10-K 1 cnmd10k2013.htm 10-K CNMD 10K 2013


United States
Securities and Exchange Commission
Washington, D.C.
20549
 
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
 
For the fiscal year ended December 31, 2013
Commission file number 0-16093
 
CONMED CORPORATION
(Exact name of registrant as specified in its charter)
 
New York
16-0977505
(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

525 French Road, Utica, New York
13502
(Address of principal executive offices)
(Zip Code)
 
(315) 797-8375
(Registrant's telephone number, including area code)
 
Securities registered pursuant to Section 12(g) of the Act:
 
Common Stock, $.01 par value per share
(Title of class)
  
Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).
Yes ý      No ¨
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes o      No x
 
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 x     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 x     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one).

Large accelerated filer ý    Accelerated filer o    Non-accelerated filer o    Smaller reporting company o
  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o      No x
 
As of June 30, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the shares of voting common stock held by non-affiliates of the registrant was approximately $861,668,334 based upon the closing price of the Company’s common stock on the NASDAQ Stock Market.
 
The number of shares of the registrant's $0.01 par value common stock outstanding as of February 19, 2014 was 27,206,496.

DOCUMENTS INCORPORATED BY REFERENCE:
 
Portions of the Definitive Proxy Statement or other informational filing for the 2014 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.




CONMED CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 2013
TABLE OF CONTENTS

Part I

 
 
Page
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
 
 
 
 
Part II
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
 31
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
Part III
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
Part IV
 
 
 
 
Item 15.
 
 
 
 


1



CONMED CORPORATION
Item 1.
Business
Forward Looking Statements
 
This Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2013 (“Form 10-K”) contains certain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) and information relating to CONMED Corporation (“CONMED”, the “Company”, “we” or “us” — references to “CONMED”, the “Company”, “we” or “us” shall be deemed to include our direct and indirect subsidiaries unless the context otherwise requires) which are based on the beliefs of our management, as well as assumptions made by and information currently available to our management.
 
When used in this Form 10-K, the words “estimate,” “project,” “believe,” “anticipate,” “intend,” “expect” and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, including those identified under the caption “Item 1A-Risk Factors” and elsewhere in this Form 10-K which 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, among others, the following:
 
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;
future levels of indebtedness and capital spending;
quality of our management and business abilities and the judgment of our personnel;
the availability, terms and deployment of capital;
the risk of litigation, especially patent litigation as well as the cost associated with patent and other litigation;
the risk of a lack of allograft tissues due to reduced donations of such tissues or due to tissues not meeting the appropriate high standards for screening and/or processing of such tissues;
changes in regulatory requirements; and
various other factors referenced in this Form 10-K.

See “Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Item 1-Business” and “Item 1A-Risk Factors” 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 Form 10-K or to reflect the occurrence of unanticipated events.

General
 
CONMED Corporation was incorporated under the laws of the State of New York in 1970 by Eugene R. Corasanti, the Company’s founder and Chairman of the Board.  CONMED is a medical technology company with an emphasis on surgical devices and equipment for minimally invasive procedures and monitoring.  The Company’s products are used by surgeons and physicians in a variety of specialties including orthopedics, general surgery, gynecology, neurosurgery, and gastroenterology.  Headquartered in Utica, New York, the Company’s 3,600 employees distribute its products worldwide from several manufacturing locations.  

We have historically used strategic business acquisitions and exclusive distribution relationships to diversify our product offerings, increase our market share in certain product lines, realize economies of scale and take advantage of growth opportunities in the healthcare field.
 
We are committed to offering products with the highest standards of quality, technological excellence and customer service.  Substantially all of our facilities have attained certification under the ISO international quality standards and other domestic and international quality accreditations.

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Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are accessible free of charge through the Investor Relations section of our website (http://www.conmed.com) as soon as practicable after such materials have been electronically filed with, or furnished to, the United States Securities and Exchange Commission (the "SEC"). Our SEC filings are also available for reading and copying at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (http:/www.sec.gov) containing reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
 
Industry
 
Market growth for our products is primarily driven by:
 
Favorable Demographics.  The number of surgical procedures performed is increasing and we believe the long-term demographic trend of the aging of the population will lead to continued growth in surgical procedures, and technological advancements, which result in safer and less invasive (or non-invasive) surgical procedures.  Additionally, as people are living longer, more active lives, they are engaging in contact sports and activities such as running, skiing, rollerblading, golf and tennis which result in injuries with greater frequency and at an earlier age than ever before.  Sales of surgical products aggregated to approximately 90% of our total net revenues in 2013.  See “Products.”

Continued Pressure to Reduce Health Care Costs.  In response to rising health care costs, managed care companies and other third-party payers have placed pressures on health care providers to reduce costs.  As a result, health care providers have focused on the high cost areas such as surgery.  To reduce costs, health care providers use minimally invasive techniques, which generally reduce patient trauma, recovery time and ultimately the length of hospitalization.  Approximately 50% of our products are designed for use in minimally invasive surgical procedures.  See “Products.”  Health care providers are also increasingly purchasing single-use, disposable products, which reduce the costs associated with sterilizing surgical instruments and products following surgery.  The single-use nature of disposable products lowers the risk of incorrectly sterilized instruments spreading infection into the patient and increasing the cost of post-operative care.  Approximately 80% of our sales are derived from single-use disposable products.
 
In the United States, the pressure on health care providers to contain costs has caused many health care providers to enter into comprehensive purchasing contracts with fewer suppliers, which offer a broader array of products at lower prices.  In addition, many health care providers have aligned themselves with Group Purchasing Organizations (“GPOs”) or Integrated Health Networks (“IHNs”), whose stated purpose is to aggregate the purchasing volume of their members in order to negotiate competitive pricing with suppliers, including manufacturers of surgical products.  We believe that these trends will favor entities which offer a diverse product portfolio.  See “Business Strategy”.
 
Increased Global Medical Spending.  We believe that foreign markets offer significant growth opportunities for our products.  We currently distribute our products through our own sales subsidiaries or through local dealers in over 100 foreign countries.

Competitive Strengths
 
Management believes that we hold a significant market share position in each of our key product areas, including Orthopedic Surgery, General Surgery and Surgical Visualization.  We have established a leadership position in the marketplace by capitalizing on the following competitive strengths:
 
Brand Recognition.  Our products are marketed under leading brand names, including CONMED®, CONMED Linvatec® and Hall Surgical®.  These brand names are recognized by physicians and healthcare professionals for quality and service.  It is our belief that brand recognition facilitates increased demand for our products in the marketplace, enables us to build upon the brand’s associated reputation for quality and service, and allows us to realize increased market acceptance of new branded products.

Breadth of Product Offering.  The breadth of our product lines in our key product areas enables us to meet a wide range of customer requirements and preferences.  This has enhanced our ability to market our products to surgeons, hospitals, surgery centers, GPOs, IHNs and other customers, particularly as institutions seek to reduce costs and minimize the number of suppliers.


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Successful Integration of Acquisitions. We seek to build growth platforms around our core markets through focused acquisitions of complementary businesses and product lines.  These acquisitions have enabled us to diversify our product portfolio, expand our sales and marketing capabilities and strengthen our presence in key geographical markets.

Strategic Marketing and Distribution Channels.  We market our products domestically through five focused sales force groups consisting of approximately 275 employee sales representatives and 215 sales professionals employed by independent sales agent groups.  Our dedicated sales professionals are highly knowledgeable in the applications and procedures for the products they sell.  Our sales representatives foster close professional relationships with physicians, surgeons, hospitals, outpatient surgery centers and physicians’ offices.  Additionally, we maintain a global presence through sales subsidiaries and branches located in key international markets.  We directly service hospital customers located in these markets through an employee-based international sales force of approximately 185 sales representatives.  We also maintain distributor relationships domestically and in numerous countries worldwide.  See “Marketing.”

Operational Improvements and Manufacturing.  We are focused on continuously improving our supply chain effectiveness, strengthening our manufacturing processes and optimizing our plant network to increase operational efficiencies within the organization.  Substantially all of our products are manufactured and assembled from components we produce.  Our strategy has historically been to vertically integrate our manufacturing facilities in order to develop a competitive advantage.  This integration provides us with cost efficient and flexible manufacturing operations which permit us to allocate capital more efficiently.  Additionally, we attempt to exploit commercial synergies between operations, such as the procurement of common raw materials and components used in production.

Technological Leadership.  Research and development efforts are closely aligned with our key business objectives, namely developing and improving products and processes, applying innovative technology to the manufacture of products for new global markets and reducing the cost of producing core products.  These efforts are evidenced by recent product introductions, such as the Y-Knot® Flex System for instability repairs, Y-Knot® RC anchors for rotator cuffs, the D4000 Resection System, the IM8000 2DHD Camera System, Hall 50™ Powered Instrument System, GS2000 50L Insufflator, EntriPort line of trocars, new D-Flex probes, and DetachaTip® III Multi-Use Endosurgery Instruments.  

Business Strategy
 
Our principal objectives are to improve the quality of surgical outcomes and patient care through the development of innovative medical devices, the refinement of existing products and the development of new technologies which reduce risk, trauma, cost and procedure time.  We believe that by meeting these objectives we will enhance our ability to anticipate and adapt to customer needs and market opportunities, and provide shareholders with superior investment returns.  We intend to achieve future growth and earnings development through the following initiatives:

Introduction of New Products and Product Enhancements.  We continually pursue organic growth through the development of new products and enhancements to existing products.  We seek to develop new technologies which improve the durability, performance and usability of existing products.  In addition to our internal research and development efforts, we receive new ideas for products and technologies, particularly in procedure-specific areas, from surgeons, inventors and other healthcare professionals.

Pursue Strategic Acquisitions.  We pursue strategic acquisitions, distribution and similar arrangements in existing and new growth markets to achieve increased operating efficiencies, geographic diversification and market penetration.  Targeted companies have historically included those with proven technologies and established brand names which provide potential sales, marketing and manufacturing synergies.

Realize Manufacturing and Operating Efficiencies.  We continually review our production systems for opportunities to reduce operating costs, consolidate product lines or identical process flows, reduce inventory requirements and optimize existing processes.  Our vertically integrated manufacturing facilities allow for further opportunities to reduce overhead, increase operating efficiencies and capacity utilization.

Geographic Diversification.  We believe that significant growth opportunities exist for our surgical products outside the United States.  Principal foreign markets for our products include Europe, Latin America and Asia/Pacific Rim.  Critical elements of our future sales growth in these markets include leveraging our existing relationships with foreign surgeons, hospitals, third-party payers and foreign distributors, maintaining an appropriate presence in emerging market countries and continually evaluating our routes-to-market.


4



Active Participation In The Medical Community.  We believe that excellent working relationships with physicians and others in the medical industry enable us to gain an understanding of new therapeutic and diagnostic alternatives, trends and emerging opportunities.  Active participation allows us to quickly respond to the changing needs of physicians and patients. In addition, we are an active sponsor of medical education both in the United States and internationally, offering new and innovative surgical techniques as well as other medical education materials for use with our products.

Products

The following table sets forth the percentage of net sales for each of our product lines during each of the three years ended December 31:

 
Year Ended December 31,
 
2011
 
2012
 
2013
Orthopedic surgery
51
%
 
54
%
 
54
%
General surgery
40
%
 
37
%
 
37
%
Surgical visualization
9
%
 
9
%
 
9
%
Consolidated net sales
100
%
 
100
%
 
100
%
Net Sales (in thousands)
$
725,077

 
$
767,140

 
$
762,704


Orthopedic Surgery

A significant portion of our business is derived from sales in our orthopedic surgery product lines, including sports medicine, powered surgical instruments and sports biologics and tissue. These lines are marketed under a number of reputable brands, including Hall®, CONMED Linvatec®, Concept® and Shutt®.

We offer a comprehensive range of devices and products to repair injuries which have occurred in the articulating joint areas of the body.  Many of these injuries are the result of sports related events or similar traumas.  Our sports medicine products include powered resection instruments, arthroscopes, reconstructive systems, tissue repair sets, metal and bioabsorbable implants as well as related disposable products and fluid management systems.  It is our standard practice to place some of these products, such as shaver consoles and pumps, with certain customers at no charge in exchange for commitments to purchase disposable products over certain time periods.  This capital equipment is loaned and subject to return if certain minimum single-use purchases are not met. Single-use products include products such as shaver blades, burs and pump tubing.  We have benefited from the introduction of new arthroscopic products and technologies, such as bioabsorbable screws, “push-in” and “screw-in” suture anchors, and resection shavers.

As a market leader in sports medicine, we compete with Smith & Nephew, plc, Arthrex, Inc., Stryker Corporation, ArthroCare Corporation, Johnson & Johnson: DePuy Mitek, Inc., and Biomet, Inc..

Our powered instruments offering is sold principally under the Hall® Surgical brand name, for use in large and small bone orthopedic, arthroscopic, oral/maxillofacial, podiatric, plastic, ENT, neurological, spinal and cardiothoracic surgeries. Our newest product is the Hall 50™ Powered Instrument System, specifically designed to meet the requirements of most orthopedic applications.  The modularity and versatility of the Hall 50™ Powered Instrument System allows a facility to purchase a single power system to perform total joint arthroplasty, trauma, arthroscopy, and some small bone procedures.  

As a market leader in powered instruments, our competition includes Stryker Corporation, Medtronic, (Midas Rex and Xomed divisions), Synvasive Technology, Inc., Synthes, Inc., MicroAire Surgical Instruments, LLC, and Zimmer Holdings, Inc.

As more fully described in Note 4 to the Consolidated Financial Statements, on January 3, 2012, the Company entered into the Sports Medicine Joint Development and Distribution Agreement (the "JDDA") with Musculoskeletal Transplant Foundation (“MTF”) to obtain MTF's worldwide promotion rights with respect to allograft tissues within the field of sports medicine and related products. Under the terms of this agreement, we are now the exclusive worldwide promoter of these allograft tissues, which includes the reconstruction and/or replacement of tendon, ligament, cartilage or menisci, along with the correction of deformities within the extremities.  

