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 which 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, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.
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, 2018 included in our Annual Report on Form 10-K.
Note 3 - Business Acquisition
On February 11, 2019 we acquired Buffalo Filter, LLC 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. The acquisition was funded through a combination of cash on hand and long-term borrowings as further described below.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as a result of the Buffalo Filter Acquisition.
|
|
|
|
|
Cash
|
$
|
119
|
|
Other current assets
|
9,315
|
|
Current assets
|
9,434
|
|
Property, plant & equipment
|
4,036
|
|
Deferred income taxes
|
80
|
|
Goodwill
|
215,793
|
|
Customer relationships
|
124,000
|
|
Developed technology
|
9,000
|
|
Trademarks & tradenames
|
7,000
|
|
Other non-current assets
|
166
|
|
Total assets acquired
|
$
|
369,509
|
|
|
|
Current liabilities assumed
|
4,462
|
|
Total liabilities assumed
|
4,462
|
|
Net assets acquired
|
$
|
365,047
|
|
The goodwill recorded as part of the acquisition primarily represents revenue synergies, as well as operating efficiencies and cost savings. The goodwill deductible for tax purposes is $215.8 million. The weighted amortization period for intangibles
acquired is 16 years. Customer relationships, developed technology and trademarks and tradenames are being amortized over a weighted average life of 16, 10 and 20 years, respectively.
The unaudited pro forma information for the three and nine months ended September 30, 2019 and 2018, assuming Buffalo Filter Acquisition occurred as of January 1, 2018 are presented below. This information has been prepared for comparative purposes only and does not purport to be indicative of the results of operations which actually would have resulted had the Buffalo Filter acquisition occurred on the dates indicated, or which may result in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net sales
|
$
|
233,590
|
|
|
$
|
211,421
|
|
|
$
|
695,250
|
|
|
$
|
645,101
|
|
Net income (loss)
|
8,675
|
|
|
(140
|
)
|
|
26,045
|
|
|
(1,459
|
)
|
These pro forma results include certain adjustments, primarily due to increases in amortization expense due to fair value adjustments of intangible assets, increases in interest expense due to additional borrowings incurred to finance the acquisition and amortization of debt issuance costs incurred to finance the transaction, and acquisition related costs including transaction costs such as legal, accounting, valuation and other professional services as well as integration costs such as severance and retention.
Acquisition related costs included in the determination of pro forma net income for the three months ended September 30, 2018 included $0.2 million in cost of goods sold and $1.5 million in selling and administrative expense and the nine months ended September 30, 2018 included $1.3 million in cost of goods sold and $11.2 million in selling and administrative expense on the consolidated condensed statement of comprehensive income. Such amounts are excluded from the determination of pro forma net income for the three and nine months ended September 30, 2019.
Net sales associated with Buffalo Filter of $13.9 million and $33.4 million have been recorded in the consolidated condensed statement of comprehensive income for the three and nine months ended September 30, 2019, respectively. It is impracticable to determine the earnings recorded in the consolidated condensed statement of comprehensive income for the three and nine months ended September 30, 2019 as these amounts are not separately measured.
Note 4 - Revenues
The following tables present revenue disaggregated by primary geographic market where the products are sold, by product line and timing of revenue recognition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
September 30, 2019
|
|
September 30, 2018
|
|
Orthopedic Surgery
|
|
General Surgery
|
|
Total
|
|
Orthopedic Surgery
|
|
General Surgery
|
|
Total
|
Primary Geographic Markets
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
42,530
|
|
|
$
|
85,652
|
|
|
$
|
128,182
|
|
|
$
|
39,574
|
|
|
$
|
67,955
|
|
|
$
|
107,529
|
|
Americas (excluding the United States)
|
17,069
|
|
|
7,356
|
|
|
24,425
|
|
|
14,949
|
|
|
7,347
|
|
|
22,296
|
|
Europe, Middle East & Africa
|
24,692
|
|
|
14,139
|
|
|
38,831
|
|
|
23,206
|
|
|
11,492
|
|
|
34,698
|
|
Asia Pacific
|
26,037
|
|
|
16,115
|
|
|
42,152
|
|
|
25,200
|
|
|
12,584
|
|
|
37,784
|
|
Total sales from contracts with customers
|
$
|
110,328
|
|
|
$
|
123,262
|
|
|
$
|
233,590
|
|
|
$
|
102,929
|
|
|
$
|
99,378
|
|
|
$
|
202,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
|
|
|
Goods transferred at a point in time
|
$
|
101,454
|
|
|
$
|
122,620
|
|
|
