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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
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended:December 31, 2020Commission file number:
001-39218
CONMED CORPORATION
(Exact name of registrant as specified in its charter) 
Delaware16-0977505
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
11311 Concept Boulevard
Largo,Florida33773
(Address of principal executive offices)(Zip Code)
(727) 392-6464
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.01 par valueCNMDNYSE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes       No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes       No
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes      No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes      No

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

Large accelerated filer     Accelerated filer     Non-accelerated filer     Smaller reporting company      Emerging growth company

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes       No
 
As of June 30, 2020, 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 $1.5 billion based upon the closing price of the Company’s common stock on the NYSE Stock Market.
 
The number of shares of the registrant's $0.01 par value common stock outstanding as of February 17, 2021 was 28,942,757.

DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Definitive Proxy Statement and any other informational filings for the 2021 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, 2020
TABLE OF CONTENTS


Part I
  Page
   
Item 1.
Item 1A.
Item 1B.
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.
   
 
Item 16.
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CONMED CORPORATION

Item 1. Business

Forward Looking Statements
 
This Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2020 (“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;
compliance with and changes in regulatory requirements;
the COVID-19 global pandemic poses significant risks to our business, financial condition and results of operations, which may be heightened if the pandemic, and various government responses to it, continue for an extended period of time;
environmental compliance risks, including lack of availability of sterilization with Ethylene Oxide (“EtO”) or other compliance costs associated with the use of EtO;
the possibility that United States or foreign regulatory and/or administrative agencies may initiate enforcement actions against us or our distributors;
competition;
changes in customer preferences;
changes in technology;
the introduction and acceptance of new products;
the availability and cost of materials;
the risk of an information security breach, including a cybersecurity breach;
cyclical customer purchasing patterns due to budgetary and other constraints;
the quality of our management and business abilities and the judgment of our personnel;
the availability, terms and deployment of capital;
future levels of indebtedness and capital spending;
changes in foreign exchange and interest rates;
the ability to evaluate, finance and integrate acquired businesses, products and companies;
changes in business strategy;
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;
the ability to defend and enforce intellectual property, including the risks related to theft or compromise of intellectual property in connection with our international operations;
the risk of patent, product and other litigation as well as the cost associated with such litigation;
trade protection measures, tariffs and other border taxes, and import or export licensing 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.




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General
 
CONMED Corporation was incorporated under the laws of the State of New York in 1970 and became a Delaware corporation in May 2020.  CONMED is a medical technology company that provides surgical devices and equipment for minimally invasive procedures.  The Company’s products are used by surgeons and other healthcare professionals in a variety of specialties including orthopedics, general surgery, gynecology, thoracic surgery and gastroenterology.   The Company’s 3,400 employees distribute its products worldwide from three primary manufacturing locations.  In January 2021, we changed the designation of our headquarters from Utica, New York to Largo, Florida.

We have historically used strategic business acquisitions, internal product development and 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.
 
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"). 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 with the SEC.
 
COVID-19

Our business has been significantly impacted by the emergence of the COVID-19 pandemic, with the Company experiencing lower sales in 2020 compared to 2019, first in the Asia/Pacific Rim and later in the United States, Europe and elsewhere as temporary closures occurred and hospitals and surgery centers postponed many non-urgent surgical procedures to minimize the risk of infection. In compliance with various governmental orders, beginning in March 2020 we restricted access to our main facilities to only essential personnel required to be on-site while maintaining production and distribution as medical device manufacturing was deemed essential. See additional discussion under Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources.

Business Strategy
 
CONMED's vision is to empower healthcare providers worldwide to deliver exceptional outcomes for patients through the following initiatives:

Introduction of New Products and Product Enhancements.  We pursue organic growth through developing new products and enhancing 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. This includes the February 11, 2019 acquisition of Buffalo Filter.

Realize Manufacturing and Operating Efficiencies.  We continually review our production systems for opportunities to reduce operating costs, consolidate product lines or process flows, reduce inventory and optimize existing processes.  

Geographic Diversification.  We believe that significant growth opportunities exist for our surgical products outside the United States.  Principal international markets for our products include Europe, Latin America, Canada and the Asia/Pacific Rim.  

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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 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 training on new and innovative surgical techniques as well as other medical education programs on the use of 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,
 202020192018
Orthopedic surgery43 %49 %52 %
General surgery57 51 48 
Consolidated net sales100 %100 %100 %
Net sales (in thousands)$862,459 $955,097 $859,634 

Orthopedic Surgery

Our orthopedic surgery product offering includes procedure specific, sports medicine implants and single-use products, powered surgical instruments, and sports biologics and tissue. These products are marketed under a number of brands, including Hall®, CONMED Linvatec®, Concept® and Shutt®. In 2020, approximately 74% of orthopedic surgery revenue came from single-use products that are expected to be recurring.

We offer a comprehensive range of products to repair injuries 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 fluid pumps, with certain customers at no charge in exchange for commitments to purchase disposable products over certain time periods.  We loan this capital equipment, and it is subject to return if the customer does not meet certain minimum single-use purchases. Single-use products include products such as shaver blades, burs and pump tubing.  In sports medicine, we compete with Smith & Nephew, plc; Arthrex, Inc.; Stryker Corporation; Johnson & Johnson: DePuy Mitek, Inc. and Zimmer 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, spinal and cardiothoracic surgeries. Our newest products include our Hall® TitanTM Large Bone Powered Instrument System and our Hall® MicroFree® Cordless Small Bone Powered Instrument System.  These systems provide our customers with comprehensive battery-powered, autoclavable, large and small bone power systems to meet the multi-specialty needs of their service lines. In powered instruments, our competition includes Stryker Corporation; Medtronic plc; Johnson & Johnson: DePuy Synthes, Inc.; and Zimmer Biomet, Inc.

Our surgical visualization products offer imaging systems for use in minimally invasive orthopedic and general surgery procedures including 2DHD vision technologies. In surgical visualization, our competition includes Stryker Corporation; Olympus, Inc.; Karl Storz GmbH; Anthrex, Inc.; Smith & Nephew, plc and Richard Wolf.

The Company is party to an agreement with Musculoskeletal Transplant Foundation (“MTF”) for the exclusive worldwide sales representation, marketing and promotion of MTF's allograft tissues in the field of sports medicine and related areas to customers through our sales force and marketing channels. The allograft tissues supplied by MTF under this agreement are used in the reconstruction and/or replacement of tendon, ligament, cartilage or menisci, along with the correction of deformities within the extremities.

General Surgery

Our general surgery product line offers a large range of products in the areas of advanced surgical, endoscopic technologies and critical care. In 2020, approximately 88% of general surgery revenue came from single-use products that are expected to be recurring.

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Our advanced surgical product offering includes the leading clinical insufflation system (AirSeal®). AirSeal® includes the proprietary valveless access ports that deliver significant benefits to traditional minimally invasive surgery and robotic surgical procedures. The Buffalo Filter acquisition complemented the CONMED portfolio of smoke removal devices, which provides the Company with the broadest portfolio of disposable and capital smoke evacuation products available in the medical device market today. In addition to AirSeal® and the Buffalo Filter® products, the Company manufactures and sells an extensive energy line and a broad offering of endomechanical products. The electrosurgical offering consists of monopolar and bipolar generators, argon beam coagulation generators, handpieces, smoke management systems and other accessories. Our endomechanical products offer a full line of instruments, including the Anchor1 line of tissue retrieval bags, trocars, suction irrigation devices, graspers, scissors and dissectors, used in minimally invasive surgery. Our competition includes Medtronic plc; Johnson & Johnson: Ethicon Endo-Surgery, Inc.; Stryker Endoscopy, Olympus, ERBE Elektromedizin GmbH; and Applied Medical Resources Corporation.
    
Our advanced endoscopic technologies offering includes a comprehensive line of diagnostic and therapeutic products used in gastroenterology procedures which utilize flexible endoscopes, and other critical care products. This offering includes devices for dilatation, stricture management, hemostasis, products for the treatment of diseases of the biliary structures, and cardiac monitoring, including ECG & EEG electrodes and cardiac defibrillation pads. Our competition includes Boston Scientific Corporation - Endoscopy; Cook Medical, Inc.; Merit Medical Endotek; Olympus, Inc.; STERIS Corporation - U.S. Endoscopy and Cantel Medical- Medivators, Inc., Cardinal and 3M Company.

International

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 (including sub-distributors or sales agents) or through direct in-country sales. We distribute our products through sales subsidiaries and branches with offices located in Australia, Austria, Belgium, Brazil, Canada, China, Denmark, Finland, France, Germany, Italy, Japan, 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 34% of our total net sales in 2020.  In the remaining countries where our products are sold through independent distributors, sales are denominated in United States dollars.

Competition

We compete in orthopedic and general surgery medical device markets across the world. Our competitors range from large manufacturers with multiple business units to smaller manufacturers with limited product offerings. We believe we have appropriate product offerings and adequate market share to compete effectively in these markets. The global markets are constantly changing due to technological advances. We seek to closely align our research and development 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.

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, group purchasing organizations ("GPOs"), integrated delivery networks ("IDNs") and other customers, particularly as institutions seek to reduce costs and minimize the number of suppliers.

Marketing

A significant portion of our products are distributed domestically directly to more than 6,000 hospitals, surgery centers and other healthcare institutions as well as through medical specialty distributors.  We are not dependent on any single customer and no single customer accounted for more than 10% of our net sales in 2020, 2019 and 2018.

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.

Our employee sales representatives are extensively trained in our various product offerings. 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.  In certain
1Anchor is a trademark of the Anchor Products Company, Addison, Illinois.
5


geographies, 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 and training for marketing and positioning of our products. Our sales professionals provide surgeons and other healthcare professionals with information relating to the technical features and benefits of our products.

Our healthcare 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 would not materially impact our business.

