NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, in thousands except per share amounts)
Note 1 – Operations
CONMED Corporation (“CONMED”, the “Company”, “we” or “us”) is a medical technology company that provides surgical devices and equipment for minimally invasive procedures. The Company’s products are used by surgeons and physicians in a variety of specialties including orthopedics, general surgery, gynecology, neurosurgery, thoracic surgery and gastroenterology.
Note 2 - Interim Financial Information
The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. The information herein reflects all normal recurring material adjustments, which are, in the opinion of management, necessary for the fair statements of the results for the periods presented. The consolidated condensed financial statements herein consist of all wholly-owned domestic and foreign subsidiaries with all significant intercompany transactions eliminated. Results for the period ended
September 30, 2018
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2018
.
The consolidated condensed financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes for the year ended
December 31, 2017
included in our Annual Report on Form 10-K.
Note 3 - Revenues
The Company adopted Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which is codified in Accounting Standards Codification ("ASC") 606, effective January 1, 2018. ASC 606 is a comprehensive new revenue recognition model that requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the company expects to receive in exchange for those goods or services. The Company has applied the modified retrospective approach to adoption whereby the standard is applied only to the current period.
Adoption of ASC 606 did not have a material impact on our consolidated condensed financial statements. Certain costs previously included in selling and administrative expense and principally related to administrative fees paid to group purchasing organizations are required to be recorded as a reduction of revenue under the new standard. These costs amounted to
$2.4 million
and
$2.0 million
during the
three months ended
September 30, 2018 and 2017
, respectively, and
$6.3 million
and
$5.8 million
during the
nine months ended
September 30, 2018 and 2017
, respectively. These costs are included as a reduction in net sales in the
three and nine months ended
September 30, 2018
and as selling and administrative expense in the
three and nine months ended
September 30, 2017
, respectively. There is no impact on net income or earnings per share as a result of this change.
The Company recognizes revenue when we have satisfied a performance obligation by transferring a promised good or service (that is an asset) to a customer. An asset is transferred when the customer obtains control of that asset. The following policies apply to our major categories of revenue transactions:
|
|
•
|
Revenue is recognized when product is shipped and the customer obtains control of the product.
|
|
|
•
|
We place certain of our capital equipment with customers on a loaned basis and at no charge in exchange for commitments to purchase related single-use products over time periods generally ranging from one to three years. In these circumstances, no revenue is recognized upon capital equipment shipment as the equipment is loaned and subject to return if certain minimum single-use purchases are not met. Revenue is recognized upon the sale and shipment of the related single-use products. The cost of the equipment is amortized over its estimated useful life which is generally five years.
|
|
|
•
|
Product returns are only accepted at the discretion of the Company and in accordance with our “Returned Goods Policy”. Historically, the level of product returns has not been significant. We accrue for sales returns, rebates and allowances based upon an analysis of historical customer returns and credits, rebates, discounts and current market conditions.
|
|
|
•
|
Our terms of sale to customers generally do not include any obligations to perform future services. Limited warranties are provided for capital equipment sales and provisions for warranty are provided at the time of product sale based upon an analysis of historical data.
|
|
|
•
|
Amounts billed to customers related to shipping and handling have been included in net sales. Shipping and handling costs included in selling and administrative expense were
$10.0 million
and
$9.6 million
for the
nine months ended
September 30, 2018 and 2017
, respectively.
|
|
|
•
|
We sell to a diversified base of customers around the world and, therefore, believe there is no material concentration of credit risk.
|
|
|
•
|
We assess the risk of loss on accounts receivable and adjust the allowance for doubtful accounts based on this risk assessment. Historically, losses on accounts receivable have not been material. Management believes that the allowance for doubtful accounts of
$2.7 million
at
September 30, 2018
is adequate to provide for probable losses resulting from accounts receivable.
|
We recognize revenue in accordance with the terms of our agreement with Musculoskeletal Transplant Foundation (“MTF”) on a net basis as our role is that of an agent earning a commission or fee. MTF is responsible for the sourcing, processing and distribution of allograft tissue for sports medicine procedures while the Company represents, markets and promotes MTF’s sports medicine allograft tissues to customers. The Company is paid a “Service Fee” by MTF which is calculated as a percentage of the amounts invoiced by MTF to customers for sports medicine allograft tissues. The Company accounts for the services as a series of distinct performance obligations and each service is recognized over time as MTF simultaneously receives and consumes the benefit.
We sell extended warranties to customers that are typically for a period of one to three years. The related revenue is recorded as a contract liability and recognized over the life of the contract on a straight-line basis, which is reflective of our obligation to stand ready to provide repair services. The Company previously expensed as incurred commissions paid for the sale of extended warranty contracts to customers. Under the new guidance, the Company capitalizes these contract acquisition costs and realizes the expense in line with the related extended warranty contract revenue recognition. Upon adoption of the new standard, we recorded a cumulative adjustment of
$0.4 million
net of income taxes to beginning shareholders’ equity in order to capitalize costs incurred to obtain contracts with customers.
