms of the merger agreement.  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 were recorded in selling and administrative expense during the nine months ended September 30, 2017. The District Court entered judgment on April 13, 2017.  SurgiQuest and Lexion each filed post-verdict motions. Lexion sought an equitable award for disgorgement of SurgiQuest’s alleged profits, for so-called corrective advertising and for attorney’s fees. CONMED sought to vacate the award of punitive damages.  By memorandum decision dated May 16, 2018, the District Court denied both Lexion’s and SurgiQuest’s post-verdict motions. The period within which either Lexion or SurgiQuest was able to pursue an appeal expired in June without either party seeking to appeal the judgment. CONMED paid the judgment, together with post-judgment interest, in a total amount of $12.3 million on July 10, 2018.

In 2014, the Company acquired EndoDynamix, Inc. The agreement governing the terms of the acquisition provides that, if various conditions are met, certain contingent payments relating to the first commercial sale of the products (the milestone payment), as well as royalties based on sales (the revenue based payments), are due to the seller. We had notified the seller that there was a need to redesign the product, and that, as a consequence, the first commercial sale had been delayed. Consequently, the payment of contingent milestone and revenue-based payments were delayed. On January 18, 2017, the seller provided notice ("the Notice") seeking $12.7 million, which essentially represents the seller's view as to the sum of the projected contingent milestone and revenue-based payments on an accelerated basis. CONMED responded to the Notice denying that there was any basis for acceleration of the payments due under the acquisition agreement. On February 22, 2017, the representative of the former shareholders of EndoDynamix filed a complaint in Delaware Chancery Court claiming breach of contract with respect to the duty to commercialize the product and seeking the contingent payments on an accelerated basis. We believe that there was a substantive contractual basis to support the Company's decision to redesign the product, such that there was no legitimate basis for seeking the acceleration of the contingent payments at that time. The Company recently decided to halt the development of the EndoDynamix clip applier for a number of reasons. While we recorded a charge to write off assets and released previously accrued contingent consideration as described in Note 11, we expect to defend the claims asserted by the sellers of EndoDynamix in the Delaware Court, although there can be no assurance that we will prevail in the litigation.

Note 14 – New Accounting Pronouncements
 
Recently Adopted Accounting Standards

In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, along with amendments issued in 2015 and 2016, which is codified in Accounting Standards Codification ("ASC") 606. 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. We adopted this new guidance as of January 1, 2018, applying the modified retrospective method, and it did not have a material impact on our consolidated financial statements as further described in Note 3.

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

14


and amounts generally described as restricted cash or restricted cash equivalents. The Company adopted this new guidance effective January 1, 2018 and it did not have a material impact on the consolidated financial statements.

In March 2017, the FASB issued ASU No. 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.  The Company adopted this new guidance effective January 1, 2018 and it did not have a material impact on the consolidated financial statements.

In May 2017, the FASB issued ASU No. 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. The Company adopted this new guidance effective January 1, 2018 and it did not have a material impact on the consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This guidance requires companies to determine if costs associated with hosted cloud computing services are capitalized or expensed depending on the nature of the cost and the project stage during which they are incurred. Generally, companies will only capitalize costs related to the development and implementation of the cloud computing arrangement. This guidance is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted in any interim period. We early adopted this new guidance, on a prospective basis, effective July 1, 2018 and it did not have a material impact on the consolidated financial statements.

Recently Issued Accounting Standards, Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), along with amendments issued in 2017 and 2018. This ASU requires lessees to record 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 will adopt the new standard on January 1, 2019, and anticipates applying the modified retrospective approach along with certain practical expedients.

We have completed a preliminary assessment of the impact of this ASU, which we expect to finalize during the fourth quarter. We expect the new standard to materially impact our balance sheet by requiring us to record right-of-use assets and lease liabilities related to operating leases that have not been recorded on the balance sheet under current GAAP, but we do not expect this update to have a material impact on our net income, earnings per share or cash flows.
    
