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CONMED Corp - Quarter Report: 2020 March (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended
Commission File Number
March 31, 2020
001-39218

CONMED CORPORATION
(Exact name of the registrant as specified in its charter)

New York
16-0977505
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
 
 
525 French Road
Utica,
New York
13502
(Address of principal executive offices)
(Zip Code)

(315) 797-8375
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $0.01 par value
CNMD
NYSE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒   No ☐

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

Yes ☒   No ☐

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

Large accelerated filer ☒    Accelerated filer ☐    Non-accelerated filer ☐

Smaller reporting company ☐    Emerging growth company ☐

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

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

The number of shares outstanding of registrant's common stock, as of April 27, 2020 is 28,528,214 shares.


CONMED CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2020

PART I FINANCIAL INFORMATION
Item Number
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I FINANCIAL INFORMATION
Item 1.
CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands except per share amounts)
 
 
Three Months Ended
 
March 31,
 
2020
 
2019
Net sales
$
214,010

 
$
218,378

 
 
 
 
Cost of sales
94,851

 
96,940

 
 
 
 
Gross profit
119,159

 
121,438

 
 
 
 
Selling and administrative expense
95,867

 
99,226

 
 
 
 
Research and development expense
10,120

 
10,575

 
 
 
 
  Operating expenses
105,987

 
109,801

 
 
 
 
Income from operations
13,172

 
11,637

 
 
 
 
Interest expense
9,592

 
9,369

 
 
 
 
Other expense
89

 
4,225

 
 
 
 
Income (loss) before income taxes
3,491

 
(1,957
)
 
 
 
 
Benefit from income taxes
(2,436
)
 
(2,978
)
 
 
 
 
Net income
$
5,927

 
$
1,021

 
 
 
 
Comprehensive income (loss)
$
(1,121
)
 
$
1,096

 
 
 
 
 
 
 
 
Per share data:
 
 
 

 
 
 
 
Net income
 
 
 

Basic
$
0.21

 
$
0.04

Diluted
0.20

 
0.04

 
 
 
 
Weighted average common shares
 
 
 

Basic
28,478

 
28,173

Diluted
29,707

 
29,034


 See notes to consolidated condensed financial statements.

1

CONMED CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited, in thousands except share and per share amounts)
 
 
March 31,
2020
 
December 31,
2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
24,309

 
$
25,856

Accounts receivable, net
166,504

 
189,097

Inventories
174,538

 
164,616

Prepaid expenses and other current assets
27,816

 
17,794

Total current assets
393,167

 
397,363

Property, plant and equipment, net
114,234

 
118,883

Goodwill
615,682

 
618,042

Other intangible assets, net
525,022

 
532,800

Other assets
102,867

 
108,007

Total assets
$
1,750,972

 
$
1,775,095

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 

Current liabilities:
 
 
 

Current portion of long-term debt
$
13,571

 
$
13,596

Accounts payable
57,379

 
55,968

Accrued compensation and benefits
34,827

 
53,690

Other current liabilities
54,227

 
64,833

Total current liabilities
160,004

 
188,087

 
 
 
 
Long-term debt
772,630

 
755,211

Deferred income taxes
72,327

 
74,488

Other long-term liabilities
44,376

 
46,842

Total liabilities
1,049,337

 
1,064,628

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Shareholders' equity:
 
 
 

Preferred stock, par value $ .01 per share;
 
 
 

authorized 500,000 shares; none outstanding
—

 
—

Common stock, par value $ .01 per share;
100,000,000 shares authorized; 31,299,194 shares
issued in 2020 and 2019, respectively
313

 
313

Paid-in capital
374,620

 
379,324

Retained earnings
471,068

 
470,844

Accumulated other comprehensive loss
(66,325
)
 
(59,277
)
Less: 2,780,667 and 2,876,729 shares of common stock
in treasury, at cost in 2020 and 2019, respectively
(78,041
)
 
(80,737
)
Total shareholders’ equity
701,635

 
710,467

Total liabilities and shareholders’ equity
$
1,750,972

 
$
1,775,095


 See notes to consolidated condensed financial statements.

2


CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited, in thousands except per share amounts)

 
Common Stock
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury
Stock
Shareholders’
Equity
 
Shares
Amount
Balance at December 31, 2019
31,299

$
313

$
379,324

$
470,844

$
(59,277
)
$
(80,737
)
$
710,467

Common stock issued under employee plans
 

 

(7,736
)
 
 

2,696

(5,040
)
Stock-based compensation
 

 

3,032

 

 

 

3,032

Dividends on common stock ($0.20 per share)
 
 
 
(5,703
)
 
 
(5,703
)
Comprehensive income (loss):
 
 
 
 
 
 


Foreign currency translation adjustments
 
 
 
 
(9,988
)
 
 
Pension liability, net
 
 
 
 
535

 
 
Cash flow hedging gain, net
 
 
 
 
2,405

 
 
Net income
 
 
 
5,927

 
 
 
Total comprehensive loss
 
 
 
 
 
 
(1,121
)
Balance at March 31, 2020
31,299

$
313

$
374,620

$
471,068

$
(66,325
)
$
(78,041
)
$
701,635

 
Common Stock
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury
Stock
Shareholders’
Equity
 
Shares
Amount
Balance at December 31, 2018
31,299

$
313

$
341,738

$
464,851

$
(55,737
)
$
(88,895
)
$
662,270

Common stock issued under employee plans
 

 

(769
)
 
 

2,517

1,748

Stock-based compensation
 

 

2,703

 

 

 

2,703

Dividends on common stock ($0.20 per share)
 
 
 
(5,643
)
 
 
(5,643
)
Convertible notes discount, net
 
 
39,145

 
 
 
39,145

Convertible notes hedge, net
 
 
(38,829
)
 
 
 
(38,829
)
Issuance of warrants
 
 
30,567

 
 
 
30,567

Comprehensive income (loss):
 
 
 
 
 
 


Foreign currency translation adjustments
 
 
 
 
(578
)
 
 
Pension liability, net
 
 
 
 
547

 
 
Cash flow hedging gain, net
 
 
 
 
106

 
 
Net income
 
 
 
1,021

 
 
 
Total comprehensive income
 
 
 
 
 
 
1,096

Balance at March 31, 2019
31,299

$
313

$
374,555

$
460,229

$
(55,662
)
$
(86,378
)
$
693,057



See notes to consolidated condensed financial statements.