$
|
224,074
|
|
|
$
|
94,640
|
|
|
$
|
98,992
|
|
|
$
|
193,632
|
|
Services transferred over time
|
8,874
|
|
|
642
|
|
|
9,516
|
|
|
8,289
|
|
|
386
|
|
|
8,675
|
|
Total sales from contracts with customers
|
$
|
110,328
|
|
|
$
|
123,262
|
|
|
$
|
233,590
|
|
|
$
|
102,929
|
|
|
$
|
99,378
|
|
|
$
|
202,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
September 30, 2019
|
|
September 30, 2018
|
|
Orthopedic Surgery
|
|
General Surgery
|
|
Total
|
|
Orthopedic Surgery
|
|
General Surgery
|
|
Total
|
Primary Geographic Markets
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
131,120
|
|
|
$
|
243,023
|
|
|
$
|
374,143
|
|
|
$
|
123,782
|
|
|
$
|
199,653
|
|
|
$
|
323,435
|
|
Americas (excluding the United States)
|
47,890
|
|
|
22,644
|
|
|
70,534
|
|
|
48,307
|
|
|
23,374
|
|
|
71,681
|
|
Europe, Middle East & Africa
|
86,199
|
|
|
45,826
|
|
|
132,025
|
|
|
80,951
|
|
|
38,420
|
|
|
119,371
|
|
Asia Pacific
|
74,313
|
|
|
39,217
|
|
|
113,530
|
|
|
68,883
|
|
|
33,821
|
|
|
102,704
|
|
Total sales from contracts with customers
|
$
|
339,522
|
|
|
$
|
350,710
|
|
|
$
|
690,232
|
|
|
$
|
321,923
|
|
|
$
|
295,268
|
|
|
$
|
617,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
|
|
|
Goods transferred at a point in time
|
$
|
312,964
|
|
|
$
|
348,972
|
|
|
$
|
661,936
|
|
|
$
|
297,096
|
|
|
$
|
294,196
|
|
|
$
|
591,292
|
|
Services transferred over time
|
26,558
|
|
|
1,738
|
|
|
28,296
|
|
|
24,827
|
|
|
1,072
|
|
|
25,899
|
|
Total sales from contracts with customers
|
$
|
339,522
|
|
|
$
|
350,710
|
|
|
$
|
690,232
|
|
|
$
|
321,923
|
|
|
$
|
295,268
|
|
|
$
|
617,191
|
|
Contract liability balances related to the sale of extended warranties to customers are as follows:
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
|
|
Contract liability
|
$
|
13,718
|
|
|
$
|
11,043
|
|
Revenue recognized during the nine months ended September 30, 2019 and September 30, 2018 from amounts included in contract liabilities at the beginning of the period were $5.5 million and $4.1 million, respectively. There were no material contract assets as of September 30, 2019 and December 31, 2018.
Note 5 – Comprehensive Income
Comprehensive income consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net income
|
$
|
6,970
|
|
|
$
|
5,825
|
|
|
$
|
13,686
|
|
|
$
|
25,201
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
Pension liability, net of income tax (income tax expense of $174 and $162 for the three months ended September 30, 2019 and 2018, respectively, and $521 and $488 for the nine months ended September 30, 2019 and 2018, respectively)
|
546
|
|
|
510
|
|
|
1,639
|
|
|
1,529
|
|
Cash flow hedging gain, net of income tax (income tax expense of $610 and $378 for the three months ended September 30, 2019 and 2018, respectively, and $135 and $2,102 for the nine months ended September 30, 2019 and 2018, respectively)
|
1,915
|
|
|
1,185
|
|
|
423
|
|
|
6,598
|
|
Foreign currency translation adjustment
|
(4,770
|
)
|
|
(384
|
)
|
|
(4,240
|
)
|
|
(5,483
|
)
|
|
|
|
|
|
|
|
|
Comprehensive income
|
$
|
4,661
|
|
|
$
|
7,136
|
|
|
$
|
11,508
|
|
|
$
|
27,845
|
|
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, 2018
|
$
|
4,085
|
|
|
$
|
(31,718
|
)
|
|
$
|
(28,104
|
)
|
|
$
|
(55,737
|
)
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications, net of tax
|
5,120
|
|
|
—
|
|
|
(4,240
|
)
|
|
880
|
|
Amounts reclassified from accumulated other comprehensive income (loss) before taxa
|
(6,193
|
)
|
|
2,160
|
|
|
—
|
|
|
(4,033
|
)
|
Income tax
|
1,496
|
|
|
(521
|
)
|
|
—
|
|
|
975
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
423
|
|
|
1,639
|
|
|
(4,240
|
)
|
|
(2,178
|
)
|
|
|
|
|
|
|
|
|
Balance, September 30, 2019
|
$
|
4,508
|
|
|
$
|
(30,079
|
)
|
|
$
|
(32,344
|
)
|
|
$
|
(57,915
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow
Hedging
Gain (Loss)
|
|
Pension
Liability
|
|
Cumulative
Translation
Adjustments
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Balance, December 31, 2017
|
$
|
(3,530
|
)
|
|
$
|
(25,813
|
)
|
|
$
|
(19,735
|
)
|
|
$
|
(49,078
|
)
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications, net of tax
|
5,462
|
|
|
—
|
|
|
(5,483
|
)
|
|
(21
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss) before taxa
|
1,498
|
|
|
2,017
|
|
|
—
|
|
|
3,515
|
|
Income tax
|
(362
|
)
|
|
(488
|
)
|
|
—
|
|
|
(850
|
)
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
6,598
|
|
|
1,529
|
|
|
(5,483
|
)
|
|
2,644
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2018
|
$
|
3,068
|
|
|
$
|
(24,284
|
)
|
|
$
|
(25,218
|
)
|
|
$
|
(46,434
|
)
|
(a) The cash flow hedging gain (loss) and pension liability accumulated other comprehensive income (loss) components are included in sales or cost of sales and as a component of net periodic pension cost, respectively. Refer to Note 6 and Note 12, respectively, for further details.