In January 2017, the FASB issued ASU No. 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 will be adopting this guidance in conjunction with our annual impairment testing during the fourth quarter of 2018.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU makes more financial and non-financial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess effectiveness. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting and increase transparency as to the scope and results of hedging programs. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. The Company is currently assessing the impact of this guidance on our consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). This ASU provides entities with the option to eliminate the stranded tax effects associated with the change in tax rates under the

15


2017 Tax Cuts and Jobs Act through a reclassification of the stranded tax effects from accumulated other comprehensive income (“AOCI”) to retained earnings. This guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted. The Company is currently assessing the impact of this guidance on our consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07 Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with accounting for employee share-based compensation. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. The Company is currently assessing the impact of this guidance on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. This update is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The Company is currently assessing the impact of this guidance on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Topic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. This ASU is effective for fiscal years beginning after December 15, 2020 and early adoption is permitted. The Company is currently assessing the impact of this guidance on our consolidated financial statements.

Note 15 – Income Taxes

On December 22, 2017 the 2017 Tax Cuts and Jobs Act (“Tax Reform”) was enacted. At December 31, 2017, the Company recorded estimated provisional amounts for the deemed repatriation toll charge implemented by Tax Reform, related to foreign tax credits, deferred tax revaluation amounts and deferred tax liabilities on unremitted foreign earnings. Staff Accounting Bulletin No. (SAB) 118 provides an extended measurement period to finalize the effects of Tax Reform for the period of enactment. During the three and nine months ended September 30, 2018 the Company recorded a provisional tax benefit of $0.2 million, primarily resulting from further analysis of the deemed repatriation toll charge and related foreign tax credits offset in part by the revaluation of certain deferred tax amounts. As the analysis of Tax Reform remains ongoing, further adjustments to the provisional amounts may impact the provision for income taxes in future periods.

FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, ("GILTI") allows for an election to account for GILTI under the deferred method which requires recognizing deferred taxes for basis differences which will impact the GILTI inclusion upon reversal or as a period cost. The Company is still evaluating this election and will complete its accounting for Tax Reform, including this election, within the measurement period prescribed by SAB 118.

Income tax expense has been recorded at an effective tax rate of 7.7% and 16.9% for the three months ended September 30, 2018 and 2017, respectively, and at an effective tax rate of 17.0% and 15.8% for the nine months ended September 30, 2018 and 2017, respectively. The lower effective rate for the three months ended September 30, 2018, as compared to the same period in the prior year, was primarily the result of recording discrete income tax benefits associated with the provisional adjustment for Tax Reform, stock options, and other federal income tax items which reduced the effective rate by 18.5% for the three months ended September 30, 2018 as compared to a reduction of 9.2% for discrete items during the three months ended September 30, 2017. The higher effective rate for the nine months ended September 30, 2018, as compared to the same period in the prior year, was due to increased federal tax expense resulting from adjustments to the December 31, 2017 tax balances related to Tax Reform. In addition, the lower federal statutory tax rate of 21% enacted with Tax Reform was offset by other provisions of Tax Reform including GILTI as well as income earned in foreign jurisdictions with effective tax rates in excess of the federal statutory rate.


16



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, 2017 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;
competition;
changes in technology;
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;
trade protection measures, tariffs and other border taxes, and import or export licensing requirements;
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 an information security breach, including a cybersecurity breach;
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
compliance with 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, 2017 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 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, thoracic surgery and gastroenterology.

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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 as a percentage of consolidated net sales are as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Orthopedic surgery
51
%
 
52
%
 
52
%
 
54
%
General surgery
49
%
 
48
%
 
48
%
 
46
%
Consolidated net sales
100
%
 
100
%
 
100
%
 
100
%

A significant amount of our products are used in surgical procedures with approximately 80% of our revenues derived from the sale of single-use products. Our capital equipment offerings also facilitate the ongoing sale of related disposable products and accessories, thus providing us with a recurring revenue stream. We manufacture substantially all of our products in facilities located in the United States and Mexico. We market our products both domestically and internationally directly to customers and through distributors. International sales approximated 48% during both the nine months ended September 30, 2018 and 2017.