3

CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Three Months Ended
 
March 31,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income
$
5,927

 
$
1,021

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 

Depreciation
4,646

 
4,442

Amortization of debt discount
2,264

 
1,510

Amortization of deferred debt issuance costs
819

 
697

Amortization
13,776

 
12,208

Stock-based compensation
3,032

 
2,703

Deferred income taxes
(2,742
)
 
(4,699
)
Loss on early extinguishment of debt
—

 
300

Increase (decrease) in cash flows from changes in assets and liabilities:
 

 
 

Accounts receivable
19,057

 
13,733

Inventories
(12,313
)
 
(11,971
)
Accounts payable
1,705

 
(1,776
)
Accrued compensation and benefits
(18,397
)
 
(13,695
)
Other assets
(7,260
)
 
(10,047
)
Other liabilities
(6,793
)
 
1,654

 
(2,206
)
 
(4,941
)
Net cash provided by (used in) operating activities
3,721

 
(3,920
)
 
 
 
 
Cash flows from investing activities:
 
 
 

Purchases of property, plant and equipment
(2,825
)
 
(4,022
)
Payments related to business and asset acquisitions, net of cash acquired
(3,852
)
 
(364,928
)
Net cash used in investing activities
(6,677
)
 
(368,950
)
 
 
 
 
Cash flows from financing activities:
 
 
 

Payments on term loan
(3,313
)
 
(144,375
)
Proceeds from term loan
—

 
265,000

Payments on revolving line of credit
(41,000
)
 
(342,000
)
Proceeds from revolving line of credit
59,000

 
299,000

Proceeds from convertible notes
—

 
345,000

Payments related to contingent consideration
(1,133
)
 
(2,859
)
Payments related to debt issuance costs
—

 
(16,210
)
Dividends paid on common stock
(5,683
)
 
(5,626
)
Purchases of convertible notes hedges
—

 
(51,198
)
Proceeds from issuance of warrants
—

 
30,567

Other, net
(5,132
)
 
1,655

Net cash provided by financing activities
2,739

 
378,954

 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(1,330
)
 
(188
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(1,547
)
 
5,896

 
 
 
 
Cash and cash equivalents at beginning of period
25,856

 
17,511

 
 
 
 
Cash and cash equivalents at end of period
$
24,309

 
$
23,407

 
 
 
 
Non-cash investing and financing activities:
 
 
 
   Dividends payable
$
5,703

 
$
5,643


See notes to consolidated condensed financial statements.

4

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

Note 1 – Operations

CONMED Corporation (“CONMED”, the “Company”, “we” or “us”) is a medical technology company that provides surgical devices and equipment for minimally invasive procedures.  The Company’s products are used by surgeons and 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 to fairly present the results for the periods presented. The consolidated condensed financial statements herein consist of all wholly-owned domestic and foreign subsidiaries with all significant intercompany transactions eliminated. Results for the period ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

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, 2019 included in our Annual Report on Form 10-K.

Use of Estimates

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

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require an update to our estimates or judgments or a revision of the carrying value of our assets or liabilities as of April 30, 2020, the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.

Note 3 - 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 business combination was funded through a combination of cash on hand and long-term borrowings.

The unaudited pro forma information for the three months ended March 31, 2019, assuming the 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 March 31,
 
2019
Net sales
$
223,397

Net income
8,745


 
These pro forma results include certain adjustments, primarily due to increases in amortization expense due to fair value

5

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 excluded from the determination of pro forma net income for the three months ended March 31, 2019 included $0.7 million in cost of goods sold and $7.2 million in selling and administrative expense on the consolidated condensed statement of comprehensive income.

Net sales associated with Buffalo Filter of $6.1 million have been recorded in the consolidated condensed statement of comprehensive income for the three months ended March 31, 2019. It is impracticable to determine the earnings recorded in the consolidated condensed statement of comprehensive income for the three months ended March 31, 2019 as these amounts are not separately measured.

In conjunction with the December 2019 acquisition of a distributor, we paid $3.3 million during the three months ended March 31, 2020.

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
 
March 31, 2020
 
March 31, 2019
 
Orthopedic Surgery
 
General Surgery
 
Total
 
Orthopedic Surgery
 
General Surgery
 
Total
Primary Geographic Markets
 
 
 
 
 
 
 
 
 
 
 
United States
$
37,039

 
$
81,808

 
$
118,847

 
$
45,256

 
$
71,770

 
$
117,026

Americas (excluding the United States)
15,802

 
7,979

 
23,781

 
15,042

 
7,462

 
22,504

Europe, Middle East & Africa
25,907

 
16,615

 
42,522

 
30,402

 
15,930

 
46,332

Asia Pacific
20,535

 
8,325

 
28,860

 
22,737

 
9,779

 
32,516

Total sales from contracts with customers
$
99,283

 
$
114,727

 
$
214,010

 
$
113,437

 
$
104,941

 
$
218,378

 
 
 
 
 
 
 
 
 
 
 
 
Timing of Revenue Recognition
 
 
 
 
 
 
 
 
 
 
 
Goods transferred at a point in time
$
90,553

 
$
113,901

 
$
204,454

 
$
104,739

 
$
104,425

 
$
209,164

Services transferred over time
8,730

 
826

 
9,556

 
8,698

 
516

 
9,214

Total sales from contracts with customers
$
99,283

 
$
114,727

 
$
214,010

 
$
113,437

 
$
104,941

 
$
218,378



Contract liability balances related to the sale of extended warranties to customers are as follows:
 
March 31, 2020
 
December 31, 2019
 
 
 
 
Contract liability
$
14,550

 
$
14,276



Revenue recognized during the three months ended March 31, 2020 and March 31, 2019 from amounts included in contract liabilities at the beginning of the period were $3.0 million and $2.3 million, respectively. There were no material contract assets as of March 31, 2020 and December 31, 2019.