Note 6 – Fair Value of Financial Instruments
We enter into derivative instruments for risk management purposes only. We operate internationally and in the normal course of business are exposed to fluctuations in interest rates, foreign exchange rates and commodity prices. These fluctuations can increase the costs of financing, investing and operating the business. We use forward contracts, a type of derivative instrument, to manage certain foreign currency exposures.
By nature, all financial instruments involve market and credit risks. We enter into forward contracts with major investment grade financial institutions and have policies to monitor the credit risk of those counterparties. While there can be no assurance, we do not anticipate any material non-performance by any of these counterparties.
Foreign Currency Forward Contracts. We hedge forecasted intercompany sales denominated in foreign currencies through the use of forward contracts. We account for these forward contracts as cash flow hedges. To the extent these forward contracts meet hedge accounting criteria, changes in their fair value are not included in current earnings but are included in accumulated other comprehensive loss. These changes in fair value will be recognized into earnings as a component of sales or cost of sales when the forecasted transaction occurs.
We also enter into forward contracts to exchange foreign currencies for United States dollars in order to hedge our currency transaction exposures. These forward contracts settle each month at month-end, at which time we enter into new forward contracts. We have not designated these forward contracts as hedges and have not applied hedge accounting to them.
The following table presents the notional contract amounts for forward contracts outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
FASB ASC Topic 815 Designation
|
|
September 30, 2019
|
|
December 31, 2018
|
Forward exchange contracts
|
Cash flow hedge
|
|
$
|
155,877
|
|
|
$
|
155,313
|
|
Forward exchange contracts
|
Non-designated
|
|
34,457
|
|
|
39,631
|
|
The remaining time to maturity as of September 30, 2019 is within 2 years for hedge designated foreign exchange contracts and approximately 1 month for non-hedge designated forward exchange contracts.
Statement of comprehensive income presentation
Derivatives designated as cash flow hedges
Foreign exchange contracts designated as cash flow hedges had the following effects on accumulated other comprehensive income (loss) and net earnings on our consolidated condensed statement of comprehensive income and our consolidated condensed balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in AOCI
|
|
Consolidated Condensed Statements of Comprehensive Income
|
|
Amount of Gain (Loss) Reclassified from AOCI
|
|
|
Three Months Ended September 30,
|
|
|
|
Three Months Ended September 30,
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
Total Amount of Line Item Presented
|
|
|
|
|
Derivative Instrument
|
|
2019
|
|
2018
|
|
Location of amount reclassified
|
|
2019
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
4,887
|
|
|
$
|
1,710
|
|
|
Net Sales
|
|
$
|
233,590
|
|
$
|
202,307
|
|
|
$
|
2,241
|
|
|
$
|
(34
|
)
|
|
|
|
|
|
|
|
Cost of Sales
|
|
103,479
|
|
91,680
|
|
|
120
|
|
|
181
|
|
Pre-tax gain
|
|
$
|
4,887
|
|
|
$
|
1,710
|
|
|
|
|
|
|
|
$
|
2,361
|
|
|
$
|
147
|
|
Tax expense
|
|
1,181
|
|
|
413
|
|
|
|
|
|
|
|
570
|
|
|
35
|
|
Net gain
|
|
$
|
3,706
|
|
|
$
|
1,297
|
|
|
|
|
|
|
|
$
|
1,791
|
|
|
$
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in AOCI
|
|
Consolidated Condensed Statements of Comprehensive Income
|
|
Amount of Gain (Loss) Reclassified from AOCI
|
|
|
Nine Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
Total Amount of Line Item Presented
|
|
|
|
|
Derivative Instrument
|
|
2019
|
|
2018
|
|
Location of amount reclassified
|
|
2019
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
6,751
|
|
|
$
|
7,202
|
|
|
Net Sales
|
|
$
|
690,232
|
|
$
|
617,191
|
|
|
$
|
5,834
|
|
|
$
|
(1,862
|
)
|
|
|
|
|
|
|
|
Cost of Sales
|
|
307,492
|
|
280,736
|
|
|
359
|
|
|
364
|
|
Pre-tax gain (loss)
|
|
$
|
6,751
|
|
|
$
|
7,202
|
|
|
|
|
|
|
|
$
|
6,193
|
|
|
$
|
(1,498
|
)
|
Tax expense (benefit)
|
|
1,631
|
|
|
1,740
|
|
|
|
|
|
|
|
1,496
|
|
|
(362
|
)
|
Net gain (loss)
|
|
$
|
5,120
|
|
|
$
|
5,462
|
|
|
|
|
|
|
|
$
|
4,697
|
|
|
$
|
(1,136
|
)
|
At September 30, 2019, $3.9 million of net unrealized gains on forward contracts accounted for as cash flow hedges, and included in accumulated other comprehensive loss, are expected to be recognized in earnings in the next twelve months.