Business Environment

The development, manufacture, sale and distribution of our products are subject to regulation by numerous agencies and legislative bodies, including the U.S. Food and Drug Administration ("FDA") and comparable foreign counterparts. We continually review our production systems for opportunities to reduce operating costs, consolidate product lines or process flows, reduce inventory requirements and optimize existing processes while maintaining compliance with regulations.     

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, 2017 describes the significant accounting policies used in preparation of the Consolidated Financial Statements. On an ongoing basis, we evaluate the critical accounting policies used to prepare our consolidated financial statements, including, but not limited to, those related to:

revenue recognition;
                    
inventory valuation;

goodwill and intangible assets;

pension plan;

stock-based compensation costs; and

income taxes.

See Note 3 to the consolidated condensed financial statements for updates to our accounting policy resulting from the adoption of Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which is codified in Accounting Standards Codification ("ASC") 606.







18


Consolidated Results of Operations

The following table presents, as a percentage of net sales, certain categories included in our consolidated condensed statements of income for the periods indicated:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net sales
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Cost of sales
45.3

 
46.1

 
45.5

 
46.5

Gross profit
54.7

 
53.9

 
54.5

 
53.5

Selling and administrative expense
42.0

 
42.5

 
42.0

 
45.2

Research and development expense
7.0

 
4.3

 
5.2

 
4.2

Income from operations
5.7

 
7.1

 
7.4

 
4.1

Interest expense
2.6

 
2.5

 
2.5

 
2.3

Income before income taxes
3.1

 
4.6

 
4.9

 
1.8

Provision for income taxes
0.2

 
0.8

 
0.8

 
0.3

Net income
2.9
%
 
3.8
%
 
4.1
%
 
1.5
%
Sales

The following table presents net sales by product line for the three and nine months ended September 30, 2018 and 2017:
 
 
Three Months Ended
 
 
 
 
 
% Change
 
2018
 
2017
 
As Reported
 
ASC 606 Impact
 
Impact of Foreign Currency
 
Adjusted a
Orthopedic surgery
$
102.9

 
$
98.6

 
4.4
%
 
0.7
%
 
0.7
 %
 
5.8
%
General surgery
99.4

 
91.5

 
8.6
%
 
1.7
%
 
0.4
 %
 
10.7
%
   Net sales
$
202.3

 
$
190.1

 
6.4
%
 
1.2
%
 
0.5
 %
 
8.1
%
 
 
 
 
 
 
 
 
 
 
 
 
Single-use products
$
159.4

 
$
153.2

 
4.0
%
 
1.4
%
 
0.6
 %
 
6.0
%
Capital products
42.9

 
36.9

 
16.3
%
 
%
 
0.7
 %
 
17.0
%
   Net sales
$
202.3

 
$
190.1

 
6.4
%
 
1.2
%
 
0.5
 %
 
8.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
% Change
 
2018
 
2017
 
As Reported
 
ASC 606 Impact
 
Impact of Foreign Currency
 
Adjusted a
Orthopedic surgery
$
321.9

 
$
307.9

 
4.5
%
 
0.7
%
 
(1.6
)%
 
3.6
%
General surgery
295.3

 
265.9

 
11.0
%
 
1.7
%
 
(0.7
)%
 
12.0
%
   Net sales
$
617.2

 
$
573.8

 
7.6
%
 
1.1
%
 
(1.2
)%
 
7.5
%
 
 
 
 
 
 
 
 
 
 
 
 
Single-use products
$
493.0

 
$
462.4

 
6.6
%
 
1.4
%
 
(1.2
)%
 
6.8
%
Capital products
124.2

 
111.4

 
11.5
%
 
%
 
(1.1
)%
 
10.4
%
   Net sales
$
617.2

 
$
573.8

 
7.6
%
 
1.1
%
 
(1.2
)%
 
7.5
%

(a) Adjusted net sales growth is measured in constant currency and is adjusted for administrative fees that we began recording as a reduction of revenue under ASC 606 on January 1, 2018. Refer to Note 3 to the consolidated condensed financial statements and Non-GAAP Financial Measures below for further details.