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

Manufacturing

Raw material costs constitute a substantial portion of our cost of production.  Substantially all of our raw materials and select components used in the manufacturing process are procured from external suppliers.  Where possible, we work closely with multiple suppliers to ensure continuity of supply while maintaining high quality and reliability.  As a consequence of supply chain best practices, new product development and acquisitions, we often form strategic partnerships with key suppliers. As a result, components and raw materials may be sole sourced. Due to the strength of these suppliers and the variety of products we provide, we do not believe the risk of supplier interruption poses an overall material adverse effect on our financial and operational performance. We schedule production and seek to 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 generally 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 other healthcare professionals who often make new product and technology disclosures, principally in procedure-specific areas.  In certain cases, 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 $1.5 million, $2.0 million and $1.5 million in 2020, 2019 and 2018, respectively.

Amounts expended for Company research and development were approximately $40.5 million, $45.5 million and $42.2 million during 2020, 2019 and 2018, respectively.

Intellectual Property

Patents and other proprietary rights, in general, are important to our business. We have rights to intellectual property, including United States patents and foreign equivalent patents which cover a wide range of our products with expiration dates from 2021 to 2040.  We own a majority of these patents and have exclusive and non-exclusive licensing rights to the remainder.  We believe that the development of new products and technological and design improvements to existing products will continue to be important to our competitive position.

Government Regulation and Quality Systems

The development, manufacture, sale and distribution of our products are subject to regulation by numerous agencies and legislative bodies, including the U.S. Food and Drug Administration ("FDA") and comparable foreign counterparts.  In the United States, these regulations were enacted under the Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetic Act and its subsequent amendments, and the regulations issued or proposed thereunder.

The FDA’s Quality System Regulations 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.  Authorization to commercially market our products in the U.S. is granted by the FDA under a procedure referred to as a 510(k) pre-market notification and clearance.  We believe that our products and processes presently meet applicable standards in all material respects.
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Medical device regulations continue to evolve world-wide.  Products marketed in the European Union 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.

We market our products in numerous foreign countries and therefore are subject to regulations affecting, among other things, product standards, sterilization, packaging requirements, labeling requirements, import laws and on-site 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 (“EU”) follow the requirements under the European Medical Device Directives ("EU MDD"), which create a single set of medical device regulations for all member countries.  In addition, the EU enacted the EU Medical Device Regulation ("EU MDR") in May 2017 that replaces the EU MDD. EU MDR becomes effective beginning in May 2021 and continuing through May 2023, depending on the device class, which imposes stricter requirements for the marketing and sale of medical devices, including in the areas of clinical evaluation requirements, quality systems, labeling and post-market surveillance. These regulations require companies that wish to manufacture and distribute medical devices in the European Union to maintain quality system certifications 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.

As noted above, 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. Refer to Note 13 for further discussion.

We are also subject to various environmental health and safety laws and regulations both in the United States and internationally, as are our suppliers and sterilization service providers. Our operations involve the use of substances regulated under environmental laws, primarily in manufacturing and sterilization processes. We believe our policies, practices and procedures are properly designed to comply, in all material respects, with applicable environmental laws and regulations. We do not expect internal compliance with these requirements to have a material effect on purchases of property, plant and equipment, cash flows, net income or our competitive position. Refer to Item 1A, Risk Factors, for further discussion of the use of outside EtO sterilization service providers.

Human Capital Resources

As of December 31, 2020, we had approximately 3,400 full-time employees, including approximately 2,100 in operations, 180 in research and development and the remaining in sales, marketing and related administrative support. 

CONMED's Vision is to empower healthcare providers worldwide to deliver positive outcomes for patients. We know that our people are our most important assets and a key part of the focus behind our CONMED Vision. Accordingly, the success and growth of our business depends in large part on our ability to attract, retain and develop a diverse population of talented employees at all levels of our organization who are empowered to deliver positive results. To deliver on our human capital needs, we have developed key recruitment and retention strategies, objectives and measures that we focus on as part of the overall management of our business. These strategies, objectives and measures align with our corporate pillars and are advanced through various programs and policies including the following:

Talent Management and Succession Planning

The Board is actively engaged and involved in talent management. The Board reviews the Company’s people strategy in support of its business strategy at least annually and frequently discusses talent issues at its meetings. This includes a detailed discussion of the Company’s global leadership bench and succession plans with a focus on key positions at the senior executive level. High-potential leaders are given exposure and visibility to Board members through formal presentations and informal events. More broadly, the Board is regularly updated on key talent indicators for the overall workforce, including diversity, recruiting and development programs.


7



Competitive Pay and Benefits

Our compensation programs are designed to align the compensation of our employees with CONMED’s performance and to provide the proper incentives to attract, retain and motivate employees to achieve positive results. The structure of our compensation programs balances incentive earnings for both short-term and long-term performance. Our compensation programs are evaluated regularly not only for market competitiveness but as importantly for equality and fairness.

Diversity and Inclusion

A demonstrated commitment to diversity and inclusion is vital to CONMED's success as we seek out individuals who bring their unique capabilities to our Company. At CONMED, we believe that diverse teams stimulate innovation, enhance our understanding of the needs of our global customer base and ultimately deliver better results for our stakeholders. We value individual strengths and are committed to hiring and retaining employees of all different backgrounds and experiences. We also recognize that while representation of diversity in the workforce is not enough to have the impact desired because inclusion is also an imperative, tracking representation of diversity in our workforce helps us to understand where our opportunities exist. These metrics are reviewed on a regular basis at the senior executive level.

Training, Development and Retention

We offer formal in person and e-learning training as well as tuition reimbursement programs to support our culture, strategy and ensure the development of key skills. In addition, we conduct anonymous employee engagement surveys and initiatives on a regular basis the results of which are reviewed both at the individual manager level and corporate wide at the senior executive level to continuously drive and support employee engagement. Finally, we track critical metrics including workforce planning needs and employee turnover, the results of which are reviewed on a regular basis at the senior executive level.
 
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”.

(i) Risks Related to Our Business and the Medical Device Industry

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.  We will continue to monitor and manage the impact of the overall economic environment on the Company.

In this regard, approximately 18% of our revenues are derived from the sale of capital products.  The sales of such products may be negatively impacted if hospitals and other healthcare providers are unable to secure the financing necessary to purchase these products or otherwise defer purchases.

The COVID-19 global pandemic may pose significant risks to our business if the pandemic, and various government responses to it, continue for an extended period of time.

The public health actions undertaken to reduce the spread of the virus have created and may continue to create significant disruptions with respect to the demand for non-urgent surgeries in hospitals and surgery centers, hospital and ambulatory surgery center operating volumes, and potentially to our ability to adequately rely on our supply chain.

As of the date of this report:

1.In some geographies or territories, our field-based sales representatives are limited in their ability to travel to service or call on customers, with in-person visits in many cases dependent on requests by physicians to cover surgeries, the policies of individual hospitals, surgery centers or other institutions, and the availability of appropriate personal protective equipment, testing or vaccines; 

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2.Our office-based employees continue to work remotely, and

3.Our manufacturing facilities and warehouses continue to operate with precautions, including increased hygiene and cleaning within facilities, social distancing, mandatory personal protective equipment and monitoring of temperatures.

As such, the COVID-19 pandemic has directly and indirectly adversely impacted the Company’s business, financial condition and operating results. The extent to which this will continue will depend on numerous evolving factors that are highly uncertain, rapidly changing and cannot be predicted with precision or certainty at this time, including:

the duration and scope of the COVID-19 pandemic, including any resurgence of the pandemic in some areas and the development of new strains, as well as the effectiveness of vaccines, and the extent to which they are distributed and administered;

governmental, business and individual actions that have been, continue to be, or may in the future be taken in response to the COVID-19 pandemic including, for example, business and travel restrictions, “stay-at-home” and “shelter-in-place” directives, quarantines, and slowdowns, suspensions or delays of commercial activity;

the effect of the COVID-19 pandemic on our partners and customers, including their ability to conduct surgeries, to continue to purchase our products, to pay for the products purchased from us and/or to collect reimbursement, or their ability to do so in the volumes that existed prior to the pandemic;

the effect of the COVID-19 pandemic and the governmental response on the budgets of our partners and customers;

our ability during the COVID-19 pandemic to continue operations and/or adjust our production schedules in an efficient manner, as a result of current and anticipated weakened demand and/or production delays, if any, from our suppliers;

significant reductions or volatility in demand for certain surgeries or for certain of our products;  

the effect of the COVID-19 pandemic on our supply chain’s reliability and costs;  

costs incurred as a result of actions intended to protect the health and safety of our employees and continued operations, including enhanced cleaning processes and protocols designed to implement appropriate social distancing practices;

our ability to comply with the financial covenants in our debt agreements if a material economic downturn as a result of the COVID-19 pandemic results in substantially increased indebtedness and/or lower earnings; and

the exacerbation of negative impacts resulting from the occurrence of a global or national recession, depression or other sustained adverse market event as a result of the COVID-19 pandemic.

We have undertaken steps to reduce our spending and expenses in light of the uncertainty concerning forecasting demand, and consequently revenues. While we expect that we will be well positioned as surgeries return to their normalized levels, we are unable to predict with certainty how long the COVID-19 pandemic will last, or how severe its economic impact will be. Even after the COVID-19 pandemic and government responses thereto have subsided, residual economic and other effects may have an impact on the demand for post-pandemic surgery levels. If the downturn is more severe and prolonged than we currently expect, we may need to take further steps to reduce our costs, or to refinance our debt.
 
Our financial performance may be adversely impacted by healthcare reform legislation.

Provisions of healthcare legislation, including provisions of the Patient Protection and Affordable Care Act ("ACA") in the United States and any future federal healthcare legislation that may be passed, and similar attempts to reform or manage health care costs in other markets, could meaningfully change the way health care is developed and delivered and may adversely affect our business and results of operations.  For example, the ACA includes provisions aimed at improving quality and decreasing costs of Medicare, governing comparative effectiveness research, and implementing an independent payment advisory board and pilot programs to evaluate alternative payment methodologies.  We also face uncertainties that might result in the modification of health care laws or reimbursement in the United States and other markets. The uncertainty associated with
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modifications could generally cause healthcare markets to be unstable and we could be subject to some interruptions, the magnitude of which cannot be determined.