The following tables present revenue disaggregated by primary geographic market where the products are sold, by product line and timing of revenue recognition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
September 30, 2018
|
|
September 30, 2017
|
|
Orthopedic Surgery
|
|
General Surgery
|
|
Total
|
|
Orthopedic Surgery
|
|
General Surgery
|
|
Total
|
Primary Geographic Markets
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
39,574
|
|
|
$
|
67,955
|
|
|
$
|
107,529
|
|
|
$
|
38,044
|
|
|
$
|
60,260
|
|
|
$
|
98,304
|
|
Americas (excluding the United States)
|
14,949
|
|
|
7,347
|
|
|
22,296
|
|
|
15,147
|
|
|
7,945
|
|
|
23,092
|
|
Europe, Middle East & Africa
|
23,206
|
|
|
11,492
|
|
|
34,698
|
|
|
22,623
|
|
|
11,027
|
|
|
33,650
|
|
Asia Pacific
|
25,200
|
|
|
12,584
|
|
|
37,784
|
|
|
22,767
|
|
|
12,304
|
|
|
35,071
|
|
Total sales from contracts with customers
|
$
|
102,929
|
|
|
$
|
99,378
|
|
|
$
|
202,307
|
|
|
$
|
98,581
|
|
|
$
|
91,536
|
|
|
$
|
190,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
|
|
|
Goods transferred at a point in time
|
$
|
94,640
|
|
|
$
|
98,992
|
|
|
$
|
193,632
|
|
|
$
|
91,047
|
|
|
$
|
91,307
|
|
|
$
|
182,354
|
|
Services transferred over time
|
8,289
|
|
|
386
|
|
|
8,675
|
|
|
7,534
|
|
|
229
|
|
|
7,763
|
|
Total sales from contracts with customers
|
$
|
102,929
|
|
|
$
|
99,378
|
|
|
$
|
202,307
|
|
|
$
|
98,581
|
|
|
$
|
91,536
|
|
|
$
|
190,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
September 30, 2018
|
|
September 30, 2017
|
|
Orthopedic Surgery
|
|
General Surgery
|
|
Total
|
|
Orthopedic Surgery
|
|
General Surgery
|
|
Total
|
Primary Geographic Markets
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
123,782
|
|
|
$
|
199,653
|
|
|
$
|
323,435
|
|
|
$
|
121,320
|
|
|
$
|
176,421
|
|
|
$
|
297,741
|
|
Americas (excluding the United States)
|
48,307
|
|
|
23,374
|
|
|
71,681
|
|
|
43,256
|
|
|
22,902
|
|
|
66,158
|
|
Europe, Middle East & Africa
|
80,951
|
|
|
38,420
|
|
|
119,371
|
|
|
76,774
|
|
|
35,655
|
|
|
112,429
|
|
Asia Pacific
|
68,883
|
|
|
33,821
|
|
|
102,704
|
|
|
66,581
|
|
|
30,928
|
|
|
97,509
|
|
Total sales from contracts with customers
|
$
|
321,923
|
|
|
$
|
295,268
|
|
|
$
|
617,191
|
|
|
$
|
307,931
|
|
|
$
|
265,906
|
|
|
$
|
573,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
|
|
|
Goods transferred at a point in time
|
$
|
297,096
|
|
|
$
|
294,196
|
|
|
$
|
591,292
|
|
|
$
|
283,728
|
|
|
$
|
265,391
|
|
|
$
|
549,119
|
|
Services transferred over time
|
24,827
|
|
|
1,072
|
|
|
25,899
|
|
|
24,203
|
|
|
515
|
|
|
24,718
|
|
Total sales from contracts with customers
|
$
|
321,923
|
|
|
$
|
295,268
|
|
|
$
|
617,191
|
|
|
$
|
307,931
|
|
|
$
|
265,906
|
|
|
$
|
573,837
|
|
Contract liability balances related to the sale of extended warranties to customers are as follows:
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
Contract liability
|
$
|
10,375
|
|
|
$
|
7,786
|
|
Revenue recognized during
nine months ended
September 30, 2018
and
September 30, 2017
from amounts included in contract liabilities at the beginning of the period were
$6.6 million
and
$4.7 million
, respectively. There were no material contract assets as of
September 30, 2018
and
December 31, 2017
.