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Net sales increased 6.4% and 7.6% in the three and nine months ended September 30, 2018, respectively, compared to the same period a year ago due to growth in both the Orthopedic and General Surgery product lines, as described below. The adoption of ASC 606 reduced sales growth by $2.4 million and $6.3 million in the three and nine months ended September 30, 2018, respectively, as we are required to report certain costs previously recorded in selling and administrative expense, and principally related to administration fees paid to group purchasing organizations, as a reduction of revenue beginning in 2018.  

Orthopedic surgery sales increased 4.4% and 4.5% in the three and nine months ended September 30, 2018, respectively, primarily due to continued growth in our sports medicine and powered instrument offerings driven by the introduction of new products.

General surgery sales increased 8.6% and 11.0% in the three and nine months ended September 30, 2018, respectively, driven by continued sales growth from all product offerings. New product introductions and continued strong AirSeal® sales contributed to this growth.
Cost of Sales

Cost of sales increased to $91.7 million in the three months ended September 30, 2018 as compared to $87.6 million in the three months ended September 30, 2017. Gross profit margins increased 0.8 percentage points to 54.7% in the three months ended September 30, 2018 as compared to 53.9% in the three months ended September 30, 2017. The increase in gross profit margins of 0.8 percentage points in the three months ended September 30, 2018 was mainly a result of a decrease in restructuring costs and product mix offset by the impact of the adoption of ASC 606.

Cost of sales increased to $280.7 million in the nine months ended September 30, 2018 as compared to $266.8 million in the nine months ended September 30, 2017. Gross profit margins increased 1.0 percentage point to 54.5% in the nine months ended September 30, 2018 as compared to 53.5% in the nine months ended September 30, 2017. The increase in gross profit margins of 1.0 percentage point in the nine months ended September 30, 2018 was mainly a result of favorable foreign exchange rates on sales, a decrease in restructuring costs and product mix offset by the impact of the adoption of ASC 606.

Selling and Administrative Expense

Selling and administrative expense increased to $85.0 million in the three months ended September 30, 2018 as compared to $80.8 million in the three months ended September 30, 2017 and decreased to $259.2 million in the nine months ended September 30, 2018 as compared to $259.4 million in the nine months ended September 30, 2017. Selling and administrative expense as a percentage of net sales decreased to 42.0% in the three months ended September 30, 2018 as compared to 42.5% in the three months ended September 30, 2017 and decreased to 42.0% in the nine months ended September 30, 2018 as compared to 45.2% in the nine months ended September 30, 2017.

The 0.5 percentage point decrease in selling and administrative expense as a percentage of net sales in the three months ended September 30, 2018 as compared to the same period a year ago included a $2.4 million (1.1 percentage point) reduction in selling and administrative expense due to the adoption of ASC 606 as we are required to report certain costs previously recorded in selling and administrative expense, and principally related to administration fees paid to group purchasing organizations, as a reduction of revenue beginning in 2018. This decrease was offset by a $1.1 million (0.5 percentage points) charge associated with a vacant lease during the three months ended September 30, 2018 as further described in Note 11 to the consolidated condensed financial statements.