Surgical Visualization


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Our surgical visualization product line offers endoscopic imaging and capture devices for the complete spectrum of surgical needs including 2DHD and 3DHD vision technologies. The 3DHD vision system is an advanced three dimensional, or 3D, vision system which employs a flat screen monitor and passive glasses. It is used by surgeons during complex minimally invasive surgical procedures, with applications in gynecologic, urologic, bariatric, thoracic and general surgery. Competition includes Smith & Nephew, plc, Arthrex, Inc., Stryker Corporation, Olympus, Inc. and Karl Storz GmbH.

General Surgery

Our general surgery product line offers a large range of products in the areas of advanced energy, endomechanical instrumentation, gastrointestinal, pulmonary and patient monitoring.

CONMED is one of the medical device industry’s leading technology sources for advanced energy solutions for a range of surgical needs. We offer an extensive line of state-of-the-art electrosurgical generators, handpieces, smoke management systems, and accessories. Our competition includes Covidien Ltd.; Valley Labs, Medline Industries, Inc., ERBE Elektromedizin GmbH, and Megadyne.

Our endomechanical instrumentation products offer a full line of unique instruments including trocars, clip appliers, scissors, and surgical staplers used in the minimally invasive laparoscopic and gynecological surgery. We offer a unique and premium uterine manipulator called VCARE® for use in increasing the efficiency of laparoscopic hysterectomies and other gynecologic laparoscopic procedures. This offering competes with such companies as Johnson & Johnson: Ethicon Endo-Surgery, Inc., Covidien Ltd; U.S. Surgical and Applied Medical Resources Corporation.

Our gastrointestinal (GI) and pulmonary offering includes a comprehensive line of minimally invasive diagnostic and therapeutic products used in conjunction with procedures which require flexible endoscopy. This offering includes mucosal management devices, forceps, scope management accessories, bronchoscopy devices, dilatation, stricture management devices, hemostasis, biliary devices, and polypectomy. Our competition includes Boston Scientific Corporation - Endoscopy, Cook Medical, Inc., Olympus America, Inc. and STERIS Corporation - U.S. Endoscopy.

Our patient monitoring offering includes a line of vital signs and cardiac monitoring products including pulse oximetry equipment & sensors, ECG electrodes and cables, cardiac defibrillation & pacing pads and blood pressure cuffs.  We also offer a complete line of suction instruments and tubing for use in the operating room, as well as a line of IV products for use in the critical care areas of the hospital. This offering competition includes Covidien Ltd: Kendall and 3M Company.

Marketing

A significant portion of our products are distributed domestically directly to more than 6,000 hospitals and other healthcare institutions as well as through medical specialty distributors and surgeons.  We are not dependent on any single customer and no single customer accounted for more than 10% of our net sales in 2011, 2012 and 2013.

A significant portion of our U.S. sales are to customers affiliated with GPOs, IDNs and other large national or regional accounts, as well as to the Veterans Administration and other hospitals operated by the Federal government.  For hospital inventory management purposes, some of our customers prefer to purchase our products through independent third-party medical product distributors.

In order to provide a high level of expertise to the medical specialties we serve, our domestic sales force consists of approximately 275 employee sales representatives who are specially trained in our various product offerings. We also have
215 sales representatives working for independent sales agent groups selling orthopedic products.

Each employee sales representative is assigned a defined geographic area and compensated on a commission basis or through a combination of salary and commission.  The sales force is supervised and supported by either area directors or district managers.  Sales agent groups are used in the United States to sell our orthopedic products.  These sales agent groups are paid a commission for sales made to customers while home office sales and marketing management provide the overall direction for sales of our products.

Our health systems organization is responsible for interacting with large regional and national accounts (e.g. GPOs, IDNs, etc.).  We have contracts with many such organizations and believe that the loss of any individual group purchasing contract will not adversely impact our business.  In addition, all of our sales professionals are required to work closely with distributors where applicable and maintain close relationships with end-users.

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Each of our dedicated sales professionals is highly knowledgeable in the applications and procedures for the products they sell.  Our sales professionals provide surgeons and medical personnel with information relating to the technical features and benefits of our products.

Maintaining and expanding our international presence is an important component of our long-term growth plan. Our products are sold in over 100 foreign countries. International sales efforts are coordinated through local country dealers or through direct in country sales. We distribute our products through sales subsidiaries and branches with offices located in Australia, Austria, Belgium, Canada, China, Denmark, Finland, France, Germany, Italy, Korea, the Netherlands, Poland, Spain, Sweden and the United Kingdom.  In these countries, our sales are denominated in the local currency and amounted to approximately 36% of our total net sales in 2013.  In the remaining countries where our products are sold through independent distributors, sales are denominated in United States dollars.

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

Manufacturing

We manufacture substantially all of our products and assemble them from components, many of which we produce.  Our strategy has historically been to vertically integrate our manufacturing facilities in order to develop a competitive advantage.  This integration provides us with cost efficient and flexible manufacturing operations which permit us to allocate capital more efficiently.  Additionally, we attempt to exploit commercial synergies between operations, such as the procurement of common raw materials and components used in production.

Raw material costs constitute a substantial portion of our cost of production.  We use numerous raw materials and components in the design, development and manufacturing of our products.  Substantially all of our raw materials and select components used in the manufacturing process are procured from external suppliers.  We work closely with multiple suppliers to ensure continuity of supply while maintaining high quality and reliability.  As a consequence of best supply chain practices, new product development and acquisitions, we often form strategic partnerships with key suppliers. As a consequence of these supplier partnerships, components and raw materials may be sole sourced. Due to the strength of these suppliers and the variety of products we provide, the risk of supplier interruption does not pose an overall material adverse effect on our financial and operational performance. To date, this strategy has served us well, as we provide excellent service levels and product availability to our customers.

All of our products are classified as medical devices subject to regulation by numerous agencies and legislative bodies, including the United States Food and Drug Administration (“FDA”) and comparable foreign counterparts.  The FDA’s Quality System Regulations set forth standards for our product design and manufacturing processes, require the maintenance of certain records and provide for on-site inspections of our facilities by the FDA.  In many of the foreign countries in which we manufacture and distribute our products we are subject to regulatory requirements affecting, among other things, product performance standards, packaging requirements, labeling requirements, import laws and onsite inspection by independent bodies with the authority to issue or not issue certifications we may require to be able to sell products in certain countries.  Regulatory requirements affecting the Company vary from country to country.  The timeframes and costs for regulatory submission and approval from foreign agencies or legislative bodies may vary from those required by the FDA.  Certain requirements for approval from foreign agencies or legislative bodies may also differ from those of the FDA.

We believe that our production and inventory management practices are characteristic of those in the medical device industry.  Substantially all of our products are stocked in inventory and are not manufactured to order or to individual customer specifications.  We schedule production and maintain adequate levels of safety stock based on a number of factors including, experience, knowledge of customer ordering patterns, demand, manufacturing lead times and optimal quantities required to maintain the highest possible service levels.  Customer orders are generally processed for immediate shipment and backlog of firm orders is therefore not considered material to an understanding of our business.

Research and Development

New and improved products play a critical role in our continued sales growth.  Internal research and development efforts focus on the development of new products and product technological and design improvements aimed at complementing and expanding existing product lines.  We continually seek to leverage new technologies which improve the durability, performance and usability of existing products.  In addition, we maintain close working relationships with surgeons, inventors and operating room personnel who often make new product and technology disclosures, principally in procedure-specific areas.  For clinical

7



and commercially promising disclosures, we seek to obtain rights to these ideas through negotiated agreements.  Such agreements typically compensate the originator through payments based upon a percentage of licensed product net sales.  Annual royalty expense approximated $2.9 million, $2.5 million and $2.3 million in 2011, 2012, and 2013, respectively.

Amounts expended for Company research and development was approximately $28.7 million, $28.2 million and $25.8 million during 2011, 2012, and 2013, respectively.

We have rights to intellectual property, including United States patents and foreign equivalent patents which cover a wide range of our products.  We own a majority of these patents and have exclusive and non-exclusive licensing rights to the remainder.  In addition, certain of these patents have currently been licensed to third parties on a non-exclusive basis.  We believe that the development of new products and technological and design improvements to existing products will continue to be of primary importance in maintaining our competitive position.

Government Regulation and Quality Systems

Substantially all of our products are classified as class II medical devices subject to regulation by numerous agencies and legislative bodies, including the FDA and comparable foreign counterparts.  Authorization to commercially market our products in the U.S. is granted by the FDA under a procedure referred to as 510(k) premarket notification.  This process requires us to demonstrate that our new products or significantly modified products are substantially equivalent to a legally marketed device which was on the market prior to May 28, 1976 or is currently on the U.S. market and does not require premarket approval.  We must continually meet certain FDA requirements to market our products in the United States. (Our products are classified as Class I, IIa, IIb and III in the European Union (EU) and subject to regulation by the Medical Device Directive.)  Our FDA clearance is subject to continual review and future discovery of previously unknown events could result in restrictions being placed on a product’s marketing or notification from the FDA to halt the distribution of certain medical devices.

Medical device regulations continue to evolve world-wide.  Products marketed in the EU and other countries require preparation of technical files and design dossiers which demonstrate compliance with applicable international regulations. As government regulations continue to change, there is a risk that the distribution of some of our products may be interrupted or discontinued if they do not meet the country specific requirements.

Our operations are supported by quality system/regulatory compliance personnel tasked with monitoring compliance to design controls, process controls and the other relevant government regulations for all of our design, manufacturing, distribution and servicing activities.  We and substantially all of our products are subject to the provisions of the Federal Food, Drug and Cosmetic Act of 1938, as amended by the Medical Device Amendments of 1976, Safe Medical Device Act of 1990, Medical Device Modernization Act of 1997, Medical User Fee and Modernization Act of 2002 and similar international regulations, such as the European Union Medical Device Directives.

As a manufacturer of medical devices, the FDA’s Quality System Regulations as specified in Title 21, Code of Federal Regulation (CFR) part 820, set forth requirements for our product design and manufacturing processes, require the maintenance of certain records, provide for on-site inspection of our facilities and continuing review by the FDA.  Many of our products are also subject to industry-defined standards.  Such industry-defined product standards are generally formulated by committees of the Association for the Advancement of Medical Instrumentation (AAMI), International Electrotechnical Commission (IEC) and the International Organization for Standardization (ISO).  We believe that our products and processes presently meet applicable standards in all material respects.

As noted above, our facilities are subject to periodic inspection by the FDA for, among other things, conformance to Quality System Regulation and Current Good Manufacturing Practice (“CGMP”) requirements. Following an inspection, the FDA typically provides its observations, if any, in the form of a Form 483 (Notice of Inspectional Observations) with specific observations concerning potential violation of regulations.  Although we respond to all Form 483 observations and correct deficiencies expeditiously, there can be no assurance that the FDA will not take further action including issuing a warning letter, seizing product and imposing fines. During the third quarter of 2013, the FDA inspected our Centennial, CO manufacturing facility and issued a Form 483 with observations on September 20, 2013. The Company subsequently submitted responses to the Observations, and the FDA issued a Warning Letter on January 30, 2014 relating to the inspection and the responses to the Form 483 Observations. Accordingly, we are undertaking corrective actions that may involve additional costs for the Company. These remediation costs are not expected to be material, however there can be no assurance that the actions undertaken by the Company will ensure that the Company will not undertake recalls, voluntary or otherwise, nor can there be any assurance that a future inspection by the FDA will not result in an additional Form 483 or warning letter, or other regulatory actions which may include consent decrees or fines.


8



We market our products in several foreign countries and therefore are subject to regulations affecting, among other things, product standards, sterilization, packaging requirements, labeling requirements, import laws and onsite inspection by independent bodies with the authority to issue or not issue certifications we may require to be able to sell products in certain countries.  Many of the regulations applicable to our devices and products in these countries are similar to those of the FDA.  The member countries of the European Union have adopted the European Medical Device Directives, which create a single set of medical device regulations for all member countries.  These regulations require companies that wish to manufacture and distribute medical devices in the European Union maintain quality system certification through European Union recognized Notified Bodies.  These Notified Bodies authorize the use of the CE Mark allowing free movement of our products throughout the member countries.  Requirements pertaining to our products vary widely from country to country, ranging from simple product registrations to detailed submissions such as those required by the FDA.  We believe that our products and quality procedures currently meet applicable standards for the countries in which they are marketed.

Our products may become subject to recall or market withdrawal regulations and we have made product recall decisions in the past.  No product recall has had a material effect on our financial condition, however there can be no assurance that regulatory issues will not have a material adverse effect in the future.

Any change in existing federal, state, foreign laws or regulations, or in the interpretation or enforcement thereof, or the promulgation or any additional laws or regulations may result in a material adverse effect on our financial condition, results of operations or cash flows.

Employees

As of December 31, 2013, we had approximately 3,600 full-time employees, including approximately 2,200 in operations, 130 in research and development, and the remaining in sales, marketing and related administrative support.  We believe that we have good relations with our employees and have never experienced a strike or similar work stoppage.  None of our domestic employees are represented by a labor union.
 
Item 1A.  Risk Factors

An investment in our securities, including our common stock, involves a high degree of risk.  Investors should carefully consider the specific factors set forth below as well as the other information included or incorporated by reference in this Form 10-K. See “Forward Looking Statements”.

Our financial performance is dependent on conditions in the healthcare industry and the broader economy.
 
The results of our business are directly tied to the economic conditions in the healthcare industry and the broader economy as a whole.  Significant volatility in the financial markets and foreign currency exchange rates and depressed economic conditions in both domestic and international markets, have presented significant business challenges since the second half of 2008. While we returned to revenue growth in 2010, 2011 and 2012, we experienced a sales decline in 2013. We are cautiously optimistic that the domestic economic environment is improving, however conditions in Europe and elsewhere may present significant business challenges for the Company. While there can be no assurance that improvement in the overall economic environment will be sustained, we will continue to monitor and manage the impact of the overall economic environment on the Company. Approximately 20% of our revenues are derived from the sale of capital products.  The sales of such products are negatively impacted if hospitals and other healthcare providers are unable to secure the financing necessary to purchase these products or otherwise defer purchases.
 
Our significant international operations subject us to foreign currency fluctuations and other risks associated with operating in foreign countries.
 