Note 4 – Comprehensive Income
Comprehensive income consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net income
|
$
|
5,825
|
|
|
$
|
7,197
|
|
|
$
|
25,201
|
|
|
$
|
8,791
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
Pension liability, net of income tax (income tax expense of $162 and $294 for the three months ended September 30, 2018 and 2017, respectively, and $488 and $880 for the nine months ended September 30, 2018 and 2017, respectively)
|
510
|
|
|
500
|
|
|
1,529
|
|
|
1,501
|
|
Cash flow hedging gain (loss) net of income tax (income tax expense (benefit) of $378 and ($790) for the three months ended September 30, 2018 and 2017, respectively, and $2,102 and ($2,312) for the nine months ended September 30, 2018 and 2017, respectively)
|
1,185
|
|
|
(1,348
|
)
|
|
6,598
|
|
|
(3,946
|
)
|
Foreign currency translation adjustment
|
(384
|
)
|
|
4,097
|
|
|
(5,483
|
)
|
|
13,320
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
$
|
7,136
|
|
|
$
|
10,446
|
|
|
$
|
27,845
|
|
|
$
|
19,666
|
|
Accumulated other comprehensive loss consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow
Hedging
Gain (Loss)
|
|
Pension
Liability
|
|
Cumulative
Translation
Adjustments
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Balance, December 31, 2017
|
$
|
(3,530
|
)
|
|
$
|
(25,813
|
)
|
|
$
|
(19,735
|
)
|
|
$
|
(49,078
|
)
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications, net of tax
|
5,462
|
|
|
—
|
|
|
(5,483
|
)
|
|
(21
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss) before tax
a
|
1,498
|
|
|
2,017
|
|
|
—
|
|
|
3,515
|
|
Income tax
|
(362
|
)
|
|
(488
|
)
|
|
—
|
|
|
(850
|
)
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
6,598
|
|
|
1,529
|
|
|
(5,483
|
)
|
|
2,644
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2018
|
$
|
3,068
|
|
|
$
|
(24,284
|
)
|
|
$
|
(25,218
|
)
|
|
$
|
(46,434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow
Hedging
Gain (Loss)
|
|
Pension
Liability
|
|
Cumulative
Translation
Adjustments
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Balance, December 31, 2016
|
$
|
1,546
|
|
|
$
|
(26,458
|
)
|
|
$
|
(33,614
|
)
|
|
$
|
(58,526
|
)
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications, net of tax
|
(3,939
|
)
|
|
—
|
|
|
13,320
|
|
|
9,381
|
|
Amounts reclassified from accumulated other comprehensive income (loss) before tax
a
|
(11
|
)
|
|
2,381
|
|
|
—
|
|
|
2,370
|
|
Income tax
|
4
|
|
|
(880
|
)
|
|
—
|
|
|
(876
|
)
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
(3,946
|
)
|
|
1,501
|
|
|
13,320
|
|
|
10,875
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2017
|
$
|
(2,400
|
)
|
|
$
|
(24,957
|
)
|
|
$
|
(20,294
|
)
|
|
$
|
(47,651
|
)
|
(a) The cash flow hedging gain (loss) and pension liability accumulated other comprehensive income (loss) components are included in sales or cost of sales and as a component of net periodic pension cost, respectively. Refer to Note 5 and Note 10, respectively, for further details.
Note 5 – Fair Value of Financial Instruments
We enter into derivative instruments for risk management purposes only. We operate internationally and in the normal course of business are exposed to fluctuations in interest rates, foreign exchange rates and commodity prices. These fluctuations can increase the costs of financing, investing and operating the business. We use forward contracts, a type of derivative instrument, to manage certain foreign currency exposures.
By nature, all financial instruments involve market and credit risks. We enter into forward contracts with major investment grade financial institutions and have policies to monitor the credit risk of those counterparties. While there can be no assurance, we do not anticipate any material non-performance by any of these counterparties.
Foreign Currency Forward Contracts.
We hedge forecasted intercompany sales denominated in foreign currencies through the use of forward contracts. We account for these forward contracts as cash flow hedges. To the extent these forward contracts meet hedge accounting criteria, changes in their fair value are not included in current earnings but are included in accumulated other comprehensive loss. These changes in fair value will be recognized into earnings as a component of sales or cost of sales when the forecasted transaction occurs. The notional contract amounts for forward contracts outstanding at
September 30, 2018
which have been accounted for as cash flow hedges totaled
$147.8 million
. Net realized gains (losses)
recognized for forward contracts accounted for as cash flow hedges approximated
$0.1 million
and
$(0.5) million
for the
three months ended
September 30, 2018 and 2017
, respectively, and
$(1.5) million
and
$0.0 million
for the
nine months ended
September 30, 2018 and 2017
, respectively. At
September 30, 2018
,
$1.7 million
of net unrealized gains on forward contracts accounted for as cash flow hedges, and included in accumulated other comprehensive loss, are expected to be recognized in earnings in the next twelve months.
We also enter into forward contracts to exchange foreign currencies for United States dollars in order to hedge our currency transaction exposures. These forward contracts settle each month at month-end, at which time we enter into new forward contracts. We have not designated these forward contracts as hedges and have not applied hedge accounting to them. The notional contract amounts for forward contracts outstanding at
September 30, 2018
which have not been designated as hedges totaled
$30.8 million
. Net realized gains (losses) recognized in connection with those forward contracts not accounted for as hedges approximated
$0.2 million
and
$(0.5) million
for the
three months ended
September 30, 2018 and 2017
, respectively, offsetting gains (losses) on our intercompany receivables of
$(0.5) million
and
$0.4 million
for the
three months ended
September 30, 2018 and 2017
, respectively. Net realized gains (losses) approximated
$0.6 million
and
$(1.2) million
for the
nine months ended
September 30, 2018 and 2017
, respectively, offsetting gains (losses) on our intercompany receivables of
$(1.2) million
and
$0.7 million
for the
nine months ended
September 30, 2018 and 2017
, respectively. These gains and losses have been recorded in selling and administrative expense in the consolidated condensed statements of comprehensive income.