The significant factors affecting the 3.2 percentage point decrease in selling and administrative expense as a percentage of net sales in the nine months ended September 30, 2018 as compared to the same period a year ago included (1) a $6.3 million (1.0 percentage point) reduction in selling and administrative expense due to the adoption of ASC 606 as we are required to report certain costs previously recorded in selling and administrative expense, and principally related to administration fees paid to group purchasing organizations, as a reduction of revenue beginning in 2018 and (2) a $17.0 million (3.0 percentage point) decrease primarily associated with the $12.2 million SurgiQuest, Inc. vs. Lexion Medical litigation verdict as further described in Notes 11 and 13 to the consolidated condensed financial statements and legal fees associated with this and other legal matters during 2017. These decreases were primarily offset by a charge associated with a vacant lease in 2018 that increased selling and administrative expense by $1.1 million as further described in Note 11 and incremental compensation costs.

Research and Development Expense

Research and development expense increased to $14.1 million in the three months ended September 30, 2018 as compared to $8.3 million in the three months ended September 30, 2017 and increased to $31.8 million in the nine months ended September 30,

20


2018 as compared to $23.9 million in the nine months ended September 30, 2017. As a percentage of net sales, research and development expense increased 2.7 percentage points to 7.0% in the three months ended September 30, 2018 as compared to 4.3% in the three months ended September 30, 2017 and increased 1.0 percentage point to 5.2% in the nine months ended September 30, 2018 as compared to 4.2% in the nine months ended September 30, 2017. The increase in both periods resulted from the recording of a net charge of $4.2 million mainly associated with the impairment of an in-process research and development asset, net of the release of previously accrued contingent consideration in other current and long-term liabilities, as further described in Notes 11 and 13, and our continued efforts to increase new product development.

Interest Expense

Interest expense increased to $5.2 million in the three months ended September 30, 2018 from $4.8 million in the three months ended September 30, 2017 and increased to $15.1 million in the nine months ended September 30, 2018 from $13.3 million in the nine months ended September 30, 2017 due to higher interest rates compared to the same periods a year ago. The weighted average interest rates on our borrowings increased to 4.45% in the three months ended September 30, 2018 as compared to 3.68% in the three months ended September 30, 2017 and increased to 4.23% in the nine months ended September 30, 2018 as compared to 3.44% in the nine months ended September 30, 2017.

Provision for Income Taxes

On December 22, 2017, the 2017 Tax Cuts and Jobs Act (“Tax Reform”) was enacted. Tax Reform made significant changes to U.S. federal income tax laws including permanently lowering the federal statutory tax rate from 35% to 21% effective January 1, 2018.

Income tax expense has been recorded at an effective tax rate of 7.7% and 16.9% for the three months ended September 30, 2018 and 2017, respectively, and at an effective tax rate of 17.0% and 15.8% for the nine months ended September 30, 2018 and 2017, respectively. The lower effective rate for the three months ended September 30, 2018, as compared to the same period in the prior year, was primarily the result of recording discrete income tax benefits associated with the provisional adjustment for Tax Reform, stock options, and other federal income tax items which reduced the effective rate by 18.5% for the three months ended September 30, 2018 as compared to a reduction of 9.2% for discrete items during the three months ended September 30, 2017. The higher effective rate for the nine months ended September 30, 2018, as compared to the same period in the prior year, was due to increased federal tax expense resulting from adjustments to the December 31, 2017 tax balances related to Tax Reform. In addition, the lower federal statutory tax rate of 21% enacted with Tax Reform was offset by other provisions of Tax Reform including global intangible low-taxed income (“GILTI”) as well as income earned in foreign jurisdictions with effective tax rates in excess of the federal statutory rate. Refer to Note 15 in the consolidated condensed financial statements for further information regarding the impact of Tax Reform to the three and nine months ended September 30, 2018. 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, 2017, under Note 7 to the consolidated financial statements.