A significant portion of our revenues are derived from foreign sales.  Approximately 51% of our total 2013 consolidated net sales were to customers outside the United States.  We have sales subsidiaries in a significant number of countries in Europe as well as Australia, Canada, China and Korea.  In those countries in which we have a direct presence, our sales are denominated in the local currency and those sales denominated in local currency amounted to approximately 36% of our total net sales in 2013.  The remaining 15% of sales to customers outside the United States was on an export basis and transacted in United States dollars.

Because a significant portion of our operations consist of sales activities in foreign jurisdictions, our financial results may be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the markets in which we distribute products.  While we have implemented a hedging strategy, our revenues may be unfavorably impacted from foreign

9



currency translation if the United States dollar strengthens as compared with currencies such as the Euro.  Our international presence exposes us to certain other inherent risks, including:
 
imposition of limitations on conversions of foreign currencies into dollars or remittance of dividends and other payments by international subsidiaries;
imposition or increase of withholding and other taxes on remittances and other payments by international subsidiaries;
trade barriers;
political risks, including political instability;
reliance on third parties to distribute our products;
hyperinflation in certain foreign countries; and
imposition or increase of investment and other restrictions by foreign governments.

We cannot assure you that such risks will not have a material adverse effect on our business and results of operations.

Our financial performance is subject to the risks inherent in our acquisition strategy, including the effects of increased borrowing and integration of newly acquired businesses or product lines.
 
A key element of our business strategy has been to expand through acquisitions and we may seek to pursue additional acquisitions in the future.  Our success is dependent in part upon our ability to integrate acquired companies or product lines into our existing operations.  We may not have sufficient management and other resources to accomplish the integration of our past and future acquisitions and implementing our acquisition strategy may strain our relationship with customers, suppliers, distributors, manufacturing personnel or others.  There can be no assurance that we will be able to identify and make acquisitions on acceptable terms or that we will be able to obtain financing for such acquisitions on acceptable terms.  In addition, while we are generally entitled to customary indemnification from sellers of businesses for any difficulties that may have arisen prior to our acquisition of each business, acquisitions may involve exposure to unknown liabilities and the amount and time for claiming under these indemnification provisions is often limited.  As a result, our financial performance is now and will continue to be subject to various risks associated with the acquisition of businesses, including the financial effects associated with any increased borrowing required to fund such acquisitions or with the integration of such businesses.
 
Our financial performance may be adversely impacted by the healthcare reform legislation.

The Patient Protection and Affordable Care Act and Health Care and Education Affordability Reconciliation Act were enacted into law in the U.S. in March 2010.  Effective January 1, 2013, as part of this legislation, a 2.3% excise tax has been imposed upon sales within the U.S. of certain medical device products. In 2013, this excise tax has imposed an additional expense of approximately 0.8% of total global sales and we expect a similar impact in 2014.  Other provisions of this legislation, including Medicare provisions aimed at improving quality and decreasing costs, comparative effectiveness research, an independent payment advisory board, and pilot programs to evaluate alternative payment methodologies, could meaningfully change the way health care is developed and delivered, and may adversely affect our business and results of operations. Further, we cannot predict what healthcare programs and regulations will be ultimately implemented at the federal or state level, or the effect of any future legislation or regulation in the U.S. or internationally. However, any changes that lower reimbursements to hospitals for surgical procedures or reduce medical procedure volumes could adversely affect our results of operations and cash flows.
 
Failure to comply with regulatory requirements may result in recalls, fines or materially adverse implications.
 
Substantially all of our products are classified as class II medical devices subject to regulation by numerous agencies and legislative bodies, including the FDA and comparable foreign counterparts.  As a manufacturer of medical devices, our manufacturing processes and facilities are subject to on-site inspection and continuing review by the FDA for compliance with the Quality System Regulations.  We received a warning letter from the FDA related to our Centennial, CO facility on January 30, 2014 and are currently undertaking corrective actions that will result in additional costs to the Company. These remediation costs are not expected to be material, however there can be no assurance that the actions undertaken by the Company will ensure that the Company will not undertake recalls, voluntary or otherwise, nor can there be any assurance that a future inspection by the FDA will not result in an additional Form 483 or warning letter, or other regulatory actions which may include consent decrees or fines. Manufacturing and sales of our products outside the United States are also subject to foreign regulatory requirements which vary from country to country.  Moreover, we are generally required to obtain regulatory clearance or approval prior to marketing a new product.  The time required to obtain approvals from foreign countries may be longer or shorter than that required for FDA clearance, and requirements for foreign approvals may differ from FDA requirements.  Failure to comply with applicable domestic and/or foreign regulatory requirements may result in:

fines or other enforcement actions;

10



recall or seizure of products;
total or partial suspension of production;
loss of certification;
withdrawal of existing product approvals or clearances;
refusal to approve or clear new applications or notices;
increased quality control costs; or
criminal prosecution.

Failure to comply with Quality System Regulations and applicable foreign regulations could result in a material adverse effect on our business, financial condition or results of operations.
 
If we are not able to manufacture products in compliance with regulatory standards, we may decide to cease manufacturing of those products and may be subject to product recall.
 
In addition to the Quality System Regulations, many of our products are also subject to industry-defined standards.  We may not be able to comply with these regulations and standards due to deficiencies in component parts or our manufacturing processes.  If we are not able to comply with the Quality System Regulations or industry-defined standards, we may not be able to fill customer orders and we may decide to cease production of non-compliant products.  Failure to produce products could affect our profit margins and could lead to loss of customers.
 
Our products are subject to product recall and we have made product recalls in the past.  Although no recall has had a material adverse effect on our business or financial condition, we cannot assure you that regulatory issues will not have a material adverse effect on our business, financial condition or results of operations in the future or that product recalls will not harm our reputation and our customer relationships.
 
The highly competitive market for our products may create adverse pricing pressures.
 
The market for our products is highly competitive and our customers have numerous alternatives of supply.  Many of our competitors offer a range of products in areas other than those in which we compete, which may make such competitors more attractive to surgeons, hospitals, group purchasing organizations and others.  In addition, several of our competitors are large, technically competent firms with substantial assets.  Competitive pricing pressures or the introduction of new products by our competitors could have an adverse effect on our revenues.  See “Products” for a further discussion of these competitive forces.

Factors which may influence our customers’ choice of competitor products include:
 
changes in surgeon preferences;
increases or decreases in healthcare spending related to medical devices;
our inability to supply products to them as a result of product recall, market withdrawal or back-order;
the introduction by competitors of new products or new features to existing products;
the introduction by competitors of alternative surgical technology; and
advances in surgical procedures, discoveries or developments in the healthcare industry.

We use a variety of raw materials in our businesses, and significant shortages or price increases could increase our operating costs and adversely impact the competitive positions of our products.

Our reliance on certain suppliers and commodity markets to secure raw materials used in our products exposes us to volatility in the prices and availability of raw materials. In some instances, we participate in commodity markets that may be subject to allocations by suppliers. A disruption in deliveries from our suppliers, price increases, or decreased availability of raw materials or commodities, could have an adverse effect on our ability to meet our commitments to customers or increase our operating costs. We believe that our supply management practices are based on an appropriate balancing of the foreseeable risks and the costs of alternative practices. Nonetheless, price increases or the unavailability of some raw materials may have an adverse effect on our results of operations or financial condition.
 
Cost reduction efforts in the healthcare industry could put pressures on our prices and margins.
 
In recent years, the healthcare industry has undergone significant change driven by various efforts to reduce costs.  Such efforts include national healthcare reform, trends towards managed care, cuts in Medicare, consolidation of healthcare distribution companies and collective purchasing arrangements by GPOs and IHNs.  Demand and prices for our products may be adversely affected by such trends.

11



 
We may not be able to keep pace with technological change or to successfully develop new products with wide market acceptance, which could cause us to lose business to competitors.
 
The market for our products is characterized by rapidly changing technology.  Our future financial performance will depend in part on our ability to develop and manufacture new products on a cost-effective basis, to introduce them to the market on a timely basis, and to have them accepted by surgeons.
 
We may not be able to keep pace with technology or to develop viable new products.  Factors which may result in delays of new product introductions or cancellation of our plans to manufacture and market new products include:
 
capital constraints;
research and development delays;
delays in securing regulatory approvals; or
changes in the competitive landscape, including the emergence of alternative products or solutions which reduce or eliminate the markets for pending products.

Our new products may fail to achieve expected levels of market acceptance.
 
New product introductions may fail to achieve market acceptance.  The degree of market acceptance for any of our products will depend upon a number of factors, including:
 
our ability to develop and introduce new products and product enhancements in the time frames we currently estimate;
our ability to successfully implement new technologies;
the market’s readiness to accept new products;
having adequate financial and technological resources for future product development and promotion;
the efficacy of our products; and
the prices of our products compared to the prices of our competitors’ products.

If our new products do not achieve market acceptance, we may be unable to recover our investments and may lose business to competitors.

In addition, some of the companies with which we now compete, or may compete in the future, have or may have more extensive research, marketing and manufacturing capabilities and significantly greater technical and personnel resources than we do, and may be better positioned to continue to improve their technology in order to compete in an evolving industry.  See “Products” for a further discussion of these competitive forces.

Our senior credit agreement contains covenants which may limit our flexibility or prevent us from taking actions.

Our senior credit agreement contains, and future credit facilities are expected to contain, certain restrictive covenants which will affect, and in many respects significantly limit or prohibit, among other things, our ability to:

incur indebtedness;
make investments;
engage in transactions with affiliates;
pay dividends or make other distributions on, or redeem or repurchase, capital stock;
sell assets; and
pursue acquisitions.

These covenants, unless waived, may prevent us from pursuing acquisitions, significantly limit our operating and financial flexibility and limit our ability to respond to changes in our business or competitive activities.  Our ability to comply with such provisions may be affected by events beyond our control.  In the event of any default under our credit agreement, the credit agreement lenders may elect to declare all amounts borrowed under our credit agreement, together with accrued interest, to be due and payable.  If we were unable to repay such borrowings, the credit agreement lenders could proceed against collateral securing the credit agreement which consists of substantially all of our property and assets.  Our credit agreement also contains a material adverse effect clause which may limit our ability to access additional funding under our credit agreement should a material adverse change in our business occur.

Our leverage and debt service requirements may require us to adopt alternative business strategies.

12




As of December 31, 2013, we had $215.6 million of debt outstanding, representing 21% of total capitalization.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”.

The degree to which we are leveraged could have important consequences to investors, including but not limited to the following:

a portion of our cash flow from operations must be dedicated to debt service and will not be available for operations, capital expenditures, acquisitions, dividends and other purposes;
our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes may be limited or impaired, or may be at higher interest rates;
we may be at a competitive disadvantage when compared to competitors that are less leveraged;
we may be hindered in our ability to adjust rapidly to market conditions;
our degree of leverage could make us more vulnerable in the event of a downturn in general economic conditions or other adverse circumstances applicable to us; and
our interest expense could increase if interest rates in general increase because a portion of our borrowings, including our borrowings under our credit agreement, are and will continue to be at variable rates of interest.

We may not be able to generate sufficient cash to service our indebtedness, which could require us to reduce our expenditures, sell assets, restructure our indebtedness or seek additional equity capital.
 
Our ability to satisfy our obligations will depend upon our future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, many of which are beyond our control.  We may not have sufficient cash flow available to enable us to meet our obligations.  If we are unable to service our indebtedness, we will be forced to adopt an alternative strategy that may include actions such as foregoing acquisitions, reducing or delaying capital expenditures, selling assets, restructuring or refinancing our indebtedness or seeking additional equity capital.  We cannot assure you that any of these strategies could be implemented on terms acceptable to us, if at all.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for a discussion of our indebtedness and its implications.

We rely on a third party to obtain, process and distribute sports medicine allograft tissue. If such tissue cannot be obtained, is not accepted by the market or is not accepted under numerous government regulations, our results of operations could be negatively impacted.

As described in Note 4 to the Consolidated Financial Statements, on January 3, 2012, we entered into an agreement with Muskuloskeletal Transplant Foundation ("MTF") to obtain MTF's worldwide promotional, marketing and distribution rights with respect to allograft tissues within the field of sports medicine. The supply of human tissue is dependent on donors and MTF has numerous relationships with donor groups. Likewise, the supply of tissues available for use as allografts depends on the continued successful processing of donated tissues by MTF at its processing facilities. We cannot be certain, however, that the supply of human tissue will continue to be available at current levels or will be of sufficiently high standards to meet the high processing standards maintained for such tissues by MTF, or in volumes sufficient to meet our customers' needs, or that MTF will be able to continue to process tissues to its high standards in volumes sufficient to keep pace with demand. We expect that the Company's share of revenue streams related to MTF's sports medicine allograft product line would decline in proportion to any decline or disruption in the supply of processed tissues.

The FDA and several states have statutory authority to regulate allograft processing and allograft-based materials. The FDA could identify deficiencies in future inspections of MTF or MTF's suppliers or promulgate future regulatory rulings that could disrupt our business, reducing profitability.     

If we infringe third parties’ patents, or if we lose our patents or they are held to be invalid, we could become subject to liability and our competitive position could be harmed.
 
Much of the technology used in the markets in which we compete is covered by patents.  We have numerous U.S. patents and corresponding foreign patents on products expiring at various dates from 2014 through 2031 and have additional patent applications pending.  See “Research and Development” for a further description of our patents.  The loss of our patents could reduce the value of the related products and any related competitive advantage.  Competitors may also be able to design around our patents and to compete effectively with our products.  In addition, the cost of enforcing our patents against third parties and defending our products against patent infringement actions by others could be substantial.  We cannot assure you that:
 
pending patent applications will result in issued patents;
patents issued to or licensed by us will not be challenged by competitors;

13



our patents will be found to be valid or sufficiently broad to protect our technology or provide us with a competitive advantage; or
we will be successful in defending against pending or future patent infringement claims asserted against our products.

Ordering patterns of our customers may change resulting in reductions in sales.
 