Derivatives not designated as cash flow hedges
Net gains and losses from derivative instruments not accounted for as hedges offset by gains and losses on our intercompany receivables on our consolidated condensed statements of comprehensive income were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
Derivative Instrument
|
|
Location on Consolidated Condensed Statements of Comprehensive Income
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on currency forward contracts
|
|
Selling and administrative expense
|
|
$
|
138
|
|
|
$
|
237
|
|
|
$
|
(355
|
)
|
|
$
|
565
|
|
Net gain (loss) on currency transaction exposures
|
|
Selling and administrative expense
|
|
$
|
(368
|
)
|
|
$
|
(459
|
)
|
|
$
|
(530
|
)
|
|
$
|
(1,172
|
)
|
Balance sheet presentation
We record these forward foreign exchange contracts at fair value. The following tables summarize the fair value for forward foreign exchange contracts outstanding at September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
Location on Consolidated Condensed Balance Sheet
|
Asset Fair Value
|
|
Liabilities Fair Value
|
|
Net
Fair
Value
|
Derivatives designated as hedged instruments:
|
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaids and other current assets
|
$
|
5,336
|
|
|
$
|
(256
|
)
|
|
$
|
5,080
|
|
Foreign exchange contracts
|
Other long-term assets
|
935
|
|
|
(70
|
)
|
|
865
|
|
|
|
$
|
6,271
|
|
|
$
|
(326
|
)
|
|
$
|
5,945
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaids and other current assets
|
15
|
|
|
(124
|
)
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
$
|
6,286
|
|
|
$
|
(450
|
)
|
|
$
|
5,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
Location on Consolidated Condensed Balance Sheet
|
Asset Fair Value
|
|
Liabilities Fair Value
|
|
Net
Fair
Value
|
Derivatives designated as hedged instruments:
|
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaids and other current assets
|
$
|
5,817
|
|
|
$
|
(431
|
)
|
|
$
|
5,386
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaids and other current assets
|
19
|
|
|
(217
|
)
|
|
(198
|
)
|
|
|
|
|
|
|
|
Total derivatives
|
|
$
|
5,836
|
|
|
$
|
(648
|
)
|
|
$
|
5,188
|
|
Our forward foreign exchange contracts are subject to a master netting agreement and qualify for netting in the consolidated condensed balance sheets.
Fair Value Disclosure. FASB guidance defines fair value and establishes a framework for measuring fair value and related disclosure requirements. This guidance applies when fair value measurements are required or permitted. The guidance indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. Fair value is defined based upon an exit price model.
Valuation Hierarchy. A valuation hierarchy was established for disclosure of the inputs to the valuations used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets in markets that are not active; inputs other than quoted prices that are observable for the asset or liability, including interest rates, yield curves and credit risks or inputs that are derived principally from, or corroborated by, observable market data through correlation. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. There have been no significant changes in the assumptions.
Valuation Techniques. Assets and liabilities carried at fair value and measured on a recurring basis as of September 30, 2019 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 7 - Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
Raw materials
|
$
|
52,104
|
|
|
$
|
45,898
|
|
Work-in-process
|
18,293
|
|
|
15,000
|
|
Finished goods
|
103,523
|
|
|
93,701
|
|
Total
|
$
|
173,920
|
|
|
$
|
154,599
|
|
Note 8 – Earnings Per Share
Basic earnings per share (“basic EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share (“diluted EPS”) gives effect to all dilutive potential shares outstanding resulting from employee stock 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, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net income
|
$
|
6,970
|
|
|
$
|
5,825
|
|
|
$
|
13,686
|
|
|
$
|
25,201
|
|
|
|
|
|
|
|
|
|
|
|
Basic – weighted average shares outstanding
|
28,353
|
|
|
28,124
|
|
|
28,280
|
|
|
28,096
|
|
|
|
|
|
|
|
|
|
Effect of dilutive potential securities
|
1,439
|
|
|
964
|
|
|
1,074
|
|
|
776
|
|
|
|
|
|
|
|
|
|
Diluted – weighted average shares outstanding
|
29,792
|
|
|
29,088
|
|
|
29,354
|
|
|
28,872
|
|
|
|
|
|
|
|
|
|
Net income (per share)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.25
|
|
|
$
|
0.21
|
|
|
$
|
0.48
|
|
|
$
|
0.90
|
|
Diluted
|
0.23
|
|
|
0.20
|
|
|
0.47
|
|
|
0.87
|
|
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 0.8 million and 0.7 million for the three and nine months ended September 30, 2019, respectively, and 0.0 million and 0.6 million for the three and nine months ended September 30, 2018, respectively. As more fully described in Note 17, our 2.625% convertible notes due in 2024 (the “Notes”) are convertible under certain circumstances, as defined in the indenture, into a combination of cash and CONMED common stock. The calculation of diluted EPS would include potential diluted shares upon conversion of the Notes when the average market price per share of our common stock for the period, is greater than the conversion price of the Notes of $88.80. We intend to settle in cash the principal outstanding and use the treasury stock method when calculating their potential dilutive effect, if any. We have entered into convertible note hedge transactions to increase the effective conversion price of the Notes to $114.92. However, our convertible note hedges are not included when calculating potential dilutive shares since their effect is always anti-dilutive.