We record these forward foreign exchange contracts at fair value. The following tables summarize the fair value for forward foreign exchange contracts outstanding at
September 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
Asset Fair Value
|
|
Liabilities Fair Value
|
|
Net
Fair
Value
|
Derivatives designated as hedged instruments:
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
3,787
|
|
|
$
|
(685
|
)
|
|
$
|
3,102
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
28
|
|
|
(135
|
)
|
|
(107
|
)
|
|
|
|
|
|
|
|
Total derivatives
|
$
|
3,815
|
|
|
$
|
(820
|
)
|
|
$
|
2,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
Asset Fair Value
|
|
Liabilities Fair Value
|
|
Net
Fair
Value
|
Derivatives designated as hedged instruments:
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
346
|
|
|
$
|
(5,945
|
)
|
|
$
|
(5,599
|
)
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
4
|
|
|
(78
|
)
|
|
(74
|
)
|
|
|
|
|
|
|
Total derivatives
|
$
|
350
|
|
|
$
|
(6,023
|
)
|
|
$
|
(5,673
|
)
|
Our forward foreign exchange contracts are subject to a master netting agreement and qualify for netting in the consolidated condensed balance sheets. Accordingly, at
September 30, 2018
, we have recorded the net fair value of
$2.4 million
and
$0.7 million
in prepaid expenses and other current assets and non-current other assets, respectively. At
December 31, 2017
, we have recorded the net fair value of
$5.7 million
in other current liabilities.
Fair Value Disclosure.
FASB guidance defines fair value and establishes a framework for measuring fair value and related disclosure requirements. This guidance applies when fair value measurements are required or permitted. The guidance indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. Fair value is defined based upon an exit price model.
Valuation Hierarchy.
A valuation hierarchy was established for disclosure of the inputs to the valuations used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted)
in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets in markets that are not active; inputs other than quoted prices that are observable for the asset or liability, including interest rates, yield curves and credit risks or inputs that are derived principally from, or corroborated by, observable market data through correlation. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. There have been no significant changes in the assumptions.
Valuation Techniques.
Assets and liabilities carried at fair value and measured on a recurring basis as of
September 30, 2018
consist of forward foreign exchange contracts. The Company values its forward foreign exchange contracts using quoted prices for similar assets. The most significant assumption is quoted currency rates. The value of the forward foreign exchange contract assets and liabilities were valued using Level 2 inputs and are listed in the table above.
The carrying amounts reported in our consolidated condensed balance sheets for cash and cash equivalents, accounts receivable, accounts payable and long-term debt approximate fair value.
Note 6 - Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31,
2017
|
Raw materials
|
$
|
43,474
|
|
|
$
|
41,844
|
|
Work-in-process
|
15,837
|
|
|
14,666
|
|
Finished goods
|
94,307
|
|
|
84,926
|
|
Total
|
$
|
153,618
|
|
|
$
|
141,436
|
|
Note 7 – Earnings Per Share
Basic earnings per share (“basic EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share (“diluted EPS”) gives effect to all dilutive potential shares outstanding resulting from employee stock options, restricted stock units, performance share units and stock appreciation rights ("SARs") during the period. The following table sets forth the computation of basic and diluted earnings per share for the
three and nine months ended
September 30, 2018 and 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net income
|
$
|
5,825
|
|
|
$
|
7,197
|
|
|
$
|
25,201
|
|
|
$
|
8,791
|
|
|
|
|
|
|
|
|
|
|
|
Basic – weighted average shares outstanding
|
28,124
|
|
|
27,924
|
|
|
28,096
|
|
|
27,915
|
|
|
|
|
|
|
|
|
|
Effect of dilutive potential securities
|
964
|
|
|
259
|
|
|
776
|
|
|
209
|
|
|
|
|
|
|
|
|
|
Diluted – weighted average shares outstanding
|
29,088
|
|
|
28,183
|
|
|
28,872
|
|
|
28,124
|
|
|
|
|
|
|
|
|
|
Net income (per share)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.21
|
|
|
$
|
0.26
|
|
|
$
|
0.90
|
|
|
$
|
0.31
|
|
Diluted
|
0.20
|
|
|
0.26
|
|
|
0.87
|
|
|
0.31
|
|
The shares used in the calculation of diluted EPS exclude options and SARs to purchase shares where the exercise price was greater than the average market price of common shares for the period and the effect of the inclusion would be anti-dilutive.
Such shares aggregated approximately
0.0 million
and
0.6 million
for the
three and nine months ended
September 30, 2018
, respectively, and approximately
1.3 million
and
1.2 million
for the
three and nine months ended
September 30, 2017
.
Note 8 – Goodwill and Other Intangible Assets
The changes in the net carrying amount of goodwill for the
nine
months ended
September 30, 2018
are as follows:
|
|
|
|
|
Balance as of December 31, 2017
|
$
|
401,954
|
|
|
|
Foreign currency translation
|
(977
|
)
|
|
|
Balance as of September 30, 2018
|
$
|
400,977
|
|
Assets and liabilities of acquired businesses are recorded at their estimated fair values as of the date of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses.