Our hospital and surgery center customers purchase our products in quantities sufficient to meet their anticipated demand.  Likewise, our healthcare distributor customers purchase our products for ultimate resale to healthcare providers in quantities sufficient to meet the anticipated requirements of the distributors’ customers.  Should inventories of our products owned by our hospital, surgery center and distributor customers grow to levels higher than their requirements, our customers may reduce the ordering of products from us.  This could result in reduced sales during a financial accounting period.
 
We can be sued for producing defective products and our insurance coverage may be insufficient to cover the nature and amount of any product liability claims.
 
The nature of our products as medical devices and today’s litigious environment should be regarded as potential risks which could significantly and adversely affect our financial condition and results of operations.  The insurance we maintain to protect against claims associated with the use of our products have deductibles and may not adequately cover the amount or nature of any claim asserted against us.  We are also exposed to the risk that our insurers may become insolvent or that premiums may increase substantially.  See “Legal Proceedings” for a further discussion of the risk of product liability actions and our insurance coverage.
 
Damage to our physical properties as a result of windstorm, earthquake, fire or other natural or man-made disaster may cause a financial loss and a loss of customers.
 
Although we maintain insurance coverage for physical damage to our property and the resultant losses that could occur during a business interruption, we are required to pay deductibles and our insurance coverage is limited to certain caps.  For example, our deductible for windstorm damage to our Florida property amounts to 2% of any loss.
 
Further, while insurance reimburses us for our lost gross earnings during a business interruption, if we are unable to supply our customers with our products for an extended period of time, there can be no assurance that we will regain the customers’ business once the product supply is returned to normal.


14



Item 2.  Properties

Facilities

The following table sets forth certain information with respect to our principal operating facilities.  We believe that our facilities are generally well maintained, are suitable to support our business and adequate for present and anticipated needs.
 
Location
 
Square Feet
 
Own or Lease
 
Lease Expiration
 
 
 
 
 
 
 
Utica, NY
 
500,000

 
Own
 
Largo, FL
 
278,000

 
Own
 
Centennial, CO
 
87,500

 
Own
 
Chihuahua, Mexico
 
207,720

 
Lease
 
September 2019
Lithia Springs, GA
 
188,400

 
Lease
 
December 2019
Brussels, Belgium
 
45,531

 
Lease
 
June 2015
Mississauga, Canada
 
22,378

 
Lease
 
December 2016
Westborough, MA
 
18,210

 
Lease
 
September 2015
Frenchs Forest, Australia
 
16,909

 
Lease
 
July 2015
Seoul, Korea
 
15,554

 
Lease
 
January 2017
Anaheim, CA
 
14,037

 
Lease
 
September 2015
Frankfurt, Germany
 
13,606

 
Lease
 
March 2023
Milan, Italy
 
13,024

 
Lease
 
March 2017
Westborough, MA
 
10,230

 
Lease
 
April 2016
Swindon, Wiltshire, UK
 
8,562

 
Lease
 
December 2015
Askim, Sweden
 
8,353

 
Lease
 
May 2016
Rungis Cedex, France
 
7,406

 
Lease
 
December 2016
Montreal, Canada
 
7,232

 
Lease
 
March 2016
Copenhagen, Denmark
 
5,899

 
Lease
 
April 2014
Shepshed, Leicestershire, UK
 
5,770

 
Lease
 
October 2015
Barcelona, Spain
 
5,382

 
Lease
 
December 2018
Edison, NJ
 
4,015

 
Lease
 
December 2014
New York, NY
 
3,473

 
Lease
 
September 2022
Beijing, China
 
3,456

 
Lease
 
June 2014
Warsaw, Poland
 
3,222

 
Lease
 
February 2018
Espoo, Finland
 
3,078

 
Lease
 
Open Ended
San Mateo, CA
 
3,068

 
Lease
 
December 2015
Shanghai, China
 
2,269

 
Lease
 
February 2015
Innsbruck, Austria
 
1,820

 
Lease
 
June 2020

Item 3.  Legal Proceedings

From time to time, we are a defendant in certain lawsuits alleging product liability, patent infringement, or other claims incurred in the ordinary course of business. Likewise, from time to time, the Company may receive a subpoena from a government agency such as the Securities and Exchange Commission, Equal Employment Opportunity Commission, the Occupational Safety and Health Administration, the Department of Labor, the Treasury Department, or other federal and state agencies or foreign governments or government agencies. These subpoenas may or may not be routine inquiries, or may begin as routine inquiries and over time develop into enforcement actions of various types. The product liability claims are generally covered by various insurance policies, subject to certain deductible amounts, maximum policy limits and certain exclusions in the respective policies or as required as a matter of law. In some cases we may be entitled to indemnification by third parties. We establish reserves sufficient to cover probable losses associated with claims. We do not expect that the resolution of any pending claims or investigations will have a material adverse effect on our financial condition, results of operations or cash flows. There can be no assurance, however, that future claims or investigations, or the costs associated with responding to such claims or investigations, especially claims and investigations not covered by insurance, will not have a material adverse effect on our financial condition, results of operations or cash flows.

Manufacturers of medical products may face exposure to significant product liability claims. To date, we have not experienced any product liability claims that have been material to our financial statements or condition, but any such claims arising in the future could have a material adverse effect on our business or results of operations. We currently maintain commercial

15



product liability insurance of $25 million per incident and $25 million in the aggregate annually, which we believe is adequate. This coverage is on a claims-made basis. There can be no assurance that claims will not exceed insurance coverage, that the carriers will be solvent or that such insurance will be available to us in the future at a reasonable cost.

Our operations are subject, and in the past have been subject, to a number of environmental laws and regulations governing, among other things, air emissions, wastewater discharges, the use, handling and disposal of hazardous substances and wastes, soil and groundwater remediation and employee health and safety. In some jurisdictions environmental requirements may be expected to become more stringent in the future. In the United States certain environmental laws can impose liability for the entire cost of site restoration upon each of the parties that may have contributed to conditions at the site regardless of fault or the lawfulness of the party’s activities. While we do not believe that the present costs of environmental compliance and remediation are material, there can be no assurance that future compliance or remedial obligations would not have a material adverse effect on our financial condition, results of operations or cash flows.

In September 2012, Bonutti Skeletal Innovations, LLC filed a complaint in the United States District Court for the Middle District of Florida against CONMED and certain of its subsidiaries. The Complaint asserts that select CONMED products infringe patents allegedly owned by Bonutti Skeletal Innovations. On the same day that it sued CONMED, Bonutti Skeletal Innovations sued several other orthopedic companies. The Company believes that the products in question do not infringe the patents-in-suit and intends to vigorously defend the claims. A range of potential losses cannot be estimated at this time.

During the third quarter of 2013, the FDA inspected our Centennial, CO manufacturing facility and issued a Form 483 with observations on September 20, 2013. The Company subsequently submitted responses to the Observations, and the FDA issued a Warning Letter on January 30, 2014 relating to the inspection and the responses to the Form 483 Observations. Accordingly, we are undertaking corrective actions that may involve additional costs for the Company. These remediation costs are not expected to be material, however there can be no assurance that the actions undertaken by the Company will ensure that the Company will not undertake recalls, voluntary or otherwise, nor can there be any assurance that a future inspection by the FDA will not result in an additional Form 483 or warning letter, or other regulatory actions which may include consent decrees or fines.

Item 4. Mine Safety Disclosures

Not applicable.
PART II

Item 5.  Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock, par value $.01 per share, is traded on the NASDAQ Stock Market under the symbol “CNMD”. At January 31, 2014, there were 729 registered holders of our common stock and approximately 4,984 accounts held in “street name”.
 
The following table sets forth quarterly high and low sales prices for the years ended December 31, 2012 and 2013, as reported by the NASDAQ Stock Market.
 
2012
Period
High
 
Low
First Quarter
$
30.47

 
$
26.00

Second Quarter
30.42

 
26.03

Third Quarter
29.25

 
25.85

Fourth Quarter
29.33

 
25.71

 
2013
Period
High
 
Low
First Quarter
$
34.29

 
$
28.03

Second Quarter
34.04

 
30.42

Third Quarter
33.96

 
31.07

Fourth Quarter
42.50

 
33.25



16



Our Board of Directors has authorized a share repurchase program as noted below; also see Note 7 to the Consolidated Financial Statements. The following table provides information about Company purchases of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act during the quarter ended December 31, 2013:

ISSUER PURCHASES OF EQUITY SECURITIES
Period
 
(a) Total Number of Shares Purchased
 
(b) Average Price Paid per Share1
 
(c) Total Number of Shares Purchased as Part of Publicly Announced Program2
 
(d) Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program
 
 
 
 
 
 
 
 
 
October 1, 2013 to
 
 
 
 
 
 
 
 
October 31, 2013
 

 
$

 


 
$
60,128,968

 
 
 
 
 
 
 
 
 
November 1, 2013 to
 
 
 
 
 
 
 
 
November 30, 2013
 

 
$

 

 
60,128,968

 
 
 
 
 
 
 
 
 
December 1, 2013 to
 
 
 
 
 
 
 
 
December 31, 2013
 
146,905

 
$
39.67

 
146,905

 
54,301,615

 
 
 
 
 
 
 
 
 
Total
 
146,905

 
 
 
146,905

 
 

1Average price paid per share includes cash paid for commissions.

2Our Board of Directors authorized a $200.0 million share repurchase program. There is no expiration date governing the period over which the Company can make its share repurchases under the share repurchase program.

On February 29, 2012, the Board of Directors adopted a cash dividend policy and declared an initial quarterly dividend of $0.15 per share. On October 28, 2013, the Board of Directors increased the quarterly dividend to $0.20 per share. The fourth quarter dividend for 2013 was paid on January 6, 2014 to shareholders of record as of December 16, 2013. The total dividend payable at December 31, 2013 was $5.5 million and is included in other current liabilities in the consolidated balance sheet. Future decisions as to the payment of dividends will be at the discretion of the Board of Directors, subject to conditions then existing, including our financial requirements and condition and the limitation and payment of cash dividends contained in debt agreements.
 
Information relating to compensation plans under which equity securities of CONMED Corporation are authorized for issuance is set forth below:

Equity Compensation Plan Information
Plan category
Number of securities to be issued upon exercise of outstanding options, warrants and rights
(a)
Weighted-average exercise price of outstanding options, warrants and rights
(b)
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(c)
Equity compensation plans approved by security holders
1,606,739


$25.55

1,145,915

Equity compensation plans not approved by security holders



Total
1,606,739


$25.55

1,145,915

 


17







Performance Graph

The performance graph below compares the yearly percentage change in the Company’s Common Stock with the cumulative total return of the NASDAQ Composite Index and the cumulative total return of the Standard & Poor’s Health Care Equipment Index. In each case, the cumulative total return assumes reinvestment of dividends into the same class of equity securities at the frequency with which dividends are paid on such securities during the applicable fiscal year.



18



Item 6.  Selected Financial Data

The following table sets forth selected historical financial data for the years ended December 31, 2009, 2010, 2011, 2012 and 2013.  The financial data set forth below should be read in conjunction with the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this Form 10-K and the Financial Statements of the Company and the notes thereto.
 
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
 
 
Years Ended December 31,
 
 
2009
 
2010
 
2011
 
2012
 
2013
 
 
(in thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
 
Statements of Operations Data (1):
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
694,739

 
$
713,723

 
$
725,077

 
$
767,140

 
$
762,704

Cost of sales (2)
 
357,407

 
348,339

 
350,143

 
361,297

 
350,287

Gross profit
 
337,332

 
365,384

 
374,934

 
405,843

 
412,417

Selling and administrative
 
266,310

 
276,463

 
276,615

 
302,469

 
310,730

Research and development
 
31,837

 
29,652

 
28,651

 
28,214

 
25,831

Impairment of goodwill (3)
 

 

 
60,302

 

 

Medical device excise tax
 

 

 

 

 
5,949

Other expense (4)
 
10,916

 
2,176

 
1,092

 
9,950

 
13,399

Income from operations
 
28,269

 
57,093

 
8,274

 
65,210

 
56,508

(Gain) loss on early extinguishment of debt (5)
 
(1,083
)
 
79

 

 

 
263

Amortization of debt discount
 
4,111

 
4,244

 
3,903

 

 

Interest expense
 
7,086

 
7,113

 
6,676

 
5,730

 
5,613

Income (loss) before income taxes
 
18,155

 
45,657

 
(2,305
)
 
59,480

 
50,632

Provision (benefit) for income taxes
 
6,018

 
15,311

 
(3,057
)
 
18,999

 
14,693

Net income
 
$
12,137

 
$
30,346

 
$
752

 
$
40,481

 
$
35,939

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Per Share Data
 
 

 
 

 
 

 
 

 
 
Basic earnings per share
 
$
0.42

 
$
1.06

 
$
.03

 
$
1.43

 
$
1.30

 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
 
$
0.42

 
$
1.05

 
$
.03

 
$
1.41

 
$
1.28

 
 
 
 
 
 
 
 
 
 
 
 Dividends per share of common stock
 
$

 
$

 
$

 
$
0.60

 
$
0.65

 
 
 
 
 
 
 
 
 
 
 
Weighted Average Number of Common Shares In Calculating:
 
 

 
 

 
 

 
 

 
 
Basic earnings per share
 
29,074

 
28,715

 
28,246

 
28,301

 
27,722

Diluted earnings per share
 
29,142

 
28,911

 
28,633

 
28,653

 
28,114

 
 
 
 
 
 
 
 
 
 
 
Other Financial Data:
 
 

 
 

 
 

 
 

 
 
Depreciation and amortization
 
$
41,283

 
$
41,807

 
$
42,687

 
$
46,616

 
$
47,867

Capital expenditures
 
21,444

 
14,732

 
17,552

 
21,532

 
18,445

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data (at period end):
 
 

 
 

 
 

 
 

 
 
Cash and cash equivalents
 
$
10,098

 
$
12,417

 
$
26,048

 
$
23,720

 
$
54,443

Total assets
 
958,413

 
985,773

 
935,594

 
1,078,849

 
1,090,508

Long-term obligations
 
302,791

 
219,344

 
231,339

 
346,637

 
372,924

Total shareholders’ equity
 
576,515

 
586,563

 
573,071

 
606,998

 
606,319


19




(1)
Results of operations of acquired businesses have been recorded in the financial statements since the date of acquisition.
(2)
In 2009, 2010, 2011, 2012 and 2013, we incurred charges related to the restructuring of certain of our operations of $12.7 million, $2.4 million, $3.5 million, $7.1 million and $6.5 million, respectively; in 2010 and 2013 we incurred charges of $2.5 million and $2.1 million, respectively, related to the termination of a product offering.  See additional discussion in Note 15 to the Consolidated Financial Statements.
(3)
During 2011, we recorded a $60.3 million charge for the impairment of goodwill related to the legacy CONMED Patient Care reporting unit. Refer to Note 4 to the Consolidated Financial Statements for further details.
(4)
Other expense includes the following:

 
 
2009
 
2010
 
2011
 
2012
 
2013
 
 
 
 
 
 
 
 
 
 
 
New plant/facility consolidation
 
$
2,726

 
$

 
$

 
$

 
$

Net pension gain
 
(1,882
)
 

 

 

 

Product recall
 
5,992

 

 

 

 

Administrative consolidation costs
 
4,080

 
2,176

 
792

 
6,497

 
8,750

Costs associated with purchase of a distributor
 

 

 
300

 
704

 

Costs associated with legal arbitration and patent dispute
 

 

 

 
1,555

 
3,206

Pension settlement expense
 

 

 

 

 
1,443

Costs associated with purchase of a business
 

 

 

 
1,194

 

Other expense
 
$
10,916

 
$
2,176

 
$
1,092

 
$
9,950

 
$
13,399


See additional discussion in Note 11 to the Consolidated Financial Statements.