Non-GAAP Financial Measures

Net sales on an "adjusted" basis is a non-GAAP measure that presents net sales in "constant currency" and adjusts for the adoption impact of ASC 606. The Company analyzes net sales on a constant currency basis to better measure the comparability of results between periods. To measure percentage sales growth in constant currency, the Company removes the impact of changes in foreign currency exchange rates that affect the comparability and trend of net sales. In addition, the Company adjusts for the adoption impact of ASC 606. For GAAP purposes, we applied the modified retrospective transition approach which requires certain costs previously included in selling and administrative expense and principally related to administrative fees paid to group purchasing organizations, to be recorded as a reduction of revenue for periods subsequent to January 1, 2018.  Amounts reported in prior years remain unchanged with these administrative fees included in selling and administrative expense.  To improve comparability between reporting periods, we assumed ASC 606 had been applied as of January 1, 2017 thereby reducing net sales by the administrative fees for both periods when calculating adjusted sales growth.

Because non-GAAP financial measures are not standardized, it may not be possible to compare this financial measure with other companies' non-GAAP financial measures having the same or similar names. This adjusted financial measure should not be considered in isolation or as a substitute for reported net sales growth, the most directly comparable GAAP financial measure. This non-GAAP financial measure is an additional way of viewing net sales that, when viewed with our GAAP results, provides a more complete understanding of our business. The Company strongly encourages investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.



21


Liquidity and Capital Resources

Our liquidity needs arise primarily from capital investments, working capital requirements and payments on indebtedness under the fifth amended and restated senior credit agreement, described below. We have historically met these liquidity requirements with funds generated from operations and borrowings under our revolving credit facility. In addition, we have historically used term borrowings, including borrowings under the fifth amended and restated senior credit agreement, and borrowings under separate loan facilities, in the case of real property purchases, to finance our acquisitions. We also have the ability to raise funds through the sale of stock or we may issue debt through a private placement or public offering. Management believes that cash flow from operations, including cash and cash equivalents on hand and available borrowing capacity under our fifth amended and restated senior credit agreement, will be adequate to meet our anticipated operating working capital requirements, debt service, funding of capital expenditures and common stock repurchases in the foreseeable future.

Operating cash flows

Our net working capital position was $198.6 million at September 30, 2018.  Net cash provided by operating activities was $50.0 million and $44.8 million in the nine months ended September 30, 2018 and 2017, respectively, generated on net income of $25.2 million and $8.8 million for the nine months ended September 30, 2018 and 2017, respectively.

The increase in cash flows from operating activities for the nine months ended September 30, 2018 as compared to the same period a year ago is primarily due to the increase in net income as 2017 included costs associated with restructuring and legal matters as further described in Note 11 to the consolidated condensed financial statements, including a $12.2 million accrual related to the Lexion trial verdict that was recorded during the nine months ended September 30, 2017. This accrual was subsequently paid in third quarter of 2018, thereby partially offsetting the increase in net income.

Investing cash flows

Net cash used in investing activities in the nine months ended September 30, 2018 consisted of capital expenditures. Capital expenditures were $11.8 million and $9.2 million in the nine months ended September 30, 2018 and 2017, respectively, and are expected to approximate $15.0 million in 2018.

Financing cash flows

Net cash used in financing activities in the nine months ended September 30, 2018 and 2017 was $40.6 million and $7.2 million, respectively. Below is a summary of the significant financing activities:

During the nine months ended September 30, 2018, we had net payments on our revolving line of credit of $15.0 million compared to net borrowings of $17.0 million during the nine months ended September 30, 2017.

During the nine months ended September 30, 2018 and 2017, we repaid $9.8 million and $6.6 million, respectively, on our term loan in accordance with the agreement.

Dividend payments were $16.8 million and $16.7 million during the nine months ended September 30, 2018 and 2017, respectively.

On January 4, 2016, we entered into a fifth amended and restated senior credit agreement consisting of: (a) a $175.0 million term loan facility and (b) a $525.0 million revolving credit facility both expiring on January 4, 2021. The term loan is payable in quarterly installments increasing over the term of the facility. Proceeds from the term loan facility and borrowings under the revolving credit facility were used to repay the then existing senior credit agreement and to finance the acquisition of SurgiQuest. Interest rates are at LIBOR plus 1.875% (4.125% at September 30, 2018). For those borrowings where we elect to use the alternative base rate, the base rate will be the greater of the Prime Rate, the Federal Funds Rate plus 0.50% or the one-month Eurocurrency Rate plus 0.875%.

