10-Q 1 cnmd-20220331.htm 10-Q cnmd-20220331
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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
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedCommission File Number
March 31, 2022001-39218
CONMED CORPORATION
(Exact name of the registrant as specified in its charter)
Delaware16-0977505
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
11311 Concept BlvdLargo,Florida33773
(Address of principal executive offices)(Zip Code)
(727) 392-6464
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.01 par valueCNMDNYSE
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    No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  

Yes    No

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     Accelerated filer     Non-accelerated filer

Smaller reporting company     Emerging growth company

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No

The number of shares outstanding of registrant's common stock, as of May 2, 2022 is 29,526,009 shares.



CONMED CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2022
PART I FINANCIAL INFORMATION
Item NumberPage
   
 
   
 
   
 
   
 
   
 
   
   
   
   
   
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
 March 31,
 20222021
Net sales$242,327 $232,677 
Cost of sales106,336 104,228 
Gross profit135,991 128,449 
Selling and administrative expense102,875 98,340 
Research and development expense10,672 10,027 
  Operating expenses113,547 108,367 
Income from operations22,444 20,082 
Interest expense4,998 10,351 
Income before income taxes17,446 9,731 
Provision for (benefit from) income taxes2,471 (129)
Net income$14,975 $9,860 
Comprehensive income$16,415 $10,743 
Per share data: 
Net income 
Basic$0.51 $0.34 
Diluted0.47 0.31 
Weighted average common shares
Basic29,428 28,972 
Diluted35,155 31,378 

 See notes to consolidated condensed financial statements.
1

CONMED CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited, in thousands except share and per share amounts)
 
March 31,
2022
December 31,
2021
ASSETS 
Current assets: 
Cash and cash equivalents$24,864 $20,847 
Accounts receivable, net183,248 183,882 
Inventories253,729 231,644 
Prepaid expenses and other current assets26,459 23,750 
Total current assets488,300 460,123 
Property, plant and equipment, net108,526 108,863 
Goodwill617,534 617,528 
Other intangible assets, net463,421 471,049 
Other assets107,943 108,454 
Total assets$1,785,724 $1,766,017 
LIABILITIES AND SHAREHOLDERS' EQUITY 
Current liabilities: 
Current portion of long-term debt$12,231 $12,249 
Accounts payable67,458 58,197 
Accrued compensation and benefits45,423 60,488 
Other current liabilities62,485 65,712 
Total current liabilities187,597 196,646 
Long-term debt703,542 672,407 
Deferred income taxes63,226 68,537 
Other long-term liabilities41,813 42,992 
Total liabilities996,178 980,582 
Commitments and contingencies
Shareholders' equity: 
Preferred stock, par value $0.01 per share;
 
authorized 500,000 shares; none outstanding
  
Common stock, par value $0.01 per share;
100,000,000 shares authorized; 31,299,194 shares
issued in 2022 and 2021, respectively
313 313 
Paid-in capital365,555 396,771 
Retained earnings526,472 496,605 
Accumulated other comprehensive loss(52,763)(54,203)
Less: 1,782,667 and 1,925,893 shares of common stock
in treasury, at cost in 2022 and 2021, respectively
(50,031)(54,051)
Total shareholders’ equity789,546 785,435 
Total liabilities and shareholders’ equity$1,785,724 $1,766,017 

 See notes to consolidated condensed financial statements.
2


CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited, in thousands except per share amounts)
 Common StockPaid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury
Stock
Shareholders’
Equity
 SharesAmount
Balance at December 31, 202131,299 $313 $396,771 $496,605 $(54,203)$(54,051)$785,435 
Common stock issued under employee plans  2,232  4,020 6,252 
Stock-based compensation  4,463    4,463 
Dividends on common stock ($0.20 per share)
(5,899)(5,899)
Comprehensive income (loss):
Cash flow hedging gain, net1,082 
Pension liability, net521 
Foreign currency translation adjustments(163)
Net income14,975 
Total comprehensive income16,415 
Cumulative effect of change in accounting principle(1)
(37,911)20,791 (17,120)
Balance at March 31, 202231,299 $313 $365,555 $526,472 $(52,763)$(50,031)$789,546 