Limitations on the availability of Ethylene Oxide (“EtO”) sterilization services may limit our ability to sell certain sterile products.

Approximately 33% of our products when measured in terms of revenues, are sterilized by third-party sterilizers using ethylene oxide, a chemical which, when present or used in high levels of concentrations, has raised some environmental concerns in some areas within the United States, with the result that some EtO sterilization facilities have closed, or are threatened with closure, either temporarily or permanently, in connection with government enforcement actions or enhanced regulations prompted by environmental concerns.  We have been able to work to secure  alternate EtO sterilization services to date, and do not currently expect sterilization availability to have a material impact on our business.  If, however, there are further restrictions on capacity or further government actions adverse to EtO sterilization, it is possible that we could be impacted materially in the future.

As a manufacturer of medical devices that interacts with physicians and health care providers domestically and internationally, we face risks under domestic and foreign regulations, including the Foreign Corrupt Practices Act.

Manufacturers of medical devices have been the subject of various investigations or enforcement actions relating to interactions with health care providers domestically or internationally. The interactions with domestic health care providers are subject to regulations, known as the Anti-Kickback Statute, the Stark Act and the False Claims Act, that generally govern incentives for health care providers, or methods of reimbursement funded in whole or in part by the government. Similarly, the Foreign Corrupt Practices Act (“FCPA”), and similar foreign laws, prohibit certain conduct by manufacturers, generally described as bribery, with respect to interactions, either directly through foreign subsidiaries or indirectly through distributors, with health care providers who may be considered government officials because they are affiliated with public hospitals. The FCPA also imposes obligations on manufacturers listed on U.S. stock exchanges to maintain accurate books and records, and maintain internal accounting controls sufficient to provide assurance that transactions are accurately recorded, lawful and in accordance with management’s authorization. The FCPA can pose unique challenges for manufacturers who operate in foreign cultures where conduct prohibited by the FCPA may not be viewed as illegal in local jurisdictions, and because, in some cases, a United States manufacturer may face risks under the FCPA based on the conduct of third parties over whom the manufacturer may not have complete control.

In this regard, from time to time, the Company may receive an information request or subpoena from a government agency, such as the Securities and Exchange Commission, Department of Justice, Equal Employment Opportunity Commission, the Occupational Safety and Health Administration, the Department of Labor, the Treasury Department or other federal and state agencies or foreign governments or government agencies. Alternatively, employees or private parties may provide us with reports of alleged misconduct. These information requests or subpoenas may or may not be routine inquiries, or may begin as informal or routine inquiries and over time develop into investigations or enforcement actions of various types under the FCPA or otherwise. Similarly, the employee and third party reports may prompt us to conduct internal investigations into the alleged misconduct. As a medical device company, CONMED’s operations and interactions with government hospitals, healthcare professionals and purchasers may be subject to various federal and state regulations, including the federal False Claims Act, which provides, in part, that the federal government may bring a lawsuit against any person or entity that it believes has knowingly presented, or caused to be presented, a false or fraudulent request for payment to the government, or has made or used, or caused to be made or used, a false statement or false record material to a false claim. In addition, in certain circumstances, private parties may bring so-called Qui Tam claims as plaintiffs purportedly on behalf of the government asserting claims arising under the False Claims Act. A violation of the False Claims Act may result in fines up to $11,000 for each false claim, plus up to three times the amount of damages sustained by the government, and may also provide the basis for the imposition of administrative penalties and exclusion from participation in federal healthcare programs. Many states have enacted false claims acts that are similar to the federal False Claims Act. No inquiry or claim that the Company currently faces or has faced to date, and no report of misconduct that the Company has received to date, has had a material adverse effect on our financial condition, results of operations or cash flows. There can be no assurance, however, that any pending inquiries will not become investigations or enforcement actions, or the costs associated with responding to such inquiries, investigations, enforcement actions or investigations relating to reports of misconduct will not have a material adverse effect on our financial condition, results of operations or cash flows.

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Failure to comply with regulatory requirements may result in recalls, loss of revenues, 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 U.S. Food and Drug Administration ("FDA") and comparable international 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 may have future inspections at our sites and there can be no assurance that the costs of responding to such inspections will not be material.

Manufacturing and sales of our products outside the United States are also subject to international 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 such 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;
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.
 
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 or sale of non-compliant products.  Failure to produce products could affect our revenues, profit margins and could lead to loss of customers.
 
Our products are subject to product recall and we have conducted 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, many 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” in Item 1 - Business 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.

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 reimbursement for procedures, consolidation of healthcare distribution companies and collective purchasing arrangements by GPOs and IDNs.  Demand and prices for our products may be adversely affected by such trends.
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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. The increases in costs or availability of raw materials may be exacerbated as a result of the COVID-19 pandemic. 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.

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 and other healthcare professionals. 

We may not be able to keep pace with technology or to develop viable new products.  In addition, many of our competitors are substantially larger with greater financial resources which may allow them to more rapidly develop 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; and
changes in the competitive landscape, including the emergence of alternative products or solutions which reduce or eliminate the markets for pending 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.

(ii) Risks Related to Our Indebtedness

The terms of our indebtedness outstanding from time to time, including our senior credit agreement, may restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.
The senior credit agreement contains, and future credit facilities are expected to contain, a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to respond to changes in our business or competitive activities, or to otherwise engage in acts that may be in our long-term best interest, including restrictions on our ability to:
incur indebtedness;
allow for liens to be placed on our assets;
make investments;
engage in transactions with affiliates;
make certain restricted payments;
enter into certain restrictive agreements;
enter into certain swap agreements;
change our line of business;
pay dividends or make other distributions on, or redeem or repurchase, capital stock;
consolidate, merge or sell all or substantially all of our assets;
prepay and/or modify the terms of certain indebtedness; and
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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.

We may not be able to generate sufficient cash to service our indebtedness, and, our leverage and debt service requirements may require us to adopt alternative business strategies.

As of December 31, 2020, we had $793.8 million of debt outstanding, representing 52% of total capitalization. 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” and Note 7.

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.

Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

Borrowings under our senior credit agreement are at variable rates of interest and expose us to interest rate risk. If interest rates were to increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. In the future, we may enter into interest rate swaps that involve the exchange of floating for fixed rate interest payments in order to reduce interest rate volatility. However, we may not maintain interest rate swaps with respect to all of our variable rate indebtedness, and any swaps we enter into may not fully mitigate our interest rate risk.

Our interest rates may be impacted by the phase out of LIBOR.

LIBOR, the London Interbank Offered Rate, is the basic rate of interest used in lending transactions between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. Certain of the interest rates applicable to our sixth amended and restated senior credit agreement are calculated using LIBOR. On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if at that time LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. While our sixth amended and restated credit agreement includes provisions for establishing alternative reference rates in the event that LIBOR shall no longer be available or the determination is made to adopt an alternative reference rate, any such alternative reference rate could be higher and more volatile than LIBOR or may otherwise perform differently than LIBOR. The consequences of the adoption of any such alternative reference rates cannot be predicted at this time and may result in exposure to additional interest rate risk and increase the cost of indebtedness under our sixth amended and restated credit agreement.

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Despite our current level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks to our financial condition described above.

We may incur substantial additional indebtedness, including secured indebtedness. As of December 31, 2020, we have $375.5 million of availability under the senior credit agreement. If we incur secured indebtedness and such secured indebtedness is either accelerated or becomes subject to a bankruptcy, liquidation or reorganization, our assets would be used to satisfy obligations with respect to the indebtedness secured thereby before any payment could be made on the debt that is not similarly secured. If new debt or other liabilities are added to our current debt levels, the related risks that we now face could intensify. Our senior credit agreement restricts our ability to incur additional indebtedness, including secured indebtedness, but if the facilities mature or are repaid, we may not be subject to such restrictions under the terms of any subsequent indebtedness.

The conditional conversion features of our 2.625% Convertible Notes due 2024 (the “Convertible Notes”), if triggered, may adversely affect our financial condition.    
 
In the event the conditional conversion features of the Convertible Notes issued on January 29, 2019 are triggered, holders of the Convertible Notes will be entitled to convert the Convertible Notes at any time during specified periods at their option.  If one or more holders elect to convert their Convertible Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock, we would be required to make cash payments to satisfy all or a portion of our conversion obligation based on the conversion rate, which could adversely affect our liquidity.  In addition, even if holders do not elect to convert their Convertible Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as a current rather than long-term liability, which could result in a material reduction of our net working capital. Refer to Item 7. Management and Discussion and Analysis - Financing Cash Flows and Note 7 for further details on the Convertible Notes.
 
The convertible notes hedge and warrant transactions that we entered into in connection with the offering of the Convertible Notes may affect the value of the Convertible Notes and our common stock.
 
In connection with the offering of the Convertible Notes, we entered into convertible notes hedge transactions with certain option counterparties (each an “Option Counterparty”).  The convertible notes hedge transactions are expected generally to reduce the potential dilution upon conversion of the Convertible Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Convertible Notes, as the case may be.  We also entered into warrant transactions with each Option Counterparty.  The warrant transactions could separately have a dilutive effect on our common stock to the extent that the market price per share of our common stock exceeds the strike price of the warrants, unless we elect to settle the warrants in cash.  In connection with establishing its initial hedge of the convertible notes hedge and warrant transactions, each Option Counterparty or an affiliate thereof may have entered into various derivative transactions with respect to our common stock concurrently with or shortly after the pricing of the Convertible Notes.  This activity could increase (or reduce the size of any decrease in) the market price of our common stock or the Convertible Notes at that time.  In addition, each Option Counterparty or an affiliate thereof may modify its hedge position by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the Convertible Notes (and is likely to do so during any observation period related to a conversion of the Convertible Notes).  This activity could also cause or avoid an increase or a decrease in the market price of our common stock or the Convertible Notes.  In addition, if any such convertible notes hedge and warrant transactions fail to become effective, each Option Counterparty may unwind its hedge position with respect to our common stock, which could adversely affect the value of our common stock and the value of the Convertible Notes.
 