(5)
Includes in 2010 and 2013, a charge of $0.1 million and $0.3 million, respectively, related to a loss on the early extinguishment of debt.  Includes in 2009, a gain of $1.1 million on the early extinguishment of debt.  See additional discussion in Note 5 to the Consolidated Financial Statements.

20




Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with Selected Financial Data (Item 6), and our Consolidated Financial Statements and related notes contained elsewhere in this report.
 
Overview of CONMED Corporation

CONMED Corporation (“CONMED”, the “Company”, “we” or “us”) is a medical technology company with an emphasis on surgical devices and equipment for minimally invasive procedures and monitoring.  The Company’s products are used by surgeons and physicians in a variety of specialties including orthopedics, general surgery, gynecology, neurosurgery, and gastroenterology.  
During 2011 and 2012, we undertook a variety of restructuring initiatives aimed at improving efficiency and internal effectiveness. These initiatives included changes in management lines of reporting and culminated in the implementation of a functional organizational structure. Under the new structure, we are now organized by function rather than by operating segment. Executives reporting in to the CEO include those responsible for operations and supply chain management, research and development, sales, marketing and certain corporate functions. Our chief operating decision maker (the CEO) evaluates the various global product portfolios on a net sales basis and evaluates profitability, investment and cash flow metrics on a consolidated worldwide basis due to shared infrastructure and resources. As a result, we have discontinued accounting and reporting for our businesses as five separate, operating segments. Effective January 1, 2013, we are accounting and reporting for our business as a single segment entity engaged in the development, manufacturing and sale on a global basis of surgical devices and related equipment.

As part of this reporting structure change, we also restructured our product lines. Orthopedic surgery consists of sports medicine instrumentation and small bone, large bone and specialty powered surgical instruments 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. Surgical visualization consists of 2D and 3D video systems for use in minimally invasive orthopedic and general surgery. These product lines as a percentage of consolidated net sales are as follows:

 
2011
 
2012
 
2013
Orthopedic surgery
51
%
 
54
%
 
54
%
General surgery
40

 
37

 
37

Surgical visualization
9

 
9

 
9

Consolidated net sales
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 disposable 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 50%, 50% and 51% in 2011, 2012 and 2013, respectively.
 
Business Environment and Opportunities
 
The aging of the worldwide population along with lifestyle changes, continued cost containment pressures on healthcare systems and the desire of clinicians and administrators to use less invasive (or noninvasive) procedures are important trends which are driving the long-term growth in our industry.  We believe that with our broad product offering of high quality surgical and patient care products, we can capitalize on this growth for the benefit of the Company and our shareholders.
 
In order to further our growth prospects, we have historically used strategic business acquisitions and exclusive distribution relationships to continue to diversify our product offerings, increase our market share and realize economies of scale.
 
We have a variety of research and development initiatives focused in each of our principal product lines as continued innovation and commercialization of new proprietary products and processes are essential elements of our long-term growth strategy.   Our reputation as an innovator is exemplified by recent new product introductions such as the Y-Knot® Flex System for instability repairs featuring the smallest double-loaded (1.8mm) anchors available and curved, flexible instrumentation to help

21



surgeons achieve ideal anchor placement and the Y-Knot® RC anchors for rotator cuffs are the world’s only self-punching all-suture anchors which helps simplify techniques while its small size is designed to improve placement options; the new D4000 Resection System featuring an intuitive touchscreen display and direct pump integration for a seamless clinical experience; the IM8000 2DHD Camera System can be used in multi-specialty procedures and includes a new autoclavable camera head featuring proprietary CMOS technology for clear, crisp imagery and a new LS8000 LED light source providing improved light sensitivity for clearer visualization; the new Hall 50™ Powered Instrument System can be used in total joint replacements featuring lighter, ergonomically-designed handpieces to provide a comfortable, high-performance clinical experience while the new Hall UL-approved autoclavable lithium batteries deliver dependable, long-lasting power and the unique, multi-tray system also provides hospitals with new levels of sterilization convenience; the new GS2000 50L Insufflator features the market’s fastest flow rate and a dual-tank shuttle valve system to help provide clear and consistent laparoscopic visualization; the EntriPort line of trocars help deliver effective sealing and clear visualization in a wide range of sizes optimal for nearly every minimally invasive abdominal surgical application; our new D-Flex probes were designed for use with the da Vinci® Surgical System and enable non-contact hemostasis with argon gas and our DetachaTip® III Multi-Use Endosurgery Instruments offer the optimal blend of performance and cost efficiency - combining precise, reliable, and comfortable performance with dramatically reduced procedural costs.

Business Challenges
 
Significant volatility in the financial markets and foreign currency exchange rates as well as depressed economic conditions in both domestic and international markets, have presented significant business challenges since the second half of 2008. While we returned to revenue growth in 2010, 2011 and 2012, we experienced a sales decline during 2013. We are cautiously optimistic that the domestic economic environment is improving, however conditions in Europe and elsewhere may present significant business challenges for the Company. While there can be no assurance that improvement in the overall economic environment will be sustained, we will continue to monitor and manage the impact of the overall economic environment on the Company.

Over the past few years we successfully completed certain of our operational restructuring plans whereby we consolidated manufacturing and distribution centers as well as restructured certain of our administrative functions. We continue to restructure both operations and administrative functions as necessary throughout the organization. However, we cannot be certain such activities will be completed in the estimated time period or that planned cost savings will be achieved.

Our facilities are subject to periodic inspection by the United States Food and Drug Administration (“FDA”) and foreign regulatory agencies or notified bodies for, among other things, conformance to Quality System Regulation and Current Good Manufacturing Practice (“CGMP”) requirements and foreign or international standards. We are committed to the principles and strategies of systems-based quality management for improved CGMP compliance, operational performance and efficiencies through our Company-wide quality systems initiatives. However, there can be no assurance that our actions will ensure that we will not receive a warning letter or be the subject of other regulatory action, which may include consent decrees or fines, that we will not conduct product recalls or that we will not experience temporary or extended periods during which we may not be able to sell products in foreign countries. During the third quarter of 2013, the FDA inspected our Centennial, CO manufacturing facility and issued a Form 483 with observations on September 20, 2013. The Company subsequently submitted responses to the Observations, and the FDA issued a Warning Letter on January 30, 2014 relating to the inspection and the responses to the Form 483 Observations. Accordingly, we are undertaking corrective actions that may involve additional costs for the Company. These remediation costs are not expected to be material, however there can be no assurance that the actions undertaken by the Company will ensure that the Company will not undertake recalls, voluntary or otherwise, nor can there be any assurance that a future inspection by the FDA will not result in an additional Form 483 or warning letter, or other regulatory actions which may include consent decrees or fines.

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 describes the significant accounting policies used in preparation of the Consolidated Financial Statements.  The most significant areas involving management judgments and estimates are described below and are considered by management to be critical to understanding the financial condition and results of operations of CONMED Corporation.
 
Revenue Recognition
 
Revenue is recognized when title has been transferred to the customer which is at the time of shipment.  The following policies apply to our major categories of revenue transactions:


22



Sales to customers are evidenced by firm purchase orders. Title and the risks and rewards of ownership are transferred to the customer when product is shipped under our stated shipping terms.  Payment by the customer is due under fixed payment terms and collectability is reasonably assured.

We place certain of our capital equipment with customers on a loaned basis in return for commitments to purchase related single-use products over time periods generally ranging from one to three years. In these circumstances, no revenue is recognized upon capital equipment shipment as the equipment is loaned and subject to return if certain minimum single-use purchases are not met. Revenue is recognized upon the sale and shipment of the related single-use products. The cost of the equipment is amortized over its estimated useful life.

We recognize revenues related to the promotion and marketing of sports medicine allograft tissue in accordance with the contractual terms of our agreement with Musculoskeletal Transplant Foundation (“MTF”) on a net basis as our role is limited to that of an agent earning a commission or fee. MTF records revenue when the tissue is shipped to the customer. Our services are completed at this time and net revenues for the “Service Fee” for our promotional and marketing efforts are then recognized based on a percentage of the net amounts billed by MTF to its customers. The timing of revenue recognition is determined through review of the net billings made by MTF each month. Our net commission Service Fee is based on the contractual terms of our agreement and is currently 50%. This percentage can vary over the term of the agreement but is contractually determinable. Our Service Fee revenues are recorded net of amortization of the acquired assets, which are being expensed over the expected useful life of 25 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.

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 $13.0 million, $12.8 million and $12.6 million for 2011, 2012 and 2013, 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 $1.4 million at December 31, 2013 is adequate to provide for probable losses resulting from accounts receivable.

Inventory Valuation

We write-off excess and obsolete inventory resulting from the inability to sell our products at prices in excess of current carrying costs. The markets in which we operate are highly competitive, with new products and surgical procedures introduced on an on-going basis. Such marketplace changes may result in our products becoming obsolete. We make estimates regarding the future recoverability of the costs of our products and record a provision for excess and obsolete inventories based on historical experience, expiration of sterilization dates and expected future trends. If actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, additional inventory write-downs may be required.    

Goodwill and Intangible Assets

We have a history of growth through acquisitions.  Assets and liabilities of acquired businesses are recorded at their estimated fair values as of the date of acquisition.  Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses.   Effective January 1, 2013, we are reporting our business as a single operating segment, and goodwill as a single reporting unit. Changes in our structure are further discussed in Note 8 to the Consolidated Financial Statements. Customer relationships, trademarks, tradenames, patents, and other intangible assets primarily represent allocations of purchase price to identifiable intangible assets of acquired businesses. Promotional, marketing and distribution rights represent intangible

23



assets created under our Sports Medicine Joint Development and Distribution Agreement (the "JDDA") with Musculoskeletal Transplant Foundation (“MTF”).  We have accumulated goodwill of $248.4 million and other intangible assets of $319.4 million as of December 31, 2013.

In accordance with FASB guidance, goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to at least annual impairment testing. It is our policy to perform our annual impairment testing in the fourth quarter. The identification and measurement of goodwill impairment involves the estimation of the fair value of our business. Estimates of fair value are based on the best information available as of the date of the assessment, which primarily incorporate management assumptions about expected future cash flows and other valuation techniques. Future cash flows may be affected by changes in industry or market conditions or the rate and extent to which anticipated synergies or cost savings are realized with newly acquired entities. During 2013, we completed our goodwill impairment testing with data as of October 1, 2013. We performed a Step 1 impairment test in accordance with ASC 350 utilizing the market capitalization approach to determine whether the fair value of a reporting unit is less than its carrying amount. Based upon our assessment, we believe the fair value continues to exceed carrying value by 99%.

During 2011, we estimated the fair value of the legacy CONMED Patient Care reporting unit (refer to Note 8 for discussion regarding the change in operating segments) utilizing both a market-based approach and an income approach. Under the income approach, we utilized a discounted cash flow valuation methodology and measured the goodwill impairment in accordance with ASC 350. The first step of the impairment test determined the carrying value exceeded fair value and therefore we proceeded to Step 2. Under Step 2, we calculated the amount of impairment loss by measuring the amount the carrying value of goodwill exceeded the implied fair value of the goodwill. We determined the goodwill of our legacy CONMED Patient Care reporting unit was impaired as a result of lower future earnings due to pricing pressures in a number of our product lines and consequently we recorded a goodwill impairment charge of $60.3 million to reduce the carrying amount of the reporting unit's goodwill to its implied fair value.

Intangible assets with a finite life are amortized over the estimated useful life of the asset and are evaluated each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization.  Intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The carrying amount of an intangible asset subject to amortization is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset.  An impairment loss is recognized by reducing the carrying amount of the intangible asset to its current fair value.

Customer relationship assets arose principally as a result of the 1997 acquisition of Linvatec Corporation.  These assets represent the acquisition date fair value of existing customer relationships based on the after-tax income expected to be derived during their estimated remaining useful life.  The useful lives of these customer relationships were not and are not limited by contract or any economic, regulatory or other known factors.  The estimated useful life of the Linvatec customer relationship assets was determined as of the date of acquisition as a result of a study of the observed pattern of historical revenue attrition during the 5 years immediately preceding the acquisition of Linvatec Corporation.  This observed attrition pattern was then applied to the existing customer relationships to derive the future expected useful life of the customer relationships.  This analysis indicated an annual attrition rate of 2.6%.  Assuming an exponential attrition pattern, this equated to an average remaining useful life of approximately 38 years for the Linvatec customer relationship assets.  Customer relationship intangible assets arising as a result of other business acquisitions are being amortized over a weighted average life of 15 years.  The weighted average life for customer relationship assets in aggregate is 33 years.