 Common StockPaid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury
Stock
Shareholders’
Equity
 SharesAmount
Balance at December 31, 202031,299 $313 $382,628 $457,417 $(63,681)$(67,639)$709,038 
Common stock issued under employee plans  2,944  5,271 8,215 
Stock-based compensation  3,387    3,387 
Dividends on common stock ($0.20 per share)
(5,813)(5,813)
Comprehensive income (loss):
Cash flow hedging gain, net3,926 
Pension liability, net631 
Foreign currency translation adjustments(3,674)
Net income9,860 
Total comprehensive loss10,743 
Balance at March 31, 202131,299 $313 $388,959 $461,464 $(62,798)$(62,368)$725,570 
(1)We recorded the cumulative impact of adopting ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity in 2022. Refer to Note 3 for further detail.

See notes to consolidated condensed financial statements.

3

CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 Three Months Ended
 March 31,
 20222021
Cash flows from operating activities: 
Net income$14,975 $9,860 
Adjustments to reconcile net income to net cash provided by operating activities: 
Depreciation4,032 4,757 
Amortization of debt discount 2,503 
Amortization of deferred debt issuance costs880 1,058 
Amortization12,799 13,519 
Stock-based compensation4,463 3,387 
Deferred income taxes177 (2,688)
Increase (decrease) in cash flows from changes in assets and liabilities:  
Accounts receivable(163)11,957 
Inventories(21,857)(11,638)
Accounts payable9,205 2,804 
Accrued compensation and benefits(14,966)(8,955)
Other assets(6,129)(6,002)
Other liabilities(3,088)1,782 
Net cash provided by operating activities328 22,344 
Cash flows from investing activities: 
Purchases of property, plant and equipment(3,687)(3,109)
Net cash used in investing activities(3,687)(3,109)
Cash flows from financing activities: 
Payments on term loan(2,981)(3,313)
Payments on revolving line of credit(99,000)(72,000)
Proceeds from revolving line of credit110,000 64,000 
Payments related to contingent consideration(798) 
Dividends paid on common stock(5,874)(5,775)
Other, net6,142 8,216 
Net cash provided by (used in) financing activities7,489 (8,872)
Effect of exchange rate changes on cash and cash equivalents(113)(950)
Net increase in cash and cash equivalents4,017 9,413 
Cash and cash equivalents at beginning of period20,847 27,356 
Cash and cash equivalents at end of period$24,864 $36,769 
Non-cash investing and financing activities:
   Dividends payable$5,899 $5,813 

See notes to consolidated condensed financial statements.
4

CONMED CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, in thousands except per share amounts)

Note 1 – Operations

CONMED Corporation (“CONMED”, the “Company”, “we” or “us”) is a medical technology company that provides surgical devices and equipment for minimally invasive procedures.  The Company’s products are used by surgeons and other healthcare professionals in a variety of specialties including orthopedics, general surgery, gynecology, thoracic surgery and gastroenterology.

Note 2 - Interim Financial Information

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. The information herein reflects all normal recurring material adjustments, which are, in the opinion of management, necessary to fairly present the results for the periods presented. The consolidated condensed financial statements herein consist of all wholly-owned domestic and foreign subsidiaries with all significant intercompany transactions eliminated. Results for the period ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

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, 2021 included in our Annual Report on Form 10-K.

Use of Estimates

Preparation of the consolidated condensed financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated condensed financial statements and the reported amounts of revenue and expenses during the reporting period.

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require an update to our estimates or judgments or a revision of the carrying value of our assets or liabilities as of May 5, 2022, the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.