6

Note 5 – Comprehensive Income

Comprehensive income consists of the following:
 
 
Three Months Ended March 31,
 
2020
 
2019
Net income
$
5,927

 
$
1,021

 
 
 
 
Other comprehensive income (loss):
 
 
 
Pension liability, net of income tax (income tax expense of $170 and $173 for the three months ended March 31, 2020 and 2019, respectively)
535

 
547

Cash flow hedging gain, net of income tax (income tax expense of $766 and $34 for the three months ended March 31, 2020 and 2019, respectively)
2,405

 
106

Foreign currency translation adjustment
(9,988
)
 
(578
)
 
 
 
 
Comprehensive income (loss)
$
(1,121
)
 
$
1,096



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, 2019
$
493

 
$
(31,691
)
 
$
(28,079
)
 
$
(59,277
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications, net of tax
3,257

 
—

 
(9,988
)
 
(6,731
)
Amounts reclassified from accumulated other comprehensive income (loss) before taxa
(1,124
)
 
705

 
—

 
(419
)
Income tax
272

 
(170
)
 
—

 
102

 
 
 
 
 
 
 
 
Net current-period other comprehensive income (loss)
2,405

 
535

 
(9,988
)
 
(7,048
)
 
 
 
 
 
 
 
 
Balance, March 31, 2020
$
2,898

 
$
(31,156
)
 
$
(38,067
)
 
$
(66,325
)

 
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
1,318

 
—

 
(578
)
 
740

Amounts reclassified from accumulated other comprehensive income (loss) before taxa
(1,598
)
 
720

 
—

 
(878
)
Income tax
386

 
(173
)
 
—

 
213

 
 
 
 
 
 
 
 
Net current-period other comprehensive income (loss)
106

 
547

 
(578
)
 
75

 
 
 
 
 
 
 
 
Balance, March 31, 2019
$
4,191

 
$
(31,171
)
 
$
(28,682
)
 
$
(55,662
)
(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.

7


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

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

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

 
 
 
As of
 
FASB ASC Topic 815 Designation
 
March 31, 2020
 
December 31, 2019
Forward exchange contracts
Cash flow hedge
 
$
156,229

 
$
156,818

Forward exchange contracts
Non-designated
 
37,819

 
33,867



The remaining time to maturity as of March 31, 2020 is within two years for hedge designated foreign exchange contracts and approximately one month for non-hedge designated forward exchange contracts.


8

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 statements of comprehensive income and our consolidated condensed balance sheets:
 
 
Amount of Gain Recognized in AOCI
 
Consolidated Condensed Statements of Comprehensive Income
 
Amount of Gain (Loss) Reclassified from AOCI
 
 
Three Months Ended March 31,
 
 
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
 
 
 
 
 
 
 
Total Amount of Line Item Presented
 
 
 
 
Derivative Instrument
 
2020
 
2019
 
Location of amount reclassified
 
2020
2019
 
2020
 
2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
$
4,295

 
$
1,738

 
Net Sales
 
$
214,010

$
218,378

 
$
1,201

 
$
1,497

 
 
 
 
 

 
Cost of Sales
 
94,851

96,940

 
(77
)
 
101

Pre-tax gain
 
$
4,295

 
$
1,738

 
 
 
 
 
 
$
1,124

 
$
1,598

Tax expense
 
1,038

 
420

 
 
 
 
 
 
272

 
386

Net gain
 
$
3,257

 
$
1,318

 
 
 
 
 
 
$
852

 
$
1,212



At March 31, 2020, $2.7 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.

Derivatives not designated as cash flow hedges

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

 
 
 
 
Three Months Ended March 31,
Derivative Instrument
 
Location on Consolidated Condensed Statements of Comprehensive Income
 
2020
 
2019
 
 
 
 
 
 
 
Net loss on currency forward contracts
 
Selling and administrative expense
 
$
(245
)
 
$
(181
)
Net loss on currency transaction exposures
 
Selling and administrative expense
 
$
(191
)
 
$
(229
)



9

Balance sheet presentation

We record these forward foreign exchange contracts at fair value. The following tables summarize the fair value for forward foreign exchange contracts outstanding at March 31, 2020 and December 31, 2019:
March 31, 2020
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
$
5,329

 
$
(1,790
)
 
$
3,539

Foreign exchange contracts
Other long-term assets
1,190

 
(907
)
 
283

 
 
$
6,519

 
$
(2,697
)
 
$
3,822

 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 

 
 

 
 

Foreign exchange contracts
Other current liabilities
25

 
(255
)
 
(230
)
 
 
 
 
 
 


Total derivatives
 
$
6,544

 
$
(2,952
)
 
$
3,592

December 31, 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
$
2,307

 
$
(1,341
)
 
$
966

Foreign exchange contracts
Other long-term liabilities
38

 
(353
)
 
(315
)
 
 
$
2,345

 
$
(1,694
)
 
$
651

 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 

 
 

 
 
Foreign exchange contracts
Other current liabilities
22

 
(159
)
 
(137
)
 
 
 
 
 
 
 
Total derivatives
 
$
2,367

 
$
(1,853
)
 
$
514



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 March 31, 2020 consist of forward foreign exchange contracts. The Company values its forward foreign exchange contracts using quoted

10

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:
 
March 31,
2020
 
December 31,
2019
Raw materials
$
54,003

 
$
51,103

Work-in-process
15,062

 
15,142

Finished goods
105,473

 
98,371

Total
$
174,538

 
$
164,616


 
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 months ended March 31, 2020 and 2019:


Three Months Ended March 31,
 
2020
 
2019
Net income
$
5,927

 
$
1,021


 
 


Basic – weighted average shares outstanding
28,478

 
28,173


 
 
 
Effect of dilutive potential securities
1,229

 
861


 
 
 
Diluted – weighted average shares outstanding
29,707

 
29,034


 
 
 
Net income (per share)
 

 
 

Basic
$
0.21

 
$
0.04

Diluted
0.20

 
0.04


 
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 1.1 million for the three months ended March 31, 2020 and 0.3 million for the three months ended March 31, 2019. 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 notes hedge transactions to increase the effective conversion price of the Notes to $114.92.  However, our convertible notes hedges are not included when calculating potential dilutive shares since their effect is always anti-dilutive.


11

During the three months ended March 31, 2020, our average share price exceeded the conversion price of the Notes and we included 0.1 million shares assumed to be issued if the Notes were converted in our diluted share count. During the three months ended March 31, 2019, our average share price had 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 – Goodwill and Other Intangible Assets

The changes in the net carrying amount of goodwill for the three months ended March 31, 2020 are as follows:
Balance as of December 31, 2019
$
618,042

 
 
Goodwill adjustment resulting from business acquisition
(1,009
)
 
 
Foreign currency translation
(1,351
)
 
 
Balance as of March 31, 2020
$
615,682


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 three months ended March 31, 2020, the Company recorded a measurement period adjustment related to a prior business combination.