Other intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Weighted Average Amortization Period (Years)
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer and distributor relationships
|
29
|
$
|
214,598
|
|
|
$
|
(94,371
|
)
|
|
$
|
214,685
|
|
|
$
|
(86,137
|
)
|
|
|
|
|
|
|
|
|
|
Sales representation, marketing and promotional rights
|
25
|
149,376
|
|
|
(40,500
|
)
|
|
149,376
|
|
|
(36,000
|
)
|
|
|
|
|
|
|
|
|
|
Patents and other intangible assets
|
15
|
61,292
|
|
|
(43,700
|
)
|
|
69,668
|
|
|
(42,127
|
)
|
|
|
|
|
|
|
|
|
|
Developed technology
|
16
|
88,132
|
|
|
(6,180
|
)
|
|
62,283
|
|
|
(3,352
|
)
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and tradenames
|
|
86,544
|
|
|
—
|
|
|
86,544
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
24
|
$
|
599,942
|
|
|
$
|
(184,751
|
)
|
|
$
|
582,556
|
|
|
$
|
(167,616
|
)
|
Customer and distributor relationships, trademarks and tradenames, developed technology and patents and other intangible assets primarily represent allocations of purchase price to identifiable intangible assets of acquired businesses. Sales representation, marketing and promotional rights represent intangible assets created under our agreement with Musculoskeletal Transplant Foundation (“MTF”).
Amortization expense related to intangible assets which are subject to amortization totaled
$6.0 million
and
$5.3 million
in the
three months ended
September 30, 2018 and 2017
, respectively, and
$17.2 million
and
$15.6 million
in the
nine months ended
September 30, 2018 and 2017
, respectively, and is included as a reduction of revenue (for amortization related to our sales representation, marketing and promotional rights) and in selling and administrative expense (for all other intangible assets) in the consolidated condensed statements of comprehensive income. Included in developed technology is
$25.8 million
of earn-out consideration that is considered probable as of
September 30, 2018
associated with a prior asset acquisition. This is recorded in other current liabilities at
September 30, 2018
. This acquired developed technology has a weighted average useful life of
14
years.
During the three months ended
September 30, 2018
, the Company wrote off
$9.5 million
related to an in-process research and development asset and recorded the net charge to research and development expense. Refer to Notes 11 and 13 for further details.
The estimated intangible asset amortization expense remaining for the year ending
December 31, 2018
and for each of the five succeeding years is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization included in expense
|
|
Amortization recorded as a reduction of revenue
|
|
Total
|
Remaining, 2018
|
$
|
4,493
|
|
|
$
|
1,500
|
|
|
$
|
5,993
|
|
2019
|
17,622
|
|
|
6,000
|
|
|
23,622
|
|
2020
|
17,639
|
|
|
6,000
|
|
|
23,639
|
|
2021
|
16,686
|
|
|
6,000
|
|
|
22,686
|
|
2022
|
15,227
|
|
|
6,000
|
|
|
21,227
|
|
2023
|
14,615
|
|
|
6,000
|
|
|
20,615
|
|
Note 9 – Guarantees
We provide warranties on certain of our products at the time of sale and sell extended warranties. The standard warranty period for our capital equipment is generally
one
year and our extended warranties typically vary from one to three years. Liability under service and warranty policies is based upon a review of historical warranty and service claim experience. Adjustments are made to accruals as claim data and historical experience warrant.
Changes in the carrying amount of service and product standard warranties for the
nine months ended
September 30
, are as follows:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Balance as of January 1,
|
$
|
1,750
|
|
|
$
|
1,954
|
|
|
|
|
|
Provision for warranties
|
1,036
|
|
|
787
|
|
|
|
|
|
Claims made
|
(937
|
)
|
|
(907
|
)
|
|
|
|
|
|
Balance as of September 30,
|
$
|
1,849
|
|
|
$
|
1,834
|
|
Costs associated with extended warranty repairs are recorded as incurred and amounted to
$4.0 million
and
$2.8 million
for the
nine months ended
September 30, 2018 and 2017
, respectively.
Note 10 – Pension Plan
Net periodic pension cost consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Service cost
|
$
|
169
|
|
|
$
|
151
|
|
|
$
|
506
|
|
|
$
|
452
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost on projected benefit obligation
|
701
|
|
|
693
|
|
|
2,104
|
|
|
2,080
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets
|
(1,354
|
)
|
|
(1,325
|
)
|
|
(4,063
|
)
|
|
(3,975
|
)
|
|
|
|
|
|
|
|
|
|
|
Net amortization and deferral
|
672
|
|
|
794
|
|
|
2,017
|
|
|
2,381
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
$
|
188
|
|
|
$
|
313
|
|
|
$
|
564
|
|
|
$
|
938
|
|
We do not expect to make any pension contributions during
2018
.