There were $147.7 million in borrowings outstanding on the term loan as of September 30, 2018. There were $312.0 million in borrowings outstanding under the revolving credit facility as of September 30, 2018. Our available borrowings on the revolving credit facility at September 30, 2018 were $210.0 million with approximately $3.0 million of the facility set aside for outstanding letters of credit.

The fifth amended and restated senior credit agreement is collateralized by substantially all of our personal property and assets. The fifth amended and restated senior credit agreement contains covenants and restrictions which, among other things,

22


require the maintenance of certain financial ratios and restrict dividend payments and the incurrence of certain indebtedness and other activities, including acquisitions and dispositions. We were in full compliance with these covenants and restrictions as of September 30, 2018. We are also required, under certain circumstances, to make mandatory prepayments from net cash proceeds from any issuance of equity and asset sales.

We have a mortgage note outstanding in connection with the Largo, Florida property and facilities bearing interest at 8.25% per annum with semiannual payments of principal and interest through June 2019. The principal balance outstanding on the mortgage note aggregated $1.6 million at September 30, 2018. The mortgage note is collateralized by the Largo, Florida property and facilities.

Our Board of Directors has authorized a $200.0 million share repurchase program. Through September 30, 2018, we have repurchased a total of 6.1 million shares of common stock aggregating $162.6 million under this authorization and have $37.4 million remaining available for share repurchases. The repurchase program calls for shares to be purchased in the open market or in private transactions from time to time. We may suspend or discontinue the share repurchase program at any time. We have not purchased any shares of common stock under the share repurchase program during 2018. We have financed the repurchases and may finance additional repurchases through operating cash flow and from available borrowings under our revolving credit facility.

Management believes that cash flow from operations, including cash and cash equivalents on hand and available borrowing capacity under our fifth amended and restated senior credit agreement, will be adequate to meet our anticipated operating working capital requirements, debt service, funding of capital expenditures and common stock repurchases in the foreseeable future.

New accounting pronouncements

See Note 14 to the consolidated condensed financial statements for a discussion of new accounting pronouncements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no significant changes in our primary market risk exposures or in how these exposures are managed during the nine months ended September 30, 2018.  Reference is made to Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2017 for a description of Qualitative and Quantitative Disclosures About Market Risk.
 
Item 4.  Controls and Procedures
 
As of the end of the period covered by this report, an evaluation was carried out by CONMED Corporation’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934).  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report.  In addition, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) occurred during the quarter ended September 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


PART II OTHER INFORMATION

Item 1. Legal Proceedings

Reference is made to Item 3 of the Company’s Annual Report on Form 10-K for the year-ended December 31, 2017 and to Note 13 of the Notes to Consolidated Condensed Financial Statements included in Part I of this Report for a description of certain legal matters.

23




Item 6. Exhibits

Exhibit Index
 
 
 
 
Exhibit No.
Description of Exhibit
Sequential Page Number
 
 
 
31.1
E-1
 
 
 
31.2
E-2
 
 
 
32.1
E-3
 
 
 
101
The following materials from CONMED Corporation's Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2018 formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Condensed Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017, (ii) the Consolidated Condensed Balance Sheets at September 30, 2018 and December 31, 2017, (iii) Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2018 and 2017, and (iv) Notes to Consolidated Condensed Financial Statements for the three and nine months ended September 30, 2018.  In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
 

24


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on the date indicated below.

 
 
CONMED CORPORATION
 
 
 
 
 
 
 
 
 
 
 
By: /s/ Todd W. Garner
 
 
Todd W. Garner
 
 
Executive Vice President and
 
 
Chief Financial Officer
 
 
 
 
 
Date:  
 
 
November 2, 2018


25