Other intangible assets consist of the following:
 
March 31, 2020
 
December 31, 2019
 
Weighted Average Amortization Period (Years)
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Intangible assets with definite lives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer and distributor relationships
24
$
342,359

 
$
(120,072
)
 
$
342,568

 
$
(115,311
)
 
 
 
 
 
 
 
 
 
Sales representation, marketing and promotional rights
25
149,376

 
(49,500
)
 
149,376

 
(48,000
)
 
 
 
 
 
 
 
 
 
Patents and other intangible assets
15
71,582

 
(47,066
)
 
70,646

 
(46,456
)
 
 
 
 
 
 
 
 
 
Developed technology
16
106,604

 
(14,805
)
 
106,604

 
(13,171
)
 
 
 
 
 
 
 
 
 
Intangible assets with indefinite lives:
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
Trademarks and tradenames
 
86,544

 
—

 
86,544

 
—

 
 
 
 
 
 
 
 
 
 
22
$
756,465

 
$
(231,443
)
 
$
755,738

 
$
(222,938
)


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 $8.5 million and $7.4 million in the three months ended March 31, 2020 and 2019, 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

12

intangible assets) in the consolidated condensed statements of comprehensive income. Included in developed technology is $6.4 million of earn-out consideration that is considered probable as of March 31, 2020 associated with a prior asset acquisition. This is recorded in other current liabilities at March 31, 2020.
 
The estimated intangible asset amortization expense remaining for the year ending December 31, 2020 and for each of the five succeeding years is as follows:
 
 
Amortization included in expense
 
Amortization recorded as a reduction of revenue
 
Total
Remaining, 2020
$
21,055

 
$
4,500

 
$
25,555

2021
27,453

 
6,000

 
33,453

2022
26,299

 
6,000

 
32,299

2023
25,443

 
6,000

 
31,443

2024
24,705

 
6,000

 
30,705

2025
24,957

 
6,000

 
30,957



Note 10 - Long-Term Debt

Long-term debt consists of the following:
 
March 31, 2020
 
December 31, 2019
Revolving line of credit
$
238,000

 
$
220,000

Term loan, net of deferred debt issuance costs of $1,428 and $1,528 in 2020 and 2019, respectively
250,322

 
253,535

2.625% convertible notes, net of deferred debt issuance costs of $6,807 and $7,252 in 2020 and 2019, respectively, and unamortized discount of $41,048 and $43,312 in 2020 and 2019, respectively
297,145

 
294,436

Financing leases
734

 
836

Total debt
786,201

 
768,807

Less:  Current portion
13,571

 
13,596

Total long-term debt
$
772,630

 
$
755,211



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 were at LIBOR plus an interest rate margin of 1.50% (2.50% at March 31, 2020). For those borrowings where we elected to use the alternate base rate, the initial base rate was 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 $251.8 million in borrowings outstanding on the term loan facility as of March 31, 2020. There were $238.0 million in borrowings outstanding under the revolving credit facility as of March 31, 2020. Our available borrowings on the revolving credit facility at March 31, 2020 were $344.5 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 March 31, 2020. We are also required, under certain circumstances, to make mandatory prepayments from net cash proceeds from any issuance of equity and asset sales.

13

 
On April 17, 2020, we amended our sixth amended and restated senior credit agreement to suspend our normal leverage ratios for up to four quarters as a result of the potential impact from the COVID-19 pandemic (as further described in Note 17). Under the terms of the amendment, there are certain minimum liquidity and fixed charge coverage ratio requirements. Interest rates are also adjusted so that the applicable margin for base rate loans is 2.50% per annum and for Eurocurrency rate loans is 3.50% per annum, and the applicable commitment fee rate for the revolving credit facility is 0.50%. Following the suspension period, the applicable margin will depend upon CONMED’s consolidated senior secured leverage ratio, using the pricing grid set forth in the amendment.

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 months ended March 31, 2020 and 2019, we have recorded interest expense related to the amortization of debt discount on the Notes of $2.3 million and $1.5 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 months ended March 31, 2020 and 2019, we have recorded interest expense on the Notes of $2.3 million and $1.6 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.

The scheduled maturities of long-term debt outstanding at March 31, 2020 are as follows:

Remaining 2020
$
9,937

2021
18,219

2022
24,844

2023
436,750

2024
345,000




14

Note 11 – Guarantees

We provide warranties on certain of our products at the time of sale and sell extended warranties. The standard warranty period for our capital equipment is generally one year and our extended warranties typically vary from one to three years. Liability under service and warranty policies is based upon a review of historical warranty and service claim experience. Adjustments are made to accruals as claim data and historical experience warrant.

Changes in the carrying amount of service and product standard warranties for the three months ended March 31, are as follows:
 
2020
 
2019
Balance as of January 1,
$
2,186

 
$
1,585

 
 
 
 
Provision for warranties
355

 
486

Claims made
(363
)
 
(343
)
 
 
 


Balance as of March 31,
$
2,178

 
$
1,728


 
Costs associated with extended warranty repairs are recorded as incurred and amounted to $1.5 million and $1.4 million for the three months ended March 31, 2020 and 2019, respectively.

Note 12 – Pension Plan

Net periodic pension cost consists of the following: 

Three Months Ended March 31,
 
2020
 
2019
Service cost
$
179

 
$
253


 
 


Interest cost on projected benefit obligation
639

 
782


 
 


Expected return on plan assets
(1,255
)
 
(1,181
)

 
 


Net amortization and deferral
705

 
720


 
 


Net periodic pension cost
$
268

 
$
574


 
We do not expect to make any pension contributions during 2020. Non-service cost of $0.1 million and $0.3 million are included in other expense in the consolidated condensed statements of comprehensive income for the three months ended March 31, 2020 and 2019, respectively.


15

Note 13 – Acquisition and Other Expense

Acquisition and other expense consists of the following:

 
Three Months Ended March 31,
 
2020
 
2019
 
 
 
 
Manufacturing consolidation costs
$
1,785

 
$
—

Acquisition and integration costs
805

 
660

Acquisition and other expense included in cost of sales
$
2,590

 
$
660

 
 
 
 
Acquisition and integration costs included in selling and administrative expense
$
754

 
$
7,245

 
 
 
 
Debt refinancing costs included in other expense
$
—

 
$
3,904


        
During the three months ended March 31, 2020, we incurred $1.8 million in costs related to the consolidation of certain manufacturing operations which were charged to cost of sales. These costs related to winding down operations at certain locations and moving production lines to other facilities.