We evaluate the remaining useful life of our customer relationship intangible assets each reporting period in order to determine whether events and circumstances warrant a revision to the remaining period of amortization.  In order to further evaluate the remaining useful life of our customer relationship intangible assets, we perform an analysis and assessment of actual customer attrition and activity as events and circumstances warrant.  This assessment includes a comparison of customer activity since the acquisition date and review of customer attrition rates.  In the event that our analysis of actual customer attrition rates indicates a level of attrition that is in excess of that which was originally contemplated, we would change the estimated useful life of the related customer relationship asset with the remaining carrying amount amortized prospectively over the revised remaining useful life.

We test our customer relationship assets for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Factors specific to our customer relationship assets which might lead to an impairment charge include a significant increase in the annual customer attrition rate or otherwise significant loss of customers, significant decreases in sales or current-period operating or cash flow losses or a projection or forecast of losses. We do not believe that there have been events or changes in circumstances which would indicate the carrying amount of our customer relationship assets might not be recoverable.

24




For all other indefinite lived intangible assets, we perform a qualitative impairment test in accordance with ASC 350. Based upon this assessment, we have determined that it is unlikely that our indefinite lived intangible assets are impaired.

See Note 4 to the Consolidated Financial Statements for further discussion of goodwill and other intangible assets.

Pension Plan

We sponsor a defined benefit pension plan (the “pension plan”) that was frozen in 2009. It covered substantially all our United States based employees at the time it was frozen. Major assumptions used in accounting for the plan include the discount rate, expected return on plan assets, rate of increase in employee compensation levels and expected mortality.  Assumptions are determined based on Company data and appropriate market indicators, and are evaluated annually as of the plan’s measurement date.  A change in any of these assumptions would have an effect on net periodic pension costs reported in the consolidated financial statements.

The weighted-average discount rate used to measure pension liabilities and costs is set by reference to the Citigroup Pension Liability Index. However, this index gives only an indication of the appropriate discount rate because the cash flows of the bonds comprising the index do not match precisely the projected benefit payment stream of the plan. For this reason, we also consider the individual characteristics of the plan, such as projected cash flow patterns and payment durations, when setting the discount rate.  The rates used in determining 2013 and 2014 pension expense are 3.90% and 4.75%, respectively.
 
We have used an expected rate of return on pension plan assets of 8.0% for purposes of determining the net periodic pension benefit cost.  In determining the expected return on pension plan assets, we consider the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance.  In addition, we consult with financial and investment management professionals in developing appropriate targeted rates of return.
 
Pension expense in 2014 is not expected to be material. Pension expense was $2.6 million in 2013, including $1.4 million in pension settlement expenses resulting from a higher level of lump sum withdrawals from pension plan participants during 2013.  In addition, we do not expect to make any contributions to the pension plan for the 2014 plan year.
 
In performing a sensitivity analysis on our pension plan expense, we do not believe a 0.25% increase or decrease in discount rate or investment return would have a material impact on our pension expense.

See Note 9 to the Consolidated Financial Statements for further discussion.
 
Stock-based Compensation

All share-based payments to employees, including grants of employee stock options, restricted stock units, performance share units and stock appreciation rights are recognized in the financial statements based at their fair values.  Compensation expense is generally recognized using a straight-line method over the vesting period. Compensation expense for performance share units is recognized using the graded vesting method.
 
Income Taxes
 
The recorded future tax benefit arising from deductible temporary differences and tax carryforwards is approximately $33.0 million at December 31, 2013.  Management believes that earnings during the periods when the temporary differences become deductible will be sufficient to realize the related future income tax benefits.
 
The Company is subject to taxation in the United States and various states and foreign jurisdictions. Taxing authority examinations can involve complex issues and may require an extended period of time to resolve. Our Federal income tax returns have been examined by the Internal Revenue Service (“IRS”) for calendar years ending through 2012. Tax years subsequent to 2012 are subject to future examination.

Consolidated Results of Operations

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

25



 
Year Ended December 31,
 
2011
 
2012
 
2013
Net sales
100.0
 %
 
100.0
%
 
100.0
%
Cost of sales
48.3

 
47.1

 
45.9

Gross margin
51.7

 
52.9

 
54.1

Selling and administrative expense
38.1

 
39.4

 
40.7

Research and development expense
4.0

 
3.7

 
3.4

Impairment of goodwill
8.3

 

 

Medical device excise tax

 

 
0.8

Other expense
0.2

 
1.3

 
1.8

Income from operations
1.1

 
8.5

 
7.4

Loss on early extinguishment of debt

 

 
0.0

Amortization of debt discount
0.5

 

 

Interest expense
0.9

 
0.7

 
0.7

Income (loss) before income taxes
(0.3
)
 
7.8

 
6.7

Provision (benefit) for income taxes
(0.4
)
 
2.5

 
1.9

Net income
0.1
 %
 
5.3
%
 
4.8
%

2013 Compared to 2012

Sales for 2013 were $762.7 million, a decrease of $4.4 million (-0.6%) compared to sales of $767.1 million in 2012 with the decreases occurring in our orthopedic surgery and visualization product lines. In local currency, excluding the effects of the hedging program, sales increased 0.2%.  Sales of capital equipment decreased $2.2 million (-1.4%) to $153.7 million in 2013 from $155.9 million in 2012; sales of single-use products decreased $2.2 million (-0.4%) to $609.0 million in 2013 from $611.2 million in 2012.  In local currency, excluding the effects of the hedging program, sales of capital equipment decreased 0.8% while single-use increased 0.4%.

Orthopedic surgery sales decreased $3.7 million (-0.9%) in 2013 to $410.2 million from $413.9 million in 2012 mainly due to lower sales in our resection product offerings and large bone burs and blades. In local currency, excluding the effects of the hedging program, sales increased 0.1%.

General surgery sales remained relatively flat with a $0.1 million (0.0%) increase in 2013 to $286.7 million from $286.6 million in 2012 mainly due to increased sales in our endomechanical, gastrointestinal and pulmonary product offerings offset by decreased sales in our advanced energy and patient monitoring product offerings. In local currency, excluding the effects of the hedging program, sales increased 0.5%.

Surgical visualization sales decreased $0.8 million (-1.2%) in 2013 to $65.8 million from $66.6 million in 2012 mainly due to lower video system product sales. In local currency, excluding the effects of the hedging program, sales decreased -0.9%.
 
Cost of sales decreased to $350.3 million in 2013 as compared to $361.3 million in 2012.  Gross profit margins increased 1.2 percentage points to 54.1% in 2013 as compared to 52.9% in 2012.  The increase in gross profit margins of 1.2 percentage points is primarily a result of the lower costs resulting from the restructuring initiatives we have completed throughout our operation.
 
Selling and administrative expense increased to $310.7 million in 2013 compared to $302.5 million in 2012. Selling and administrative expense as a percentage of net sales increased to 40.7% in 2013 from 39.4% in 2012.  This increase of 1.3 percentage points is attributable to higher benefit costs, lower overall sales, and higher selling and marketing expenses during the period.

Research and development expense was $25.8 million in 2013 compared to $28.2 million in 2012.  As a percentage of net sales, research and development expense decreased to 3.4% in 2013 compared to 3.7% in 2012. The decrease of 0.3 percentage points is mainly the result of the timing of projects.

In accordance with the Patient Protection and Affordable Care Act and Health Care and Education Affordability Reconciliation Act, the Company was required in 2013 to begin paying a 2.3% excise tax imposed upon sales within the U.S. of certain medical device products. The medical device excise tax expense totaled $5.9 million in 2013.

26



 
As discussed in Note 11 to the Consolidated Financial Statements, other expense in 2013 consisted of an $8.8 million charge related to administrative consolidation expenses, $3.2 million in legal costs associated with a patent infringement claim and a $1.4 million pension settlement expense as further described in Note 10. Other expense in 2012 consisted of  a $6.5 million charge related to administrative consolidation expenses, a $0.7 million charge related to the purchase of the Company's former distributor for the Nordic region of Europe, $1.6 million in costs associated with a contractual dispute with a former distributor and $1.2 million in costs associated with the purchase of Viking Systems, Inc..

As discussed in Note 5 to the Consolidated Financial Statements, we entered into an amended and restated senior credit agreement on January 17, 2013. In connection with the refinancing, we recorded a $0.3 million loss on the early extinguishment of debt related to the write-off of unamortized deferred financing costs under the then existing senior credit agreement.
 
Interest expense was $5.6 million in 2013 compared to $5.7 million in 2012.  The decrease in interest expense is due to lower weighted average interest rates on higher weighted average borrowings outstanding in 2013 as compared to the same period a year ago.  The weighted average interest rates on our borrowings decreased to 2.39% in 2013 as compared to 3.03% in 2012.
 
A provision for income taxes was recorded at an effective rate of 29.0% in 2013 and 31.9% in 2012 as compared to the Federal statutory rate of 35.0%. The effective tax rate is lower than that recorded in the same period a year ago as a result of a greater proportion of earnings in foreign jurisdictions where the corporate tax rate and deduction for notional interest on equity allowed against taxable profits in Europe result in effective tax rates lower than the statutory rate, tax benefits recorded in the third quarter of 2013 as a result of taxing authority determinations, and tax benefits related to business tax provisions, including the research and development credit ($0.8 million), that were enacted in the first quarter of 2013, retroactive to January 1, 2012.  A reconciliation of the United States statutory income tax rate to our effective tax rate is included in Note 6 to the Consolidated Financial Statements.
 
2012 Compared to 2011

Sales for 2012 were $767.1 million, an increase of $42.0 million (5.8%) compared to sales of $725.1 million in 2011 with the increases in our orthopedic surgery and surgical visualization product lines. The distribution agreement with Musculoskeletal Transplant Foundation ("MTF") accounted for a 3.9% annual sales increase. In local currency, excluding the effects of the hedging program, sales increased 5.7%. Sales of capital equipment decreased $6.1 million (-3.8%) to $155.9 million in 2012 from $162.0 million in 2011; sales of single-use products increased $48.1 million (8.5%) to $611.2 million in 2012 from $563.1 million in 2011. In local currency, excluding the effects of the hedging program, sales of capital equipment decreased 3.7% while single-use products increased 8.4%. We believe the overall decline in capital sales is driven by capital purchasing constraints in hospitals due to depressed economic conditions.

Orthopedic surgery sales increased $42.7 million (11.5%) in 2012 to $413.9 million from $371.2 million in 2011 mainly due to the distribution agreement with MTF, increased sales of our procedure specific, large bone burs and blades and small bone handpiece product offerings. In local currency, excluding the effects of the hedging program sales increased 11.4%.

General surgery sales decreased $0.8 million (-0.3%) in 2012 to $286.6 million from $287.4 million in 2011 mainly due to lower sales in our patient monitoring products and advanced energy products offset by increases in our gastrointestinal and pulmonary products. In local currency, excluding the effects of the hedging program, sales decreased -0.4%.

Surgical visualization sales remained relatively flat, with a $0.1 million (0.2%) increase in 2012 to $66.6 million from $66.5 million in 2011 due to higher video systems sales. In local currency, excluding the effects of the hedging program, sales increased 0.7% .

Cost of sales increased to $361.3 million in 2012 as compared to $350.1 million in 2011. Gross profit margins increased 1.2 percentage points to 52.9% in 2012 as compared to 51.7% in 2011. The increase in gross profit margins of 1.2 percentage points is primarily a result of the distribution agreement we entered into during 2012 with MTF as further described in Note 4 to the Consolidated Financial Statements (1.5 percentage points) and product mix offset by the impact of unfavorable foreign exchange rates on sales and higher restructuring charges than the same period a year ago.

Selling and administrative expense increased to $302.5 million in 2012 compared to $276.6 million in 2011. Selling and administrative expense as a percentage of net sales increased to 39.4% in 2012 from 38.1% in 2011. This increase of 1.3 percentage points is primarily attributable to higher selling expenses mainly related to our MTF distribution agreement and acquisition of our

27



former distributor for the Nordic region of Europe.

Research and development expense was $28.2 million in 2012 compared to $28.7 million in 2011. As a percentage of net sales, research and development expense decreased to 3.7% in 2012 compared to 4.0% in 2011. The decrease of 0.3 percentage points is mainly a result of relatively flat spending on increased sales in 2012.

During 2011, we recorded a $60.3 million charge for the impairment of goodwill related to our legacy Patient Care reporting unit. Refer to Note 4 to the Consolidated Financial Statements for further details.

As discussed in Note 11 to the Consolidated Financial Statements, other expense in 2012 consisted of a $6.5 million charge related to administrative consolidation expenses, a $0.7 million charge related to the purchase of the Company's former distributor for the Nordic region of Europe, $1.6 million in costs associated with a contractual dispute with a former distributor and $1.2 million in costs associated with the purchase of Viking Systems, Inc.. Other expense in 2011 consisted of  a $0.8 million charge related to the consolidation of administrative functions and a $0.3 million charge related to the purchase of the Company's former distributor for the Nordic region of Europe.

Amortization of debt discount was $3.9 million in 2011. The debt discount on the Notes was amortized through November 2011.

Interest expense was $5.7 million in 2012 compared to $6.7 million in 2011.  The decrease in interest expense is due to lower weighted average interests rates on higher weighted average borrowings outstanding in 2012 as compared to the same period a year ago. The weighted average interest rates on our borrowings decreased to 3.03% in 2012 as compared to 3.66% in 2011.

A provision for income taxes was recorded at an effective rate of 31.9% in 2012 and -132.6% in 2011 as compared to the Federal statutory rate of 35.0%. Income tax expense recorded in 2012 was higher than recorded in the same period a year ago as a result of increased pre-tax earnings, offset by higher earnings in foreign jurisdictions where the tax rates are lower than the statutory federal rate and tax benefits recorded in 2012 as a result of determinations received from multiple taxing authorities.  A reconciliation of the United States statutory income tax rate to our effective tax rate is included in Note 6 to the Consolidated Financial Statements.
 
Liquidity and Capital Resources
 
Our liquidity needs arise primarily from capital investments, working capital requirements and payments on indebtedness under the 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 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. We believe that our cash on hand, cash from operating activities and proceeds from our amended and restated senior credit agreement provide us with sufficient financial resources to meet our anticipated capital requirements and obligations as they come due.