Note 3 – New Accounting Pronouncements
    
Recently Adopted Accounting Standards

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity ("ASU 2020-06"), which simplifies the accounting for convertible instruments by removing certain separation models requiring separate accounting for embedded conversion features which will result in more convertible debt instruments accounted for as a single liability. The ASU eliminates certain settlement conditions that are required for equity classification to qualify for the derivative scope exception. The ASU addresses how convertible instruments are accounted for in the calculation of diluted earnings per share by using the if-converted method. The ASU is effective for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. The Company adopted this standard on January 1, 2022 using the modified retrospective method. The adoption of this new guidance resulted in an increase of approximately $22.6 million to long-term debt in the consolidated condensed balance sheets, to reflect the full principal amount of the convertible notes outstanding net of issuance costs, a reduction of approximately $37.9 million to additional paid-in capital, net of income tax effects, to remove the equity component separately recorded for the conversion features associated with the convertible notes, a decrease to deferred income tax liabilities of approximately $5.5 million, and a cumulative-effect adjustment of approximately $20.8 million, net of income tax effects, to the beginning balance of retained earnings as of January 1, 2022. The adoption of this new guidance reduced interest expense related to amortization of debt discount by approximately $2.6 million during the three months ended March 31, 2022 and is expected to reduce interest expense by approximately $10.4 million for the year ended December 31, 2022.
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Additionally, the dilutive share count increased by approximately 2.5 million shares as a result of calculating the impact of dilution from the Company's convertible notes using the if-converted method. Diluted EPS increased by approximately $0.07 in the quarter ended March 31, 2022 as a result of adoption of this new standard.

Recently Issued Accounting Standards, Not Yet Adopted
    
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance if certain criteria are met for entities that have contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued as a result of reference rate reform. This ASU is effective as of March 12, 2020 through December 31, 2022. The Company has not adopted this ASU as of March 31, 2022. Our seventh amended and restated senior credit agreement includes language to address the change from LIBOR to an alternative base rate, therefore we do not believe reference rate reform will have a significant impact on our consolidated financial statements, however will continue to monitor our transition away from LIBOR and the potential to elect to apply this guidance in our consolidated financial statements in the event that we are impacted by reference rate reform.


Note 4 - Revenues
    
The following tables present revenue disaggregated by primary geographic market where the products are sold, by product line and timing of revenue recognition:
Three Months EndedThree Months Ended
March 31, 2022March 31, 2021
 Orthopedic SurgeryGeneral SurgeryTotalOrthopedic SurgeryGeneral SurgeryTotal
Primary Geographic Markets
United States$37,947 $93,280 $131,227 $37,131 $86,812 $123,943 
Europe, Middle East & Africa29,980 20,326 50,306 26,052 18,544 44,596 
Asia Pacific23,418 12,954 36,372 26,602 12,662 39,264 
Americas (excluding the United States)16,172 8,250 24,422 17,381 7,493 24,874 
Total sales from contracts with customers$107,517 $134,810 $242,327 $107,166 $125,511 $232,677 
Timing of Revenue Recognition
Goods transferred at a point in time$98,204 $133,322 $231,526 $97,690 $124,394 $222,084 
Services transferred over time9,313 1,488 10,801 9,476 1,117 10,593 
Total sales from contracts with customers$107,517 $134,810 $242,327 $107,166 $125,511 $232,677 


Contract liability balances related to the sale of extended warranties to customers are as follows:

March 31, 2022December 31, 2021
Contract liability$17,534 $16,760 
    
Revenue recognized during the three months ended March 31, 2022 and March 31, 2021 from amounts included in contract liabilities at the beginning of the period were $3.9 million and $3.4 million, respectively. There were no material contract assets as of March 31, 2022 and December 31, 2021.

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Note 5 – Comprehensive Income

Comprehensive income consists of the following:
 
Three Months Ended March 31,
 20222021
Net income$14,975 $9,860 
Other comprehensive income (loss):
Cash flow hedging gain, net of income tax (income tax expense of $346 and $1,250 for the three months ended March 31, 2022 and 2021, respectively)
1,082 3,926 
Pension liability, net of income tax (income tax expense of $127 and $201 for the three months ended March 31, 2022 and 2021, respectively)
521 631 
Foreign currency translation adjustment(163)(3,674)
Comprehensive income$16,415 $10,743 