In conjunction with the consolidation of our manufacturing operations, our Buffalo, New York facility is currently held for sale and classified in prepaid expenses and other current assets in the consolidated condensed balance sheet. The net book value of this facility at March 31, 2020 was $3.0 million.

During the three months ended March 31, 2020 and 2019, we incurred costs for inventory adjustments and other costs of $0.8 million related to a previous acquisition and $0.7 million associated with the acquisition of Buffalo Filter as further described in Note 3, respectively. These costs were charged to cost of sales.

During the three months ended March 31, 2020, we incurred $0.8 million in severance and integration costs mainly related to the Buffalo Filter acquisition. During the three months ended March 31, 2019, we incurred $7.2 million in investment banking fees, consulting fees, legal fees and integration related costs associated with the February 11, 2019 acquisition of Buffalo Filter as further described in Note 3. These costs were included in selling and administrative expense.

During the three months ended March 31, 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.


16

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 chief operating decision maker (the CEO) evaluates the various global product portfolios on a net sales basis and evaluates profitability, investment, cash flow metrics and allocates resources on a consolidated worldwide basis due to shared infrastructure and resources. 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 fees related to the sales representation, 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 March 31,
 
2020
 
2019
Orthopedic surgery
$
99,283

 
$
113,437

General surgery
114,727

 
104,941

Consolidated net sales
$
214,010

 
$
218,378



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 United States Food and Drug 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

17

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. We previously recorded a charge to write off assets and released a previously accrued contingent consideration liability. A non-jury trial is now scheduled to take place in December 2020. 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 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 the Company adopted the new standard on January 1, 2020. We adopted this ASU by applying historical loss rates to our accounts receivable aging schedule to estimate expected credit losses. We further adjusted expected credit losses for specifically identified and forecasted credit losses. This update did not have a material impact on our net income, earnings per share or cash flows.

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. We adopted this update as of January 1, 2020 and it did not have a material impact on our net income, earnings per share or cash flows.
    
Recently Issued Accounting Standards, Not Yet Adopted
    
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.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which results in the removal of certain exceptions to the general principles of ASC 740 and simplifies other aspects of the accounting for income taxes. 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.


18

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance if certain criteria are met for entities that have contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued as a result of reference rate reform. This ASU is effective as of March 12, 2020 through December 31, 2020. The Company has not adopted the ASU as of March 31, 2020 and will continue to assess the impact of this guidance on our consolidation financial statements.

Note 17 - COVID-19

We experienced lower sales for the three months ended March 31, 2020 as a result of the emergence of the COVID-19 virus, which was first identified in Wuhan, China in December 2019 and then spread throughout Asia before emerging in the United States, Europe and elsewhere. Our sales were negatively impacted first in the Asia Pacific geography and later in the United States, Europe and elsewhere as lockdown measures were implemented and hospitals and surgery centers postponed many non-urgent surgical procedures in order to minimize the risk of infection with COVID-19. We believe the deferral of non-urgent procedures has had a greater impact on our Orthopedic product lines compared to General Surgery as a result of the nature of the products and the procedures in which they are used.
    
In compliance with various governmental lockdown orders, beginning in March we restricted access to our main facilities to only essential personnel required to be onsite (primarily manufacturing and distribution) with substantially all other personnel working remotely. As a medical device manufacturer, we were designated as an “essential business” by the relevant authorities in New York, Florida, Georgia and Mexico and have maintained production or distribution at our facilities in these locations.
    
We expect to continue to experience materially lower sales for as long as the lockdown and deferral of surgeries continues, which we anticipate will materially impact the results of operations for the quarter ended June 30, 2020. As a result, on April 17, 2020 we amended our sixth amended and restated senior credit agreement to suspend our normal leverage ratios (the "Existing Covenants") for up to four quarters. Under the terms of the amendment, we will have certain minimum liquidity and fixed charge coverage ratio requirements. We were in full compliance with our Existing Covenants as of March 31, 2020. We are forecasting that sales and earnings will be sufficient to remain in compliance with the liquidity and fixed charge coverage ratio requirements under the terms of the amendment and we will have sufficient availability under our revolving credit facility to meet our liquidity needs. We have undertaken steps to reduce our spending and expenses in light of our expectation that our revenues will be depressed over the next several months. While we expect that we will be well positioned when surgeries begin to return to their pre-pandemic levels, we are unable to predict with certainty how long the COVID-19 pandemic will last, or how severe its economic impact will be. Even after the COVID-19 pandemic and government responses thereto have subsided, residual economic and other effects may have an impact on the demand for post-pandemic surgery levels that are difficult to predict. If the downturn is more severe and prolonged than we currently expect, we may need to take further steps to reduce our costs, or to refinance our debt.
  
Additionally, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020 to provide economic relief in the early wake of the COVID-19 pandemic.  The CARES Act includes many measures to assist companies, including temporary changes to income and non-income-based tax laws.  Income tax relief includes temporary favorable changes to net operating loss and interest expense annual deduction limitations.  These provisions are not expected to result in any material impact to our financial results. 

Note 18 – Subsequent Events

On April 17, 2020, we amended our sixth amended and restated senior credit agreement to suspend our normal leverage ratios for up to four quarters as a result of the potential impact from the COVID-19 pandemic. Under the terms of the amendment, there are certain minimum liquidity and fixed charge coverage ratio requirements. Refer to Note 10 for further details.


19


Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 AND RESULTS OF OPERATIONS
 

Forward-Looking Statements
 
In this Report on Form 10-Q, we make forward-looking statements about our financial condition, results of operations and business. Forward-looking statements are statements made by us concerning events that may or may not occur in the future. These statements may be made directly in this document or may be “incorporated by reference” from other documents. Such statements may be identified by the use of words such as “anticipates”, “expects”, “estimates”, “intends” and “believes” and variations thereof and other terms of similar meaning.