We had total cash on hand at December 31, 2013 of $54.4 million, of which approximately $45.2 million was held by our foreign subsidiaries outside the United States with unremitted earnings. During the fourth quarter of 2011, we repatriated $16.2 million of foreign earnings to the United States. We do not currently intend to repatriate additional funds held outside of the United States in the foreseeable future. If we were to repatriate these funds, we would be required to accrue and pay taxes on such amounts.
    
Operating cash flows
 
Our net working capital position was $260.9 million at December 31, 2013.  Net cash provided by operating activities was $103.0 million in 2011, $95.2 million in 2012 and $80.9 million in 2013 generated on net income of $0.8 million in 2011, $40.5 million in 2012 and $35.9 million in 2013.  

The decrease in cash provided by operating activities is primarily the result of the payments related to the medical device excise tax that became effective January 1, 2013 and changes in working capital accounts in 2013.

Investing cash flows
 

28



Net cash used in investing activities during 2013, consisted primarily of capital expenditures.  Capital expenditures were $17.6 million, $21.5 million and $18.4 million in 2011, 2012 and 2013, respectively.  Capital expenditures are expected to approximate $20.0 million in 2014. The decrease in the cash used in investing activities during 2013 is the result of $64.1 million in payments related to the distribution and development agreement with MTF and purchase of Viking Systems, Inc. for $22.5 million during 2012.
 
Financing cash flows

Financing activities in 2013 resulted in a use of cash of $31.3 million compared to proceeds of cash of $11.4 million in 2012. During 2013, we repurchased common stock totaling $50.6 million compared to only $3.9 million in 2012. We also had a $34.0 million payment associated with the distribution and development agreement with MTF. Finally, we made $16.7 million in dividend payments in 2013 compared to $12.9 million in 2012; 2012 included only three quarters of payments as this was the first year we paid dividends. This increased use of cash in 2013 was offset by $17.3 million in proceeds from the issuance of common stock under our equity compensation plans and employee stock purchase plan during 2013 compared to only $10.2 million in 2012 as a result of increases in exercises in 2013. 2012 also consisted of $53.6 million in repayments of term borrowings under our then outstanding senior credit agreement.

On January 17, 2013, we entered into an amended and restated $350.0 million senior credit agreement (the "amended and restated senior credit agreement"). The amended and restated senior credit agreement consists of a $350.0 million revolving credit facility expiring on January 17, 2018. In connection with the refinancing, we recorded a $0.3 million loss on the early extinguishment of debt related to the write-off of unamortized deferred financing costs under the then existing senior credit agreement. Interest rates are at LIBOR plus 1.625% (1.795% at December 31, 2013) or an alternative base rate. 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 in effect on such date plus 0.50%, or the one month Eurocurrency rate plus 1%, plus an additional margin of 0.625%. As described in Note 4, we entered into a distribution and development agreement with MTF on January 3, 2012 and used cash on hand and available borrowings under our revolving credit facility to fund the up front payment of $63.0 million and contingent payment made on January 3, 2013 of $34.0 million. We expect to fund the remaining $50.0 million in contingent payments, including the $16.7 million paid on January 3, 2014, through cash on hand and available borrowings under our revolving credit facility as these payments come due over the next three years.

There were $208.0 million in borrowings outstanding under the revolving credit facility as of December 31, 2013.  Our available borrowings on the revolving credit facility at December 31, 2013 were $134.2 million with approximately $7.8 million of the facility set aside for outstanding letters of credit.

     The amended and restated senior credit agreement is collateralized by substantially all of our personal property and assets.  The 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 December 31, 2013. 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 $7.6 million at December 31, 2013.  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 December 31, 2013, we have repurchased a total of 5.7 million shares of common stock aggregating $145.7 million under this authorization and have $54.3 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 repurchased $50.6 million under the share repurchase program in 2013.  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 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. See “Item 1. Business – Forward Looking Statements.”
 
Restructuring

29




During 2011, 2012 and 2013, we continued our operational restructuring plan which includes the transfer of additional production lines from manufacturing facilities located in the United States to our manufacturing facility in Chihuahua, Mexico and the consolidation of our Finland operations into our Largo, Florida and Utica, New York manufacturing facilities.   During the first quarter of 2013, we began the consolidation of our Westborough, Massachusetts operations into our Largo, Florida and Chihuahua, Mexico facilities. For the years ending December 31, 2011, 2012 and 2013, we charged $3.5 million, $7.1 million, and $6.5 million, respectively, to cost of goods sold related to our restructuring plan. These costs include severance and other charges associated with the transfer of production to Mexico and consolidation of our Finland and Westborough, Massachusetts operations. We expect this phase of our plan to be substantially completed in the first quarter of 2014.

As part of our ongoing restructuring, the Company discontinued a patient monitoring product offering and incurred $2.1 million in costs which were charged to cost of goods sold during the year ending December 31, 2013.

During 2011, 2012 and 2013, we consolidated certain administrative functions throughout the Company and incurred $0.8 million, $6.5 million, and $8.8 million, respectively, in related costs consisting principally of severance charges. These costs were charged to other expense.

We have recorded an accrual in current liabilities of $3.1 million at December 31, 2013 mainly related to severance and lease impairment costs associated with the restructuring.  We expect this phase of our plan and related cash payments to be substantially completed in 2014.

We plan to continue to restructure both operations and administrative functions as necessary throughout the organization.  As the restructuring plan progresses, we will incur additional charges, including employee termination and other exit costs.  We estimate restructuring costs associated with the Finland and Westborough, Massachusetts consolidations and other legal costs related to a patent dispute will approximate $4.0 million to $5.0 million in 2014 and will be charged to cost of goods sold and other expense.

During February 2014, the Company announced a new phase of the restructuring plan to consolidate our Centennial, Colorado manufacturing operations into other existing CONMED manufacturing facilities. We expect this plan to be completed over the next 24 months and are in the process of determining the total costs expected to be incurred.
 
Refer to Note 15 to the Consolidated Financial Statements for further discussions regarding restructuring.

Contractual Obligations
 
The following table summarizes our contractual obligations for the next five years and thereafter (amounts in thousands) as of December 31, 2013.  Purchase obligations represent purchase orders for goods and services placed in the ordinary course of business.  There were no capital lease obligations as of December 31, 2013.
 
 
Payments Due by Period
 
Total
 
Less than
1 Year
 
 1-3
Years
 
 3-5
Years
 
More than
5 Years
 
 
 
 
 
 
 
 
 
 
Long-term debt
$
215,575

 
$
1,140

 
$
2,573

 
$
211,026

 
$
836

Contingent consideration
50,000

 
16,667

 
33,333

 

 

Purchase obligations
40,130

 
39,996

 
134

 

 

Operating lease obligations
28,529

 
6,723

 
9,926

 
6,874

 
5,006

Total contractual obligations
$
334,234

 
$
64,526

 
$
45,966

 
$
217,900

 
$
5,842


In addition to the above contractual obligations, we are required to make periodic interest payments on our long-term debt obligations (see additional discussion under Item 7A. “Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risk” and Note 5 to the Consolidated Financial Statements).  The above table also does not include unrecognized tax benefits of approximately $0.6 million, the timing and certainty of recognition for which is not known.  (See Note 6 to the Consolidated Financial Statements).

Stock-based Compensation


30



We have reserved shares of common stock for issuance to employees and directors under three shareholder-approved share-based compensation plans (the "Plans").  The Plans provide for grants of options, stock appreciation rights (“SARs”), dividend equivalent rights, restricted stock, restricted stock units (“RSUs”), performance share units (“PSUs”) and other equity-based and equity-related awards.  The exercise price on all outstanding options and SARs is equal to the quoted fair market value of the stock at the date of grant.  RSUs and PSUs are valued at the market value of the underlying stock on the date of grant.  Stock options, SARs, RSUs and PSUs are non-transferable other than on death and generally become exercisable over a five year period from date of grant.  Stock options and SARs expire ten years from date of grant.  SARs are only settled in shares of the Company’s stock.  (See Note 7 to the Consolidated Financial Statements).

New Accounting Pronouncements

See Note 14 to the Consolidated Financial Statements for a discussion of new accounting pronouncements.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

Market risk is the potential loss arising from adverse changes in market rates and prices such as commodity prices, foreign currency exchange rates and interest rates.  In the normal course of business, we are exposed to various market risks, including changes in foreign currency exchange rates and interest rates.  We manage our exposure to these and other market risks through regular operating and financing activities and as necessary through the use of derivative financial instruments.

Foreign currency risk

Approximately 51% of our total 2013 consolidated net sales were to customers outside the United States.  We have sales subsidiaries in a significant number of countries in Europe as well as Australia, Canada, China and Korea.  In those countries in which we have a direct presence, our sales are denominated in the local currency amounting to approximately 36% of our total net sales in 2013.  The remaining 15% of sales to customers outside the United States was on an export basis and transacted in United States dollars.

Because a significant portion of our operations consist of sales activities in foreign jurisdictions, our financial results may be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the markets in which we distribute products.  During 2013, foreign currency exchange rates, including the effects of the hedging program, caused sales to decrease by approximately $2.3 million and income before income taxes to decrease by approximately $1.5 million, compared to sales and income before income taxes in 2012.

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 December 31, 2013 which have been accounted for as cash flow hedges totaled $132.4 million.  Net realized gains (losses) recognized for forward contracts accounted for as cash flow hedges approximated -$4.7 million, $3.8 million and $0.2 million for the years ended December 31, 2011, 2012, and 2013 respectively.  Net unrealized losses on forward contracts outstanding which have been accounted for as cash flow hedges and which have been included in other comprehensive income totaled $1.4 million at December 31, 2013.  It is expected these unrealized losses will be recognized in the consolidated statement of comprehensive income in 2014 and 2015.

We also enter into forward contracts to exchange foreign currencies for United States dollars in order to hedge our currency transaction exposures on intercompany receivables denominated in foreign currencies.  These forward contracts settle each month at month-end, at which time we enter into new forward contracts.  We have not designated these forward contracts as hedges and have not applied hedge accounting to them.  The notional contract amounts for forward contracts outstanding at December 31, 2013 which have not been designated as hedges totaled $42.0 million.  Net realized gains (losses) recognized in connection with those forward contracts not accounted for as hedges approximated $0.0 million, -$2.1 million and -$0.3 million for the years ended December 31, 2011, 2012, and 2013, respectively, offsetting gains (losses) on our intercompany receivables of -$0.3 million, $0.8 million and -$0.8 million for the years ended December 31, 2011, 2012, and 2013, respectively.  These gains and losses have been recorded in selling and administrative expense in the consolidated statements of comprehensive income.
 
We record these forward foreign exchange contracts at fair value;  the net fair value for forward foreign exchange contracts outstanding at December 31, 2013 was $2.2 million and is included in other current liabilities in the Consolidated Balance Sheets.

Refer to Note 13 in the Consolidated Financial Statements for further discussion.

31




Interest rate risk

At December 31, 2013, we had approximately $208.0 million of variable rate long-term debt outstanding under our senior credit agreement.  Assuming no repayments, if market interest rates for similar borrowings averaged 1.0% more in 2014 than they did in 2013, interest expense would increase, and income before income taxes would decrease by $2.1 million.  Comparatively, if market interest rates for similar borrowings average 1.0% less in 2014 than they did in 2013, our interest expense would decrease, and income before income taxes would increase by $2.1 million.

Item 8.  Financial Statements and Supplementary Data

Our 2013 Financial Statements are included elsewhere herein.

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosures

There were no changes in or disagreement with accountants on accounting and financial disclosure.

Item 9A. 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) 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) under the Securities Exchange Act of 1934) occurred during the fourth quarter of the year ended December 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm thereon are set forth in Part IV, Item 15 of the Annual Report on Form 10-K.

Item 9B.  Other Information

Not applicable.

32



PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this item is incorporated herein by reference to the sections captioned “Proposal One: Election of Directors” and “Directors, Executive Officers, Other Company Officers and Nominees for the Board of Directors” in CONMED Corporation’s definitive Proxy Statement or other informational filing to be filed with the Securities and Exchange Commission on or about April 10, 2014.
 
Item 11. Executive Compensation

The information required by this item is incorporated herein by reference to the sections captioned “Compensation Discussion and Analysis”, “Summary Compensation Table”, “Grants of Plan-Based Awards”, “Outstanding Equity Awards at Fiscal Year-End”, “Option Exercises and Stock Vested”, “Pension Benefits”, “Non-Qualified Deferred Compensation”, “Potential Payments on Termination or Change-in-Control”, “Director Compensation” and “Board of Directors Interlocks and Insider Participation; Certain Relationships and Related Transactions” in CONMED Corporation’s definitive Proxy Statement or other informational filing to be filed with the Securities and Exchange Commission on or about April 10, 2014.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
The information required by this item is incorporated herein by reference to the section captioned “Security Ownership of Certain Beneficial Owners and Management” in CONMED Corporation’s definitive Proxy Statement or other informational filing to be filed with the Securities and Exchange Commission on or about April 10, 2014.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this item is incorporated herein by reference to the section captioned “Board of Directors Interlocks and Insider Participation; Certain Relationships and Related Transactions” in CONMED Corporation’s definitive Proxy Statement or other informational filing to be filed with the Securities and Exchange Commission on or about April 10, 2014.

Item 14. Principal Accounting Fees and Services
 
The information required by this item is incorporated herein by reference to the section captioned “Principal Accounting Fees and Services” in CONMED Corporation’s definitive Proxy Statement or other informational filing to be filed with the Securities and Exchange Commission on or about April 10, 2014.


33



PART IV

Item 15. Exhibits, Financial Statement Schedules

Index to Financial Statements
 
 
 
(a)(1)
List of Financial Statements
Page in Form 10-K
 
 
 
 
Management’s Report on Internal Control Over Financial Reporting
40
 
 
 
 
Report of Independent Registered Public Accounting Firm
41
 
 
 
 
Consolidated Balance Sheets at December 31, 2012 and 2013
42
 
 
 
 
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2011, 2012 and 2013
43
 
 
 
 
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2011, 2012 and 2013
44
 
 
 
 
Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 2012 and 2013
46
 
 
 
 
Notes to Consolidated Financial Statements
48
 
 
 
(2)
List of Financial Statement Schedules
 
 
 
 
 
Valuation and Qualifying Accounts (Schedule II)
75
 
 
 
 
All other schedules have been omitted because they are not applicable, or the required information is shown in the financial statements or notes thereto.
 