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, 2021$3,656 $(29,671)$(28,188)$(54,203)
Other comprehensive income (loss) before reclassifications, net of tax2,460  (163)2,297 
Amounts reclassified from accumulated other comprehensive income (loss) before taxa
(1,819)648  (1,171)
Income tax 441 (127) 314 
Net current-period other comprehensive income (loss)1,082 521 (163)1,440 
Balance, March 31, 2022$4,738 $(29,150)$(28,351)$(52,763)
Cash Flow
Hedging
Gain (Loss)
Pension
Liability
Cumulative
Translation
Adjustments
Accumulated
Other
Comprehensive
Income (Loss)
Balance, December 31, 2020$(5,945)$(36,620)$(21,116)$(63,681)
Other comprehensive income (loss) before reclassifications, net of tax2,725  (3,674)(949)
Amounts reclassified from accumulated other comprehensive income (loss) before taxa
1,584 832  2,416 
Income tax (383)(201) (584)
Net current-period other comprehensive income (loss)3,926 631 (3,674)883 
Balance, March 31, 2021$(2,019)$(35,989)$(24,790)$(62,798)
(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 6 and Note 12, respectively, for further details.

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Note 6 – Fair Value of Financial Instruments
 
 We enter into derivative instruments for risk management purposes only. We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates, foreign exchange rates and commodity prices. These fluctuations can increase the costs of financing, investing and operating the business. We use forward contracts, a type of derivative instrument, to manage certain foreign currency exposures.
 
By nature, all financial instruments involve market and credit risks. We enter into forward contracts with major investment grade financial institutions and have policies to monitor the credit risk of those counterparties. While there can be no assurance, we do not anticipate any material non-performance by any of these counterparties.
 
Foreign Currency Forward Contracts. We hedge forecasted intercompany sales denominated in foreign currencies through the use of forward contracts.  We account for these forward contracts as cash flow hedges.  To the extent these forward contracts meet hedge accounting criteria, changes in their fair value are not included in current earnings but are included in accumulated other comprehensive loss.  These changes in fair value will be recognized into earnings as a component of sales or cost of sales when the forecasted transaction occurs.  

We also enter into forward contracts to exchange foreign currencies for United States dollars in order to hedge our currency transaction exposures on intercompany receivables designated in foreign currencies.  These forward contracts settle each month at month-end, at which time we enter into new forward contracts.  We have not designated these forward contracts as hedges and have not applied hedge accounting to them.  

The following table presents the notional contract amounts for forward contracts outstanding:

As of
FASB ASC Topic 815 DesignationMarch 31, 2022December 31, 2021
Forward exchange contractsCash flow hedge$189,696 $172,894 
Forward exchange contractsNon-designated57,255 38,897 

The remaining time to maturity as of March 31, 2022 is within two years for hedge designated foreign exchange contracts and approximately one month for non-hedge designated forward exchange contracts.

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Statement of comprehensive income presentation

Derivatives designated as cash flow hedges

Foreign exchange contracts designated as cash flow hedges had the following effects on accumulated other comprehensive income (loss) ("AOCI") and net earnings on our consolidated condensed statements of comprehensive income and our consolidated condensed balance sheets:

Amount of Gain Recognized in AOCIConsolidated Condensed Statements of Comprehensive IncomeAmount of Gain (Loss) Reclassified from AOCI
Three Months Ended March 31,
Total Amount of Line Item Presented
Derivative Instrument20222021Location of amount reclassified2022202120222021
Foreign exchange contracts$3,247 $3,593 Net Sales$242,327 $232,677 $1,744 $(1,849)
 Cost of Sales106,336 104,228 75 265 
Pre-tax gain (loss)$3,247 $3,593 $1,819 $(1,584)
Tax expense (benefit)787 868 441 (383)
Net gain (loss)$2,460 $2,725 $1,378 $(1,201)

At March 31, 2022, $4.5 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.