During the three months ended September 30, 2019, our average share price exceeded the conversion price of the Notes and we included 0.2 million shares assumed to be issued if the Notes were converted in our diluted share count. During the nine
months ended September 30, 2019 our average share price has not exceeded the conversion price of the Notes; therefore, under the net share settlement method, there were no potential shares issuable under the Notes to be used in the calculation of diluted EPS.
Note 9 – Leases
The Company adopted ASU No. 2016-02, Leases (Topic 842) on January 1, 2019 and applied the modified retrospective approach to adoption whereby the standard is applied only to the current period. The Company leases various manufacturing facilities, office facilities and equipment under operating and finance leases. We determine if an arrangement is a lease at inception. Right-of-use ("ROU") assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Certain of our leases include variable lease payments, mainly when a lease is tied to an index rate. These variable lease payments are recorded as expense in the period incurred and are not material.
The Company has lease agreements with lease and non-lease components, which we account for separately. For certain equipment leases, we apply a portfolio approach to efficiently account for the operating lease ROU assets and lease liabilities. We also elected the short-term lease exemption and do not recognize leases with terms less than one year on the balance sheet. The related short-term lease expense is not material.
Our leases have remaining lease terms of one year to twelve years, some of which include options to extend the leases for up to five years, and some of which include options to terminate the leases within one year. We only account for such extensions or early terminations when it is reasonably certain we will exercise such options.
Lease costs consists of the following:
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2019
|
|
2019
|
Operating lease cost:
|
|
|
|
Straight-line lease cost
|
$
|
1,957
|
|
|
$
|
5,938
|
|
Right-of-use asset impairment cost
|
312
|
|
|
312
|
|
Total operating lease cost
|
2,269
|
|
|
6,250
|
|
Finance lease cost:
|
|
|
|
Depreciation
|
55
|
|
|
162
|
|
Interest on lease liabilities
|
6
|
|
|
19
|
|
Total finance lease cost
|
61
|
|
|
181
|
|
Total lease cost
|
$
|
2,330
|
|
|
$
|
6,431
|
|
Supplemental balance sheet information related to leases is as follows:
|
|
|
|
|
|
September 30, 2019
|
Operating leases
|
|
Other assets (net of lease impairment of $1,243)
|
$
|
17,675
|
|
|
|
Other current liabilities
|
$
|
5,384
|
|
Other long-term liabilities
|
13,953
|
|
Total operating lease liabilities
|
$
|
19,337
|
|
|
|
Finance leases
|
|
Property, plant and equipment, gross
|
$
|
1,190
|
|
Accumulated depreciation
|
(422
|
)
|
Property, plant and equipment, net
|
$
|
768
|
|
|
|
Current portion of long-term debt
|
$
|
232
|
|
Long-term debt
|
188
|
|
Total finance lease liabilities
|
$
|
420
|
|
|
|
|
|
Weighted average remaining lease term (in years)
|
|
Operating leases
|
4.33 years
|
|
Finance leases
|
3.58 years
|
|
|
|
Weighted average discount rate
|
|
Operating leases
|
4.67
|
%
|
Finance leases
|
4.96
|
%
|
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2019
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows from operating leases
|
$
|
6,391
|
|
Financing cash flows from finance leases
|
272
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
Operating leases
|
5,789
|
|
Finance leases
|
56
|
|
Maturities of lease liabilities as of September 30, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
Finance Lease
|
|
Operating Lease
|
|
|
|
|
Remaining, 2019
|
$
|
90
|
|
|
$
|
1,843
|
|
2020
|
234
|
|
|
5,662
|
|
2021
|
36
|
|
|
4,356
|
|
2022
|
86
|
|
|
3,667
|
|
2023
|
4
|
|
|
2,815
|
|
2024
|
—
|
|
|
1,968
|
|
Thereafter
|
—
|
|
|
1,117
|
|
Total lease payments
|
450
|
|
|
21,428
|
|
|
|
|
|
Less imputed interest
|
(30
|
)
|
|
(2,091
|
)
|
|
|
|
|
Total lease liabilities
|
$
|
420
|
|
|
$
|
19,337
|
|
As of September 30, 2019, we have entered into approximately $0.3 million of operating leases that have not yet commenced. As of September 30, 2019, we have entered into no additional finance leases that have not yet commenced. Maturities of lease liabilities under ASC 840 are consistent with the above disclosure.