 
 
 
(3)
List of Exhibits
 
 
 
 
 
The exhibits listed on the accompanying Exhibit Index on page 37 below are filed as part of this Form 10-K.
 
 
 
 
 
 
 


34



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/ Joseph J. Corasanti
Joseph J. Corasanti
(President and Chief
Executive Officer)
 
Date:
February 24, 2014

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


35



Signature
 
Title
 
Date
 
 
 
 
 
/s/ EUGENE R. CORASANTI
 
Chairman of the Board
 
 
Eugene R. Corasanti
 
of Directors
 
February 24, 2014
 
 
 
 
 
/s/ JOSEPH J. CORASANTI
 
President, Chief Executive
 
 
Joseph J. Corasanti
 
Officer and Director
 
February 24, 2014
 
 
 
 
 
/s/ ROBERT D. SHALLISH, JR.
 
Executive Vice President-Finance
 
 
Robert D. Shallish, Jr.
 
and Chief Financial Officer (Principal Financial Officer)
 
February 24, 2014
 
 
 
 
 
/s/ LUKE A. POMILIO
 
Executive Vice President-
 
 
Luke A. Pomilio
 
Controller and Corporate General Manager (Principal Accounting Officer)
 
February 24, 2014
 
 
 
 
 
/s/ BRIAN CONCANNON
 
 
 
 
Brian Concannon
 
Director
 
February 24, 2014
 
 
 
 
 
/s/ BRUCE F. DANIELS
 
 
 
 
Bruce F. Daniels
 
Director
 
February 24, 2014
 
 
 
 
 
/s/ JO ANN GOLDEN
 
 
 
 
Jo Ann Golden
 
Director
 
February 24, 2014
 
 
 
 
 
/s/ DIRK M. KUYPER
 
 
 
 
Dirk M. Kuyper
 
Director
 
February 24, 2014
 
 
 
 
 
/s/ STEPHEN M. MANDIA
 
 
 
 
Stephen M. Mandia
 
Director
 
February 24, 2014
 
 
 
 
 
/s/ STUART J. SCHWARTZ
 
 
 
 
Stuart J. Schwartz
 
Director
 
February 24, 2014
 
 
 
 
 
/s/ MARK E. TRYNISKI
 
 
 
 
Mark E. Tryniski
 
Director
 
February 24, 2014

36




Exhibit Index

Exhibit No.
 
Description
 
 
 
3.1
-
Amended and Restated By-Laws, as adopted by the Board of Directors on April 29, 2011 (Incorporated by reference to the Company’s Current Report on Form 10-Q filed with the Securities and Exchange Commission on May 2, 2011).
 
 
 
3.2
-
1999 Amendment to Certificate of Incorporation and Restated Certificate of Incorporation of CONMED Corporation (Incorporated by reference to Exhibit 3.2 of the Company’s Annual Report on Form 10-K for the year ended December 31, 1999).
 
 
 
4.1
-
See Exhibit 3.1.
 
 
 
4.2
-
See Exhibit 3.2.
 
 
 
4.3
-
Guarantee and Collateral Agreement, dated August 28, 2002, made by CONMED Corporation and certain of its subsidiaries in favor of JP Morgan Chase Bank (Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002).
 
 
 
4.4
-
First Amendment to Guarantee and Collateral Agreement, dated June 30, 2003, made by CONMED Corporation and certain of its subsidiaries in favor of JP Morgan Chase Bank and the several banks and other financial institutions or entities from time to time parties thereto (Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003).
 
 
 
4.5
-
Second Amendment to Guarantee and Collateral Agreement, dated April 13, 2006, made by CONMED Corporation and certain of its subsidiaries in favor of JP Morgan Chase Bank and the several banks and other financial institutions or entities from time to time parties thereto (Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 19, 2006).
 
 
 
4.6
-
Third Amendment to Guarantee and Collateral Agreement, dated as of January 17, 2013, made by CONMED Corporation and certain of its subsidiaries in favor of JP Morgan Chase Bank (Incorporated by reference to Exhibit 4.6 of the Company's Annual Report on Form 10-K for the year ended December 31, 2012).
 
 
 
10.1+
-
Employment Agreement between the Company and Eugene R. Corasanti, dated October 31, 2006 (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 2, 2006).
 
 
 
10.2+
-
Amended and Restated Employment Agreement, dated October 30, 2009, by and between CONMED Corporation and Joseph J. Corasanti, Esq. (Incorporated by reference to the Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
 
 
 
10.3
-
Amended and Restated Employee Stock Option Plan (including form of Stock Option Agreement) (Incorporated by reference to Exhibit 10.6 of the Company’s Annual Report on  Form 10-K for the year ended December 31, 1996).
 
 
 
10.4
-
Stock Option Plan for Non-Employee Directors of CONMED Corporation (Incorporated by reference to Exhibit 10.5 of the Company’s Annual Report on Form 10-K for the year ended December 31, 1996).

37



 
 
 
10.5
-
Amendment to Stock Option Plan for Non-employee Directors of CONMED Corporation (Incorporated by reference to the Company’s Definitive Proxy Statement for the 2002 Annual Meeting filed with the Securities and Exchange Commission on April 17, 2002).
 
 
 
10.6
-
Amended and Restated 1999 Long Term Incentive Plan (Incorporated by reference to Exhibit 4.3 of the Company’s Registration Statement on Form S-8 on November 3, 2009).
 
 
 
10.7
-
2002 Employee Stock Purchase Plan (Incorporated by reference to the Company’s Definitive Proxy Statement for the 2002 Annual Meeting filed with the Securities and Exchange Commission on April 17, 2002).
 
 
 
10.8
-
Amendment to CONMED Corporation 2002 Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.11 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005).
 
 
 
10.9
-
2006 Stock Incentive Plan (Incorporated by reference to Exhibit 4.3 of the Company’s Registration Statement on Form S-8 on August 8, 2006).
 
 
 
10.10
-
Amended and Restated 2007 Non-Employee Director Equity Compensation Plan of CONMED Corporation (Incorporated by reference to Exhibit 4.3 of the Company’s Registration Statement on Form S-8 on August 3, 2010).
 
 
 
10.11
-
Amended and Restated Long Term Incentive Plan (Incorporated by reference to Exhibit 4.3 of the Company’s Registration Statement on Form S-8 on July 27, 2012).
 
 
 
10.12
-
Amended and Restated Credit Agreement, dated January 17, 2013, among CONMED Corporation, JP Morgan Chase Bank and the several banks and other financial institutions or entities from time to time parties thereto (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2013).
 
 
 
10.13
-
Change in Control Severance Agreement for Joseph J. Corasanti (Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008).
 
 
 
10.14
-
Change in Control Severance Agreement for Robert D. Shallish, Jr. (Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008).
 
 
 
10.15
-
Change in Control Severance Agreement for Daniel S. Jonas (Incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008).
 
 
 
10.16
-
Change in Control Severance Agreement for Luke A. Pomilio (Incorporated by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008).
 
 
 
10.17
-
Executive Severance Agreement for Joseph G. Darling (Incorporated by reference to Exhibit 10.28 of the Company's Annual Report on Form 10-K for the year ended December 31, 2008).
 
 
 
10.18
-
Change in Control Severance Agreement for Joseph G. Darling (Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010). 
 
 
 

38



10.19
-
Sports Medicine Joint Development and Distribution Agreement by and between Musculoskeletal Transplant Foundation, Inc. and CONMED Corporation dated as of January 3, 2012 (Incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K dated January 3, 2012).
 
 
 
14
-
Code of Ethics. The CONMED code of ethics may be accessed  via the Company’s website at http://www.CONMED.com/conmed_investor_template.php
 
 
 
21*
-
Subsidiaries of the Registrant.
 
 
 
23*
-
Consent of Independent Registered Public Accounting Firm.
 
 
 
31.1*
-
Certification of Joseph J. Corasanti pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2*
-
Certification of Robert D. Shallish, Jr. pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1*
-
Certifications of Joseph J. Corasanti and Robert D. Shallish, Jr. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101*
 
The following materials from CONMED Corporation's Annual Report on Form 10-K for the year ended December 31, 2013 formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Comprehensive Income for the three years ended December 31, 2013, (ii) Consolidated Balance Sheets at December 31, 2013 and 2012, (iii) Consolidated Statements of Shareholders' Equity for the three years ended December 31, 2013 (iv) Consolidated Statements of Cash Flows for the three years ended December 31, 2013, (v) Notes to the Consolidated Financial Statements for the year ended December 31, 2013 and (vi) Schedule II - Valuation and Qualifying Accounts. In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K 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.

 
 
 
 
*
Filed herewith
 
+
Management contract or compensatory plan or arrangement.

39




MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING

The management of CONMED Corporation is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles.  Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Management assessed the effectiveness of CONMED’s internal control over financial reporting as of December 31, 2013.  In making its assessment, management utilized the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in “Internal Control-Integrated Framework”, released in 1992.  Management has concluded that based on its assessment, CONMED’s internal control over financial reporting was effective as of December 31, 2013.  The effectiveness of the Company’s internal control over financial reporting as of December 31, 2013 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
 
/s/  Joseph J. Corasanti
Joseph J. Corasanti
President and
Chief Executive Officer
 
/s/  Robert D. Shallish, Jr.
Robert D. Shallish, Jr.
Executive Vice President-Finance and
Chief Financial Officer





40




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Shareholders of CONMED Corporation
 
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of comprehensive income, of shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of CONMED Corporation and its subsidiaries at December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


 /s/ PricewaterhouseCoopers LLP
Albany, New York
February 24, 2014

41



CONMED CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2012 and 2013
(In thousands except share and per share amounts)
 
 
2012
 
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
23,720

 
$
54,443

Accounts receivable, less allowance for doubtful
 

 
 

accounts of $1,203 in 2012 and $1,384 in 2013
139,124

 
140,426

Inventories
156,228

 
143,211

Income taxes receivable
2,897

 
3,805

Deferred income taxes
11,931

 
13,202

Prepaid expenses and other current assets
14,993

 
17,045

Total current assets
348,893

 
372,132

Property, plant and equipment, net
139,041

 
138,985

Deferred income taxes
1,057

 
1,183

Goodwill
248,502

 
248,428

Other intangible assets, net
334,185

 
319,440

Other assets
7,171

 
10,340

Total assets
$
1,078,849

 
$
1,090,508

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
1,050

 
$
1,140

Accounts payable
23,622

 
27,448

Accrued compensation and benefits
33,511

 
33,426

Income taxes payable
2,706

 
2,116

Other current liabilities
64,325

 
47,135

Total current liabilities
125,214

 
111,265

 
 
 
 
Long-term debt
160,802

 
214,435

Deferred income taxes
99,199

 
113,199

Other long-term liabilities
86,636

 
45,290

Total liabilities
471,851

 
484,189

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Shareholders' equity:
 

 
 

Preferred stock, par value $.01 per share; authorized
 

 
 

500,000 shares, none issued or outstanding

 

Common stock, par value $.01 per share; 100,000,000
 

 
 

authorized; 31,299,194 issued in 2012 and 2013, respectively
313

 
313

Paid-in capital
324,322

 
326,436

Retained earnings
377,907

 
395,889

Accumulated other comprehensive loss
(27,581
)
 
(17,572
)
Less:  Treasury stock, at cost;
 

 
 

2,925,801 and 3,718,332 shares in
 

 
 

2012 and 2013, respectively
(67,963
)
 
(98,747
)
Total shareholders' equity
606,998

 
606,319

Total liabilities and shareholders' equity
$
1,078,849

 
$
1,090,508

The accompanying notes are an integral part of the consolidated financial statements.

42



CONMED CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2011, 2012 and 2013
(In thousands except per share amounts)

 
 
 
 
 
 
 
2011
 
2012
 
2013
Net sales
$
725,077

 
$
767,140

 
$
762,704

Cost of sales
350,143

 
361,297

 
350,287

 
 
 
 
 
 
Gross profit
374,934

 
405,843

 
412,417

 
 
 
 
 
 
Selling and administrative expense
276,615

 
302,469

 
310,730

Research and development expense
28,651

 
28,214

 
25,831

Impairment of goodwill
60,302

 

 

Medical device excise tax

 

 
5,949

Other expense
1,092

 
9,950

 
13,399

 
366,660

 
340,633

 
355,909

 
 
 
 
 
 
Income from operations
8,274

 
65,210

 
56,508

Loss on early extinguishment of debt

 

 
263

Amortization of debt discount
3,903

 

 

Interest expense
6,676

 
5,730

 
5,613

 
 
 
 
 
 
Income (loss) before income taxes
(2,305
)
 
59,480

 
50,632

 
 
 
 
 
 
Provision (benefit) for income taxes
(3,057
)
 
18,999

 
14,693

 
 
 
 
 
 
Net income
$
752

 
$
40,481

 
$
35,939

 
 
 
 
 
 
Per share data:
 

 
 

 
 

 
 
 
 
 
 
Basic
$
0.03

 
$
1.43

 
$
1.30

Diluted
$
0.03

 
$
1.41

 
$
1.28

 
 
 
 
 
 
Dividends per share of common stock
$

 
$
0.60

 
$
0.65

 
 
 
 
 
 
Other comprehensive income (loss), before tax:
 
 
 
 
 
Foreign currency translation adjustments
$
(1,937
)
 
$
1,995

 
$
(1,193
)
Pension liability
(20,250
)
 
1,387

 
18,175

Cash flow hedging gain (loss)
6,690

 
(6,507
)
 
(404
)
Other comprehensive income (loss), before tax
(14,745
)
 
37,356

 
52,517

Provision (benefit) for income taxes related to items of other comprehensive income
(5,010
)
 
(1,892
)
 
6,569

Comprehensive income (loss)
$
(9,735
)
 
$
39,248