Derivatives not designated as cash flow hedges

Net gains and losses from derivative instruments not accounted for as hedges and gains and losses on our intercompany receivables on our consolidated condensed statements of comprehensive income were:

Three Months Ended March 31,
Derivative InstrumentLocation on Consolidated Condensed Statements of Comprehensive Income20222021
 
Net gain (loss) on currency forward contractsSelling and administrative expense$(958)$458 
Net gain (loss) on currency transaction exposuresSelling and administrative expense$415 $(1,123)

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Balance sheet presentation

We record these forward foreign exchange contracts at fair value. The following tables summarize the fair value for forward foreign exchange contracts outstanding at March 31, 2022 and December 31, 2021:

March 31, 2022Location on Consolidated Condensed Balance SheetAsset Fair ValueLiabilities Fair ValueNet
Fair
Value
Derivatives designated as hedged instruments:   
Foreign exchange contractsPrepaid expenses and other current assets$6,518 $(570)$5,948 
Foreign exchange contractsOther long-term assets651 (344)307 
$7,169 $(914)$6,255 
Derivatives not designated as hedging instruments:   
Foreign exchange contractsOther current liabilities46 (213)(167)
Total derivatives$7,215 $(1,127)$6,088 

December 31, 2021Location on Consolidated Condensed Balance SheetAsset Fair ValueLiabilities Fair ValueNet
Fair
Value
Derivatives designated as hedged instruments:  
Foreign exchange contracts Prepaid expenses and other current assets$5,331 $(430)$4,901 
Foreign exchange contractsOther long-term liabilities82 (161)(79)
$5,413 $(591)$4,822 
Derivatives not designated as hedging instruments:  
Foreign exchange contractsOther current liabilities38 (180)(142)
Total derivatives$5,451 $(771)$4,680 

Our forward foreign exchange contracts are subject to a master netting agreement and qualify for netting in the consolidated condensed balance sheets.
 
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.
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Valuation Techniques. Assets and liabilities carried at fair value and measured on a recurring basis as of March 31, 2022 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 variable long-term debt approximate fair value.  

Note 7 - Inventories

Inventories consist of the following:

March 31,
2022
December 31,
2021
Raw materials$89,986 $83,386 
Work-in-process22,210 17,449 
Finished goods141,533 130,809 
Total$253,729 $231,644 
 
Note 8 – 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 compensation as well as the 2.625% convertible notes due in 2024 (the “Notes”) and related hedge transactions during the period.

The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31, 2022
 Basic EPSAdjustmentsDiluted EPS
Net income$14,975 $1,715 $16,690 
Weighted average shares outstanding29,428 — 29,428 
Employee stock compensation— 1,158 1,158 
Warrants— 684 684 
Convertible notes— 3,885 3,885 
29,428 5,727 35,155 
EPS$0.51 $0.47 
 
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Three Months Ended March 31, 2021
 Basic EPSAdjustmentsDiluted EPS
Net income$9,860 $ $9,860 
Weighted average shares outstanding28,972 — 28,972 
Employee stock compensation— 1,221 1,221 
Warrants— 170 170 
Convertible notes— 1,015 1,015 
28,972 2,406 31,378 
EPS$0.34 $0.31 

The shares used in the calculation of diluted EPS exclude employee stock options and stock appreciation rights 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.

The Notes are convertible under certain circumstances, as defined in the indenture, into a combination of cash and CONMED common stock.  The following is intended to describe the impact of the Notes and related hedge transactions on the calculation of diluted EPS. Additional shares to be issued pursuant to the terms of the Notes and related hedge transactions, if any, would occur at maturity.

Effective with our adoption of ASU 2020-06 on January 1, 2022 (refer to Note 3 for further detail), the Company began using the if-converted method to compute diluted EPS. Under the if-converted method, in the calculation of diluted EPS, the numerator is adjusted for interest expense applicable to the convertible notes (net of tax) and the denominator is adjusted to include additional common shares assuming the principal portion of the Notes and the conversion premium are settled in common shares.

For periods prior to adoption of ASU 2020-06, the calculation of diluted EPS includes potential diluted shares upon conversion of the Notes only when the average market price per share of our common stock for the period is greater than the conversion price of the Notes of $88.80 and only for the conversion premium with the principal portion of the Notes assumed to be settled in cash.