The Company places 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. Placed equipment is loaned and subject to return if minimum single-use purchases are not met. The Company accounts for these placements as operating leases but applies a practical expedient and does not separate the nonlease and lease components from the combined component. Accordingly, the Company accounts for the combined component as a single performance obligation with revenue recognized upon shipment of the related single use-products. The cost of the equipment is amortized over its estimated useful life which is generally five years.
Note 10 – Goodwill and Other Intangible Assets
The changes in the net carrying amount of goodwill for the nine months ended September 30, 2019 are as follows:
|
|
|
|
|
Balance as of December 31, 2018
|
$
|
400,440
|
|
|
|
Goodwill resulting from business acquisition
|
215,793
|
|
|
|
Foreign currency translation
|
(465
|
)
|
|
|
Balance as of September 30, 2019
|
$
|
615,768
|
|
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. During the nine months ended September 30, 2019, the Company acquired Buffalo Filter as further described in Note 3. Goodwill resulting from the acquisition amounted to $215.8 million and acquired intangible assets including customer and distributor relationships, developed technology and trademarks and tradenames amounted to $140.0 million.
Other intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Weighted Average Amortization Period (Years)
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer and distributor relationships
|
24
|
$
|
338,463
|
|
|
$
|
(110,727
|
)
|
|
$
|
214,577
|
|
|
$
|
(97,131
|
)
|
|
|
|
|
|
|
|
|
|
Sales representation, marketing and promotional rights
|
25
|
149,376
|
|
|
(46,500
|
)
|
|
149,376
|
|
|
(42,000
|
)
|
|
|
|
|
|
|
|
|
|
Patents and other intangible assets
|
15
|
69,553
|
|
|
(45,895
|
)
|
|
61,473
|
|
|
(44,242
|
)
|
|
|
|
|
|
|
|
|
|
Developed technology
|
16
|
106,604
|
|
|
(11,625
|
)
|
|
91,965
|
|
|
(7,369
|
)
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and tradenames
|
|
86,544
|
|
|
—
|
|
|
86,544
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
22
|
$
|
750,540
|
|
|
$
|
(214,747
|
)
|
|
$
|
603,935
|
|
|
$
|
(190,742
|
)
|
Customer and distributor relationships, trademarks and tradenames, developed technology and patents and other intangible assets primarily represent allocations of purchase price to identifiable intangible assets of acquired businesses. Sales representation, marketing and promotional rights represent intangible assets created under our agreement with Musculoskeletal Transplant Foundation (“MTF”).
Amortization expense related to intangible assets which are subject to amortization totaled $8.4 million and $6.0 million in the three months ended September 30, 2019 and 2018, respectively, and $24.1 million and $17.2 million in the nine months ended September 30, 2019 and 2018, 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 $8.3 million of earn-out consideration that is considered probable as of September 30, 2019 associated with a prior asset acquisition. This is recorded in other current liabilities at September 30, 2019.
The estimated intangible asset amortization expense remaining for the year ending December 31, 2019 and for each of the five succeeding years is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization included in expense
|
|
Amortization recorded as a reduction of revenue
|
|
Total
|
Remaining, 2019
|
$
|
6,635
|
|
|
$
|
1,500
|
|
|
$
|
8,135
|
|
2020
|
27,716
|
|
|
6,000
|
|
|
33,716
|
|
2021
|
26,925
|
|
|
6,000
|
|
|
32,925
|
|
2022
|
25,776
|
|
|
6,000
|
|
|
31,776
|
|
2023
|
24,922
|
|
|
6,000
|
|
|
30,922
|
|
2024
|
24,158
|
|
|
6,000
|
|
|
30,158
|
|
Note 11 – Guarantees
We provide warranties on certain of our products at the time of sale and sell extended warranties. The standard warranty period for our capital equipment is generally 1 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:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Balance as of January 1,
|
$
|
1,798
|
|
|
$
|
1,750
|
|
|
|
|
|
Provision for warranties
|
1,495
|
|
|
1,036
|
|
Claims made
|
(1,034
|
)
|
|
(937
|
)
|
|
|
|
|
|
Balance as of September 30,
|
$
|
2,259
|
|
|
$
|
1,849
|
|
Costs associated with extended warranty repairs are recorded as incurred and amounted to $4.0 million for both the nine months ended September 30, 2019 and 2018.