We are subject to counterparty risk with respect to the convertible notes hedge transactions.
 
Each Option Counterparty to the convertible notes hedge transactions is a financial institution whose obligation to perform under the convertible notes hedge transaction will not be secured by any collateral.  If an Option Counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under our transactions with the Option Counterparty.  Our exposure will generally correlate to the increase in the market price and in the volatility of our common stock.  In addition, upon a default by an Option Counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our common stock.  Although these counterparties are large, reputable U.S. financial institutions, we can provide no assurances as to the financial stability or viability of any Option Counterparty.


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(iii) Risks Related to Our Acquisition Strategy

Our financial performance is subject to the risks inherent in any acquisition, 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 in pursuing acquisitions depends on our ability to identify target companies or product lines that are available for sale, and, negotiating successful terms with the sellers, as the sellers may also be negotiating with other bidders with greater financial resources than we have. Even when we win a bid, our success is also 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, which may strain our relationship with customers, suppliers, distributors, personnel or others.  There can be no assurance that we will be able to identify and make acquisitions, 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 or coverage from representation and warranty insurance 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.
 
The terms of any future preferred equity or debt financing may give holders of any preferred securities or debt securities rights that are senior to rights of our common shareholders or impose more stringent operating restrictions on our company.

Debt or equity financing may not be available to us on acceptable terms. If we incur additional debt or raise equity through the issuance of preferred stock or convertible securities, the terms of the debt or the preferred stock issued may give the holders rights, preferences and privileges senior to those of holders of our common stock, particularly in the event of liquidation. The terms of the debt may also impose additional and more stringent restrictions on our operations. If we raise funds through the issuance of additional equity, the ownership percentage of our existing shareholders would be diluted.

(iv) Other Risks Related to Our Business

We could experience a failure of a key information technology system, process or site or a breach of information security, including a cybersecurity breach or failure of one or more key information technology systems, networks, processes, associated sites or service providers, and could potentially become liable for a breach of various data privacy regulations.

We rely extensively on information technology (“IT”) systems for the storage, processing, and transmission of our electronic, business-related, information assets used in or necessary to conduct business.  We leverage our internal IT infrastructures, and those of our business partners, to enable, sustain, and support our global business activities. In addition, we rely on networks and services, including internet sites, data hosting and processing facilities and tools and other hardware, software and technical applications and platforms, some of which are managed, hosted, provided and/or used by third-parties or their vendors, to assist in conducting our business. The data we store and process may include customer payment information, personal information concerning our employees, confidential financial information, and other types of sensitive business-related information. In limited instances, we may also come into possession of information related to patients of our physician customers. Numerous and evolving cybersecurity threats pose potential risks to the security of our IT systems, networks and services, as well as the confidentiality, availability and integrity of our data. In addition, the laws and regulations governing security of data on IT systems and otherwise collected, processed, stored, transmitted, disclosed and disposed of by companies are evolving, adding another layer of complexity in the form of new requirements. We have made, and continue to make investments, seeking to address these threats, including monitoring of networks and systems, hiring of experts, employee training and security policies for employees and third-party providers. The techniques used in these attacks change frequently and may be difficult to detect for periods of time and difficult to anticipate by implementing adequate preventative measures.

Our worldwide operations mean that we are subject to laws and regulations, including data protection and cybersecurity laws and regulations, in many jurisdictions. For example, the European Union ("EU") General Data Protection Regulation ("GDPR") requires us to manage personal data in the EU and may impose fines of up to four percent of our global revenue in the event of certain violations. Likewise, the California Consumer Privacy Act imposes obligations on companies that conduct business in California, and meet other requirements, with respect to the collection or sale of specified personal information. Other jurisdictions are also implementing or proposing a variety of data privacy laws and regulations. Further, there has been a developing trend of civil lawsuits and class actions relating to breaches of consumer data held by large companies or incidents
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arising from other cyber-attacks. Any data security breaches, cyber-attacks, malicious intrusions or significant disruptions could result in actions by regulatory bodies and/or civil litigation, any of which could materially and adversely affect our business, results of operations, financial condition, cash flows, reputation or competitive position.

The costs of attempting to protect IT systems and data may increase, and there can be no assurance that these added security efforts will prevent all breaches of our IT systems or thefts of our data. If our IT systems are damaged or cease to function properly, the networks or service providers we rely upon fail to function properly, we fail to comply with an applicable law or regulation, such as the GDPR, or we or one of our third-party providers suffer a loss or disclosure of our business or stakeholder information due to any number of causes ranging from catastrophic events or power outages to improper data handling or security breaches and our business continuity plans do not effectively address these failures on a timely basis, we may be exposed to potential disruption in operations, loss of customers, reputational, competitive and business harm, and significant costs from remediation, litigation and regulatory actions.

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.

A portion of our orthopedic revenues relate to our share of the service fees from the MTF allograft tissues for which we have exclusive worldwide sales representation, marketing and promotion rights, as further described in our revenue recognition policy in Note 1.  Our primary costs related to these revenues come from our commission expense and certain marketing costs.  Our ability to increase the service fees may be constrained by certain factors which are outside of our control, such as the limited supply of donors and donated tissue that meets the quality standards of MTF.  Similarly, under the terms of the agreement, MTF remains responsible for tissue procurement and processing, shipment of tissues and invoicing of service fees to customers. To the extent MTF’s performance does not meet customer expectations or otherwise fails, CONMED may be unable to increase the allograft service fees or to find a suitable replacement for MTF on terms that are acceptable.  

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.

We distribute some products for third-party companies, and cannot ensure that our rights to distribute such third-party products will continue indefinitely.

While we generally own the products' designs and rights to the products we sell, in some cases we distribute products for third-parties. While these third-parties may have business reasons for contracting with us to distribute their products, we may face the risk that the third-parties may seek alternate distribution partners when their distribution contracts with us expire or are scheduled for renewal. If we lose the distribution rights to such products, we may not be able to find replacement products that are acceptable to our customers, or to us.

If we lose our patents or they are held to be invalid, or if our products or services infringe on third party patents, 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 international patents on products expiring at various dates from 2021 through 2040 and have additional patent applications pending.  See Item 1 Business “Research and Development” and “Intellectual Property” 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, and we may not prevail.

While we seek to take reasonable steps to avoid infringing on patents we do not own or license, we cannot be sure that our services and products do not infringe on the intellectual property rights of third parties, and we may have infringement claims asserted against us. These claims could cost us money, prevent us from offering some services or products, or damage our reputation. 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;
our patents will be found to be valid or sufficiently broad to protect our technology or provide us with a competitive advantage; or
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we will be successful in defending against pending or future patent infringement claims asserted against our products.

We can be sued for product liability claims and our insurance coverage may be insufficient to cover the nature and amount of any product liability claims.
 
Even if our products are properly designed and perform as intended, we may be sued. The nature of our products as medical devices, and the 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 has 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 “Item 3 - 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. Any increase in the frequency or severity of natural disaster events could result in increased insurance premiums.
 
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.

Our significant international operations subject us to foreign currency fluctuations and other risks associated with operating in countries outside the United States.
 
A significant portion of our revenues, approximately 44% of 2020 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, Japan 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 34% of our total net sales in 2020.  The remaining 10% 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 jurisdictions outside the United States, 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 involving foreign currency forward contracts for 2020, our revenues and earnings are only partially protected from foreign currency translation if the United States dollar strengthens as compared with currencies such as the Euro.  Further, as of the date of this Form 10-K, we have not entered into any foreign currency forward contracts beyond 2022. 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 and tariffs;
compliance with economic sanctions, trade embargoes, export controls, and the customs laws and regulations of the many countries in which we operate;
political risks, including political instability;
reliance on third parties to distribute our products;
hyperinflation in certain countries outside the United States; 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.






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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” in Item 1 - Business for a further discussion of these competitive forces.

Our Board of Directors may, in the future, limit or discontinue payment of a dividend on common stock.

We have paid a quarterly dividend to our shareholders since 2012. However, we may not pay such dividends in the future at the prior rate, or at all. All decisions regarding our payment of dividends will be made by our Board of Directors from time to time, and are subject to an evaluation of our financial condition, results of operations and capital requirements, applicable law, industry practice, contractual restraints and other business considerations. In addition, our senior credit agreement may restrict our ability to pay dividends, and the terms of agreements governing debt that we may incur in the future may also limit or prohibit dividend payments. We may not have sufficient surplus or net profits under Delaware law to be able to pay any dividends, which may result from extraordinary cash expenses, actual expenses exceeding contemplated costs, funding of capital expenditures or increases in reserves.

Anti-takeover provisions in our organizational documents and Delaware law could delay or prevent a change in control.

Provisions of our certificate of incorporation and bylaws may delay or prevent a merger or acquisition that a shareholder may consider favorable. These provisions include:

the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without shareholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;
the requirement that a special meeting of shareholders may be called only by the board of directors, the chair of the board of directors, the president, or stockholders holding at least 25% of our outstanding stock (subject to certain procedural and informational requirements), which may delay the ability of our shareholders to force consideration of a proposal or to take action;
the procedural safeguards in place in connection with stockholder action by written consent, including a requirement that stockholders of at least 25% of our outstanding common stock request that the board of directors set a record date to determine the stockholders entitled to act by written consent;
providing indemnification and exculpation rights to our directors and officers;
advance notice procedures that shareholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a shareholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us; and
exclusive forum provisions, including provisions providing for the Court of Chancery of the State of Delaware as the exclusive forum for bringing certain actions.