We previously entered into convertible notes hedge transactions to increase the effective conversion price of the Notes from $88.80 to $114.92.  However, our convertible notes hedges are not included when calculating potential dilutive shares since their effect is always anti-dilutive. Concurrent with entering into the hedge transactions, we entered into warrant transactions under which we agreed to sell shares of our common stock at $114.92. The calculation of diluted EPS includes potential diluted shares to be issued under the warrants when the average market price per share of our common stock for the period is greater than $114.92, calculated under the treasury stock method.


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Note 9 – Goodwill and Other Intangible Assets

The changes in the net carrying amount of goodwill for the three months ended March 31, 2022 are as follows:

Balance as of December 31, 2021$617,528 
Foreign currency translation6 
Balance as of March 31, 2022$617,534 
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:

 March 31, 2022December 31, 2021
Weighted Average Amortization Period (Years)Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
Intangible assets with definite lives:22
Customer and distributor relationships25$342,391 $(157,285)$342,452 $(152,934)
Sales representation, marketing and promotional rights25149,376 (61,500)149,376 (60,000)
Developed technology16106,604 (28,266)106,604 (26,495)
Patents and other intangible assets1576,849 (51,292)76,392 (50,890)
Intangible assets with indefinite lives:    
Trademarks and tradenames86,544 — 86,544 — 
$761,764 $(298,343)$761,368 $(290,319)

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

Amortization expense related to intangible assets which are subject to amortization totaled $8.0 million and $8.3 million in the three months ended March 31, 2022 and 2021, 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.
 
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The estimated intangible asset amortization expense remaining for the year ending December 31, 2022 and for each of the five succeeding years is as follows:
 
Amortization included in expenseAmortization recorded as a reduction of revenueTotal
Remaining, 2022$18,321 $4,500 $22,821 
202325,729 6,000 31,729 
202425,205 6,000 31,205 
202525,400 6,000 31,400 
202624,889 6,000 30,889 
202724,499 6,000 30,499 

Note 10 - Long-Term Debt

Long-term debt consists of the following:

 March 31, 2022December 31, 2021
Revolving line of credit$151,000 $140,000 
Term loan, net of deferred debt issuance costs of $1,297 and $1,373 in 2022 and 2021, respectively
223,290 226,196 
2.625% convertible notes, net of deferred debt issuance costs of $3,986 and $3,700 in 2022 and 2021, respectively, and unamortized discount of $23,404 in 2021
341,014 317,896 
Financing leases469 564 
Total debt715,773 684,656 
Less:  Current portion12,231 12,249 
Total long-term debt$703,542 $672,407 

On July 16, 2021, we entered into a seventh amended and restated senior credit agreement consisting of: (a) a $233.5 million term loan facility and (b) a $585.0 million revolving credit facility. The revolving credit facility will terminate and the loans outstanding under the term loan facility will expire on July 16, 2026. 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. Interest rates are at LIBOR (0.50% at March 31, 2022) plus an interest rate margin of 1.25% (1.750% at March 31, 2022). For borrowings where we elect to use the alternate base rate, the initial base rate is the greatest of (i) the Prime Rate, (ii) the Federal Funds Rate plus 0.50% or (iii) the one-month Adjusted LIBOR plus 1.00%, plus, in each case, an interest rate margin.

There were $224.6 million in borrowings outstanding on the term loan facility as of March 31, 2022. There were $151.0 million in borrowings outstanding under the revolving credit facility as of March 31, 2022. Our available borrowings on the revolving credit facility at March 31, 2022 were $431.8 million with approximately $2.2 million of the facility set aside for outstanding letters of credit.
    
The seventh amended and restated senior credit agreement is collateralized by substantially all of our personal property and assets. The seventh amended and restated senior credit agreement contains covenants and restrictions which, among other things, require the maintenance of certain financial ratios and restrict dividend payments and the incurrence of certain indebtedness and other activities, including acquisitions and dispositions. We were in full compliance with these covenants and restrictions as of March 31, 2022. We are also required, under certain circumstances, to make mandatory prepayments from net cash proceeds from any issuance of equity and asset sales.