Forward-Looking Statements are not Guarantees of Future Performance
 
Forward-looking statements involve known and unknown risks, uncertainties and other factors, including those that may cause our actual results, performance or achievements or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include those identified under “Risk Factors” in our Annual Report on Form 10-K for the year-ended December 31, 2019 and the following, among others:

•
general economic and business conditions;
•
compliance with and changes in regulatory requirements;
•
COVID-19 global pandemic poses significant risks to our business, financial condition and results of operations, which may be heightened if the pandemic, and various government responses to it, continue for an extended period of time;
•
environmental compliance risks, including lack of availability of sterilization with Ethylene Oxide (“EtO”);
•
the possibility that United States or foreign regulatory and/or administrative agencies may initiate enforcement actions against us or our distributors;
•
competition;
•
changes in customer preferences;
•
changes in technology;
•
the introduction and acceptance of new products;
•
the availability and cost of materials;
•
cyclical customer purchasing patterns due to budgetary and other constraints;
•
quality of our management and business abilities and the judgment of our personnel;
•
the availability, terms and deployment of capital;
•
future levels of indebtedness and capital spending;
•
changes in foreign exchange and interest rates;
•
the ability to evaluate, finance and integrate acquired businesses, products and companies;
•
changes in business strategy;
•
the risk of an information security breach, including a cybersecurity breach;
•
the risk of a lack of allograft tissues due to reduced donations of such tissues or due to tissues not meeting the appropriate high standards for screening and/or processing of such tissues;
•
the ability to defend and enforce intellectual property, including the risks related to theft or compromise of intellectual property in connection with our international operations;
•
the risk of patent, product and other litigation, as well as the cost associated with such litigation; and
•
trade protection measures, tariffs and other border taxes, and import or export licensing requirements.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and "Risk Factors" below and “Risk Factors” and “Business” in our Annual Report on Form 10-K for the year-ended December 31, 2019 for a further discussion of these factors. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.






20

Overview

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.

Our product lines consist of orthopedic surgery and general surgery. Orthopedic surgery consists of sports medicine instrumentation and small bone, large bone and specialty powered surgical instruments as well as, imaging systems for use in minimally invasive surgery procedures including 2DHD and 3DHD vision technologies and service fees related to the promotion and marketing of sports medicine allograft tissue. General surgery consists of a complete line of endo-mechanical instrumentation for minimally invasive laparoscopic and gastrointestinal procedures, a line of cardiac monitoring products as well as electrosurgical generators and related instruments. These product lines as a percentage of consolidated net sales are as follows:
 
 
Three Months Ended March 31,
 
2020
 
2019
Orthopedic surgery
46
%
 
52
%
General surgery
54
%
 
48
%
Consolidated net sales
100
%
 
100
%

A significant amount of our products are used in surgical procedures with approximately 83% of our revenues derived from the sale of single-use products. Our capital equipment offerings also facilitate the ongoing sale of related single-use products and accessories, thus providing us with a recurring revenue stream. We manufacture substantially all of our products in facilities located in the United States and Mexico. We market our products both domestically and internationally directly to customers and through distributors. International sales approximated 44% and 46% during the three months ended March 31, 2020 and 2019, respectively.

Business Environment
    
Our business has been significantly impacted by the emergence of the COVID-19 virus, with the Company experiencing significant sales declines in the three months ended March 31, 2020, first in the Asia Pacific geography and later in the United States, Europe and elsewhere as lockdown measures were implemented and hospitals and surgery centers postponed many non-urgent surgical procedures in order to minimize the risk of infection.  In compliance with various governmental lockdown orders, beginning in March we restricted access to our main facilities to only essential personnel required to be onsite while maintaining production and distribution.  We expect to continue to experience materially lower sales for as long as the lockdown and deferral of surgeries continues, which we anticipate will last at least through June 30, 2020.   See additional discussion in Note 10 and Note 17 to the consolidated condensed financial statements, as well as in Liquidity and Capital Resources below. 

Critical Accounting Policies

Preparation of our financial statements requires us to make estimates and assumptions which affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year-ended December 31, 2019 describes the significant accounting policies used in preparation of the Consolidated Financial Statements. On an ongoing basis, we evaluate the critical accounting policies used to prepare our consolidated financial statements, including, but not limited to, those related to:

•
goodwill and intangible assets.











21

Consolidated Results of Operations

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

 
Three Months Ended March 31,
 
2020
 
2019
Net sales
100.0
 %
 
100.0
 %
Cost of sales
44.3

 
44.4

Gross profit
55.7

 
55.6

Selling and administrative expense
44.8

 
45.4

Research and development expense
4.7

 
4.8

Income from operations
6.2

 
5.3

Interest expense
4.5

 
4.3

Other expense
—


1.9

Income (loss) before income taxes
1.6

 
(0.9
)
Benefit from income taxes
(1.1
)
 
(1.4
)
Net income
2.8
 %
 
0.5
 %
Net Sales

The following table presents net sales by product line for the three months ended March 31, 2020 and 2019:

 
Three Months Ended
 
 
 
 
 
% Change
 
2020
 
2019
 
As Reported
 
Impact of Foreign Currency
 
Constant Currency
Orthopedic surgery
$
99.3

 
$
113.4

 
-12.5
 %
 
1.8
%
 
-10.7
 %
General surgery
114.7

 
105.0

 
9.3
 %
 
0.7
%
 
10.0
 %
   Net sales
$
214.0

 
$
218.4

 
-2.0
 %
 
1.3
%
 
-0.7
 %
 
 
 
 
 
 
 
 
 
 
Single-use products
$
177.7

 
$
172.4

 
3.1
 %
 
1.4
%
 
4.5
 %
Capital products
36.3

 
46.0

 
-21.1
 %
 
1.0
%
 
-20.1
 %
   Net sales
$
214.0

 
$
218.4

 
-2.0
 %
 
1.3
%
 
-0.7
 %

Net sales decreased 2.0% in the three months ended March 31, 2020 compared to the same period a year ago due to a decrease in the orthopedic product line which was partially offset by growth in the general surgery product line, as described below.

•
Orthopedic surgery sales decreased 12.5% in the three months ended March 31, 2020 primarily driven by deferral of non-urgent surgeries as a result of the COVID-19 pandemic. A significant portion of this decline was driven by a reduction in capital equipment purchases as customers deferred these purchases.

•
General surgery sales increased 9.3% in the three months ended March 31, 2020. Approximately 590 basis points of this growth was from the Buffalo Filter acquisition. In addition to growth in Buffalo Filter products, we also had sales growth in other general surgery product offerings.


22

Cost of Sales

Cost of sales decreased to $94.9 million in the three months ended March 31, 2020 as compared to $96.9 million in the three months ended March 31, 2019. Gross profit margins increased 10 basis points to 55.7% in the three months ended March 31, 2020 as compared to 55.6% in the three months ended March 31, 2019. The increase in gross profit margins of 10 basis points in the three months ended March 31, 2020 was driven by favorable product mix mainly due to lower capital sales offset by $1.8 million in charges related to manufacturing consolidation costs as further described in Note 13.