Note 11 – Acquisition, Restructuring and Other Expense
Acquisition, restructuring and other expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Restructuring costs included in cost of sales
|
$
|
—
|
|
|
$
|
1,306
|
|
|
$
|
—
|
|
|
$
|
2,778
|
|
|
|
|
|
|
|
|
|
Business acquisition costs
|
$
|
1,073
|
|
|
$
|
128
|
|
|
$
|
1,073
|
|
|
$
|
1,020
|
|
Restructuring costs
|
—
|
|
|
—
|
|
|
—
|
|
|
1,347
|
|
Legal matters
|
—
|
|
|
327
|
|
|
—
|
|
|
17,041
|
|
Acquisition, restructuring and other expense included in selling and administrative expense
|
$
|
1,073
|
|
|
$
|
455
|
|
|
$
|
1,073
|
|
|
$
|
19,408
|
|
|
|
|
|
|
|
|
|
Impairment charges included in research and development expense
|
$
|
4,212
|
|
|
$
|
—
|
|
|
$
|
4,212
|
|
|
$
|
—
|
|
During the
three and nine months ended
September 30, 2018
, we recorded a
$1.1 million
charge to selling and administrative expense associated with a vacant lease related to a prior acquisition. During the
three and nine months ended
September 30, 2017
, we incurred
$0.1 million
and
$1.0 million
, respectively, in costs associated with the January 4, 2016 acquisition of SurgiQuest, Inc. The costs were associated with expensing of unvested options acquired and integration related costs.
During the
three and nine months ended
September 30, 2018
, we recorded a net charge of
$4.2 million
to research and development expense mainly associated with the impairment of an in-process research and development asset, net of the release of previously accrued contingent consideration in other current and long-term liabilities, as further described in Note 13.
During
2017
, we continued our operational restructuring plan. As part of this plan, we engaged a consulting firm to assist us in streamlining our product offering and improving our operational efficiency. As a result, we identified certain catalog numbers to be discontinued and consolidated into existing product offerings and recorded a
$1.3 million
charge during the
three months ended
September 30, 2017
to write-off inventory which no longer is offered for sale. For the
nine months ended
September 30, 2017
we incurred
$2.8 million
in costs associated with the operational restructuring. These costs were charged to cost of sales and included severance, inventory and other charges.
During the
nine months ended
September 30, 2017
, we restructured certain selling and administrative functions and incurred
$1.3 million
in costs consisting principally of severance charges.
During the
nine months ended
September 30, 2017
, we incurred
$12.2 million
in costs associated with the SurgiQuest, Inc. vs. Lexion Medical litigation verdict whereby SurgiQuest was found liable for
$2.2 million
in compensatory damages with an additional
$10.0 million
in punitive damages as further described in Note 13. These costs were paid on July 10, 2018. In addition, during the
three and nine months ended
September 30, 2017
, we incurred
$0.3 million
and
$4.8 million
, respectively, in costs associated with this litigation and other legal matters.
Note 12 — Business Segments
We are accounting and reporting for our business as a single operating segment entity engaged in the development, manufacturing and sale on a global basis of surgical devices and related equipment. Our product lines consist of orthopedic surgery and general surgery. Orthopedic surgery consists of sports medicine instrumentation and small bone, large bone and specialty powered surgical instruments as well as imaging systems for use in minimally invasive surgery procedures including 2DHD and 3DHD vision technologies and service fees related to the promotion and marketing of sports medicine allograft tissue. General surgery consists of a complete line of endo-mechanical instrumentation for minimally invasive laparoscopic and gastrointestinal procedures, a line of cardiac monitoring products as well as electrosurgical generators and related instruments. These product lines' net sales are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Orthopedic surgery
|
$
|
102,929
|
|
|
$
|
98,581
|
|
|
$
|
321,923
|
|
|
$
|
307,931
|
|
General surgery
|
99,378
|
|
|
91,536
|
|
|
295,268
|
|
|
265,906
|
|
Consolidated net sales
|
$
|
202,307
|
|
|
$
|
190,117
|
|
|
$
|
617,191
|
|
|
$
|
573,837
|
|
Note 13 – Legal Proceedings
From time to time, we are subject to claims alleging product liability, patent infringement or other claims incurred in the ordinary course of business. These may involve our United States or foreign operations, or sales by foreign distributors. Likewise, from time to time, the Company may receive an information request or subpoena from a government agency such as the Securities and Exchange Commission, Department of Justice, Equal Employment Opportunity Commission, the Occupational Safety and Health Administration, the Department of Labor, the Treasury Department or other federal and state agencies or foreign governments or government agencies. These information requests or subpoenas may or may not be routine inquiries, or may begin as routine inquiries and over time develop into enforcement actions of various types. Likewise, we receive reports of alleged misconduct from employees and third parties, which we investigate as appropriate.
Manufacturers of medical devices have been the subject of various enforcement actions relating to interactions with health care providers domestically or internationally whereby companies are claimed to have provided health care providers with inappropriate incentives to purchase their products. Similarly, the Foreign Corrupt Practices Act ("FCPA") imposes obligations on manufacturers with respect to interactions with health care providers who may be considered government officials based on their affiliation with public hospitals. The FCPA also requires publicly listed manufacturers to maintain accurate books and records, and maintain internal accounting controls sufficient to provide assurance that transactions are accurately recorded, lawful and in accordance with management's authorization. The FCPA poses unique challenges both because manufacturers operate in foreign cultures in which conduct illegal under the FCPA may not be illegal in local jurisdictions, and because, in some cases, a United States manufacturer may face risks under the FCPA based on the conduct of third parties over whom the manufacturer may not have complete control. While CONMED has not experienced any material enforcement action to date, there can be no assurance that the Company will not be subject to a material enforcement action in the future, or that the Company will not incur costs including, in the form of fees for lawyers and other consultants, that are material to the Company’s results of operations in the course of responding to a future inquiry or investigation.