On January 29, 2019, we issued $345.0 million in 2.625% convertible notes due in 2024 (the "Notes"). Interest is payable semi-annually in arrears on February 1 and August 1 of each year, commencing August 1, 2019. The Notes will mature on February 1, 2024, unless earlier repurchased or converted. The Notes represent subordinated unsecured obligations and are convertible under certain circumstances, as defined in the indenture, into a combination of cash and CONMED common
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stock.  The Notes may be converted at an initial conversion rate of 11.2608 shares of our common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $88.80 per share of common stock). Holders of the Notes may convert the Notes at their option at any time on or after November 1, 2023 through the second scheduled trading day preceding the maturity date. Holders of the Notes will also have the right to convert the Notes prior to November 1, 2023, but only upon the occurrence of specified events. The conversion rate is subject to anti-dilution adjustments if certain events occur. A portion of the net proceeds from the offering of the Notes were used as part of the financing for the Buffalo Filter acquisition and $21.0 million were used to pay the cost of certain convertible notes hedge transactions as further described below.

Our effective borrowing rate for nonconvertible debt at the time of issuance of the Notes was estimated to be 6.14%, which resulted in $51.6 million of the $345.0 million aggregate principal amount of Notes issued, or $39.1 million after taxes, being attributable to equity.  For the three months ended March 31, 2021, we recorded interest expense related to the amortization of debt discount on the Notes of $2.5 million at the effective interest rate of 6.14%.  On January 1, 2022, we adopted ASU 2020-06 using the modified retrospective approach as further described in Note 3. This ASU eliminated the equity component separately recorded for the conversion features associated with the convertible notes and related debt discount. For both the three months ended March 31, 2022 and 2021, we have recorded interest expense on the Notes of $2.3 million at the contractual coupon rate of 2.625%.

The estimated fair value of the Notes was approximately $596.9 million as of March 31, 2022 based on a market approach which represents a Level 2 valuation in the fair value hierarchy. The estimated fair value was determined based on the estimated or actual bids and offers of the Notes in an over-the-counter market transaction on the last business day of the period.

In connection with the offering of the Notes, we entered into convertible note hedge transactions with a number of financial institutions (each, an “option counterparty”). The convertible note hedge transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Notes, the number of shares of our common stock underlying the Notes. Concurrently with entering into the convertible note hedge transactions, we also entered into separate warrant transactions with each option counterparty whereby we sold to such option counterparty warrants to purchase, subject to customary anti-dilution adjustments, the same number of shares of our common stock.

The convertible note hedge transactions are expected generally to reduce the potential dilution upon conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be, in the event that the market price per share of our common stock, as measured under the terms of the convertible note hedge transactions, is greater than the strike price of the convertible note hedge transactions, which initially corresponds to the conversion price of the Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Notes. If, however, the market price per share of our common stock, as measured under the terms of the warrant transactions, exceeds the strike price ($114.92) of the warrants, there would nevertheless be dilution to the extent that such market price exceeds the strike price of the warrants as noted in Note 8, unless we elect to settle the warrants in cash.

The scheduled maturities of long-term debt outstanding at March 31, 2022 are as follows:

Remaining 2022$8,944 
202314,906 
2024365,869 
202523,850 
2026307,018 
2027 
The above amounts exclude deferred debt issuance costs and financing leases.

Note 11 – 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.

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Changes in the liability for standard warranties for the three months ended March 31, are as follows:

 20222021
Balance as of January 1,$2,344 $1,826 
Provision for warranties197 291 
Claims made(187)(206)
Balance as of March 31,$2,354 $1,911 
 
Costs associated with extended warranty repairs are recorded as incurred and amounted to $1.6 million for both the three months ended March 31, 2022 and 2021.

Note 12 – Pension Plan

Net periodic pension cost consists of the following: 

Three Months Ended March 31,
 20222021
Service cost$269 $248 
Interest cost on projected benefit obligation537 451 
Expected return on plan assets(1,324)(1,289)
Net amortization and deferral648 832 
Net periodic pension cost$130 $242 
 
We do not expect to make any pension contributions during 2022. Non-service pension cost/(benefit) was immaterial for the three months ended March 31, 2022 and 2021.

Note 13 – Other Expense

Other expense consists of the following, which is included in selling and administrative expense:

Three Months Ended March 31,
 20222021
Restructuring and related costs$