Note 12 – Pension Plan
Net periodic pension cost consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Service cost
|
$
|
253
|
|
|
$
|
169
|
|
|
$
|
759
|
|
|
$
|
506
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost on projected benefit obligation
|
782
|
|
|
701
|
|
|
2,346
|
|
|
2,104
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets
|
(1,181
|
)
|
|
(1,354
|
)
|
|
(3,543
|
)
|
|
(4,063
|
)
|
|
|
|
|
|
|
|
|
|
|
Net amortization and deferral
|
720
|
|
|
672
|
|
|
2,160
|
|
|
2,017
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
$
|
574
|
|
|
$
|
188
|
|
|
$
|
1,722
|
|
|
$
|
564
|
|
We do not expect to make any pension contributions during 2019. Non-service cost of $0.3 million and $1.0 million are included in other expense in the consolidated condensed statement of comprehensive income for the three and nine months ended September 30, 2019, respectively.
Note 13 – Acquisition and Other Expense
Acquisition and other expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
Manufacturing consolidation costs
|
$
|
1,430
|
|
|
$
|
—
|
|
|
$
|
1,430
|
|
|
$
|
—
|
|
Business acquisition costs
|
171
|
|
|
—
|
|
|
1,335
|
|
|
—
|
|
Acquisition and other expense included in cost of sales
|
$
|
1,601
|
|
|
$
|
—
|
|
|
$
|
2,765
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Business acquisition costs included in selling and administrative expense
|
$
|
1,490
|
|
|
$
|
1,073
|
|
|
$
|
11,196
|
|
|
$
|
1,073
|
|
|
|
|
|
|
|
|
|
Impairment charges included in research and development expense
|
$
|
—
|
|
|
$
|
4,212
|
|
|
$
|
—
|
|
|
$
|
4,212
|
|
|
|
|
|
|
|
|
|
Debt refinancing costs included in other expense
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,904
|
|
|
$
|
—
|
|
During the three and nine months ended September 30, 2019, we incurred $1.4 million in costs related to the consolidation of certain manufacturing operations. These costs mainly related to severance and were charged to costs of sales.
During the three and nine months ended September 30, 2019, we incurred $0.2 million and $1.3 million, respectively, in costs for inventory adjustments and other costs associated with the acquisition of Buffalo Filter as further described in Note 3. These costs were charged to cost of sales.
During the three and nine months ended September 30, 2019, we incurred $1.5 million and $11.2 million in costs associated with the February 11, 2019 acquisition of Buffalo Filter as further described in Note 3 that were included in selling and administrative expense. These costs include investment banking fees in the first quarter of 2019, and, consulting fees, legal fees, severance and integration related costs in the three and nine months ended September 30, 2019. 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 building under lease from a prior acquisition.
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 15.
During the nine months ended September 30, 2019, we incurred 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 recorded a loss on the early extinguishment of debt of $0.3 million in conjunction with the sixth amended and restated senior credit agreement as further described in Note 17.
Note 14 — Business Segment
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,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Orthopedic surgery
|
$
|
110,328
|
|
|
$
|
102,929
|
|
|
$
|
339,522
|
|
|
$
|
321,923
|
|
General surgery
|
123,262
|
|
|
99,378
|
|
|
350,710
|
|
|
295,268
|
|
Consolidated net sales
|
$
|
233,590
|
|
|
$
|
202,307
|
|
|
$
|
690,232
|
|
|
$
|
617,191
|
|
Note 15 – Legal Proceedings
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, if we receive reports of alleged misconduct from employees and third parties, 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, as well as patent infringement and other claims incurred in the ordinary course of business. To date, we have not experienced any 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.
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. Likewise, the operations of our suppliers and sterilizers are subject to similar environmental laws and regulations. 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 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. In 2016, we 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. In the third quarter of 2018, the Company decided to halt the development of the EndoDynamix clip applier. While we previously recorded a charge to write off assets and released a previously accrued contingent consideration liability, 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.
We record reserves sufficient to cover probable and estimable 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.
Note 16 – New Accounting Pronouncements
Recently Adopted Accounting Standards
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 expense 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-of-use ("ROU") asset for the right to use the underlying asset for the lease term.
The Company adopted the new standard on January 1, 2019, and applied the modified retrospective approach along with the package of transition practical expedients. The Company has lease agreements with lease and non-lease components, which we account for separately. For certain equipment leases, we apply a portfolio approach to efficiently account for the operating lease ROU assets and lease liabilities. We also elected the short-term lease exemption and do not recognize leases with terms less than one year on the balance sheet. The related short-term lease expense is not material. On January 1, 2019, we recorded initial right-of-use assets and lease liabilities, that were previously unrecorded under prior GAAP, of $17.9 million. Operating lease ROU assets are included in other assets and lease liabilities are included in other current liabilities and other long-term liabilities. Our accounting for finance leases, which were capital leases under prior GAAP, remained substantially unchanged. Finance leases are included in property and equipment, current portion of long-term debt and long-term debt in our consolidated balance sheets. This update did not have a material impact on our net income, earnings per share or cash flows. Refer to Note 9 for further detail on leases.