As a Delaware corporation, we are also subject to Section 203 of the Delaware General Corporation Law, which provides that we may not engage in a business combination, such as a merger, consolidation, recapitalization, asset sale or disposition of stock, with any "interested stockholder" for a period of three years from the date that the interested stockholder first became an interested stockholder unless certain conditions are met.

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Any provision of our certificate of incorporation and bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our shareholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

Environmental laws and regulations and climate change initiatives could materially and adversely affect our business, financial condition, and results of operations.

Our business and facilities and those of our suppliers are subject to a number of federal, state, local and international laws and regulations governing the protection of human health and the environment. In addition, concern over climate change and sustainability has led to foreign and domestic legislative and regulatory initiatives directed at limiting carbon dioxide and other greenhouse gas emissions. A failure to comply with current or future environmental laws and regulations could result in fines or penalties. Any such expenses or liability could have a material adverse effect on our financial condition, results of operations or cash flows.

Our ability to attract and retain qualified employees is critical to our success.

CONMED’s employees are its most important resource, and in many areas of the medical industry, competition for qualified personnel is intense. CONMED seeks to attract talented and diverse new employees and retain and motivate its existing employees. If we are unable to continue to attract or retain qualified employees, including our executives, CONMED’s performance, including its competitive position, could be materially and adversely affected.

Item 1B. Unresolved Staff Comments

None.

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.
 
LocationSquare FeetOwn or LeaseLease Expiration
Utica, NY500,000 Own
Largo, FL278,000 Own
Chihuahua, Mexico207,720 LeaseOctober 2024
Chihuahua, Mexico40,626 LeaseMarch 2028
Lithia Springs, GA188,400 LeaseJanuary 2025
Brussels, Belgium58,276 LeaseJune 2024
Mississauga, Canada22,421 LeaseDecember 2023
Greenwood Village, CO22,162 LeaseJuly 2024
Westborough, MA19,515 LeaseNovember 2025
Frenchs Forest, Australia16,959 LeaseJuly 2025

Our principal manufacturing facilities are located in Utica, NY, Largo, FL and Chihuahua, Mexico. Lithia Springs, GA and Brussels, Belgium are our principal distribution centers. We also maintain sales and administrative offices in countries throughout the world.

Item 3.  Legal Proceedings

We are involved in various proceedings, legal actions and claims arising in the normal course of business, including proceedings related to product, labor and intellectual property and other matters that are more fully described in Note 13. We are not a party to any pending legal proceedings other than ordinary routine litigation incidental to our business.

Item 4. Mine Safety Disclosures

Not applicable.
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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 New York Stock Exchange ("NYSE"), effective February 10, 2020, under the symbol “CNMD”. Prior to this date, our common stock was traded on the NASDAQ Global Market under the same symbol. At February 1, 2021, there were 518 registered holders of our common stock and approximately 31,636 accounts held in “street name”.
 
Our Board of Directors has authorized a share repurchase program; see Note 9.

The Board of Directors declared a quarterly cash dividend of $0.20 per share in 2019 and 2020. The fourth quarter dividend for 2020 was paid on January 5, 2021 to shareholders of record as of December 15, 2020. The total dividend payable at December 31, 2020 was $5.8 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. See "Item 1A. Risk Factors - Other Risk Factors Related to our Business - Our Board of Directors may, in the future, limit or discontinue payment of a dividend on common stock."
 
Refer to Item 12 for information relating to compensation plans under which equity securities of CONMED Corporation are authorized for issuance.
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Performance Graph

The performance graph below compares the yearly percentage change in the Company’s Common Stock with the cumulative total return of the S&P 500 Index, NASDAQ Composite Index and the cumulative total return of the Standard & Poor’s Health Care Equipment Index. The Company added the S&P 500 Index to the graph because the Company changed its listing from the NASDAQ Global Market to the NYSE in February 2020 and believes the S&P 500 Index is a more appropriate index for comparison to our stock performance. In future years, the Company plans to discontinue the use of the NASDAQ Composite 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.

cnmd-20201231_g1.jpg


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Item 6.  Selected Financial Data

The following table sets forth selected historical financial data for the years ended December 31, 2020, 2019, 2018, 2017 and 2016.  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 Consolidated Financial Statements of the Company and the notes thereto.
 
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(In thousands, except per share data)
Years Ended December 31,
20202019201820172016
 
Statements of Operations Data (1):
Net sales $862,459 $955,097 $859,634 $796,392 $763,520 
Cost of sales402,159 430,382 390,524 365,351 355,190 
Gross profit460,300 524,715 469,110 431,041 408,330 
Selling and administrative expense373,817 400,141 355,617 351,799 338,400 
Research and development expense40,473 45,460 42,188 32,307 32,254 
Income from operations46,010 79,114 71,305 46,935 37,676 
Interest expense44,052 42,701 20,652 18,203 15,359 
Other expense355 5,188 — — 2,942 
Income before income taxes1,603 31,225 50,653 28,732 19,375 
Provision (benefit) for income taxes(7,914)2,605 9,799 (26,755)4,711 
Net income$9,517 $28,620 $40,854 $55,487 $14,664 
Per Share Data:
Basic earnings per share$0.33 $1.01 $1.45 $1.99 $0.53 
Diluted earnings per share$0.32 $0.97 $1.41 $1.97 $0.52 
Dividends per share of common stock$0.80 $0.80 $0.80 $0.80 $0.80 
Other Financial Data:
Depreciation and amortization$72,625 $72,323 $60,761 $57,506 $54,267 
Capital expenditures13,013 20,066 16,507 12,842 14,753 
Balance Sheet Data (at period end):
Cash and cash equivalents$27,356 $25,856 $17,511 $32,622 $27,428 
Total assets1,751,673 1,775,095 1,369,138 1,357,961 1,328,983 
Long-term obligations852,434 876,541 545,924 576,526 634,455 
Total shareholders’ equity709,038 710,467 662,270 631,432 580,576 

(1)Results of operations of acquired businesses have been recorded in the financial statements since the date of acquisition.

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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.

This section of this Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
 
Overview of CONMED Corporation

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

Our product lines consist of orthopedic surgery and general surgery. Orthopedic surgery consists of sports medicine instrumentation and small bone, large bone and specialty powered surgical instruments as well as, imaging systems for use in minimally invasive surgery procedures including 2DHD and 3DHD vision technologies and service fees related to the promotion and marketing of sports medicine allograft tissue. General surgery consists of a complete line of endo-mechanical instrumentation for minimally invasive laparoscopic and gastrointestinal procedures, a line of cardiac monitoring products as well as electrosurgical generators and related instruments. These product lines as a percentage of consolidated net sales are as follows:
 202020192018
Orthopedic surgery43 %49 %52 %
General surgery57 51 48 
Consolidated net sales100 %100 %100 %
 
A significant amount of our products are used in surgical procedures with approximately 82% of our revenues derived from the sale of single-use products.  Our capital equipment offerings also facilitate the ongoing sale of related single-use 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 44% in 2020, 46% in 2019 and 48% in 2018.
 
COVID-19
Our business has been significantly impacted by the emergence of the COVID-19 pandemic, with the Company experiencing lower sales in 2020 compared to 2019, first in the Asia/Pacific Rim and later in the United States, Europe and elsewhere as temporary closures occurred and hospitals and surgery centers postponed many non-urgent surgical procedures to minimize the risk of infection. In compliance with various governmental orders, beginning in March we restricted access to our main facilities to only essential personnel required to be on-site while maintaining production and distribution. We expect revenues to increase in 2021 as compared to 2020. We expect the United States to rebound faster than our international markets based on the expected timing of increases in procedural volumes and general surgery rebounding faster than orthopedic surgery due to the nature of the products. However, the extent and duration of the adverse impact of COVID-19 on our business are still uncertain, rapidly changing and are subject to factors outside of our control, see "Item 1A. Risk Factors" for more information. For additional discussion regarding COVID 19, see Liquidity and Capital Resources below.

Buffalo Filter Acquisition
 
On February 11, 2019, we acquired Buffalo Filter and all of the issued and outstanding common stock of Palmerton Holdings, Inc. from Filtration Group FGC LLC (the “Buffalo Filter Acquisition”) for approximately $365 million, in cash. Buffalo Filter develops, manufactures and markets smoke evacuation technologies that are complementary to our general surgery offering. See Note 2 for further information on this business acquisition.

We financed the purchase price for the Buffalo Filter Acquisition using a combination of the issuance of $345.0 million of 2.625% convertible notes due 2024 issued on January 29, 2019 (the Convertible Notes”) and the incurrence of
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indebtedness under our sixth amended and restated senior secured credit agreement, which closed on February 7, 2019. Refer to Financing Cash Flows and Note 7 for further details.
    
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 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. Actual results may or may not differ from these estimates.

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.  Factors that contribute to the recognition of goodwill include synergies that are expected to increase net sales and profits; acquisition of a talented workforce; cost savings opportunities; the strategic benefit of expanding our presence in core and adjacent markets; and diversifying our product portfolio. Customer and distributor relationships, trademarks, tradenames, developed technology, patents and other intangible assets primarily represent allocations of purchase price to identifiable intangible assets of acquired businesses. Sales representation, marketing and promotional rights represent intangible assets created under our agreement with Musculoskeletal Transplant Foundation (“MTF”).  Determining the fair value of intangible assets acquired as part of a business combination requires us to make significant estimates. These estimates include the amount and timing of projected future cash flows of each project or technology, revenue growth rates, projected cost of sales, customer attrition rates, the discount rate used to discount those cash flows to present value, the assessment of the asset’s useful life, and the consideration of legal, technical, regulatory, economic, and competitive risks. As these are significant estimates, we would obtain the assistance of a third-party valuation specialist in estimating fair values of intangible assets for significant acquisitions.