Manufacturers of medical products may face exposure to significant product liability claims. To date, we have not experienced any product liability claims that have been material to our financial statements or financial condition, but any such claims arising in the future could have a material adverse effect on our business, results of operations or cash flows. We currently maintain commercial product liability insurance of
$30 million
per incident and
$30 million
in the aggregate annually, which we believe is adequate. This coverage is on a claims-made basis. There can be no assurance that claims will not exceed insurance coverage, that the carriers will be solvent or that such insurance will be available to us in the future at a reasonable cost.
We establish reserves sufficient to cover probable losses associated with any such pending claims. We do not expect that the resolution of any pending claims, investigations or reports of alleged misconduct will have a material adverse effect on our financial condition, results of operations or cash flows. There can be no assurance, however, that future claims or investigations, or the costs associated with responding to such claims, investigations or reports of misconduct, especially claims and investigations not covered by insurance, will not have a material adverse effect on our financial condition, results of operations or cash flows.
Our operations are subject, and in the past have been subject, to a number of environmental laws and regulations governing, among other things, air emissions; wastewater discharges; the use, handling and disposal of hazardous substances and wastes; soil and groundwater remediation and employee health and safety. In some jurisdictions, environmental requirements may be expected to become more stringent in the future. In the United States, certain environmental laws can impose liability for the entire cost of site restoration upon each of the parties that may have contributed to conditions at the site regardless of fault or the lawfulness of the party’s activities. While we do not believe that the present costs of environmental compliance and remediation are material, there can be no assurance that future compliance or remedial obligations would not have a material adverse effect on our financial condition, results of operations or cash flows.
In April 2017, the previously disclosed lawsuit involving a false advertising claim by Lexion Medical ("Lexion") against SurgiQuest arising prior to the acquisition of SurgiQuest by CONMED went to trial in federal court in the District of Delaware. The claims arose under the Lanham Act, as well as Delaware state laws. Lexion sought damages of
$22.0 million
for alleged lost profits and
$18.7 million
for costs related to alleged “corrective advertising,” as well as damages claimed for disgorgement of SurgiQuest’s alleged profits and attorneys' fees. On January 4, 2016, SurgiQuest became a subsidiary of CONMED, and we assumed the costs and liabilities related to the Lexion lawsuit subject to the terms of the merger agreement. On April 11, 2017, a jury returned a verdict finding SurgiQuest liable for
$2.2 million
in compensatory damages with an additional
$10.0 million
in punitive damages. These costs were recorded in selling and administrative expense during the
nine months ended
September 30, 2017
. The District Court entered judgment on April 13, 2017. SurgiQuest and Lexion each filed post-verdict motions. Lexion sought an equitable award for disgorgement of SurgiQuest’s alleged profits, for so-called corrective advertising and for attorney’s fees. CONMED sought to vacate the award of punitive damages. By memorandum decision dated May 16, 2018, the District Court denied both Lexion’s and SurgiQuest’s post-verdict motions. The period within which either Lexion or SurgiQuest was able to pursue an appeal expired in June without either party seeking to appeal the judgment. CONMED paid the judgment, together with post-judgment interest, in a total amount of
$12.3 million
on July 10, 2018.
In 2014, the Company acquired EndoDynamix, Inc. The agreement governing the terms of the acquisition provides that, if various conditions are met, certain contingent payments relating to the first commercial sale of the products (the milestone payment), as well as royalties based on sales (the revenue based payments), are due to the seller. We had notified the seller that there was a need to redesign the product, and that, as a consequence, the first commercial sale had been delayed. Consequently, the payment of contingent milestone and revenue-based payments were delayed. On January 18, 2017, the seller provided notice ("the Notice") seeking
$12.7 million
, which essentially represents the seller's view as to the sum of the projected contingent milestone and revenue-based payments on an accelerated basis. CONMED responded to the Notice denying that there was any basis for acceleration of the payments due under the acquisition agreement. On February 22, 2017, the representative of the former shareholders of EndoDynamix filed a complaint in Delaware Chancery Court claiming breach of contract with respect to the duty to commercialize the product and seeking the contingent payments on an accelerated basis. We believe that there was a substantive contractual basis to support the Company's decision to redesign the product, such that there was no legitimate basis for seeking the acceleration of the contingent payments at that time. The Company recently decided to halt the development of the EndoDynamix clip applier for a number of reasons. While we recorded a charge to write off assets and released previously accrued contingent consideration as described in Note 11, we expect to defend the claims asserted by the sellers of EndoDynamix in the Delaware Court, although there can be no assurance that we will prevail in the litigation.
Note 14 – New Accounting Pronouncements
Recently Adopted Accounting Standards
In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, along with amendments issued in 2015 and 2016, which is codified in Accounting Standards Codification ("ASC") 606. This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the company expects to receive in exchange for those goods or services. We adopted this new guidance as of January 1, 2018, applying the modified retrospective method, and it did not have a material impact on our consolidated financial statements as further described in Note 3.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this ASU require that a statement of cash flows explain the change during the period in total cash, cash equivalents
and amounts generally described as restricted cash or restricted cash equivalents.