Selling and Administrative Expense

Selling and administrative expense decreased to $95.9 million in the three months ended March 31, 2020 as compared to $99.2 million in the three months ended March 31, 2019. Selling and administrative expense as a percentage of net sales decreased to 44.8% in the three months ended March 31, 2020 compared to 45.4% in the three months ended March 31, 2019.

The 60 basis points decrease in selling and administrative expense during the three months ended March 31, 2020 is primarily due to the prior year including $7.2 million in charges for investment banking fees, consulting fees, legal fees and integration related costs related to the Buffalo Filter acquisition as compared to $0.8 million in the three months ended March 31, 2020 as further described in Note 13. The offsetting increase as a percentage of sales is a result of lower sales in 2020.

Research and Development Expense

Research and development expense decreased to $10.1 million in the three months ended March 31, 2020 as compared to $10.6 million in the three months ended March 31, 2019. As a percentage of net sales, research and development expense decreased 10 basis points to 4.7% in the three months ended March 31, 2020 as compared to 4.8% in the three months ended March 31, 2019. The decrease is primarily due to timing of our research projects.

Other Expense

Other expense in the three months ended March 31, 2020 related to non-service pension costs as further described in Note 12.

Other expense in the three months ended March 31, 2019 was mainly related to non-service pension costs and costs associated with our sixth amended and restated senior credit agreement entered into on February 7, 2019. These costs include a $3.6 million charge related to commitment fees paid to certain of our lenders, which provided a financing commitment for the Buffalo Filter acquisition, and a loss on the early extinguishment of debt of $0.3 million.

Interest Expense

Interest expense increased to $9.6 million in the three months ended March 31, 2020 from $9.4 million in the three months ended March 31, 2019 due to the first quarter of 2020 containing additional days for which the additional borrowings under the sixth amended and restated senior credit agreement and the issuance of $345.0 million in 2.625% convertible notes due in 2024 were outstanding. These financing agreements were finalized during the three months ended March 31, 2019. The weighted average interest rates on our borrowings decreased to 3.12% in the three months ended March 31, 2020 as compared to 3.97% in the three months ended March 31, 2019.

Benefit from Income Taxes

Income tax benefit has been recorded at an effective tax rate of (69.8)% for the three months ended March 31, 2020 compared to income tax benefit recorded at an effective tax rate of 152.2% for the three months ended March 31, 2019. The lower effective rate for the three months ended March 31, 2020, as compared to the same period in the prior year, was primarily the result of recording discrete income tax benefits associated with stock options and settlements with tax authorities which decreased the effective rate by 79.9% for the three months ended March 31, 2020 as compared to an increase of 120.7% for discrete items during the three months ended March 31, 2019. A reconciliation of the United States statutory income tax rate to our effective tax rate is included in our Annual Report on Form 10-K for the year ended December 31, 2019, under Note 8 to the consolidated financial statements.


23

Non-GAAP Financial Measures

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

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

Liquidity and Capital Resources

Our liquidity needs arise primarily from capital investments, working capital requirements and payments on indebtedness under the sixth amended and restated senior credit agreement, described below. We have historically met these liquidity requirements with funds generated from operations and borrowings under our revolving credit facility. In addition, we have historically used term borrowings, including borrowings under the sixth amended and restated senior credit agreement, and borrowings under separate loan facilities, in the case of real property purchases, to finance our acquisitions. We also have the ability to raise funds through the sale of stock or we may issue debt through a private placement or public offering.

As a result of the COVID-19 pandemic, we expect to continue to experience materially lower sales for as long as the lockdown and deferral of surgeries continues, which we anticipate will last at least through June 30, 2020. As a result of the decrease in sales, we expect to incur a net loss for the three months ended June 30, 2020. As a result, on April 17, 2020 we amended our senior credit agreement to suspend our normal leverage ratios (the "Existing Covenants") for up to four quarters. Under the terms of the amendment, we will have certain minimum liquidity and fixed charge coverage ratio requirements. We were in full compliance with our Existing Covenants as of March 31, 2020. We are forecasting that sales and earnings will be sufficient to remain in compliance with the liquidity and fixed charge coverage ratio requirements under the terms of the amendment. Management believes that cash flow from operations, including cash and cash equivalents on hand and available borrowing capacity under our revolving credit facility, will be adequate to meet our liquidity needs for the foreseeable future. We have undertaken steps to reduce our spending and expenses in light of our expectation that our revenues will be depressed over the next several months. While we expect that we will be well positioned when surgeries begin to return to their pre-pandemic levels, we are unable to predict with certainty how long the COVID-19 pandemic will last, or how severe its economic impact will be. Even after the COVID-19 pandemic and government responses thereto have subsided, residual economic and other effects may have an impact on the demand for post-pandemic surgery levels that are difficult to predict. If the downturn is more severe and prolonged than we currently expect, we may need to take further steps to reduce our costs, or to refinance our debt.

Operating cash flows

Our net working capital position was $233.2 million at March 31, 2020.  Net cash provided by operating activities was $3.7 million and net cash used in operating activities was $3.9 million in the three months ended March 31, 2020 and 2019, respectively, generated on net income of $5.9 million and $1.0 million for the three months ended March 31, 2020 and 2019, respectively. The increase in cash provided by operating activities was mainly driven by an increase in net income in 2020.

Investing cash flows

Net cash used in investing activities in the three months ended March 31, 2020 decreased $362.3 million from the same period a year ago mainly due to the $364.9 million payment for the Buffalo Filter Acquisition in 2019. Capital expenditures were $2.8 million and $4.0 million in the three months ended March 31, 2020 and 2019.

Financing cash flows

Net cash provided by financing activities in the three months ended March 31, 2020 was $2.7 million compared to $379.0 million during 2019. Below is a summary of the significant financing activities impacting the change during the three months ended March 31, 2020 compared to 2019:


24

•
We received proceeds of $345.0 million during the three months ended March 31, 2019 related to the issuance of 2.625% convertible notes as further described below.
•
We entered into a $265.0 million term loan during the three months ended March 31, 2019 in conjunction with the refinancing of our senior credit agreement. This new term loan replaced the previous term loan and resulted in net proceeds of $120.6 million during the three months ended March 31, 2019 compared to $3.3 million in payments in the current year.
•
We had net proceeds on our revolving line of credit of $18.0 million compared to $43.0 million in payments during the three months ended March 31, 2019.
•
During the three months ended March 31, 2019, we paid $51.2 million to purchase hedges related to our convertible notes. Partially offsetting this, were proceeds of $30.6 million from the issuance of warrants as further described below.
•
During the three months ended March 31, 2019, we paid $16.2 million in debt issuance costs associated with the 2.625% convertible notes and the sixth amended and restated senior credit agreement.
•
We paid $1.1 million in contingent consideration related to prior asset acquisitions during the three months ended March 31, 2020 as compared to $2.9 million during the three months ended March 31, 2019.