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. We completed our goodwill impairment testing of our single reporting unit during the fourth quarter of 2020. We performed our impairment test 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, the fair value of our reporting unit continues to exceed carrying value.

For our indefinite-lived intangible assets, trademarks and tradenames, we performed our impairment testing as of the fourth quarter of 2020 utilizing the relief from royalty income based approach to determine whether the fair value is less than its carrying amount. A considerable amount of management judgment and assumptions are required in performing the impairment testing. The key assumptions used in the impairment testing were long-term revenue growth projections, royalty rates, discount rates and general industry, market and macro-economic conditions. Based upon our assessment, the fair value continues to exceed carrying 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.

See Note 6 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. In conjunction with the pension plan, we recorded a pension benefit obligation totaling $101.2 million as of December 31, 2020. In accounting for this pension plan, we are required to make a number of assumptions, including the expected rate of return on plan assets and discount rate. In determining the expected rate of return on plan assets, we consider the relative weighting of plan assets, the historical performance of total plan
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assets and individual asset classes and economic and other indicators of future performance. The discount rate represents the interest rate used in estimating the present value of projected cash flows to settle the Company’s pension obligations. The discount rate assumption is determined by using a full yield curve approach, which involves applying the specific spot rates along the yield curve used in the determination of the benefit obligation that correlates to the relevant projected cash flows. See Note 12 for further discussion of the pension plan.

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:
 
 Years Ended December 31,
 202020192018
Net sales100.0 %100.0 %100.0 %
Cost of sales46.6 45.1 45.4 
Gross profit53.4 54.9 54.6 
Selling and administrative expense43.3 41.9 41.4 
Research and development expense4.7 4.8 4.9 
Income from operations5.3 8.3 8.3 
Interest expense5.1 4.5 2.4 
Other expense— 0.5 — 
Income before income taxes0.2 3.3 5.9 
Provision (benefit) for income taxes(0.9)0.3 1.1 
Net income1.1 %3.0 %4.8 %

Net Sales

The following table presents net sales by product line for the years ended December 31, 2020, 2019 and 2018:
% Change from
2020 to 2019
20202019As ReportedImpact of Foreign Currency
Constant Currency a
Orthopedic surgery$374.7 $463.3 -19.1 %0.7 %-18.4 %
General surgery487.8 491.8 -0.8 %0.1 %-0.7 %
   Net sales$862.5 $955.1 -9.7 %0.4 %-9.3 %
Single-use products$703.0 $756.3 -7.0 %0.4 %-6.6 %
Capital products159.5 198.8 -19.8 %0.2 %-19.6 %
   Net sales$862.5 $955.1 -9.7 %0.4 %-9.3 %
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% Change from
2019 to 2018
20192018As ReportedImpact of Foreign Currency
Constant Currency a
Orthopedic surgery$463.3 $446.7 3.7 %0.8 %4.5 %
General surgery491.8 412.9 19.1 %0.3 %19.4 %
   Net sales$955.1 $859.6 11.1 %0.6 %11.7 %
Single-use products$756.3 $681.1 11.0 %0.6 %11.6 %
Capital products198.8 178.5 11.3 %0.7 %12.0 %
   Net sales$955.1 $859.6 11.1 %0.6 %11.7 %

(a) Refer to Non-GAAP Financial Measures below for further details.

Net sales decreased 9.7% to $862.5 million in 2020 from $955.1 million in 2019. Net sales decreased across all product lines in 2020 as a result of the COVID-19 pandemic.

Orthopedic surgery sales decreased 19.1% in 2020 to $374.7 million from $463.3 million in 2019 primarily driven by deferral of non-urgent surgeries in hospitals and surgery centers as a result of the COVID-19 pandemic. A significant portion of this decline was driven by a reduction in capital equipment purchases as hospitals and surgery centers conserved cash and deferred capital outlays.
General surgery sales decreased 0.8% in 2020 to $487.8 million from $491.8 million in 2019. The decrease was a result of the deferral of non-urgent surgeries in hospitals and surgery centers as a result of the COVID-19 pandemic. We believe the deferral of non-urgent procedures has had a lesser impact on our general surgery lines as a result of the nature of the products and procedures in which they are used and this belief was borne out in the second half of the year as we experienced sequential growth from the third to the fourth quarter, including continued growth in our Buffalo Filter® and AirSeal® products throughout 2020.

Cost of Sales
Cost of sales was $402.2 million in 2020 compared to $430.4 million in 2019.  Gross profit margins were 53.4% in 2020 and 54.9% in 2019.  The decrease in gross profit margin of 1.5 percentage points in 2020 was driven by the following:

$6.6 million in costs related to plant underutilization due to abnormally low production as a result of decreased sales caused by the COVID-19 pandemic;
an increase of $1.1 million in costs related to the consolidation of certain manufacturing operations related to winding down operations at certain locations and moving production lines to other facilities ($4.0 million in 2020 compared to $2.9 million in 2019);
an increase of $1.5 million in business acquisition costs ($2.8 million in 2020 compared to $1.3 million in 2019);
$2.2 million in costs related to product rationalization; and
$1.1 million in restructuring costs related to a voluntary separation arrangement as a result of the COVID-19 pandemic.

Refer to Note 14 for further details.

Selling and Administrative Expense

Selling and administrative expense was $373.8 million in 2020 compared to $400.1 million in 2019. Selling and administrative expense as a percentage of net sales was 43.3% in 2020 and 41.9% in 2019.  

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The decrease in selling and administrative expense in 2020 was driven mainly by actions taken to reduce expenses in response to the COVID-19 pandemic. We experienced reduced travel due to safety measures put in place and reduced trade show costs as shows were cancelled during the year. We also had lower commission costs during 2020 as sales declined compared to the prior year. In addition, during 2020, we incurred $4.8 million in severance costs related to a voluntary termination program and costs associated with the restructuring of our sales force, a $2.1 million write-off of field inventory used for customer demonstration and evaluation of products resulting from the product rationalization initiative and $1.2 million in acquisition and integration costs relating to the Buffalo Filter acquisition compared to $13.1 million in acquisition and integration costs in 2019. Refer to Note 14 for further details.
    
Research and Development Expense

Research and development expense was $40.5 million in 2020 and $45.5 million in 2019.  As a percentage of net sales, research and development expense was 4.7% in 2020 and 4.8% in 2019. The lower spend in 2020 was driven by cost cutting measures in light of the COVID-19 pandemic while still investing in key projects.
    
Interest Expense

Interest expense increased to $44.1 million in 2020 compared to $42.7 million in 2019.  The weighted average interest rates on our borrowings were 3.65% in 2020 decreasing from 3.71% in 2019. The increase in interest expense during 2020 was primarily due to an increase in non-cash interest expense offset by a decrease in outstanding debt balances and slightly lower interest rates.

Other Expense

Other expense during the year ended December 31, 2020 related to non-service pension costs. Other expense during the year ended December 31, 2019 was mainly related to costs associated with our sixth amended and restated senior credit agreement entered into on February 7, 2019 as further described in Note 7. These costs included a $3.6 million charge related to commitment fees paid to certain of our lenders, which provided a financing commitment for the Buffalo Filter acquisition, and a loss on the early extinguishment of debt of $0.3 million. Also included in 2019 were non-service pension costs.

Provision for Income Taxes

A provision (benefit) for income taxes was recorded at an effective rate of (493.9)% and 8.3% in 2020 and 2019, respectively, as compared to the federal statutory rate of 21.0%. The lower effective tax rate in 2020 was primarily the result of federal tax items having a greater benefit due to lower book income in 2020 as compared to 2019 as well as the benefit relating to the final issuance of tax regulations regarding United States tax on foreign earnings at different rates. A reconciliation of the United States statutory income tax rate to our effective tax rate is included in Note 8.

Non-GAAP Financial Measures

Net sales on a "constant currency" basis is a non-GAAP measure. The Company analyzes net sales on a constant currency basis to better measure the comparability of results between periods. To measure percentage sales growth in constant currency, the Company removes the impact of changes in foreign currency exchange rates that affect the comparability and trend of net sales.

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

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 sixth 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
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ability to raise funds through the sale of stock or we may issue debt through a private placement or public offering.

As a result of the COVID-19 pandemic, we experienced lower sales in 2020, however as noted above we expect revenues to increase in 2021. On April 17, 2020 we amended our senior credit agreement to suspend our required leverage ratios for up to four quarters. On November 20, 2020, we entered into a third amendment under our senior credit agreement to lower the applicable margin on loans and lower the interest floor on Eurocurrency loans agreed upon in April as actual and forecasted results are expected to be better than anticipated. We have certain minimum liquidity and fixed charge coverage ratio requirements with which we were in compliance with as of December 31, 2020. Management believes that cash flow from operations, including cash and cash equivalents on hand and available borrowing capacity under our revolving credit facility, will be adequate to meet our liquidity needs for the foreseeable future. We have undertaken steps to reduce our spending and expenses in light of our expectation that our revenues will be depressed over the next several months. While we expect that we will be well positioned when surgeries begin to return to their pre-pandemic levels, we are unable to predict with certainty how long the COVID-19 pandemic will last, or how severe its economic impact will be. Even after the COVID-19 pandemic and government responses thereto have subsided, residual economic and other effects may have an impact on the demand for post-pandemic surgery levels that are difficult to predict. If the downturn is more severe and prolonged than we currently expect, we may need to take further steps to reduce our costs, or to refinance our debt.

We had total cash on hand at December 31, 2020 of $27.4 million, of which approximately $26.3 million was held by our foreign subsidiaries outside the United States with unremitted earnings. During 2020, we redeployed $15.8 million of cash from certain non-U.S. subsidiaries primarily for U.S. debt reduction which consisted primarily of earnings that were taxed in 2017 as part of the deemed repatriation toll charge implemented by Tax Reform. We may repatriate funds from certain foreign subsidiaries in the future. Refer to Note 8 for further details.
    