The Company adopted this new guidance effective January 1, 2018 and it did not have a material impact on the consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-07, Compensation Retirement Benefits (ASC 715) - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires companies to record the service component of net periodic pension cost in the same income statement line as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net periodic pension cost would be presented in the income statement separately from the service cost component and outside the subtotal of income from operations, if one is presented. The Company adopted this new guidance effective January 1, 2018 and it did not have a material impact on the consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Based Compensation (ASC 718) - Scope of Modification Accounting. This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the changes are considered non-substantive. The Company adopted this new guidance effective January 1, 2018 and it did not have a material impact on the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.
This guidance requires companies to determine if costs associated with hosted cloud computing services are capitalized or expensed depending on the nature of the cost and the project stage during which they are incurred. Generally, companies will only capitalize costs related to the development and implementation of the cloud computing arrangement.
This guidance is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted in any interim period. We early adopted this new guidance, on a prospective basis, effective July 1, 2018 and it did not have a material impact on the consolidated financial statements.
Recently Issued Accounting Standards, Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), along with amendments issued in 2017 and 2018. This ASU requires lessees to record leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term.
The new standard is effective for interim and annual periods beginning after December 15, 2018 and early adoption is permitted. The Company will adopt the new standard on January 1, 2019, and anticipates applying the modified retrospective approach along with certain practical expedients.
We have completed a preliminary assessment of the impact of this ASU, which we expect to finalize during the fourth quarter. We expect the new standard to materially impact our balance sheet by requiring us to record right-of-use assets and lease liabilities related to operating leases that have not been recorded on the balance sheet under current GAAP, but we do not expect this update to have a material impact on our net income, earnings per share or cash flows.
In January 2017, the FASB issued ASU
No.
2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. This ASU removes Step 2 of the goodwill impairment test, which requires hypothetical purchase price allocation. A goodwill impairment will now be the amount by which the reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
This new guidance is effective for periods beginning after December 15, 2019, however early adoption is permitted.
The Company will be adopting this guidance in conjunction with our annual impairment testing during the fourth quarter of 2018.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU makes more financial and non-financial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess effectiveness. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting and increase transparency as to the scope and results of hedging programs. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. The Company is currently assessing the impact of this guidance on our consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). This ASU provides entities with the option to eliminate the stranded tax effects associated with the change in tax rates under the
2017 Tax Cuts and Jobs Act through a reclassification of the stranded tax effects from accumulated other comprehensive income (“AOCI”) to retained earnings. This guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted. The Company is currently assessing the impact of this guidance on our consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07 Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with accounting for employee share-based compensation. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. The Company is currently assessing the impact of this guidance on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. This update is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The Company is currently assessing the impact of this guidance on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Topic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. This ASU is effective for fiscal years beginning after December 15, 2020 and early adoption is permitted. The Company is currently assessing the impact of this guidance on our consolidated financial statements.
Note 15 – Income Taxes
On December 22, 2017 the 2017 Tax Cuts and Jobs Act (“Tax Reform”) was enacted. At
December 31, 2017
, the Company recorded estimated provisional amounts for the deemed repatriation toll charge implemented by Tax Reform, related to foreign tax credits, deferred tax revaluation amounts and deferred tax liabilities on unremitted foreign earnings. Staff Accounting Bulletin No. (SAB) 118 provides an extended measurement period to finalize the effects of Tax Reform for the period of enactment. During the three and nine months ended September 30, 2018 the Company recorded a provisional tax benefit of
$0.2 million
, primarily resulting from further analysis of the deemed repatriation toll charge and related foreign tax credits offset in part by the revaluation of certain deferred tax amounts. As the analysis of Tax Reform remains ongoing, further adjustments to the provisional amounts may impact the provision for income taxes in future periods.
FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, ("GILTI") allows for an election to account for GILTI under the deferred method which requires recognizing deferred taxes for basis differences which will impact the GILTI inclusion upon reversal or as a period cost. The Company is still evaluating this election and will complete its accounting for Tax Reform, including this election, within the measurement period prescribed by SAB 118.
Income tax expense has been recorded at an effective tax rate of
7.7%
and
16.9%
for the
three months ended
September 30, 2018 and 2017
, respectively, and at an effective tax rate of
17.0%
and
15.8%
for the
nine months ended
September 30, 2018 and 2017
, respectively. The lower effective rate for the
three months ended
September 30, 2018
, as compared to the same period in the prior year, was primarily the result of recording discrete income tax benefits associated with the provisional adjustment for Tax Reform, stock options, and other federal income tax items which reduced the effective rate by
18.5%
for the three months ended September 30, 2018 as compared to a reduction of
9.2%
for discrete items during the three months ended September 30, 2017. The higher effective rate for the
nine months ended
September 30, 2018
, as compared to the same period in the prior year, was due to increased federal tax expense resulting from adjustments to the December 31, 2017 tax balances related to Tax Reform. In addition, the lower federal statutory tax rate of
21%
enacted with Tax Reform was offset by other provisions of Tax Reform including GILTI as well as income earned in foreign jurisdictions with effective tax rates in excess of the federal statutory rate.