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. We adopted this update on January 1, 2019 and it did not have a material impact on our consolidated financial statements.
In August 2018, the SEC adopted a final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, that amends certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. The amendments also expanded the disclosure requirements on the analysis of shareholders' equity for interim financial statements, in which registrants must now analyze changes in shareholders’ equity, in the form of reconciliation, for the current and comparative year-to-date periods, with subtotals for each interim period. This final rule was effective on November 5, 2018. The Company
adopted all relevant disclosure requirements during the fourth quarter of 2018, with the exception of the shareholders’ equity interim disclosures, which was adopted as of January 1, 2019.
Recently Issued Accounting Standards, Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, along with subsequent amendments issued in 2019. This ASU requires instruments measured at amortized cost, including accounts receivable, to be presented at the net amount expected to be collected. The new model requires an entity to estimate credit losses based on historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. This ASU is effective for fiscal years beginning after December 31, 2019 and early adoption is permissible during any interim period after December 31, 2018. The Company will adopt the new standard on January 1, 2020. We performed an initial assessment of the impact of adopting this guidance and we do not expect the update to have a material impact 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 ASU 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 17 - Long-Term Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
Revolving line of credit
|
$
|
247,000
|
|
|
$
|
312,000
|
|
Term loan, net of deferred debt issuance costs of $1,627 and $311 in 2019 and 2018, respectively
|
256,748
|
|
|
144,064
|
|
2.625% convertible notes, net of deferred debt issuance costs of $9,421 and unamortized discount of $45,576 in 2019
|
290,003
|
|
|
—
|
|
Financing leases
|
420
|
|
|
—
|
|
Mortgage notes
|
—
|
|
|
836
|
|
Total debt
|
794,171
|
|
|
456,900
|
|
Less: Current portion
|
13,482
|
|
|
18,336
|
|
Total long-term debt
|
$
|
780,689
|
|
|
$
|
438,564
|
|
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 expire 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. Interest rates are at LIBOR plus an interest rate margin of 1.750% (3.813% at September 30, 2019). For those borrowings where we elect to use the alternate base rate, the initial base rate will be the greatest of (i) the Prime Rate, (ii) the Federal Funds Rate plus 0.50% or (iii) the one-month Eurocurrency Rate plus 1.00%, plus, in each case, an interest rate margin.
There were $258.4 million in borrowings outstanding on the term loan facility as of September 30, 2019. There were $247.0 million in borrowings outstanding under the revolving credit facility as of September 30, 2019. Our available borrowings on the revolving credit facility at September 30, 2019 were $335.5 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 September 30, 2019. 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.
Our effective borrowing rate for nonconvertible debt at the time of issuance of the Notes was estimated to be 6.14%, which resulted in $51.6 million of the $345.0 million aggregate principal amount of Notes issued, or $39.1 million after taxes, being attributable to equity. For the three and nine months ended September 30, 2019, we have recorded interest expense related to the amortization of debt discount on the Notes of $2.3 million and $6.0 million, respectively, at the effective interest rate of 6.14%. The debt discount on the Notes is being amortized through February 2024. For the three and nine months ended September 30, 2019, we have recorded interest expense on the Notes of $2.3 million and $6.0 million, respectively, at the contractual coupon rate of 2.625%.
In connection with the offering of the Notes, we entered into convertible note hedge transactions with a number of financial institutions (each, an “option counterparty”). The convertible note hedge transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Notes, the number of shares of our common stock underlying the Notes. Concurrently with entering into the convertible note hedge transactions, we also entered into separate warrant transactions with each option counterparty whereby we sold to such option counterparty warrants to purchase, subject to customary anti-dilution adjustments, the same number of shares of our common stock.
The convertible note hedge transactions are expected generally to reduce the potential dilution upon conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be, in the event that the market price per share of our common stock, as measured under the terms of the convertible note hedge transactions, is greater than the strike price ($114.92) of the convertible note hedge transactions, which initially corresponds to the conversion price of the Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Notes. If, however, the market price per share of our common stock, as measured under the terms of the warrant transactions, exceeds the strike price of the warrants, there would nevertheless be dilution to the extent that such market price exceeds the strike price of the warrants.
During the three months ended June 30, 2019, we paid in full our mortgage note in connection with the Largo, Florida property and facilities.
The scheduled maturities of long-term debt outstanding at September 30, 2019 are as follows:
|
|
|
|
|
Remaining, 2019
|
$
|
3,312
|
|
2020
|
13,250
|
|
2021
|
18,219
|
|
2022
|
24,844
|
|
2023
|
445,750
|
|
2024
|
345,000
|
|