Operating Cash Flows
 
Our net working capital position was $226.5 million at December 31, 2020.  Net cash provided by operating activities was $64.5 million in 2020 and $95.1 million in 2019 generated on net income of $9.5 million in 2020 and $28.6 million in 2019.   The decrease in cash provided by operating activities in 2020 as compared to 2019 was mainly driven by lower sales and net income in 2020 resulting from the COVID-19 pandemic. Significant impacts to operating cash flows in 2020 include increases from accounts receivable as fourth quarter sales in 2020 were lower than the same period in 2019 offset by decreases in operating cash flow caused by higher inventories on lower sales compared to the same period a year ago. Use of cash in other assets declined in 2020 compared to 2019 as lower sales force activity caused by the pandemic resulted in lower field inventory requirements.
    
Investing Cash Flows
 
Net cash used in investing activities decreased to $13.6 million in 2020 compared to $387.7 million in 2019 primarily due to the $365 million payment for the Buffalo Filter acquisition in 2019 and $3.2 million in cash received from the sale of a facility during 2020. Capital expenditures were $13.0 million and $20.1 million in 2020 and 2019, respectively.  

Financing Cash Flows

Financing activities in 2020 used cash of $52.1 million compared to providing cash of $300.9 million in 2019. Below is a summary of the significant financing activities:

During 2019, we received proceeds of $345.0 million related to the issuance of 2.625% convertible notes as further described below.
During 2019, we entered into a $265.0 million term loan in conjunction with the refinancing of our senior credit agreement. This new term loan replaced the previous term loan and resulted in payments of $13.3 million during the year ended December 31, 2020 compared to $110.7 million in net proceeds in the prior year.
We had net repayments on our revolving line of credit of $13.0 million and $92.0 million in 2020 and 2019, respectively.
In 2019, we paid $51.2 million to purchase hedges related to our convertible notes. Partially offsetting this, were proceeds of $30.6 million from the issuance of warrants as further described below.
We paid $2.7 million and $6.5 million in 2020 and 2019, respectively, in contingent consideration related to prior acquisitions.
In 2020, we paid debt issuance costs of $3.2 million in connection with the April 17, 2020 and November 20, 2020 amendments of our sixth amended and restated senior credit agreement as further described below compared to $16.2 million in 2019 related to the sixth amended and restated senior credit agreement and 2.625% convertible notes.
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On February 7, 2019, we entered into a sixth amended and restated senior credit agreement consisting of: (a) a $265.0 million term loan facility and (b) a $585.0 million revolving credit facility. The revolving credit facility will terminate and the loans outstanding under the term loan facility will mature on the earlier of (i) February 7, 2024 or (ii) 91 days prior to the earliest scheduled maturity date of the 2.625% convertible notes due in 2024 described below, (if, as of such date, more than $150.0 million in aggregate principal amount of such convertible notes (or any refinancing thereof) remains outstanding). The term loan facility is payable in quarterly installments increasing over the term of the facility. Proceeds from the term loan facility and borrowings under the revolving credit facility were used to repay the then existing senior credit agreement and in part to finance the acquisition of Buffalo Filter. As noted above, on April 17, 2020, we amended our sixth amended and restated senior credit agreement to suspend our required leverage ratios for up to four quarters. On November 20, 2020, we entered into a third amendment under our senior credit agreement to lower the applicable margin on the loans and lower the interest floor on Eurocurrency loans agreed upon in April as forecasted results are expected to be better than anticipated. We have certain minimum liquidity and fixed charge coverage ratio requirements. Interest rates are adjusted so that the applicable margin for base rate loans is 2.00% per annum and for Eurocurrency rate loans is 3.00% per annum, and the applicable commitment fee rate for the revolving credit facility is 0.50%. Following the suspension period, the applicable margin will depend upon CONMED’s consolidated senior secured leverage ratio, using the pricing grid set forth in the November 2020 amendment. Interest rates were at LIBOR (subject to 0.50% floor) plus an interest rate margin of 3.00% (3.50% at December 31, 2020).

There were $241.8 million in borrowings outstanding on the term loan facility as of December 31, 2020. There were $207.0 million in borrowings outstanding under the revolving credit facility as of December 31, 2020. Our available borrowings on the revolving credit facility at December 31, 2020 were $375.5 million with approximately $2.5 million of the facility set aside for outstanding letters of credit.

The sixth amended and restated senior credit agreement is collateralized by substantially all of our personal property and assets.  The sixth amended and restated senior credit agreement contains covenants and restrictions which, among other things, require the maintenance of certain financial ratios and restrict dividend payments and the incurrence of certain indebtedness and other activities, including acquisitions and dispositions.  We were in full compliance with these covenants and restrictions as of December 31, 2020. We are also required, under certain circumstances, to make mandatory prepayments from net cash proceeds from any issuance of equity and asset sales.

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

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

The convertible notes hedge transactions are expected generally to reduce the potential dilution upon conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be, in the event that the market price per share of our common stock, as measured under the terms of the convertible notes hedge transactions, is greater than the strike price ($114.92) of the convertible notes hedge transactions, which initially corresponds to the conversion price of the Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Notes. If, however, the market price per share of our common stock, as measured under the terms of the warrant transactions, exceeds the strike price of the warrants, there would nevertheless be dilution to the extent that such market price exceeds the strike price of the warrants, unless we elect to settle the warrants in cash.
    
29


Our Board of Directors has authorized a $200.0 million share repurchase program. Through December 31, 2020, we have repurchased a total of 6.1 million shares of common stock aggregating $162.6 million under this authorization and have $37.4 million remaining available for share repurchases.  The repurchase program calls for shares to be purchased in the open market or in private transactions from time to time.  We may suspend or discontinue the share repurchase program at any time.  We have not purchased any shares of common stock under the share repurchase program during 2020.  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 sixth amended and restated senior credit agreement, will be adequate to meet our anticipated operating working capital requirements, debt service, funding of capital expenditures, dividend payments and common stock repurchases in the foreseeable future. See “Item 1A. Risk Factors - Risks Related to Our Indebtedness." 

Contractual Obligations
 
The following table summarizes our contractual obligations for the next five years and thereafter (amounts in thousands) as of December 31, 2020.  Purchase obligations represent purchase orders for goods and services placed in the ordinary course of business.  
 
 Payments Due by Period
TotalLess than
1 Year
 1-3
Years
 3-5
Years
More than
5 Years
Long-term debt$793,812 $18,219 $430,593 $345,000 $— 
Purchase obligations93,606 91,124 2,482 — — 
Lease obligations25,203 7,666 12,097 4,714 726 
Total contractual obligations$912,621 $117,009 $445,172 $349,714 $726 

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 7).  The above table also does not include unrecognized tax benefits of approximately $0.2 million, the timing and certainty of recognition for which is not known (See Note 8).

Stock-based Compensation

We have reserved shares of common stock for issuance to employees and directors under two shareholder-approved share-based compensation plans (the "Plans").  The Plans provide for grants of stock 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 stock 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 generally non-transferable other than on death and generally become exercisable over a four to 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 9). Total pre-tax stock-based compensation expense recognized in the consolidated statements of comprehensive income was $13.1 million, $11.8 million and $10.0 million for the years ended December 31, 2020, 2019 and 2018, respectively.  

Other Matters

Through April 1, 2020, our credit facility allowed us to seek to sell products to certain customers in Iran in compliance with applicable laws and regulations and subject to certain terms and conditions, including pre-approval by us and our lenders of the identity of any distributor and prior review of each of the end-customers. We had sales to a third-party distributor in Iran during the first quarter of 2020. We limited such sales into Iran to products that qualified as “medical supplies” within the meaning of the general license, or covered by specific licenses, provided by the Iranian Transactions and Sanctions Regulations set forth in the regulations promulgated by the Office of Foreign Assets Control (“OFAC”) of the United States Department of the Treasury set forth at 31 C.F.R. § 560.530. We have implemented certain controls and processes designed to ensure that the ultimate end-users for the products are those permitted under the OFAC general license, and that the sales and transactions with the Iranian distributor otherwise comply with the requirements of the OFAC regulations. The expected revenues and net profits associated with sales to the Iranian distributor were not material to our overall results of operations.
30


We do not believe that our activities to date have been subject to required disclosure under Section 13(r) of the Securities Exchange Act of 1934 (the “Exchange Act”), which, among other things, requires disclosure of transactions and activities knowingly entered into with the Government of Iran that do not benefit from an OFAC license and with certain designated parties. If, however, activities are in the future discovered to be within the scope of the transactions and activities captured by Section 13(r) of the Exchange Act, we will make the required disclosures and notices.

New Accounting Pronouncements

See Note 17 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 44% of our total 2020 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, Japan and Korea.  In those countries in which we have a direct presence, our sales are denominated in the local currency amounting to approximately 34% of our total net sales in 2020.  The remaining 10% 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 2020, foreign currency exchange rates, including the effects of the hedging program, caused sales to decrease by approximately $4.9 million.

We hedge forecasted intercompany sales denominated in foreign currencies through the use of forward contracts.  We account for these forward contracts as cash flow hedges.  To the extent these forward contracts meet hedge accounting criteria, changes in their fair value are not included in current earnings but are included in accumulated other comprehensive loss.  These changes in fair value will be recognized into earnings as a component of sales or cost of sales when the forecasted transaction occurs. 

We also enter into forward contracts to exchange foreign currencies for United States dollars in order to hedge our currency transaction exposures on intercompany receivables 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.  

Refer to Note 16 for further discussion.

Interest rate risk

At December 31, 2020, we had approximately $448.8 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 2021 than they did in 2020, interest expense would increase, and income before income taxes would decrease by $4.5 million.  Comparatively, if market interest rates for similar borrowings average 1.0% less in 2021 than they did in 2020, our interest expense would decrease, and income before income taxes would increase by $4.5 million.