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 $345.0 million in 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 were at LIBOR plus an interest rate margin of 1.50% (2.50% at March 31, 2020). For those borrowings where we elected to use the alternate base rate, the base rate was 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 $251.8 million in borrowings outstanding on the term loan facility as of March 31, 2020. There were $238.0 million in borrowings outstanding under the revolving credit facility as of March 31, 2020. Our available borrowings on the revolving credit facility at March 31, 2020 were $344.5 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 March 31, 2020. We are also required, under certain circumstances, to make mandatory prepayments from net cash proceeds from any issuance of equity and asset sales.

As noted above, on April 17, 2020 we amended our sixth amended and restated senior credit agreement to suspend our normal leverage ratios for up to four quarters. Under the terms of the amendment, there are certain minimum liquidity and fixed charge coverage ratio requirements.  Interest rates are also adjusted so that the applicable margin for base rate loans is 2.50% per annum and for Eurocurrency rate loans is 3.50% per annum, and the applicable commitment fee rate for the revolving credit facility is 0.50%. Following the suspension period, the applicable margin will depend upon CONMED’s consolidated senior secured leverage ratio, using the pricing grid set forth in the amendment.

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

In connection with the offering of the Notes, we entered into convertible note hedge transactions with a number of financial

25

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, unless we elect to settle the warrants in cash.

Our Board of Directors has authorized a $200.0 million share repurchase program. Through March 31, 2020, we have repurchased a total of 6.1 million shares of common stock aggregating $162.6 million under this authorization and have $37.4 million remaining available for share repurchases. The repurchase program calls for shares to be purchased in the open market or in private transactions from time to time. We may suspend or discontinue the share repurchase program at any time. We have not purchased any shares of common stock under the share repurchase program during 2020. We have financed the repurchases and may finance additional repurchases through operating cash flow and from available borrowings under our revolving credit facility.

Management believes that cash flow from operations, including cash and cash equivalents on hand and available borrowing capacity under our sixth amended and restated senior credit agreement, will be adequate to meet our anticipated operating working capital requirements, debt service, funding of capital expenditures, dividend payments and common stock repurchases in the foreseeable future.

New accounting pronouncements

See Note 16 to the consolidated condensed financial statements for a discussion of new accounting pronouncements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no significant changes in our primary market risk exposures or in how these exposures are managed during the three months ended March 31, 2020.  Reference is made to Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2019 for a description of Qualitative and Quantitative Disclosures About Market Risk.
 
Item 4.  Controls and Procedures
 
As of the end of the period covered by this report, an evaluation was carried out by CONMED Corporation’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934).  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report.  In addition, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) occurred during the quarter ended March 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


PART II OTHER INFORMATION


Item 1. Legal Proceedings

Reference is made to Item 3 of the Company’s Annual Report on Form 10-K for the year-ended December 31, 2019 and to Note 15 of the Notes to Consolidated Condensed Financial Statements included in Part I of this Report for a description of certain legal matters.

26


Item 1A. Risk Factors

This Form 10-Q should be read in conjunction with the risk factors and information disclosed in our Annual Report on Form 10-K under Part I, Item 1A for the year ended December 31, 2019. There have been no material changes in the risk factors described in our Annual Report on Form 10-K under Part I, Item 1A for the year ended December 31, 2019, except for the risk factor below.

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

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

As of the date of this report:

1.
Our field-based sales representatives are generally restricted from traveling, both in the interests of their health as well as at the request of our customers; 

2.
Our office-based employees have been working remotely, and

3.
Our manufacturing facilities and warehouses are operating with precautions including, increased hygiene and cleaning within facilities, social distancing and monitoring of temperatures.

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

•
the duration and scope of the COVID-19 pandemic;

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

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

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

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

•
significant reductions or volatility in demand for surgeries or for our products;  

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

•
costs incurred as a result of necessary actions and preparedness plans to help ensure the health and safety of our employees and continued operations, including enhanced cleaning processes, protocols designed to implement appropriate social distancing practices, and/or adoption of additional wage and benefit programs to assist employees;  

•
potential future restructuring, impairment and other charges;

•
the impact of the COVID-19 pandemic on the financial and credit markets and economic activity generally;  

•
our ability to access lending, capital markets, and other sources of liquidity when needed on reasonable terms or at all; 


27

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

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

We have undertaken steps to reduce our spending and expenses in light of our expectation that our revenues will be depressed over the next several months. While we expect that we will be well positioned when surgeries begin to return to their pre-pandemic levels, we are unable to predict with certainty how long the COVID-19 pandemic will last, or how severe its economic impact will be. Even after the COVID-19 pandemic and government responses thereto have subsided, residual economic and other effects may have an impact on the demand for post-pandemic surgery levels that are difficult to predict. If the downturn is more severe and prolonged than we currently expect, we may need to take further steps to reduce our costs, or to refinance our debt.

In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Risk Factors” in our annual report on Form 10-K for the 2019 fiscal year. These risks may be heightened by the COVID-19 pandemic and could materially and adversely affect our business. The risks and uncertainties presented in this report and in our annual report on Form 10-K are not the only ones facing us. Additional risks and uncertainties not presently known to us, or that we currently believe to be immaterial, may also adversely affect our business.




28


Item 6. Exhibits

Exhibit Index
 
 
Exhibit No.
Description of Exhibit
 
 
10.1
 
 
31.1
 
 
31.2
 
 
32.1
 
 
101.INS
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
104
Cover Page - Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document (included in Exhibit 101)

29

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on the date indicated below.

 
 
CONMED CORPORATION
 
 
 
 
 
 
 
 
 
 
 
By: /s/ Todd W. Garner
 
 
Todd W. Garner
 
 
Executive Vice President and
 
 
Chief Financial Officer
 
 
 
 
 
Date:  
 
 
April 30, 2020


30