Item 8.  Financial Statements and Supplementary Data

Our 2020 Financial Statements are included in this Form 10-K beginning on page 43 and incorporated by reference 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.
31


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 under the Securities Exchange Act of 1934) occurred during the fourth quarter of the year ended December 31, 2020 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”, “Directors, Executive Officers, Other Company Officers and Nominees for the Board of Directors”, “Delinquent Section 16(a) Reports", “Ethics Disclosure” and "Meetings of the Board of Directors and Committees, Leadership Structure and Risk Oversight” in CONMED Corporation’s definitive Proxy Statement or other informational filing to be filed with the Securities and Exchange Commission on or about April 9, 2021.
 
Item 11. Executive Compensation

The information required by this item is incorporated herein by reference to the sections captioned “Compensation Discussion and Analysis”, “Compensation Committee Report on Executive Compensation”, “Summary Compensation Table”, “Grants of Plan-Based Awards”, “Outstanding Equity Awards at Fiscal Year-End”, “Option Exercises and Stock Vested”, “Non-Qualified Deferred Compensation”, “Potential Payments on Termination or Change-in-Control”, “Director Compensation,” “Pay Ratio” and “Board of Directors and Compensation Committee 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 9, 2021.

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 9, 2021.

Information relating to shareholder approved compensation plans under which equity securities of CONMED Corporation are authorized for issuance is set forth below:
Equity Compensation Plan Information
Plan categoryNumber 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 holders3,336,232 $66.76 3,788,058 
Equity compensation plans not approved by security holders— — — 
Total3,336,232 66.76 3,788,058 
    
The number of securities included in column (a) above consists of outstanding stock options, share appreciation rights (“SARs”) and performance share units, however the weighted-average exercise price in column (b) is for stock options and SARs only.

During 2018, the Company granted employment inducement awards in conjunction with the hiring of the Executive Vice President & Chief Financial Officer. This included 48,000 stock options, that would be issued upon exercise, at an exercise price of $50.61 per share. These shares are not part of a shareholder approved plan and no shares remain available for future issuance.

33


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 “Directors, Executive Officers and Nominees for the Board of Directors” and “Board of Directors and Compensation Committee 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 9, 2021.

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 9, 2021.

34


PART IV

Item 15. Exhibits, Financial Statement Schedules
Index to Financial Statements
  
(a)(1)List of Financial StatementsPage in Form 10-K
   
 Management’s Report on Internal Control Over Financial Reporting
  
 Report of Independent Registered Public Accounting Firm
   
 Consolidated Balance Sheets at December 31, 2020 and 2019
   
 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019 and 2018
   
 Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2020, 2019 and 2018
   
 Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018
  
 Notes to Consolidated Financial Statements
   
(2)List of Financial Statement Schedules 
   
 Valuation and Qualifying Accounts (Schedule II) for the Years Ended December 31, 2020, 2019 and 2018
   
 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 38 below are filed as part of this Form 10-K.
 
   
   
35


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.
 
CONMED CORPORATION
 
By: /s/ Curt R. Hartman
Curt R. Hartman
(President and Chief
Executive Officer)
 
Date:
February 22, 2021
36



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.
SignatureTitleDate
   
/s/ CURT R. HARTMANPresident, Chief Executive Officer and 
Curt R. HartmanChair of the Board of DirectorsFebruary 22, 2021
 
/s/ TODD W. GARNERExecutive Vice President 
Todd W. Garnerand Chief Financial OfficerFebruary 22, 2021
 
/s/ TERENCE M. BERGEVice President- 
Terence M. BergeCorporate ControllerFebruary 22, 2021
 
/s/ MARTHA GOLDBERG ARONSON 
Martha Goldberg AronsonLead Independent DirectorFebruary 22, 2021
 
/s/ DAVID BRONSON 
David BronsonDirectorFebruary 22, 2021
/s/ BRIAN P. CONCANNON
Brian P. ConcannonDirectorFebruary 22, 2021
/s/ LAVERNE COUNCIL
Laverne CouncilDirectorFebruary 22, 2021
/s/ CHARLES M. FARKAS 
Charles M. FarkasDirectorFebruary 22, 2021
/s/ JEROME J. LANDE 
Jerome J. LandeDirectorFebruary 22, 2021
/s/ BARBARA SCHWARZENTRAUB 
Barbara SchwarzentraubDirectorFebruary 22, 2021
 
/s/ MARK E. TRYNISKI
Mark E. TryniskiDirectorFebruary 22, 2021
/s/ JOHN L. WORKMAN
John L. WorkmanDirectorFebruary 22, 2021
37



Exhibit Index
Exhibit No. Description
   
-
-
   
-
-
-
-
-
  
-
 
-
  
-
-
 
-
-
-
-
38


-
-
-
-
   
-
   
-
-
-
-
-
-
-
-
39


-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
40


-
-
-
-
-
-
-
-
14-Code of Ethics. The CONMED code of ethics may be accessed via the Company’s website at http://www.conmed.com/en/about-us/investors/investor-relations
-
   
-
   
-
   
-
   
-
101.INS*-XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*-XBRL Taxonomy Extension Schema Document
101.CAL*-XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*-XBRL Taxonomy Extension Definition Linkbase Document
41


101.LAB*-XBRL Taxonomy Extension Label Linkbase Document
101.PRE*-XBRL Taxonomy Extension Presentation Linkbase Document
104*-Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document (included in Exhibit 101)
   
 *Filed herewith
+Management contract or compensatory plan or arrangement
42


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, 2020.  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 2013.  Management has concluded that based on its assessment, CONMED’s internal control over financial reporting was effective as of December 31, 2020.  The effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
 
/s/  Curt R. Hartman
Curt R. Hartman
President and
Chief Executive Officer
 
/s/  Todd W. Garner
Todd W. Garner
Executive Vice President and
Chief Financial Officer





43




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 

To the Board of Directors and Shareholders of CONMED Corporation 

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of CONMED Corporation and its subsidiaries (the "Company") as of December 31, 2020 and 2019, and the related consolidated statements of comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020 based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle
As discussed in Note 17 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, 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 the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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.

Definition and Limitations of Internal Control over Financial Reporting

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
44


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.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Valuation of Pension Benefit Obligation

As described in Note 12 to the consolidated financial statements, the Company’s consolidated pension benefit obligation was $101.2 million as of December 31, 2020. Management's discount rate assumption is the significant assumption in determining the projected benefit obligation of the Company’s pension plan. The discount rate assumption is determined by management using a full yield curve approach, which involves applying the specific spot rates along the yield curve used in the determination of the benefit obligation that correlates to the relevant projected cash flows.

The principal considerations for our determination that performing procedures relating to the valuation of the pension benefit obligation is a critical audit matter are (i) the significant judgment by management to determine the pension benefit obligation, (ii) significant auditor judgment, subjectivity, and effort in evaluating management’s significant assumptions related to the discount rate, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of the pension benefit obligation, including controls over management's methodology, significant assumption, and data. These procedures also included, among others, (i) testing the completeness and accuracy of underlying data used in the valuation of the pension benefit obligation and (ii) the involvement of professionals with specialized skill and knowledge to assist in (a) testing management’s process for determining the pension benefit obligation, (b) evaluating the appropriateness of the methodology used by management, and (c) evaluating the reasonableness of the discount rate.



 /s/ PricewaterhouseCoopers LLP
Rochester, New York
February 22, 2021

We have served as the Company’s auditor since 1982.
45


CONMED CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2020 and 2019
(In thousands except share and per share amounts)
 20202019
ASSETS  
Current assets:  
Cash and cash equivalents$27,356 $25,856 
Accounts receivable, less allowance for doubtful  
accounts of $3,876 in 2020 and $2,786 in 2019
177,152 189,097 
Inventories194,868 164,616 
Prepaid expenses and other current assets17,278 17,794 
Total current assets416,654 397,363 
Property, plant and equipment, net111,407 118,883 
Deferred income taxes6,842 5,659 
Goodwill618,440 618,042 
Other intangible assets, net501,537 532,800 
Other assets96,793 102,348 
Total assets$1,751,673 $1,775,095 
LIABILITIES AND SHAREHOLDERS' EQUITY  
Current liabilities:  
Current portion of long-term debt$18,415 $13,596 
Accounts payable53,310 55,968 
Accrued compensation and benefits50,171 53,690 
Other current liabilities68,305 64,833 
Total current liabilities190,201 188,087 
Long-term debt735,221 755,211 
Deferred income taxes57,875 74,488 
Other long-term liabilities59,338 46,842 
Total liabilities1,042,635 1,064,628 
Commitments and contingencies (Note 13)
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 2020 and 2019, respectively
313 313 
Paid-in capital382,628 379,324 
Retained earnings457,417 470,844 
Accumulated other comprehensive loss(63,681)(59,277)
Less:  Treasury stock, at cost;  
2,410,045 and 2,876,729 shares in
  
2020 and 2019, respectively(67,639)(80,737)
Total shareholders' equity709,038 710,467 
Total liabilities and shareholders' equity$1,751,673 $1,775,095 

The accompanying notes are an integral part of the consolidated financial statements.
46


CONMED CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2020, 2019 and 2018
(In thousands except per share amounts)
202020192018
Net sales$862,459 $955,097 $859,634 
Cost of sales402,159 430,382 390,524 
Gross profit460,300 524,715 469,110 
Selling and administrative expense373,817 400,141 355,617 
Research and development expense40,473 45,460 42,188 
Operating expenses414,290 445,601 397,805 
Income from operations46,010 79,114 71,305 
Interest expense44,052 42,701 20,652 
Other expense355 5,188  
Income before income taxes1,603 31,225 50,653 
Provision (benefit) for income taxes(7,914)2,605 9,799 
Net income$9,517 $28,620 $40,854 
Per share data: 
Basic$0.33 $1.01 $1.45 
Diluted$0.32 $0.97 $1.41 
Other comprehensive income (loss), before income tax:
Foreign currency translation adjustments$6,963 $25 $(8,369)
Pension liability(6,499)